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Alltel Corp. (NYSE:AT)

Q4 2005 Earnings Conference Call

January 20th 2006, 8:30 AM.

Executives:

Rob Clancy, Vice President of Investor Relations

Scott T. Ford, President and Chief Executive Officer

Kevin L. Beebe, Group President of Operations

Jeffery R. Gardner, President and Chief Executive Officer of Wireline Operations

Sharilyn Gasaway, Executive Vice President and Chief Financial Officer

Analysts:

Michael Rollins, Citigroup

Thomas Lee, JP Morgan

Rick Prentiss, Raymond James

Phil Cusick, Bear Stearns

David Barden, Banc of America

Jonathan Atkin, RBC Capital Markets

Simon Flannery, Morgan Stanley

David Janazzo, Merrill Lynch

Jason Armstrong, Goldman Sachs

Christopher King, Stifel Nicolaus

Operator

Good morning. My name is Angela and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Fourth Quarter Earnings 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. If you would like to ask a question during this time simply press “*” then the “1” on your telephone keypad. If you would like to withdraw your question press the “#”. Thank you. Mr. Clancy, you may begin your conference.

Rob Clancy, Vice President of Investor Relations

Thank you, Angela, and good morning everyone. Welcome to Alltel’s fourth quarter 2005 conference call. My name is Rob Clancy; I lead investor relations for Alltel Corporation. Thank you for participating in this discussion of our fourth quarter results this morning. Today’s conference call was preceded by our fourth quarter 2005 earnings release. This press release has been distributed on the news wires 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 2005 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.

During our call this morning we will make reference to performance in our heritage markets which excludes the effect of the properties acquired from Cingular in the first quarter of 2005 and the merger with Western Wireless completed on August 1st, 2005.

Participating in our earnings discussion this morning are: Scott Ford, Alltel President and Chief Executive Officer; Kevin Beebe, Alltel Group President, Operations; Jeff Gardner, who has been named President and Chief Executive Officer of the new Wireline company, and Sharilyn Gasaway, who has been named Alltel Executive Vice President and Chief Financial Officer. At the end of the call we’ll take a few questions. And with that, here is Scott Ford.

Scott T. Ford, President and Chief Executive Officer

Thank you, Rob. Good morning, everybody. Rob, that was an fine swan song reading of the disclaimers and all that. We appreciate that. He’ll be going over as treasurer and IR head for the Wireline business, as most of you know.

2005 was another very busy year for Alltel. This morning I’d like to start with a few highlights from both the fourth quarter and then go through the full year and then provide updates on several strategic initiatives that we have underway. Kevin will review the operational highlights from our Wireless business. Jeff Gardner will go through the operational highlights of our Wireline business, and finally Sharilyn will provide an overview of the financial results.

As we look back at 2005, we are very pleased with what we accomplished operationally, financially and strategically. It was a year of great effort and great results. We delivered financial results that exceeded the guidance we provided earlier in the year and markedly improved our profile in both the Wireless and Wireline businesses.

In our Wireless business, we added over two million domestic customers, roughly doubled our wireless footprint and significantly expanded our data capabilities.

In the Wireline business, the pending spin off and merger with Valor creates new opportunities for customers, shareholders and employees alike.

Operationally, in our Wireless business, we again increased ARPU year over year, successfully launched a rebranding effort, significantly expanded our data footprint, integrated many new markets and lowered post-pay churn in our heritage markets. In our Wireline business we increased our broadband customer base, launched a video offering through our partnership with EchoStar and further streamlined our businesses.

Let me now review our quarterly financial results just briefly. For the fourth quarter of ‘05 Alltel achieved $0.66 of fully diluted earnings per share on a GAAP basis. This reflects merger integration and hurricane-related expenses, an accounting change to adopt FIN 47 and a net gain in discontinued operations. Sharilyn will go through each of these in detail in a few minutes. Excluding these items, Alltel achieved fully diluted earnings per share of $0.77 from current businesses, which, while in line with our expectations, is down 13% year over year due to the increased share count related to both the equity unit conversion and the Western Wireless merger.

This quarter we generated $309 million of equity free cash flow, an increase of 37% year over year. Again, that’s net income plus depreciation and amortization minus CapEx. In addition, consolidated revenues and operating income grew 21% and 14%, respectively. Excluding the effects of these non-cash amortization charges related to our acquisitions, operating income actually grew 20%, in line with revenues.

