Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  
TRANSCRIPT SPONSOR
Better Than AdSense

Alltel Corporation (AT)

Q4 2006 Earnings Call

February 20, 2007 8:30 am ET

Executives

John Ebner - SVP of IR and Treasurer

Scott Ford - President and CEO

Kevin Beebe - Group President of Operations

Sharilyn Gasaway - EVP and CFO

Analysts

Thomas Lee - J.P. Morgan

David Janazzo - Merrill Lynch

Tom Seitz - Lehman Brothers

David Barden - Banc of America

Simon Flannery - Morgan Stanley

Phil Cusick - Bear Stearns

Chris Larsen - Credit Suisse

Jason Armstrong - Goldman Sachs

Richard Klugman - Prudential

Donna Jaegers - Janco Partners

Kevin Roe - Roe Equity Research

Presentation

Operator

Good morning. My name is Dishanta, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2006 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Ebner, you may begin your conference.

John Ebner

Thank you. Good morning, everyone and Happy Mardi Gras Day. Welcome to Alltel's fourth quarter 2006 conference call. My name is John Ebner, and I lead the Treasury and Investor Relations for Alltel. Thank you for participating in this discussion of our fourth quarter and full year results.

Today's conference call was preceded by our fourth quarter 2006 earnings release. This press release has been distributed on the newswire 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 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 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 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 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.

Participating in our earnings discussion this morning 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 our prepared remarks, we will take a few questions.

With that, here's Scott Ford.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Scott Ford

Thank you, John. And what is it, Happy Mardi Gras Day?

John Ebner

Absolutely.

Scott Ford

Happy Mardi Gras Day. This morning I'd like to provide highlights from our fourth quarter and a very busy 2006. As well as, provide an update on our ongoing strategic review process. Kevin is going to cover the key operational highlights, followed by Sharilyn's review of the financials and she's going to give you our guidance for 2007.

On a GAAP basis, in the fourth quarter and for the full year, Alltel earned $0.58 and $2.93 respectively of fully diluted EPS, which includes one-time expenses and several other items disclosed in our supplemental material. From current businesses in the fourth quarter and for the full year, Alltel earned fully diluted EPS of $0.63 and $2.19.

These current business EPS numbers represent increases of 58% for the quarter and 20% for the full year over the comparable periods in 2005. And they were impacted by the de-leveraging from the wireline spin, the ongoing share repurchases and both organic and acquired growth.

In 2006, we generated $709 million of equity free cash flow. This was an increase of 35% year-over-year on growth and total revenues of 20%. The strong rise in both revenues and earnings for both, the fourth quarter and the full year was driven by record level customer growth. For the full year and pro forma for the acquisition of Western Wireless, gross and net adds increased 7% and 51% respectively year-over-year.

2006 was a milestone year for Alltel. We completed the spin-off and merger of our wireline business, sold our international assets for $2.3 billion, acquired over 0.5 million customers through our purchases of Midwest Wireless, First Cellular of Southern Illinois, Virginia Cellular and Cellular One in Amarillo, Texas, ending the year serving almost 12 million customers. And we have launched My Circle, one of our most innovative and successful service offerings yet.

As it pertains to our to capital structure during 2006, in addition to Windstream spin-off, the Alltel Board of Directors approved dividend payments of over $500 million and authorized share buybacks that once completed will be one of the largest relative share repurchases in the country over the past decade.

In the second half of the year, we spent $1.6 billion acquiring approximately 28.5 million shares at an average cost of $56 a share. It represents more than 50% of the authorized $3 billion share repurchase and almost 7.5% of our total shares outstanding.

In total, we returned over $6.7 billion in cash and Windstream stock to our shareholders in 2006. We maintained one of the strongest balance sheets in our industry, finishing the year with only $1.8 billion in outstanding net debt. And we saw a 17% increase in our stock price excluding the Windstream distribution for the year.

In short, 2006 was a banner year for us, both strategically and operationally. And this quarter was our best quarter ever from a financial perspective, as we set records in wireless revenues and OBITDA. In the quarter, we also increased our OBITDA margins, 210 basis points year-over-year to 37.3%, while simultaneously setting record level gross and net adds. Further, with the nation's largest wireless network operating in the highest quality spectrum available, we are confident that we will be able to deliver another outstanding year in 2007.

