Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Alltel Corporation (NYSE:AT)

Q2 2006 Earnings Conference Call

August 2, 2006 5:00 pm ET

Executives

John Ebner - Treasurer, IR

Scott Ford - President and CEO

Kevin Beebe - Alltel Group President of Operations

Sharilyn Gasaway - EVP, CFO

Analysts

Michael Rollins – Citigroup

Thomas Lee – J.P. Morgan

David Barden – Banc of America Securities

Chris Larsen – Credit Suisse

Rick Prentiss – Raymond James

Simon Flannery – Morgan Stanley

David Janazzo – Merrill Lynch

Jonathan Atkin – RBC Capital Markets

Presentation

Operator

At this time, I would like to welcome everyone to the second quarter earnings release conference call. (Operator Instructions) Mr. Ebner, you may begin your conference.

John Ebner

Thank you, Katie. Good afternoon. Welcome to Alltel’s second quarter 2006 conference call. My name is John Ebner and I lead Treasury and Investor Relations for Alltel. Thank you for participating in this discussion of our second quarter results this afternoon.

Today’s conference call was preceded by our second quarter 2006 earnings release. This press release has been distributed on the news wires and is available from our web site at www.alltel.com. 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 1995. Forward-looking statements are subject to uncertainties that could cause actual or 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 second quarter 2006 earnings press release.

Additionally, today’s discussion will include certain non-GAAP financial measures. Again, we refer you to the Investor Relations section of our web site, 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 web site. To access the call, please go to the Investor Relations section and click on the live webcast link.

During our call this afternoon, we will make reference to the new Alltel, which now is a single segment inclusive of the wireless business and the retained communications support business. We have provided pro forma results that reflect the new Alltel and Western Wireless merger as if it was completed on January 1, 2005. These pro forma financials are included in the supplemental material and provided in the earnings release.

Participating in our earnings discussion this afternoon are Scott Ford, Alltel President and Chief Executive Officer, Kevin Beebe, Alltel Group President of Operations and 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 Ford

Thank you, John. Welcome to your new role.

John Ebner

Thank you. I appreciate that.

Scott Ford

Good afternoon, everybody. This afternoon we will share highlights of the second quarter for Alltel as it was constituted during the quarter and for Alltel as it is now configured. Kevin will review the operational highlights from our wireless business and Sharilyn will provide an overview of our financial results and an update on second half guidance. We will then be glad to answer as many of your questions as we can get to in the hour.

As a consolidated entity for the second quarter of 2006, Alltel earned $1.10 of fully diluted earnings per share on a GAAP basis. This reflects several unusual items, including a gain from the liquidation of the Rural Telephone Bank, onetime expenses related to the wireline separation, a net loss in discontinued operations, primarily related to our international wireless assets and several other items which Sharilyn will cover in detail in a few minutes.

The current businesses of the consolidated Alltel generated fully diluted earnings per share of $0.93 for the quarter. These results were flat year over year, primarily due to the 24% increase in the share count related to both the equity unit conversion that took place in the second quarter of 05 and the Western Wireless merger which closed in the third quarter of 05.

This quarter, we generated $336 million of equity free cash flow, an increase of 32% year over year. In addition, consolidated revenues and operating income from current businesses, including wireline, grew 18% and 21%, respectively.

An important step in the transformation of Alltel was completed on July 17, the successful spin-off and merger of Alltel’s wireline business with VALOR, which created Windstream. We completed this complex transaction in less than eight months from our announcement on December 9 of last year.

This quarter we also completed all of the remaining divestitures of our international assets due to the near heroic efforts of the legal and finance team, so we will gladly let Sharilyn provide you all the details of that transaction in a minute as well.

Pro forma for Western Wireless and the spin of the wireline business, the new Alltel which John referenced a moment ago, which includes the wireless business and certain retained communications support services, grew revenues and operating income 9% and 6% year over year respectively.

The customer growth attained during the first half of the year has been exceptional. In 2006, our intention has been to expand our market share even though this creates a lag in profit margins in the business. We have a solid history of successfully balancing customer growth and profitability over the long run and we are confident that the results will be worth these efforts. Kevin will walk you through the details of these trade offs in his prepared remarks and share with you the progress we’ve had on the customer acquisition front.

As to Alltel’s balance sheet and capital structure, from the spin date through today we have acquired roughly 3 million shares under our $3 billion repurchase authorization. In addition, we launched our previously announced $1 billion debt tender offer on Monday of this week with an expected closing on August 28. This series of transactions, pursued over the past two years, leaves Alltel with a capital structure and a balance sheet that allows for optimal financial and strategic flexibility.

Before I turn the call over to Kevin I’d like to compliment, for a moment, the entire Alltel team for the tremendous effort and wonderful results produced over the first half of the year. This series of mergers, acquisitions, integrations, financing, spin-offs, sales and organizational realignments, that this team has handled is almost too long to list. There were numerous operational challenges in each but the team handled each one of them flawlessly.

The results of these efforts create options for our shareholders and our employees and will help align our daily efforts more directly on our wireless customers’ needs. But they have also caused a substantial realignment in our financial reporting presentation. Therefore, in a departure from our norm and in order to help you truly understand the impact of all the moving parts, Sharilyn will take you through detailed financial guidance for the second half of the year in just a few moments.