In our Wireless business, service revenue and operating income grew 31% and 15%, respectively. In our heritage wireless markets, service revenue grew 9% year over year, while segment income declined 8% due to an increase in gross additions year over year and to the added depreciation and system costs related to our data footprint expansion in 2005.

In our Wireline business, revenue declined 2% year over year, while segment income grew 8%. Turning to full-year results, financially we achieved $3.41 of fully diluted earnings per share from current businesses even with the dilution from both Cingular and the Western Wireless acquisitions. $3.41 per share is within our initial guidance range, which did not contemplate the dilution from those transactions, an accomplishment we are very proud of. In fact, on just our heritage business, we actually exceeded the high end of our previous EPS guidance. We also raised our dividend for the 45th consecutive year and generated $1.3 billion of equity free cash flow, an increase of 11% year over year.

Strategically, 2005 was the busiest year that we have ever had. Let me review some of the many accomplishments in ‘05. In the first quarter we closed on the properties we acquired from Public Service Cellular, and we announced a $6.4 billion merger with Western Wireless, and at the same time announced that we would review our strategic alternatives for the Wireline business.

In the second quarter, we closed on the properties we acquired from Cingular and promptly began the process of converting these properties to CDMA technology.

In the third quarter, we closed on the $6.4 billion Western Wireless merger and we announced an agreement to sell our Irish asset Meteor for $500 million. We announced an agreement to sell our Austrian asset Telering to Deutsche Telekom for 1.6 billion, which we expect to close in the first quarter of ‘06, and we sold our assets in Ghana and the minority interest we held in Georgia.

In the fourth quarter, we announced an agreement to acquire Midwest Wireless for $1.075 billion. We look forward to welcoming the Midwest Wireless team to Alltel after we close, which we expect to be in the first half of ‘06. We closed on the $500 million sale of our Irish asset Meteor. We announced an agreement to sell the Haitian and Bolivian assets, which we expect to close in the first half of ‘06. We acquired new markets in Idaho via a property swap with US Cellular and completed the vast majority of the required divestitures related to the Western Wireless merger. Finally, we announced plans to spin off our Wireline business and merge it with Valor Communications in a transaction valued at over $9 billion. We expect this transaction to close somewhere in the middle of ‘06 as well.

Looking at ‘06, we are encouraged about the strategic opportunities available for both our Wireless and Wireline businesses. Within the Wireless business, we believe that access minutes, both voice and data will continue to migrate over time to wireless networks. Thus, we have plans to capitalize on that growth through network expansion and evolution and perhaps through other strategic initiatives, including participation in the upcoming spectrum auctions, both on our own or potentially with partners. Post spinoff of the Wireline business, the Wireless business will have a capital structure that allows for optimal financial and strategic flexibility. We expect to have net debt to OBITDA of well under one half a turn, and as we announced last month, we have plans for a $3 billion share repurchase program and a $1 billion debt reduction program.

On the Wireline front, the merger with Valor will create new opportunities for our Wireline business in terms of strategic initiatives, capital structure and growth opportunities through continued broadband deployment, video services and wireless resale. Jeff Gardner has much more to say about this in just a few moments.

I’d like to once again say thank you and congratulations to our entire team for a very solid 2005. It was a job that was very well done when everyone had a lot on their plate and I want to commend the Alltel team members for doing such a fantastic job. With that, let me turn the call over to Kevin who will take you through the Wireless business highlights.

Kevin L. Beebe, Group President of Operations

Thank you Scott. Good morning everyone. First I’d like to review some of our quarterly highlights. Wireless gross customer additions were 838,000 for the quarter and net customer additions were 147,000. Within our heritage markets, gross additions were up 7% year over year. We added 76,000 net post-pay customers in our heritage markets and 90,000 net prepay customers, driven by the significant success of our Simple Freedom service plans. You recall that that’s our phone in a box prepay service. That’s sold primarily through Wal-Mart. For the end of the third quarter we added a second phone to our Simple Freedom lineup and because of improved handset pricing we also lowered the out-the-door price with little change to handset subsidies.

In the former Western Wireless markets we added 18,000 net customers and within the former Cingular markets we lost 37 thousand customers, driven by the conversion from GSM to CDMA technology, which I’m very happy to report is completed. Post-pay churn was 1.83% and total churn was 2.2%. In our heritage markets, post-pay churn was flat year over year. Average revenue per customer increased 6% year over year to $52.13. And within our heritage markets, average revenue per customer increased 3% to $50.54. These increases are a result of data and wholesale revenue growth as well as improvements in ETC revenue. Data revenue per customer was $2.58. That’s an increase of 67% year over year and now represents about 5% of total ARPU.