Strategically, as reported on our third quarter call, we continue to carefully review a wide span of options. The ongoing review touches upon all aspects of potential value creation from balance sheet restructuring to strategic alternatives to operational opportunities. While comments about likely outcomes or expected timing beyond these generic descriptions are not appropriate at this time, I can provide you with a brief update on where we stand in the process.

We recently met with our Board to preliminarily review the broad spectrum of options available to the company. More analysis will be conducted on several of these options. We will then review with the Board that updated work. This review and the implementation of any option we may wish to pursue, could last several months. Of course, if and when a conclusion on these matters is reached, we will notify the public at the appropriate time.

Before I turn the call over to Kevin, I would like to take one moment to thank the entire Alltel team for its tremendous efforts in 2006. Managing through all of the corporate level changes, while turning in the best operational set of results in the company's history was no small feat. The entire team has my respect and my appreciation. 2007 will no doubt have its own share of unique challenges and opportunities, and I am confident that we are prepared to meet them as well. Kevin.

Kevin Beebe

Thank you, Scott and good morning everyone. First, I would like to review some of our fourth quarter highlights. Wireless gross customer additions were an all-time high at 899,000 for the quarter. That’s up 7% year-over-year. We achieved record setting net additions of 228,000 for the quarter. That’s up 35% year-over-year. Post-pay net additions were 126,000 and pre-paid net additions were 102,000 in the quarter.

For 2006 and pro forma for the acquisition of Western Wireless, gross adds increased 215,000 or 7% and net adds also increased 215,000 or as Scott said 51%. Our post-pay churn was 1.47% and our total churn was 1.92 during the quarter. This is the fourth consecutive quarter that both metrics improved year-over-year.

Also during the year, we were recognized by both JD Powers and Consumer Reports for our continued focus on improving customer service. This is further supported by the churn improvements that I just mentioned.

Fourth quarter costs per gross add of $344 was relatively flat sequentially and year-over-year. Consistent with the industry, we will no longer report a CPGA metric. We will begin to report a single, total cash cost per average customer, which will include selling and marketing expenses. We believe that that’s a better gauge of our effectiveness.

ARPU was $52.84 in the quarter. It now includes revenues associated with our wholesale transport business. Retail revenue per unit is essentially flat year-over-year this quarter at $46.62, driven by a combination of a decrease in voice ARPU. That's offset by continued growth in data and ETC revenues. For the year retail revenue per unit was $47.02, that’s up 1% year-over-year.

Data revenue per customer was $4.14 in the quarter, that’s an increase of 60% year-over-year and 11%, sequentially. It is now almost 9% of retail revenue per unit.

We ended 2006 with 50% of our cell sites having EV-DO capability and plan on equipping 65% of our cell sites by the end of this year. This planned network expansion coupled with our Sprint data roaming relationship, enables cost-effective access to a national high-speed data network. Also as of the end of 2006, over 90% of our customers' handsets are data capable and in the fourth quarter over 40% of the handsets we sold were EV-DO capable.

We expect data revenues to be a big part of our growth in 2007. A few weeks ago, we changed the face of wireless phones by launching Celltop. Celltop offers customers an easier way to access, manage and organize a wide range of information already available on their Alltel wireless phones. We'll continue to find innovative ways to maximize the choices our customers have in data offerings and to provide them with easy access to those services.

Cash costs per customer excluding CPGA expenses were $24.31 in the fourth quarter, that’s down 2% year-over-year. In the fourth quarter, total cash cost per average customer per month was $33.13. That’s down approximately 6% year-over-year, if you exclude the costs related to the wholesale transport revenues.

Turning to our wireless wholesale business; the movement of minutes to lower rates in exchange for new long-term agreements signed earlier this year, coupled with reduced volumes from some carriers, resulted in a year-over-year revenue decrease of 2% in the fourth quarter.

Before I turn the call over to Sharilyn, I would like to make a few comments about 2007. Data revenue growth remains key to our success. We'll look for opportunities to increase our offerings and make it easier for customers to use our data services. Also, we plan to continue growing customers at the rate experienced in the second-half of 2006, as long as we believe the long-term benefit outweighs the short-term cost.