But before that, let me turn the call over to Kevin for a closer look at our wireless operation. Kevin?

Kevin Beebe

Thanks, Scott, and good afternoon everyone. Wireless gross customer additions were 771,000 for the quarter. That’s up 30% year over year on an as-reported basis and 11% on a pro forma basis. In fact, for the first half of 2006, we have already achieved 75% of the full-year customer growth goal we presented in our February 2006 guidance.

As Scott mentioned previously, the results from the first half of the year are very encouraging. Our My Circle servicing offering, which gives customers the ability to make an unlimited number of calls to the ten phone numbers they call the most, regardless of network, has been received very, very well by the marketplace.

Additionally, our brand resonates across more market segments than ever before.

These achievements translated into net additions of 146,000 for the quarter, which included 124,000 post-pay net additions and 22,000 pre-pay net additions. We also added 112,000 customers through the acquisitions of First Cellular of Southern Illinois and Virginia Cellular.

The 124,000 post-pay net customer additions were driven by our My Circle service offering and by our post-pay churn rate of 1.47%. Our total churn was 1.9% during the quarter. Both of these metrics improved year over year as well as sequentially.

Cost per gross add was 5% higher year over year, driven by larger subsidies for higher-end handsets and a higher level of advertising to support the My Circle campaign.

Average revenue per customer continues to grow year over year. Average revenue per customer on an as-reported basis increased 4%, to $52.54. Pro forma ARPU was up 1% year over year. These increases are the result of growth in data, ETC revenues and were achieved despite the roaming revenue pressures we discussed during our first quarter call.

Data revenue per customer was $3.26. That’s a 61% increase year over year and over 6% of total ARPU, the result of increased data application sales.

Wireless cash cost per customer, excluding selling and marketing expenses, were $24.07. That’s an increase of 2% year over year, driven mostly by additional expenses to service our data customers and by bad debt expense.

Finally, in the second quarter there were a number of wireless wholesale business developments, including a ten-year voice 1XRTT and EBDO roaming agreement with Sprint that became effective July 1. The network integration made possible through this arrangement will enable seamless voice and high-speed data services and should be completed in the next couple of months. We also extended the Cingular roaming agreement until 2012 which, if you recall, is for GSM services.

We expect our new roaming agreements to impact revenue and operating income in the back half of the year, especially in the third quarter, as reduced rates are not immediately offset by incremental minutes. We expect that these agreements will provide us with more sustainable wireless wholesale revenue and improve costs going forward.

With that, let me turn the call over to Sharilyn to discuss the financial results.

Sharilyn Gasaway

Thank you, Kevin, and good afternoon everyone. In the second quarter we achieved a $1.10 of fully diluted earnings per share on GAAP basis, which includes the following significant, onetime items and wireless amortization expense:

$177 million gain on the redemption of our equity interest in the Rural Telephone Bank.

$12 million of expenses associated with the spin-off and merger of our wireline business. Final separation expenses will be recorded in 3Q.

$9 million of net loss from discontinued operations which includes the various international businesses held for sale.

$47 million of wireless amortization expense related to intangible assets recorded in connection with previous wireless acquisitions.

Excluding these items, we achieved $0.93 of fully diluted earnings per share from current businesses on a 390 million share count.

For the quarter, under our historical presentation, our wireless business generated $1.73 billion of service revenue, an increase of 26% year over year. We also generated $647 million of [EBITDA] and $392 million of segment income, which are increases of 25% and 22% respectively, year over year.

Included in the results this quarter is wireless stock option expense of $7 million associated with the adoption of FAS 123R.

Wireline generated $581 million of revenue and $336 million of [EBITDA] this quarter, a year over year decrease of 2% and 1%, respectively.

Segment income from the quarter was $235 million, an increase of 9% year over year due to previous discussed changes in depreciable lives.

Please note that Windstream issued a press release on July 27 announcing their merger update conference call, which is scheduled for September 7, where they will discuss their wireline business in more detail.

Communication support services produced $287 million in revenue, and $31 million in segment income.

Below the line, other income was up $9 million sequentially, driven by interest income as our average cash balance was higher this quarter. Also, our tax rate decreased to 37.4% this quarter, but our expected tax rate for the remainder of 06 is between 38% and 39%.

Capital expenditures for 2Q totalled $394 million and we generated $336 million of equity free cash flow, an increase of 32% year over year, ending another quarter with strong balance sheet and credit metrics.

Our wireless capital expenditures will increase in the coming quarters and we expect those expenditures to remain within the previous guidance.

Now I’m going to walk you through the new Alltel. As John mentioned previously, we have provided pro form financial information which assumes Western Wireless was acquired and the wireline spin was completed on January 1, 2005. Keep in mind that the new Alltel service revenue includes the traditional wireless retail and wireless wholesale roaming revenues and will prospectively include approximately $100 to $120 million annually in transport revenue from leasing our fiber backbone to Windstream.

The inclusion of lower margin transport revenues has the effect of decreasing reported service margin percentages by approximately 1%, or 100 basis points.

Product sales for the new Alltel include the traditional equipment sales to end-user customers as well as equipment sales to agents.

The new Alltel total revenue increased 9% year over year, to $1.945 billion. The primary drivers of retail revenue growth of 8% were our continued focus on quality customer growth and growth in data and ETC revenues. For the quarter, we received approximately $63 million in ETC revenues.