We continued making progress selling text messaging, application downloads, BlackBerry devices, and during the quarter we were the first CDMA carrier to launch the RAZR phone, our first handset using EVDO technology. We also launched MobiTV, a real-time television application that’s available in both our 1X and our DO networks. We ended the year with 1X data coverage of roughly 92% of our POPs, including the former Western Wireless markets and DO deployed in about 12 markets.

During the full year, average revenue per customer was $51.44. That’s an increase of 7% year over year. Within our heritage markets, average revenue per customer was $50.36, that’s an increase of 5% year over year. Post-pay churn for the year was 1.77%. That’s an increase of 3 basis points year over year and certainly affected by the higher disconnects in the former Cingular markets. Within our heritage markets, post-pay churn did improve 8 basis points year over year to 1.66%.

As Scott reviewed, 2005 was a very active year strategically, which led to a number of integration activities. Within the former Cingular markets during the quarter, we completed the GSM to CDMA conversion and moved to improve our competitiveness in those markets through a number of marketing activities. Within the former Western Wireless markets we launched our national plans and our handsets, began retail store modifications and continued preparation for support system conversions which we expect to take place by the second quarter of this year.

We’re very pleased with the progress to date.

Before I turn the call over to Jeff let me also thank our entire team for an outstanding year, and I’d like to make a few comments about 2006.

As we enter this year, we enter this year planning to maintain our competitiveness for post-pay customer growth by emphasizing a broader selection of phones, data applications and pricing to market, primary and family plans. Secondly, we have completed the first phase of our conversion to a new prepaid service platform that will allow us to offer expanded features at substantially reduced costs. We plan to relaunch the prepaid service plans sold in our stores and our dealer locations as well as enhance the features offered via Simple Freedom. Given the expected increase in family plans and prepaid sales, combined with limited ETC revenue growth, we expect retail ARPU growth to slow from the 5% growth we experienced in 2005.

Finally, we expect to have opportunities to expand both our wholesale CDMA and GSM businesses throughout 2006. We’ll keep you updated on these developments as they progress. I’d like to turn the call over to Jeff, who will discuss our Wireline operations. Jeffery.

Jeffery R. Gardner, President and Chief Executive Officer of Wireline Operations

Thank you, Kevin. And good morning everyone. In our Wireline business we added 38,000 broadband customers this quarter, bringing our broadband customer base to 398,000. Our Wireline teams have done an exceptional job growing this customer base throughout 2005 as evidenced by our overall penetration rates and penetration growth, both of which are among the best in the industry.

Feature revenue per eligible line increased 5% and coupled with our broadband revenue growth led to average revenue per Wireline customer of $68.72, an increase of 3% year over year. We’re doing an excellent job selling additional services into our customer base.

This quarter we lost 34,000 access lines, the result of continued wireless and broadband substitutions, bringing our year-over-year loss to 4.1%. Our access line losses remain concentrated in our larger markets and we have voice over IP competition in several markets.

In the fourth quarter, we launched our DISH Network TV offering, and we’re encouraged with the initial customer response. We expect this additional service offering to improve our overall competitiveness as we continue to focus our Wireline business on broadband-related services. For the full year we added 154,000 broadband customers, an increase of 71% year over year, and lost 124,000 access lines.

Before I turn the call over to Sharilyn, let me make a few comments regarding the spin-off and merger with Valor.

We’re all very excited about this transaction and believe that the new Wireline Company will be the premiere RLEC in the industry in terms of scale, cash flow generation and strategic flexibility. Our business will be appropriately capitalized for our profile, with net debt to OBITDA of roughly 3.2 times and a dividend payout ratio of 65 to 70% of free cash flow.

In terms of transition activities, we have begun the internal separation process and have largely put in place the management team that will run the Wireline business. We feel it is important to operate as if we were a standalone entity, although in the short run, that will mean redundant expenses for Wireless and Wireline through the first half of 2006. Additionally, we are developing a new branding strategy, which we expect to complete by the second quarter. We have also filed applications in each state that require approval for this transaction. We will keep the investment community apprised of any new developments as the year progresses.