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

Sharilyn Gasaway

Thank you, Kevin and good morning everyone. I will start-off with some fourth quarter financial highlights, and then cover the results for the full-year. In the fourth quarter, we achieved $0.58 of fully diluted earnings per share on a GAAP basis, which includes $19 million in net losses, primarily related to discontinued operations and the amortization of purchased wireless intangible assets. Both partially offset by favorable IRS tax settlements. Excluding these items we achieved $0.63 of fully diluted earnings per share from current businesses on a 373 million average share count.

For the quarter, Alltel generated $1.9 billion of service revenue, an increase of $201 million or 12% year-over-year.

Retail revenue grew 11% in the fourth quarter and was driven by our continued focus on quality customer adds and increases in data and ETC revenues. In the fourth quarter, ETC revenue was $71 million, up 32% year-over-year.

Cash costs per customer, excluding selling and marketing expenses were $24.31 in the fourth quarter, down 2% from a year-ago and down 4% sequentially. In the fourth quarter, bad debt expense was down year-over-year and sequentially, due to improvements in the management and collection of customer accounts and our roaming expense was also down year-over-year and sequentially, as our average costs per minute declined.

Also impacting our cash costs per unit are the expenses related to the transport revenue from Windstream, which are at very low margins.

In addition, keep in mind that we are still providing various transition services for Windstream. In the fourth quarter, we recognized approximately $20 million in Windstream pass-through invoices. These Windstream expenses, paid by Alltel and billed back to Windstream at cost, are grossed up in our transport revenue and are also reported in our cost of service expense. They have no impact on our margins. The volume of this pass-through activity will continue through the first half of '07, but will diminish each month as vendor relationships are transitioned to Windstream.

For the quarter, OBITDA of $691 million was up 19% year-over-year for a 37.3% service margin, up 210 basis points from 2005's fourth quarter. Below the line, both other income and interest expense declined sequentially $22 million and $16 million respectively, due to decreases in our average cash balances and our average debt outstanding, as compared to the third quarter. Also our tax rate was 38.7% this quarter, bringing our annual effective rate to just over 38.3%.

Overall, we were very pleased with our results for the quarter.

Before I cover our full-year results, I will touch on our second half performance. Service revenue was $3.65 billion, which was within our guidance of $3.64 billion to $3.72 billion. OBITDA of $1.36 billion compares to our guidance of $1.38 billion to $1.43 billion. As we mentioned on our third quarter call, we made some trade-offs in that quarter that were substantially overcome by our outstanding fourth quarter results.

For the year, total service revenue was $7 billion, an increase of $545 million or 8% year-over-year on a pro forma basis. Retail revenue also grew 8%. OBITDA for the year was $2.6 billion, a 7% increase from a year-ago on a pro forma basis. For the year, cash costs per customer, excluding selling and marketing expenses, were $24.52, an increase of 1% year-over-year.

Total cash costs per average customer, which is the metric we will be reporting in the future for the full year of $33.10, was up 2% on a year-over-year basis. These costs are flat year-over-year excluding costs related to wholesale transport revenues.

Capital expenditures totaled $455 million in the fourth quarter and $1.2 billion for the year. This annual number was slightly below our guidance of $1.22 billion to $1.32 billion.

At the end of 2006, Our debt balance was $2.7 billion and our cash balance was $900 million, leaving a net debt balance of approximately $1.8 billion. Subsequent to yearend, we also sold, for approximately $189 million, equity securities that were part of Western Wireless's investment portfolio at the time of its acquisition.

Turning to guidance for 2007, we expect the following results for the year. Service revenue, between $7.8 billion and $8 billion, which is an increase of between 11% and 14%. OBITDA between $2.9 billion and $3 billion, which is an increase of between 11% and 15%; and CapEx between $1.15 billion and $1.25 billion, which is flat from 2006. Of course, this guidance does not take into account any strategic decisions we might make during the year, around such things as our roaming relationships, merger and acquisition activity, or spectrum purchases.

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 Thomas Lee with J.P. Morgan.

Thomas Lee - J.P. Morgan

Hi, good morning. Congratulations, because I think this is unequivocally one of the strongest quarters I have ever seen from you guys, both in terms of net adds and EBITDA margin.

Scott Ford

Thank you.

Thomas Lee - J.P. Morgan

I have a couple of questions. I am just trying to parse through the remarkable performance in the fourth quarter relative to third quarter. Now, I was hoping you could answer this in the structure I am providing?

Scott Ford

No guarantees on that Tom.

Thomas Lee - J.P. Morgan

So, in the third quarter, you had reported EBITDA of around $668 million?