During the quarter, wholesale revenue declined 2% year over year on a pro forma basis, driven primarily by the transition of the former Western Wireless markets and to the Verizon roaming agreement.

Pro forma segment income grew by 6% year over year, driven by post-pay and pre-paid customer growth. Of course, these customer additions were associated with the higher sales cost Kevin discussed earlier.

During the second quarter we also completed all of the remaining divestitures of our international assets, which included properties in Austria, Haiti, Bolivia, Ivory Coast and Slovenia. In the aggregate, international asset sales provided pre-tax proceeds of $1.7 billion this quarter.

Our net debt balance at the end of the quarter was $3.3 billion, which will be impacted in the coming quarters by the just-completed $4.2 billion de-leveraging from our wireline spin-off, the purchase of Midwest Wireless for $1.1 billion and tax payments of roughly $200 million on our international asset sales.

Following these events, our net debt balance will be approximately $400 million and that excludes any impact from free cash flow from operations and any additional share repurchases.

So to recap our performance for the first half of 2006, wireless service revenues were up 8% year over year, which was in line with our guidance. Total [EBITDA] was up 3% year over year, which was also within the first half guidance. Wireless [EBITDA] for the first half of 2006 was up 4% year over year, slightly below our guidance due to the roaming revenue pressure and higher sales and service cost mentioned previously on the call.

Finally, turning to the second half of 06, let me update you on certain items that have changed since we delivered guidance back in February.

First, Midwest Wireless was assumed to close on June 30 of this year. That closing has been delayed and we now believe it will close early in the fourth quarter.

Second, as I mentioned a moment ago, the communications support services revenue presented in February has now been separated into its component parts, wholesale transport revenue which will be included in service revenues, and agent handset sales will now be in product sales.

Then lastly, margin pressure from higher sales and service calls and roaming pressure will likely impact the second half of this year.

Given these items, and under our new financial reporting structure, we expect the following results for the back half of this year:

Service revenue of between $3.64 billion and $3.72 billion.

An EBITDA between $1.38 billion and $1.43 billion.

This represents service revenue growth of between 9% and 11%, and EBITDA growth of between 10% and 14% when compared to the second half of 2005 pro forma revenues of $3.35 billion and EBITDA of $1.25 billion.

Greater detail on the historical pro forma look of the new Alltel is presented in the supplemental material on our web site and included in this earnings release.

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

(Operator Instructions) Your first question comes from Michael Rollins with Citigroup.

Michael Rollins - Citigroup

Hi. Good afternoon. Just a couple questions. First, Kevin, on the operation itself, can you give us a little bit more color about what you’re seeing in the competitive environment with the My Circle, and are you getting a sense from the channels that this has a lot of sustainability, not only with new customers but maybe expanding the presence of your family plans?

Then, just on the financials, I was just wondering if you looked at the pro forma revenue number that you gave, if you could just segment that out specifically between wireless, the CSS segment that’s left over and then what might be intercompany?

Thanks.

Kevin Beebe

Okay, Mike, this is Kevin. Let me take the first part of your question. I think a couple of things have resonated in the marketplace relative to My Circle. One is, it is an offering that I have been very pleased with in terms of how easy it is for the customer to understand it. I mean, as you know, you’ve been around the business as long as I’ve been and oftentimes we in the industry have complicated our offers to the point where you’ve really got to take the time to explain it to the customer, but it’s very understandable. It’s pick the ten numbers you call the most. Network doesn’t matter. Could be land line, could be another wireless provider, and that has resonated nicely.

I haven’t seen any different stats on family plan uptake as a result of My Circle, which still had, you know, similar kind of growth and family plan activity so it hasn’t caused a change in the percent of our sales that are family plan members. We’ve still seen a good mix of new customers as well as our gross is up nicely in the quarter, which we talked about earlier, or I talked about earlier. A nice mix of impact on new customer growth. I think we’re taking some share right now as well as nice impact on existing customers with a lower churn rate.

That churn rate, by the way, I think it’s a six-year low for us. We feel great about that.

Of course, My Circle’s a part of that. There’s many things; great networks, customer service folks doing a good job, etc.

On the revenue part, I think Sharilyn’s going answer that one for you.

Sharilyn Gasaway

Yeah. Hopefully I’ve got what you’re looking at. In terms of looking at the pro forma information, Michael, on product sales, what you’re going to have in product sales are the product sales that we sell to our customers as well as what we sell to our agents, and we can give you some details on the split-up between those. Is that what you’re looking for?

Michael Rollins - Citigroup

It’s just basically to sort of reconcile how the wireless revenue now fits against what’s left over in the company going forward.

Sharilyn Gasaway

Sure. The two components that we kept from communications support services are the handset sales and we historically had sales to agents and sales to our customers, so that doesn’t really change that much. Then, prospectively, we are going to be leasing our fiber backbone to Windstream and that’s the $100 to $120 million that you’re going to see going forward. Those revenues were intercompany and so you don’t really see those reflected in the pro formas. You’ll see those beginning in 3Q06 going forward.

Michael Rollins - Citigroup

Okay. Thank you.

Operator

Your next question comes from Thomas Lee with J.P. Morgan.