With that I will now turn the call over to Sharilyn to discuss the financial results. Sharilyn has been a key person in our finance organization for a number of years. I’ve relied on her advice and counsel to lead Alltel from a financial perspective and I’m very pleased that our board named her to succeed me as CFO. Alltel is in very capable hands. Sharilyn.

Sharilyn Gasaway, Executive Vice President and Chief Financial Officer

Great. Thank you Jeff and good morning everyone. In the fourth quarter, we achieved $0.66 of fully diluted earnings per share on a GAAP basis, which includes the following items: 40 million of pre-tax expense related to the integration of Western Wireless; handset subsidies for the GSM to CDMA conversion in the markets acquired from Cingular, and advisory costs for the pending spin-off and merger of our Wireline business; $10 million of pre-tax expense related to the effects of Hurricane Katrina; approximately 7 million of after-tax expense for the adoption of the new accounting principle FIN 47 to record an estimated liability for feature remediation costs primarily related to Wireline assets; and finally 4 million of net income from discontinued operations which includes the various international businesses held for sale and the required domestic divestitures.

Excluding these items we achieved $0.77 of fully diluted earnings per share from current businesses, which includes a fully diluted weighted average share count of approximately 389 million.

For the quarter, our Wireless business generated 1.64 billion of service revenue, an increase of 31% year over year. This consists of retail revenue growth of 27% year over year and wholesale revenue growth of 81%. Within our heritage market service revenue increased 9% year over year driven by retail and wholesale revenue growth of 8 and 12% respectively. The primary drivers of our retail revenue growth continue to be our focus on quality customer growth, data revenue improvements and ETC revenues. For the quarter, we received approximately 54 million of ETC revenues, which includes revenues related to the former Western Wireless markets. This quarter we generated 300 million of wireless segment income, an increase of 15% year over year. Excluding the effects of non-cash amortization related to our acquisitions, operating income grew 27%. In our heritage markets segment income declined 8% year over year driven by increased gross additions as well as added depreciation and system expenses related to our data footprint expansion.

Turning now to our Wireline business, we generated 598 million of revenue, a decrease of 2% year over year and OBITDA of 362 million, which is essentially flat year over year. Segment income for the quarter was 256 million, an increase of 8% year over year driven by lower depreciation expenses as we lengthened the depreciable lives of certain assets that are expected to be in service longer than originally anticipated. Communication support services produced 276 million in revenue and 24 million in segment income.

Now some results for the entire year. In our Wireless business, service revenue increased 23% to 5.9 billion and segment income increased 23% to 1.25 billion. In our heritage markets, service revenue increased 10% to 5.3 billion, and segment income increased 10% to 1.12 billion. Wireline revenue decreased 2% to 2.4 billion and segment income also decreased 2% to 904 million. And finally communication support services revenue was $1 billion and segment income was 68 million.

In early 2005, we provided the investment community with annual guidance covering revenue growth, capital expenditures and earnings per share from current businesses, which excluded the effects of acquisitions. For the year, excluding the effects of all acquisitions, our consolidated revenue grew at 7%, which exceeded the guidance range of 3 to 6%. We spent less than 1.2 billion on capital, which was less than our original guidance of 1.3 to 1.4 billion, and we achieved earnings per share from current businesses that exceeded the guidance range of $3.30 to $3.50. On an as-reported basis or including the effects of our acquisitions, we have consolidated revenue growth of 15%. We spent 1.35 billion on capital, which was below our revised guidance of 1.4 to 1.5 billion, and we achieved earnings per share from current businesses of $3.41, which was within the guidance range of $3.30 to $3.50. All in all, we are very pleased that from a heritage perspective we delivered results that exceeded guidance for all three metrics and on an as-reported basis delivered results within the initial guidance ranges while completing several very large acquisitions.

As we look to 2006, we have begun the separation process to operate as two independent companies. These efforts will result in redundant expenses as the two businesses operate as independent entities prior to completion of the separation. We will discuss these details along with other strategic and financial objectives at our analyst day which will be hosted in New York on February 1st. It’s our intention to provide guidance at our analyst day for both the Wireless and Wireline businesses. It is also our plan to provide quarterly financial results for 2005 that will reflect the pro forma impact of Western Wireless and will assume the Wireless and Wireline businesses have been separated. We believe this should assist with your year-over-year comparisons as we progress throughout 2006.

With that, we will now take a few of your questions. Operator, please review the instructions and open the call to questions. Thank you.