Scott Ford

Yes, correct.

Thomas Lee - J.P. Morgan

And Midwest was going to add $25 million in the fourth quarter. When I look at the third quarter to fourth quarter, you have ARPU down by a $1. Gross adds up by $70,000 sequentially. So, both really representing EBITDA pressures. And the fact that in the third quarter, you made a reference to strategic decisions that may or may not affect the second half, which I think a lot of folks ended up interpreting to be an incorrect roaming expense issue on choosing to stay with Verizon versus switching those minutes to Sprint?

That being said, it didn't seem like you made any progress there in the fourth quarter. So, when I look at the third quarter to fourth quarter, it almost looks like your EBITDA ex-Midwest. So, if you take the 691 minus the 25, you basically have flat sequential EBITDA despite having significantly higher gross adds, a $1 less in ARPU. So I was hoping you could walk us through what were the offsets in the quarter? Again, just remarkable clean beat on top line of EBITDA?

Scott Ford

Thanks Tom. And you reflect the sentiment that we share around the table here. We were exceptionally pleased with the quarter. And Kevin has got several of those specifics that you asked about to try and give you some flavor on that. But if you go back to the third quarter, we made it very clear that we thought people overreacted to what we said on the third quarter call. And that we were not nearly as worried about the full year as a lot of people interpreted the third quarter results to reflect. A lot of that was just taking time, trying to integrate Western, trying to integrate Midwest and starting to hit on all cylinders from just an operational management perspective.

We did make some decisions around roaming in the third quarter that were beyond our plan, negative to our plan in the third quarter. We've talked to you about that. We said we would be working through that in the fourth quarter in a rational, systemic way, and we did that. But it's really the operations, really from the top line revenue down to managing the expenses all the way through the income statement that drove this quarter's performance. Kevin, do you want to throw any specifics on that?

Kevin Beebe

Yeah. Hey, Tom. I think there were many things that happened in the fourth quarter in a positive way. A real credit to the Alltel team for lining it all up. First of all, I want to say that Dennis Miller and his team at Midwest did an exceptional job in the fourth quarter. They came in better than we thought on EBITDA. We announced earlier last week that Dennis has decided to retire. Many of you don't know him because he was running a private business, but just a great operator. And I wish him much luck in whatever he ends up doing next. That was one.

Two, we made some decisions in terms of our roaming expense in the fourth quarter. Some of which we alluded to in the third quarter, as you said that ended up helping us. We have no news to report on any new agreement signed with any particular carrier. But we made some decisions that were beneficial for our business in the fourth quarter in terms of our expenses.

Bad debt came in greatly improved in the fourth quarter. We told you in the third quarter call we had an issue where we were going to go address that if we thought it was mostly operational and [Dan Miller] customer service team and others that support them did an exceptional job with that in the fourth quarter.

The last thing I'd mention is that our gross mix was a bit different in the fourth quarter than it was in the third. While we still had predominantly post-pay sales, we did have a good amount of pre-paid sales. Those are less expensive from an acquisition cost perspective. Having seen some other numbers, obviously most carriers numbers, I felt really good about our customer growth this fourth quarter in terms of amount and overall quality.

Thomas Lee - J.P. Morgan

Okay. But just a follow-up. I just want to give you some numbers. The ARPU head in the third quarter and the fourth quarter is like $33 million, right? Just a $1 less. And the CPGA on the 70,000 gross adds is $21 million. So in another words, you overcame $54 million in expenses that would have been incremental sequentially. But of course, I think, Kevin, you answered partly the question because it sounds like you may have shifted minutes to Sprint, which would have overcome a lot of the expense pressure in the third quarter. Therefore, in the fourth quarter those numbers are sustainable going forward and that's obviously why you have the double-digit EBITDA guidance growth. But I am just curious, was there like over time or some other expense pressure in the third quarter that's also lifted? Was there a lot of extra expense that hit the third and it's gone now?

Sharilyn Gasaway

Tom, this is Sharilyn. Now, I would really just reiterate the comments that Kevin made in some of the things that we mentioned in our prepared remarks, and we did mention roaming. Our fourth quarter roaming expense was down sequentially because our average cost per minute declined. And then, we definitely did see pretty significant improvements in bad debt expense that also go along with the benefits in reduced churn and also improvements in the agings that we have seen in the customer accounts. And so, those were very positive as well. And then, we were able to keep our CPGA flat relatively on a sequential basis as well.