Thomas Lee – J.P. Morgan

Hello. Got a couple questions for you. One’s just a clarification. Sharilyn, you mentioned there was $12 million associated with separation expense and I just want to make sure that it’s – that we should be classifying it under the corporate expense number?

Sharilyn Gasaway

That’s correct.

Thomas Lee – J.P. Morgan

Or is that within the $392 million of wireless operating income?

Sharilyn Gasaway

Yeah. No, that would be a corporate expense, onetime expense.

Thomas Lee – J.P. Morgan

Okay.

Sharilyn Gasaway

You’re correct.

Thomas Lee – J.P. Morgan

Okay, and I wanted to kind of just get a better feel for some of the margin issues you discussed and specifically really kind of look at a couple things. Like, you know, one, when you consider the My Circle program and, you know, and the ability of the customers to select, you know, an unlimited number of calls to make, I’m curious, you know, if you could describe what could have surprised you about the profile of these customers? You know, A, are they a lot heavier users? Obviously, they have to have some Internet – they have to be somewhat capable of using the Internet to actually go on and list the numbers, and has their usage surprised you? You know, in other word, has there been expense pressure?

On the margin pressure side, I’m also kind of wondering aloud that, I know we saw the [re-rate] associated with the former Western markets becoming under the Alltel rate with Verizon Wireless. But on the other hand, I’m curious to see, you know, has there been an offset or any pickup associated with your expanded roaming agreements with Cingular, with Sprint, and T Mobile in particular? You know, I’d love an update on what’s been happening with the in market build associated with Cingular.

Then thirdly, has the competitive market gotten more aggressive? Is that what you guys are talking about on the margin side, just out of curiosity, you know? Is there, you know, is it the [leak] that’s kind of effecting you, you know, the cricket-type plans out there? Or is it just the national carriers being more aggressive.

Thanks. Sorry for the longwinded question.

Scott Ford

That’s all right.

Kevin Beebe

That’s okay, Tom. Hey, this is Kevin. Let me take a shot at all three and then Scott and Sharilyn are welcome to chime in.

But on My Circle, what I can tell you is that right now – keep in mind that you have to subscribe to a $59 and above rate plan so while there is this unlimited component of My Circle, it is an unlimited service offering in essence, we’re really driving that $59 access point so we’ve seen some nice impact in terms of access revenue as a result of that.

About half – I think it’s still true that, of the existing base, the existing customer base that’s moved to My Circle, about half have migrated up and about half have migrated down. So it’s probably still too early to tell if there’s any long-term impact on usage in a [positive] way. We’ll keep a close watch. I think your suspicions are probably right. There’s certainly higher users. I think Mike asked a good question, too, about family plan usage because they’re higher users and may attract more family plan, more families, if you will to us. So we’ll keep a good eye on it. But early on, that’s what we’ve seen so far and I do think the nice uptick in post-pay this quarter as well as if you notice, I’m sure you have, our ARPU up 4% on as reported. That, we think, is huge given where the industry’s going.

On the Verizon – on wholesale and other margin pressures, here’s what essentially happened. Still too early on Cingular. We signed an extension. We’re in the process of joint planning with them on where DSM sites should go. We’ll get some of those in place by the end of the year. You probably won’t see any revenue uptick until next year as a result of the new Cingular agreement.

Short-term, keep in mind that I would guess that you would all assume that if we extended the agreement, it probably meant a lower rate. Decent assumption, and that’s why I mentioned, you know, there’s this period of time between the changes in rates and the delay in the pickup in volume. So we’re not – putting it another way, we’re not making it up in volume yet, but we believe that will happen because there are commitments.

As it relates to Sprint, same kind of thing. We’ve had some good success in moving some volume to Sprint. Vice versa. They’ve been great to work with. In terms of joint planning, of how we go about that, we’re real excited about the DO component of that agreement and are in the process of planning some marketing efforts around what that allows us to deliver to our customers. But again, still too early and it probably will take another 90 to 120 days for that to really be reflected in our numbers is my thought, both revenue and then probably some expense savings there as well.

Competitively, what I really meant was that, just overall add expense has been up all year, year over year. I think that will continue. It’s just more or less the price of poker right now. I think I’m right. I saw a stat that Frank O’Mara, our marketing guy, shared with us, shared with me. I think the top, it’s like the top three advertisers in the world this year are going to be telecom companies. U.S. telecom companies. Which is –

Scott Ford

Unfortunately, they’re not over –

Kevin Beebe

Yeah, yeah. [Inaudible.] So, you know, if the add spend - we feel great about the productivity of that spend right now. We’ve changed our media buying, as you probably know. You’ve seen some ads in New York because we’ve done some national buying on different stations and that’s certainly had a, that’s certainly contributed to our success.

Anything else on margin?

Sharilyn Gasaway

I think you covered it.

Kevin Beebe

Great.

Scott Ford

It’s a share [inaudible] battle, for the most part.

Thomas Lee – J.P. Morgan

Well, you know, if I could just follow up on that add spend, Kevin, because you know I’ve been curious. You know, I’ve seen some of these ads in New York, you know, and I know you’ve got that guy from like Trading Spaces, I think, you know?

Kevin Beebe

Yeah.

Thomas Lee – J.P. Morgan

On some of your ads? Ty, and like, you know, is that leading to any inbound customer confusion because like someone in New York City may try to sign up for service, or is there potentially strategy down the road where you could have a wholesale offering for a customer? You know, whether it’s a pre-pay product or you know, some way to provision it?