Question-and-Answer Session

Operator

Thank you. At this time I would like to remind everyone, if you would like to ask a question please press “*” then the “1” on your telephone keypad. You will pause for just a moment to compile the Q&A raster.

Your first question comes from Michael Rollins of Citigroup.

Q - Michael Rollins

Hi. Good morning.

A - Kevin Beebe

Good morning.

Q - Michael Rollins

I was curious, Kevin, if you could talk a bit more about the Wireless ARPU in the quarter and your outlook as you look at the competitive environment for ‘06. Can ARPU, particularly on the voice side, with the national plans that you’re offering, grow? And how do you perceive your prepaid strategy changing from I guess a year ago where you might have been losing some prepaid subs to now where you’re gaining prepaid subs? Thanks.

A - Kevin Beebe

You bet, Mike. Thanks for the question. First on the quarterly numbers. The percent increase for 4Q, the percent increase especially in our heritage markets, year over year 4Q ‘05 versus 4Q ‘04, was certainly down from previous quarters, driven primarily by lighter ETC growth. To be more specific, obviously our ETC revenues didn’t go away, it’s just the fact that in the fourth quarter of ‘04, a lot of them were already there. So the comparison is impacted, if you will, by that. We saw great data growth in the fourth quarter. We saw some good growth as well in our wholesale revenue in the fourth quarter. To 2006, and the comment I made, which I figured you’d probably notice, I do think there can be growth. ETC, the contribution of ETC revenue to our growth in ARPU will be less in 2006 because, again, we don’t expect to have as many new, as many states award us ETC revenue in 2006 as did in 2005, additional states. We’re working that, though, and we still think we can make some progress there, because it’s, as we, as the whole Wireless business moves more minutes from Wireline, it’s certainly worth consideration at the commission levels in all of our states. But having said that, the increase will be less. Data growth, we feel very good about in 2006. We have some new plans. We’ve launched our first DO phone. We have more planned in the first quarter and beyond. And we’ll build out more DO markets as the year progresses. So we feel very good about that. On prepay, we’re real pleased and very soon you will hear about our launch of our new prepaid service, which as I’ve mentioned, and I know, as you and I have talked before, enhances not only the feature capabilities but also the cost structure tremendously of our prepaid offering. The success in the quarter of Simple Freedom is very material. Keep in mind that the average acquisition cost of a Simple Freedom customer is well below our overall average and even well below our prepay, our own prepay service average because Wal-Mart does all the advertising and merchandising. We really just stock the shelves for them and support the service. That’s the kind of prepay service we want: low cost, higher features. We had been absent from that part of the market. Again, something that I’ve talked with many of you about, especially you, Mike, and I now feel good that we have a platform that will allow us to be more aggressive. The combination of all of those things, and family plan pricing in the market today, which we believe we need to remain competitive on, because of the down-the-road churn impacts, the positive impacts on churn of family plan pricing really mean that we don’t expect to see the 5% growth that we saw in 2005 in our average revenue per customer. Now, things that could help that: I mentioned we’re planning for some nice wholesale revenue growth. We have some discussions going on with some new partners that we feel real good about. So we’re excited about that. We’re going to continue to drive that voice business through additional features. We have some plans for some unique features that we’re going to launch hopefully in the first quarter of this year. That should be adders, if you will. A customer might find it attractive to add to their core plans and their family plans. Those are the types of things we’re working on right now.

Q - Michael Rollins

Great. Thank you.

A - Kevin Beebe

You’re welcome.

Operator

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

Q - Thomas Lee

Hi. Good morning, guys. I first just wanted to follow up with Michael’s question on ARPU. Just a quick confirmation. If I’ve heard you correctly, just to understand, I guess ARPU is expected to increase in ‘06 versus ‘05, but just at a slower rate?

A - Kevin Beebe

Yeah, Tom, you know that the industry really went down in ‘05 so we felt great about our ability to grow our average revenue per customer, even our larger competitors reported declines year over year. But we’re still expecting some growth because of the things that I went through. It just won’t be that 5%.

Q - Thomas Lee

Gotcha. And then, there’s something I wanted to get my arms around a little more concretely, which is the markets that you guys had acquired from Cingular. Because as you guys had talked about, those were essentially headwinds in the second half of this year. So I was hoping you could give me or give us some performance information. I guess, in other words, what the number of customers that were migrated in the quarter in that Cingular market, kind of some sort of relative churn rates in those markets, as well as whether or not those markets actually had positive EBITDA contribution in the quarter, because as you know, that’s not going to be there in ‘06.