Thomas Lee - J.P. Morgan

Okay. And by the way, in the future every time you get to [suspend] guidance that means you are just raising numbers, right?

Kevin Beebe

You're done Tom.

Thomas Lee - J.P. Morgan

Thank you, guys.

Operator

Your next question comes from David Janazzo with Merrill Lynch.

David Janazzo - Merrill Lynch

Good morning. You had mentioned the debt balance at the end of the year and obviously the strategic alternatives. But on an ongoing basis, what level of leverage would you be comfortable with, realizing that we have got auctions coming up etcetera? But what type of leverage would you be comfortable with on an ongoing basis?

Scott Ford

We are clearly under-levered. And what we'd be comfortable with is probably a part of the strategic review that we are going through with the Board. And I am going to stay off of anything beyond the very scripted comments in the prepared remarks on that. Dave, I appreciate the question. It's a reasonable question. It needs to be answered and it will be in the [fullness of time].

David Janazzo - Merrill Lynch

Okay. Thanks.

Operator

Your next question comes from Tom Seitz with Lehman Brothers.

Tom Seitz - Lehman Brothers

Yeah, thanks for taking the question. Could you talk a little bit about your data strategy? I think you said EV-DO in 65% of the pops or markets by the end of 2007, is that right?

Kevin Beebe

Hey, Tom. It is cell sites actually.

Tom Seitz - Lehman Brothers

Cell sites, okay. Are you targeting the rural and suburban builds to capture the roaming opportunity that you have? Or are you targeting the urban markets, where the take rate today might be a little bit higher? And what I am asking is, over time do you think the rural and the suburban areas will use data commensurate with the urban users?

Kevin Beebe

Yeah. Let me answer your question first. The build-out plans for '07 are really a combination of different kinds of markets. I have mentioned in the prepared remarks that what we plan to do is really leverage the Sprint data roaming agreement we have to launch and offer a very broad national data network. So, it's a combination of markets. There are some markets that are very rural and there are some markets that aren't rural. We're proponent of rural broadband and the positions we've taken around all of this USF's discussion that is going on right now in Washington. We think that's critical. And if there are revisions, we think there is a real opportunity there to be revisions that support further expansion of broadband in the rural community.

I would say that, in terms of the demographic make-up, rural versus more urban, we don’t see there being much difference. It is certain, and absolutely now there's a difference. But our strategy is a simple one. I think what the industry has missed in general is making it much easier for customers to access the wealth of applications that are out there today.

Celltop, I am not sure Tom if you had a chance to look at that closely or to read some of the stuff we've been talking about relative to Celltop. Celltop is our attempt to bring a more usable device to the mass market. Keep in mind that there is no special price for Celltop. It's not a couple of hundred bucks to get Celltop. It will be placed on all of our phone line-up. The procurement team at Alltel did a tremendous job this year in working through the offering with the number of customers.

So, once we get that out there, we think the penetration rates on data will really be very similar across rural and more urban markets. That’s what needs to be there and that’s what we're going to make sure happens this year. Network team did a great job as well. 50% of our cell sites by the end of the year were an amazing accomplishment, given all the integration work we had to do this year. As Scott mentioned, we had a number of smaller acquisitions which are just as hard as the bigger acquisitions, quite frankly.

Tom Seitz - Lehman Brothers

Great, thank you very much.

Kevin Beebe

You bet Tom.

Operator

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

David Barden - Banc of America

Hey guys, thanks a lot. A couple of questions if I could. I want to go back to this question on the roaming and the margins. It looks like you guys beat at least my numbers, which is on page 600 of the financial release here. You guys had a $30 million bump up in cost of services in the second quarter and $30 million bump up in the cost of service in the third quarter. Last year quarter-over-quarter you had a $30 million bump up in the fourth quarter. And in this quarter when you layer in Midwest and all those other things we talked about. The sequential cost of services went from 610 to 613. Outside of anything else happening, it should have been closer to 640, 645 is my guess.

So, you've obviously done something very meaningful on the roaming side, and we need to explore that a little bit. What percentage of what you could be doing, have you done of this run rate margin. What can we expect is going to be sustained, what could be improved? The second question is a follow-up to that Scott. You play chess on a lot of different levels with your partners and how it all affects M&A and how it affects the 700 megahertz auctions.