Kevin Beebe

It’s not our intent, but are people from New York or LA or Chicago calling us and asking about service? I think it’s probably yes, so there’s a little bit of bleed-over and confusion but it’s not, you know, not to the degree it’s been disruptive to our business certainly. Again, what essentially happened there is the per unit price of buying on a national basis got low enough where it was worth, quite frankly, it was just worth the bleed over.

Thomas Lee – J.P. Morgan

Gotcha. Well, thanks. We’re looking forward to, you know, the second half and some of these agreements really kicking in.

Kevin Beebe

Us too, man. Thanks.

Operator

Your next question comes from David Barden with Banc of America Securities.

David Barden – Banc of America Securities

Hey, guys. Thanks a lot for making it to this point. I guess the first question would be on the kind of [CPCA] trend and [possibly] because I missed the very first question but obviously we saw Cingular kind of backing away from some of their handset promotions. They seem to have kind of started the fight on handset subsidies. Verizon seems to be kind of carrying on the fight at this point in time with their $79 Razr promotion. Kind of as you look at the My Circle plan and you kind of balance out pricing promotions versus handset promotions, kind of strategically, how do we think about that into the back half of the year?

Then, I guess, just in terms of, I know the buyback is kind of underway and there’s certain targets that we’re looking to be met over the course of the year. I guess if there was kind of any commentary or thought process that you guys had around what else, you know, not that you need to do much else, but what else can be done or are you thinking about things to be done that are incremental to the game plan that’s been laid out, $3 billion and $1 billion on debt?

Thanks a lot.

Kevin Beebe

Hey, Dave, why don’t I take the first part and then I’ll turn over the second part to somebody else?

You know, I have – I can’t remember an offering we’ve had that has enabled us to price our phones at a premium and still get growth the way My Circle has. We stayed at $99 on the Razr. As you’ve suggested, you know, the two largest have really been slugging it out at $79. There’s been some relief, you’re right; it looks like Cingular’s backed off a bit on some of their phone pricing. I think it’ll be a flurry as we end the year and, you know, fourth quarter will probably be very aggressive is what we’re expecting. But we’ve been real pleased to hold the line on what has become with the Razr, certainly the most popular phone. Credit to Motorola for their product.

[Launched] some new phones as the year winds on. We just launched something with what we call fast tap, which is technology developed by a company called Digit Wireless out of Boston or Lexington, Mass. that’s, we think, pretty cool and should hopefully stimulate some additional texting so you’ll see us do that kind of stuff and then at the same time price the phones as aggressively as we can. But we’re trying to get a premium for it if we can and so far, this first half of the year, it’s worked.

David Barden – Banc of America Securities

But it sounds like, maybe in the guidance, Kevin, you’re kind of anticipating kind of accelerating rate pressure on the handset subsidy side?

Kevin Beebe

I think we’re anticipating it staying about the same and hopefully, with our volume – you know, with volume the good thing that happens is you, we love the fact that we’re selling a lot of phones, especially Motorola phones, and we hope they notice that and we hope that –

Scott Ford

Who you talking to?

Kevin Beebe

We hope that they’re able to give us some real nice price breaks as we go forward which – yeah, I mean, you know, that’s the way it works, right? Get more volume, you should get a better price.

Scott Ford

Okay, guys, it pertains to the buyback. This is Scott. There are several things that limit it. We could talk about what informs it and why we’re interested in it, and we will stay off that soapbox. What limits the buyback right now is a couple of things, one of which is, as part of the wireline spin and the tax-free nature of the spin, we are limited to 19% plus or minus buyback over a reasonable period of time.

We have announced a 15% to 18% buyback and we have started executing on that.

We are also limited by the percentage of the float that we can pick in any given day based on the trading and that all has to be managed and John Ebner, that led off our call, has to watch that everyday.

All of that said, it is, I think, in the top five buybacks in the history of corporate America in terms of the percentage of the outstanding shares once it is fully executed, and it may take us, you know, 18 or 24 months to execute it but it may not take us that long, depending upon how all these other factors are sorted through by the treasury and the tax team.

David Barden – Banc of America Securities

Well, you know, if I could be more specific, I have – obviously you have a significant amount of leverage. Obviously you are limited in terms of how much you can buyback on stock. Are you able to contemplate dividends, increasing special dividends or other kinds of [inaudible] to accelerate the rate of return to stockholders above and beyond the $3 billion that’s been articulated?

Scott Ford

Yes, I appreciate the specificity of the question and I will assure you that, now that we have been allowed to contemplate and think, we’re thinking. We have a range of things that we could look at, and some of which we have studied in the past and we will continue to take a hard look at in the future. When there’s something that rises to the level of being worth to report, we will get right to you.

David Barden – Banc of America Securities

I appreciate it, Scott. Thanks.

Operator

Your next question comes from Chris Larsen with Credit Suisse.

Chris Larsen – Credit Suisse

Hi, Scott. I’m going to just follow on that one. Beat this dead horse just a little bit more. Can you do an accelerated share repurchase plan where you go to an investment bank and, you know, here’s $X million, go ahead, buy it until you can stop worrying about windows and stuff like that?