A - Kevin Beebe

Let me try to help this way. We, on December 28th of last year, the agreements we had with Cingular that would allow us to continue to support GSM services in all the markets that we acquired from them expired. That was part of our original agreement. That was not a change in the agreement. We knew that was coming. So that meant that on December 28th, if a customer had not decided to obtain a CDMA phone from Alltel or keep their existing GSM phone and go to another GSM provider, whether that was Cingular or T-Mobile, for the most part, there’s some others in the market, but for the most part, it’s those two, their service stopped. Now, we gave them, we grandfathered their number for two weeks and allowed them to call us and we still are getting, we still got calls after the December 28th period. But at the end of 2005, we took all of those customers off of our books, if you will. We disconnected them. So the outflow of customers stopped on December 28th. That’s good news. So now we can get back to just reporting growth. We feel good about our competitiveness in those marketplaces, Oklahoma City being the largest, of course, and look forward, we also launched DO in Oklahoma City. We were really the first carrier to launch that in that market. We feel really good about our prospects for growing.

A - Jeffery Gardner

From a financial perspective, all of that activity was obviously a drag on those markets in 2005. That will be behind us. We are selling a much larger calling area up there, and as Kevin said it’s really business as usual going forward, and so we should have opportunities to improve those markets without giving any specific market level financials.

A - Kevin Beebe

One thing I want, Tom, and really Mike’s question as well on ARPU, you all to keep in mind, we’re fully aware of the fact that as our average revenue per customer growth slows, that means we need to look at the expense side. That mix, that balance of average revenue growth, expense growth, maintaining that and trying to maintain our margins, that’s our goal. It’s just not one or the other, is my point. And you know, that’s the way we’ve run our company as long as I can remember. And we’ll continue to do that.

Q - Thomas Lee

Gotcha. Thanks. Looking forward to you guys on December 1st.

A - Kevin Beebe

Yeah. February 1st.

Q - Thomas Lee

February 1st, right.

A - Kevin Beebe

Don’t go in December. We won’t be there. See you, Tom.

Q - Thomas Lee

See you.

Operator

Your next question comes from Rick Prentiss of Raymond James.

Q - Richard Prentiss

Good morning, guys. Just a quick question on the comments about the upcoming spectrum auctions. Can you share with us a little bit about what your thoughts there are, as far as going outside of your existing markets, looking at trying to cobble together a national footprint maybe, given that those auctions are kind of sliced up into a lot of REAGs and other types of license areas, just kind of what your early thoughts are on the auctions.

A - Scott Ford

No. It’s a great question. I understand the interest in it. At this point, it’s a fluid situation and to speculate on what we would, wouldn’t do, whether we’re going to be on our own, in a group, would just be premature. We’re just going to, we felt the obligation to tell you that we’re working on it. Beyond that, it’s not clear enough at this point in time and it’s not definitive enough to have any more to say about it.

Q - Richard Prentiss

It’s worth asking the question, though.

A - Scott Ford

It was. I understand the question.

Q - Richard Prentiss

On your Western markets, can you talk a little bit about what kind of, I know you haven’t made the support system changes yet, but what you’ve seen as far as your ability to almost edge out in those markets and what the effect has been in the Alltel heritage markets, any benefits on the add side yet, and also any update as far as your putting GSM into some of your heritage markets?

A - Kevin Beebe

Hey Rick, this is Kevin. On the Western side, while we haven’t done the support system conversions, as I mentioned we launched our rate plans and our handsets. So we were able to make those changes in their existing support system, support systems. We feel real good about that. The uptick in the fourth quarter was nice. Keep in mind again, just a reminder, if you’re comparing that fourth quarter number to Western’s fourth quarter in 2004, we don’t report resellers as part of our net gain. We have not done that. And they did. So that 18,000 number is purely post-pay and prepay customers through our stores, but we feel very good about the uptick and will continue to drive that. In terms of the second part of your question…

Q - Richard Prentiss

GSM into the heritage markets.