Could you talk to us about how shifting this meaningful amount of roaming has or will or could affect the chess game you are playing with Verizon in terms of negotiating new roaming agreements? How are you thinking about 700 megahertz? How it affects the M&A game? Because clearly this is something that’s taking away from Verizon, adding to Sprint and it could be even more down the road. So, I would like to get more granularity on that. Thanks a lot.

Scott Ford

Yeah Dave, that's a good question. I appreciate the desire to get granularity on that. I think that we have great relationships with all our roaming partners. We work very hard at that. There are a lot of other factors in the business. Sometimes we all get along; sometimes we have issues that we have to work through. But we have a great track record working through the issues with all of them. Well I can appreciate your desire for granularity, you can appreciate my lack of desire to negotiate with any of them on our quarterly conference calls, and we'll just leave that be. The question that you asked on the operations was the exact questions that Kevin and Sharilyn have just gone through. We gave you the six or eight key things that were different. The fact of matter is, we got tired of the level of performance that we were operating at, and we decided to change. That’s the bottom-line. What you're seeing is a result of that over about a six-month timeframe.

David Barden - Banc of America

Maybe I'll just ask a follow-up. Of those things you kind of did this quarter, my assumption is that roaming is the biggest, but what can be done at the margin? If you shifted 25% of your roaming traffic and got $20 million of savings, there's obviously a lot of savings to be at the margin.

Scott Ford

Whatever is reasonable to be expected is in our guidance for '07.

David Barden - Banc of America

Okay. Thanks so much.

Scott Ford

You bet.

Operator

Your next question comes from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Hello, good morning. I wonder if we could talk a little bit about the post-paid adds, and the churn number in particular continues to come down nicely. Can you give us a sense of where you think that can go? It's obviously amongst the better in the industry. Is there still more there potentially if you compare yourself against Verizon? And give us a sense of the mix of the ads on the post-paid side. How is it trending towards family plans, towards My Circle? On My Circle, how much of the base is now My Circle and, what are the trends in terms of improving ARPU overall for your people trading down from higher price plans. Thanks.

Scott Ford

Hey, Simon, let me try to answer the questions. First of all the post-paid gains we had in a quarter and the churn improvement is a great combination. This obviously led to the stellar numbers that we reported. I think churn improvement is a combination of a couple of things. One is, we haven’t discussed in our planning on discussing any specifics on My Circle in terms of percent of the base. But what I can tell you is the characteristics of the customer base, which has grown much-much faster than we thought. The characteristics of that part of customer base are greatly improved when compared to our average as it relates to their desire to stay with us. So the churn rate is lower.

Keep in mind when you switch rate plans, we don’t require you to sign a new contract. So, that means that the base of customers that has My Circle, the general make up of that base and the period of time that is either remaining on their contract or the percent of those customers that are under contract is really no different than our overall average. So, often times the carriers who launch new service plans require contracts. Hence, the churn characteristics should be better in that particular part of their customer base. That’s not driven by a new contract for us. I think that’s very important to understand and very, very excellent for us going forward in terms for My Circle and its receptivity.

In terms of family plans, they still continue to be a big part of what we all sell in the industry. The churn characteristics of a customer that has an additional number from us as a part of the family plan again are much better than the overall average. Cingular really led the way there a few years ago and that was a correct move, as all of us have followed; right thing to do.

Going forward, while we haven't guided on churn or net or gross for the quarter, I would want you to expect that within the guidance Sharilyn talked about, is a plan to continue churn improvements throughout 2007.

The other thing we've done is that our IT team has worked hard to develop a database that we use from a marketing perspective that is just exceptional in terms of our understanding of our customer base. And our marketing team has put together some strategies around retention that are very much targeted, and they are working. So credit to all the folks that made that happen here at Alltel.

Simon Flannery - Morgan Stanley

Thanks.

Operator

Your next question comes from Phil Cusick with Bear Stearns.

Phil Cusick - Bear Stearns

Hi, guys. I wonder if you can talk specifically about expanding the GSM roaming and the potential there through the year? What that could be as a portion of your CapEx, and whether that's really already embedded in there or could be incremental? Thanks.

Kevin Beebe

Yeah. Phil this is Kevin, it's embedded in the CapEx number and we have consistent and constant dialogue with our GSM roaming partners about new markets.