Second question, the Midwest Wireless transaction close, anything that we should be worried about? Why it was pushed off a quarter or so?

Then, on an operational basis, you had the 2% decline in the wholesale revenues. If Western had not had the Verizon price decline, so to speak, you know, if we were to X that out, could you give us a sense, ballpark, what wholesale revenues would have done so that we can think about the anniversary of that, what the trend might be?

Thanks.

Sharilyn Gasaway

I’ll take the first one on the spin-off, I mean, the share repurchase and doing something on a more accelerated basis. When we went through and basically determined how we were going to do our tax free spin off, the safe harbor rules allow us to do it more in an open market and so that’s – we’ve been a little bit more conservative from that standpoint and have done it in an open market repurchase scenario so that we stay within and not jeopardize in any way the tax-free nature of the spin-off that we completed. That’s really the reason that we are doing it in that manner.

If we wanted to be more aggressive, we would actually have to go back to the IRS and talk to them about doing something different.

Kevin Beebe

Hey, Chris, why don’t I take the next two? This is Kevin. On the Midwest close, nothing to worry about there but if you’ll recall shortly after we announced the transaction with Midwest one of their partners took – decided to take issue with Midwest’s interpretation of a partnership agreement and what the partner – there’s a right of first refusal on the markets that we have to divest of [inaudible] in Minnesota, that took some time to clear. But at the end of the whole process, a court in Delaware viewed the same way that Midwest did so that got kicked out and is over with. But that delayed things.

That also delayed the process of discussion at the Department of Justice of how we clear the conflicts and how we go about doing that. We’ve had conversations now with the DOJ. Those have gone well. We have a plan in place and are getting after it. So it’s nothing around the Midwest business or anything else. It’s just the consequence, consequence isn’t the right word, but its just some circumstances around the transaction, mostly that particular partner who took issue with what they thought was a right of first refusal which really wasn’t according to a nice judge in Delaware.

Chris Larsen – Credit Suisse

Excellent.

Kevin Beebe

On the wholesale side, here’s what I’d say. I don’t know specifically the answer to your question but my guess is because of the way the first quarter turned out, which involved some overbills by Verizon and had an impact on our wholesale business, I think overall our wholesale revenue would probably still be down but not as much. I don’t know specifically anything more around that. We can get you some insight if you like but, you know, just going back to the first quarter, I know that overbill had some impact on us for sure and that was before we saw the full impact of the transition that we now see at Western.

Chris Larsen – Credit Suisse

Thanks a lot.

Kevin Beebe

You’re welcome.

Operator

Your next question comes from Rick Prentiss with Raymond James.

Rick Prentiss – Raymond James

Yeah, good afternoon. Follow up on a question I think Tom was getting at a little bit earlier about the building out of GSM sites for Cingular? When you bought Western Wireless you were thinking about expanding the amount of [inaudible] historic markets that you might do [inaudible] what you’re doing with that?

The second question is, obviously some exciting potential future with the DO with Sprint. How many of the handsets that you’re seeing today DO in it from a handset side, not an AirCard and where do you think we’ll be at by the holiday season?

Kevin Beebe

Hey, Rick, this is Kevin. On the GSM sites, yeah, we’ve continued to expand the number of GSM locations within the ex Western markets, if you will, so that’s – we had some obligations as part of our agreement with Cingular and actually an agreement with T Mobile as well so that’s continued to happen.

The next step in the expansion agreement we just signed is to work with Cingular jointly, which we are now doing, to target some heritage Alltel markets. We’ve begun the process of identifying those markets. We haven’t done any build-out. That’s why I think I mentioned earlier, don’t expect to see any revenue uptick in 06. It’ll probably be 07 until we see some of that impact.

On DO roaming with Sprint, right now, I’m going off the top of my head but, you know, probably 20%, 30% of our handsets have some DO functionality. I think that will continue to increase and by the holiday season. Given the success of the Razr, a good amount of our volume going out the door right now has been, it’s on DO handsets.

I think the impact of that we’ve seen is that DO handset and the functionality of a higher-speed data service really encourages more downloading and we’re certainly seeing our ARPU, our data revenue, as a percent of our total ARPU is up to 6%. As you recall, you know, a scant year ago, I think we were around, I don’t know, maybe 3%, 4%.

Scott Ford

Maybe.

Kevin Beebe

Yeah. We’ve gotten some good growth which we feel great about. We have some progress to make. Verizon just reported some great numbers yesterday in terms of the ARPU, data ARPU as a percent of their total. So we saw the gap and we’re working hard to get there.

Rick Prentiss – Raymond James

Great. Maybe one question for Scott. Since you guys are not in Auction 66, you’re one of the guys that can maybe talk a little bit about it strategically, are you [surprised] by the size in the deposit by the satellite TV guys, or what do you think it might be up to?

Scott Ford

Well you know, this auction, apart from us being in it, not in it, just talking about it in abstract, the auction looks to me like it’s been – it was most aggressively pushed for by those who desperately need spectrum. It’s not the best spectrum in the world and it’s a little high to be good voice coverage spectrum. It’s a little low to be good broadband, but it’s the spectrum that the government could get its hands on and if you’ve really got to get into the market, I guess, you know, it’ll do. You may have to – you’re going to see phone with four radios and two antennas, if people are actually going to use this network in the fashion of tradition mobile work is deployed today.

So yeah, it’s going to be a series of wild cards. It looks – we just decided not to go because it wasn’t worth the headache. It looks to me that everyone who’s got a reasonable spectrum position is just going to sit around and watch, and the people who have gotten themselves in a spectrum crunch are going to be your primary participants. That’s just what it looks like as an observer.

I – you know, we could all sit around here and opine on that and I don’t know that we could tell you anything you don’t already know.

Rick Prentiss – Raymond James

Great. Well thanks for that insight. Good luck, guys.

Scott Ford

Thank you.

Operator

Your next question comes from Simon Flannery with Morgan Stanley.

Simon Flannery – Morgan Stanley

Okay, thank you. Good afternoon. First, Sharilyn, I just want to make sure we have apples to apples with the February meeting. The guidance you gave I think was for wireless service revenues but can we have number for CSS or else for the total and, if you can parse out how much of that is – how much of the change is due to Midwest not being in for the full six months.

Then Scott, just coming back to February again for you, you talked about the added flexibility to pursue more growth-oriented strategies in a post-wireline world. You’re obviously not participating AWS. You have, though, pursued My Circle and some innovative calling plans. Anything else that you’re really, you know, thinking about that we should be factoring in for the next few quarters?

Thanks.

Sharilyn Gasaway

Simon, if you go back and look at what guidance we provided back in February, we split out wireless revenue between wireless and CSS and now, given that some of those revenues actually need to be in-service revenues, that’s why we gave you basically new guidance that has, and primarily the only change is the backbone revenues that we’re going to be getting from Windstream. Those are going to be reflected, along with some small amounts of third-party wholesale transport LD, into the wireless service revenue number. Then everything else will just be in product sales. So that’s why we wanted to give you some new numbers, just given the geography.

The impact of Midwest, what we had assumed was about $125 million of revenue for the back half of the year for Midwest and now we’re basically assuming about a half impact of that.

Then, for EBITDA impact, the amount that we are now – that we previously assumed was about $55 million and now we have 23 in there. Those are all included in the reconciliations that we provided you.

Scott Ford

As to the AWS auction, Simon we did spend a good bit of time reviewing the AWS auction both as an individual entity and with people who are not typically in the industry. We had two or three primary reservations as an individual company, when you get down to it. One was the nature of the spectrum causes us some angst. The second one is, when you go through buying the spectrum because you’re going to build a wireless network, whatever type of wireless network that might be, buying the spectrum, however much it might cost, is the absolute cheapest part of the exercise. The capital expenditures are the second cheapest part of the exercise, and then you have to sell, market, brand and move customers onto the network.

What we determined when we really took a hard look at it is that, to go up against incumbent providers was going to cost three to five times the amount of money that people were bandying around as what it costs to build a network and get into business.

We are, as usual I guess, and I guess we’re just getting used to it, we are kind of alone in the wilderness with that point of view and so be it.

The third thing is, given that view from the work that we did, we looked around and said, could you replace our business for our market cap if you started from spectrum and the answer to that is, we don’t believe we could. So we think for our shareholders, if we’re right about our analysis on No. 1 and 2, our shareholders will benefit the most from us sitting here and buying our own stock back given the capital resources and the assets that we have to derive value from and it’s, you know, you can debate this, right or wrong, but it’s pretty much that simple and that’s what we’re doing.

Simon Flannery – Morgan Stanley

Great. Thank you.

Operator

Your next question comes from David Janazzo with Merrill Lynch.

David Janazzo – Merrill Lynch

Good afternoon. Scott, can you walk us through the strategic thought process on the roaming deals, the Sprint and the Cingular, both the near-term and the long-term implications and the thought process there?

Scott Ford

Well, sure. You guys jump in here if I go wayward. It’s really pretty straightforward. Dave, we’ve had a very good relationship with Verizon for a number of years and, you know, Verizon and we pioneered the low-rate kind of high-volume, long-term roaming agreement and, you know, we about lost our jobs over it. You know, five or six years ago when we did it the first time. But we think that it’s proved out that that was the right thing to do in terms of positioning us to really compete and to have a footprint that we could sell into our retail customer base.

That agreement has several more years to go and I would imagine in the ordinary course that that will be extended, modified and adjusted over time just like all of these agreements are and I have no worries with that.

We were in a position through the Western deal to pick up T Mobile and Cingular and Kevin alluded to where we are on that a few minutes ago. I won’t go back through that, but it introduced us to two new roaming partners that we really had lost any ability to do anything with since – once analog had basically been taken down. We used to be fairly good-sized roaming partners on an analog basis with the old SBC and BellSouth.

But we were able to pick up a relationships there that are just good money. John Stanton and his team were the pioneers of kind of the cross-banded, multi-technology roaming so we might have invented the low-rate, long-term but their group figured out the multi-technology and so we were able to bring a lot of those folks in and the knowledge there and use that experience for the benefit of our shareholders. So we think that’s been good.

The wild card in this was Sprint and the Sprint folks have been exceptionally easy to sit down and talk to about the EBDO nature. It’s one thing to have a voice agreement but everybody has different - Kevin help me out here. Everybody has different technological twists, if you will, in the hardware and software in the provisions of their data networks and it’s not easy to make those networks mesh together, not as easy as it is on the voice side.