Phil Cusick - Bear Stearns

So should that be a substantial part of your ramp-up or is that something we should just look to grow slowly through the year?

Kevin Beebe

Yeah, I think it will grow slowly through the year. Substantial is probably an overstatement. Even if it was substantial in terms of new markets, it wouldn't be substantial in terms of the overall number. CDMA is still a big part of our revenue.

Phil Cusick - Bear Stearns

Great. Thanks, guys.

Kevin Beebe

You are welcome.

Operator

Your next question comes from Chris Larsen with Credit Suisse.

Chris Larsen - Credit Suisse

Hi, thanks there. A couple of questions. Could you give us a sense for what percent of the handsets were upgraded within the quarter and the difference in subsidies versus new customers and existing customers? And then on EV-DO Rev A's, Sprint needs that for the QChat. What are your thoughts on deploying Rev A throughout your footprint or how much Sprint might need for their QChat? And then could you just remind us when the Verizon contract expires? Thanks.

Kevin Beebe

Alright, last one first Chris, that's 2010.

Chris Larsen - Credit Suisse

Okay.

Kevin Beebe

We don't release specific numbers on retention customers. But I can tell you that the subsidy between an existing customer or a retention spend as related to the handsets and overall phone or equipment subsidy as related to a new customer is no different. It's exactly the same. What we have been able to do, is leverage this idea of no new contract, if you change your service plan. When we launched that a few years ago now, it didn't get a lot of play, because it was just little or more or less doing it. But it was a great strategy and it's very compelling from a customer perspective and it's causing them to stay around. So, I think it helps us to keep that subsidy the same, is my point.

On Rev A, we are in dialogue with our roaming partner on that and how to deploy it, throughout our footprint is probably an overstatement, but understand that they will have a need for it from another perspective and we are talking with them about that. Whatever we will do is within the CapEx guidance for the year.

Chris Larsen - Credit Suisse

Thank you.

Kevin Beebe

You are welcome.

Operator

Your next question comes from Jason Armstrong with Goldman Sachs.

Jason Armstrong - Goldman Sachs

Great, thanks. Couple of questions. First, the guidance; you're implying sort of growing ARPU into '07. Kevin, you just talked about churn improvements, and you've got the prospects for continued deal integration. But if you take the midpoint of guidance for both OBITDA and service revenues, it implies really no margin pickup from '06. I am just wondering, given all the moving parts, why we wouldn't see a pickup there?

And then, second question, more data points into '07. ETC stepped up again this quarter, I am wondering what the outlook is for '07? Thanks.

Sharilyn Gasaway

I will answer a bit of that, Jason. Keep in mind that midway through '06; we entered into new roaming agreements with Sprint. And so we are going to have some pressure on our bottom-line from those reduced rates that we were offering to our CDMA partner there. Also, keep in mind that with some of the revenue growth, we still have some transport revenue that's probably distorting our comparisons just a bit and a lot of that doesn't always make its way to the bottom-line. So those are just a couple of items to keep in mind.

Scott Ford

I think overall, we expect some nice growth, customer growth, '07 versus '06, keep that one in mind. The tail end of the year, I mentioned in my prepared comments that we expect '07 customer growth exactly similar to the second half of '06, which was better than the first half of '06. Keep that one in mind too, Jason.

And then, lastly on ETC. Yes, also nice growth, but relatively flat in '07 is our expectation. Lot of things there that we are working on. We have a great team of people that works on that as well. And if we see some improvement, believe me, you'll be the first to hear that along with everybody.

Jason Armstrong - Goldman Sachs

Okay, great. Thanks.

Scott Ford

Thanks.

Operator

Your next question comes from Richard Klugman with Prudential.

Richard Klugman - Prudential

Thanks. Good morning. I know you can't talk much on the Board review, but will share buybacks continue through this? And will you continue to consider acquisitions along the lines of what you just completed with Midwest?

Scott Ford

Yeah. Richard, this is Scott. Those are good questions. The color that I can give beyond the prepared remarks on the strategic review is that it's highly iterative and ongoing. It's very active. It's not once in a blue moon that we talk about it, which we always do about all of our strategic options. In the ordinary course, I guess every company in America does that. The pace of iteration is considerably higher than normal. Exactly where it will come out on and will come out on any particular item, I think I should stay away from.

The share buyback that we have executed, if you look at where we finished the year, if you look at the pace that we have been able to execute that buyback on, going back over the second half of '06 and you extrapolate that same pace forward, you are going to run out in the May-June timeframe. So, I think if you start thinking about when you would hear at a minimum, something from us on our view of share buybacks and capital structure. that it would coincide with the elapsing of that or the conclusion of that buyback. That wouldn't surprise me. We might come up with something before that. But if you are looking for a place to get a read out, I think the end of that buyback in the May timeframe or so, would be a good place to check back in if you hadn't heard from us before.

Richard Klugman - Prudential

Well, I will make sure to put in that call. But it sounds like you are saying expect the current trend on share buybacks to continue in the first quarter?

Scott Ford

I don't see any reason why that wouldn't take place.

Richard Klugman - Prudential

That's great. Thanks a lot.

Operator

Your next question comes from Donna Jaegers with Janco Partners.

Donna Jaegers - Janco Partners

Hi. Thanks for taking my question. Two quick ones, on the 700 megahertz auctions, can you refresh our memory as far as the date of when those start and when everyone has to go into the quiet period?

Scott Ford

Donna, I don't think it's set yet when it's going to go. I think you've heard Chairman Martin and one or two of the other commissioners, and for all I know it is set. But I think it's not going to be set for some period of time. You have heard people speculate, it could be as early as August. I think most of the people think it would be after that. Strangely, if it were August I guess the quiet period would start at about the May timeframe.

Donna Jaegers - Janco Partners

Okay. So, the quiet period starts four months--

Scott Ford

I think that was a rule on that last one and from all I am hearing they plan on adopting very similar rules on this one. But, none of that's set yet.

Donna Jaegers - Janco Partners

Okay. Then, there is a lot of discussion going on on the Universal Service Fund and the reverse auctions. What's your stance on the reverse auction?

Scott Ford

We think the reverse auction is the great idea. I think you would see wireless businesses do very well in that. The fact that some of the ILECs don't want to be part of the overhaul of that whole part and parcel lease, that's a little concern. And that's an active issue for us right now that we are trying to work through. We would like to see all of USF overhaul, RLECs, ILECs, and wireless. I think there are some who would just like to see the wireless overhauls, on whatever terms it could be negotiated. But we'll see how that goes. I don't think that's going to be resolved in the immediately near future. I think that's going be a fairly long protracted battle.

Donna Jaegers - Janco Partners

Yeah, I agree on that one. Thanks.

Kevin Beebe

Operator, we have time for one more question.

Operator

Okay. Your final question comes from Kevin Roe with Roe Equity Research.

Kevin Roe - Roe Equity Research

Good morning and terrific metrics everyone and congrats on your significant accomplishments in '06.

Scott Ford

Move in up the list Kevin.

Kevin Roe - Roe Equity Research

And Happy Mardi Gras Day.

Scott Ford

Never mind.

Kevin Roe - Roe Equity Research

Scott, you've obviously accomplished some very nice acquisitions on the smaller side. Can you give us an update on your views of the M&A environment in general, comment on relative valuations? And do you have an appetite for materially larger transactions? And Kevin, just to follow-up on My Circle, is that product showing strong momentum into '07, or what kind of legs do you think that product has going into this year?

Scott Ford

Kevin, you'd better be preparing quickly over there. Great question. We will stick to our prepared remarks on our thinking about the M&A environment in general in the wireless industry right now.

Kevin Beebe

Yeah, Kevin, My Circle has a great momentum. We actually enhanced it already this year by adding text messaging to it and that has been received very well in the marketplace. I think it's a unique offering. Of course, Timo will have something that we have a little fun with in our ads. I believe that in terms of this uniqueness as an offer in the marketplace we feel very good about. That part of the offering being sustainable, if that makes sense. I think we will have something unique throughout the year. Our marketing plans, we'll take a close look at how we can continue to improve it from a customer perspective.

Kevin Roe - Roe Equity Research

Great thanks.

Kevin Beebe

You are welcome.

John Ebner

I'd like thank everyone for joining us this morning. We appreciate your interest and support. If you have additional questions please contact our Investor Relations department at 501-905-8991. Tim Hick, our Director of Investor Relations and I will be available at that number. Thank you very much.

Scott Ford

Thank you all.

Kevin Beebe

Thanks.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

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 Q4 2006 Earnings Call Transcript
This Transcript
All Transcripts