But it does take putting people in a room, sitting down and hammering through it and Sprint was in a position where they wanted to do that, I guess for their own business reasons as they expand their network, and it gave us a moment where we could get a ten-year run at an EBDO network and we needed to take it.

Strategically, as you think about it – I’m going to shut up here in just a second. Strategically, [inaudible] what we thought was most important was that we secure a long-term future for our retail customers, that we make money where we can in our markets where it’s just not cost-effective, really, for other people to, I guess, build some of the network [inaudible].

But number three, that we not damage the strategic value of the business in the chess game of consolidation and we’ve been very careful in each of those contracts to assure that if we’re the owner of the business, everything can run along as it and if we’re not the owner of the business, that someone who wants to pay to be the owner of the business has the benefit of redirecting those relationships in the fashion that they deem appropriate.

So that’s the strategic thinking, really, and soup to nuts on how we structure the roaming agreements.

All right. That was maybe more than you were looking for.

David Janazzo – Merrill Lynch

A great dissertation. Thanks for that.

John Ebner

Hey, Katie? We have time for one more question.

Operator

Your last question comes from Jonathan Atkin with RBC Capital Markets.

Jonathan Atkin – RBC Capital Markets

Thanks for taking the question. I was wondering about the incremental net add penetration that you’re seeing. Is it any different in the former Western markets versus legacy Alltel?

Then, with respect to competition, one of the national carriers recently entered Wal Mart. Wondering if you’re seeing any impact from that, as well as any other kind of developments on the competitive front?

Kevin Beebe

Hey, Jon, this is Kevin. Why don’t I take both of those.

Yeah, in fact the – we had good post-take growth in both heritage Alltel and Western markets, but certainly in terms of a percentage pickup, Western has been a great success. Credit to the teams that are out there, a lot of them being ex Western Wireless employees that are really grabbing ahold of the new offerings we have, the new phones, the new footprint, a lot of goods, new pricing, etc. That’s really beginning to resonate.

I always want to give credit to folks in our network organization. It’s done a great job of improving the networks in those markets in a short term, very short term.

Secondly, you know, the not so glamorous part of our business is often the behind-the-scenes things like billing systems and customer care systems but we converted 1.4, almost 1.5 million customers over a weekend without a blip which is just flipping amazing to me, and great work on the part of the IT team at Alltel as well as the op support folks that really helped them to make that happen.

So all of that – I share all of that, one, to give all the employees on the phone great thanks –

Scott Ford

[Inaudible]

Kevin Beebe

Yeah, great thanks because they really deserve it but in addition, to let you know that we did many things to prepare for the growth that we’re now seeing in the Western markets. We’re real pleased with that.

Then of course you and I have talked in the past about the opportunities there and we’re seeing that come to fruition.

You’re right. One national carrier did enter Wal Mart. No direct impact on our business as of yet. We’re doing some things to reposition our Simple Freedom brand. That should happen this quarter, actually, third quarter, which I think – I know Wal Mart’s [inaudible] so we’re going to kick it up a notch, so stay tuned for some things there.

Been very pleased with the Wal Mart, though. It’s slower – it was slower in the second quarter than it was in first. When we ended the first quarter, we attempted, at least, to let everybody know we though 2Q pre-pay would be a lot less because a lot of that’s seasonal but we did see, we certainly did see that, combined with the fact that we just did so darn well on post-pay which we’ll take all day.

Jonathan Atkin – RBC Capital Markets

Then Q2, real quick ones if I may follow up. One is, you have modified and even added these new pre-pay offers. What kind of ballpark ARPU and churn are you thinking about from pre-pay going forward?

Then the last one would be, you know, Sharilyn mentioned leasing the long-haul capacity to Windstream. Are there additional wholesale revenue opportunities that might come from that asset?

Kevin Beebe

Yeah, on pre pay ARPU and churn [set], it’s too early to tell on our new offering. The new wireless plans, I think, is probably what you’re referring to. We’re pleased with the uptick, or the take up, I should say, from the customer base and the numbers that have subscribed to it. But it’s still too early to tell if any of that’s going to stick in terms of improvement in churn and ARPU, quite frankly. It’s just, you know, it’s a pretty tough marketplace in terms of the constant turnover.

On the wholesale side, you want to take that, Sharilyn?

Sharilyn Gasaway

Yeah, I can take that. The wholesale revenues that we have with Windstream are really part of our transition service plan that we have with them and that service lasts for a minimum of two years. Keep in mind that’s certainly at very pretty low margins just given the nature of the services that we’re talking about, mainly wholesale LD so not likely we’d pick more of that up in the future.

Scott Ford

Just keep in mind, Jon, that the sales people that are selling access to those kinds of networks and services actually went with Windstream.

Jonathan Atkin – RBC Capital Markets

Thanks very much.

Kevin Beebe

You’re welcome.

John Ebner

We’d like to thank everybody for joining us this evening. We appreciate your interest and support. If you have additional questions, please contact our Investor Relations Department at 501 905 8991. Tim Hicks, our new Director of Investor Relations and I will be available for questions and Mary Michaels, Windstream Investor Relations, will also be available to answer [inaudible] questions. She may be reached at 501 748 7578. Thank you very much.

Operator

This concludes the second quarter earnings release conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Alltel Q2 2006 Earnings Conference Call Transcript (AT)
This Transcript
All Transcripts