A - Kevin Beebe

Oh, GSM. Oh, and heritage market, heritage market growth was great in both post-pay, primarily through Simple Freedom and then the, or prepaid primarily through Simple Freedom, and then post-pay was real solid as well. GSM in our heritage markets, in discussions right now with some GSM carriers. You could probably guess who that could be. We’re very pleased with the conversations. We’re very interested in adding that technology in our heritage markets from a roaming perspective. We’ve had enough experience now with the Western markets to know that John Stanton and team did a great job. It works very well from a network perspective. So look for us to do some things in the near future there.

Q - Richard Prentiss

Great. Good luck. We’ll see you in a couple of weeks.

A - Kevin Beebe

Thank you.

Operator

Your next question comes from Phil Cusick of Bear Stearns.

Q - Phil Cusick

Hi guys. Can you hear me?

A - Kevin Beebe

Yes.

Q - Phil Cusick

Wonder if you could talk about the overall competitive environment for wireless. It seems like some of the national carriers got pretty aggressive this quarter and we’ve seen weakness out of some other regional guys. Do you feel like you stepped up to get those post-paid numbers, or was it really just business as usual for the fourth quarter for you?

A - Kevin Beebe

Phil, this is Kevin. I think your perception of pricing is right. You all follow that now so close in so many ways with your market checks. Especially the pricing for family plans, typically what we saw in general happening in the fourth quarter was a reduction in the initial, in the primary plan, a reduction of the monthly recurring charge required on the primary plan to get a $10 family plan. We tried to hold the monthly recurring charge, but we added more minutes to those plans. That’s what we did in our heritage markets and in the Western markets. That’s pretty much market now. The leader of the pack, of course, is T-Mobile in terms of their pricing. You all have written a lot about that. But, we certainly haven’t followed all the way there. But I expect that to continue. The benefit of family plans, while certainly we’d love to get more than $10 for an additional phone, the benefit of that down the road in terms of churn reduction is meaningful. I think as family plans have grown, the carriers that have been, again, generally most successful with that have seen some nice improvements in their churn rates. And I think that’s a, in their post-pay churn rates, I think that’s a part of it.

Q - Phil Cusick

Cingular has said that the family plans tend to add more like 20 to 25 as you add data and more minutes and things like that. Are you finding the same thing or is it really, as you add minutes to the core, is it sort of a lower number?

A - Kevin Beebe

No, I think there’s a great opportunity to up-sell features across multiple service plans within that family, if you will. And I would agree. I’m not sure of the specific number for us. But it’s certainly more than $10. So that’s good news. And it’s a different business. Taking care of the existing customer base is critical. We’re moving our customer satisfaction studies down to our store level so we can track that, eventually compensate people at that, or for their improvements in store level compensation. We’ve made great strides in our call centers this year in terms of delivering on customer satisfaction, and just, the whole team pulled together and really did incredible work in that regard.

A - Scott Ford

One of the interesting things around that, just anecdotal to add just one color point there, some of the studies we track about, we track ourselves and everybody else in the industry through outside parties in terms of research and how people, our customers feel about us, how other people’s customers feel about them, et cetera. And we actually have started to see, in the last couple of quarters, a nice uptick in some of the leading indicators about customer sentiment, who they want to do business with, what they value, and although pricing continues to be what it is in the wireless industry, sometimes it makes a lot of sense, sometimes it doesn’t, the things that are leading indicators around that have been positive and we’ve actually been encouraged amidst the melee.

A - Jeffery Gardner

When you look at our financials, how that manifested itself this quarter and we think these were all very good investments, in terms of this gain that Kevin talked about, we’ve stepped up our advertising and that really helped us drive home some of the points that Scott made about improving customer perception. We put out many more data capable handsets, which, when you look at our net equipment margins, those are up a little bit year over year. Really that is enabling us to sell more data products. We saw great acceleration again in our data sales. Our marketing team and sales force are delivering on that. And so, all of those things I think are changing, we’re making some investments that I believe are going to pay off for us in the long run.

A - Kevin Beebe

I want to add one more thing that I just thought of after Jeff’s comments there that I think you all should think about as well, the questions around ARPU and, early on, it’s still early, right, because we just launched our first DO phone. But the customer download activity on a DO phone is as much as double that of a non-DO phone. So a combination of the screen technology that’s on there, which is much better, as well as just the speed of downloading a music tone or a game, has been noticed, we think, in the marketplace. And I haven’t heard any other carriers talk about that yet. Of course, we really only have two out there with broader high speed, do-like high speed coverage.

A - Scott Ford

And they haven’t reported yet.

A - Kevin Beebe

Yeah, and they haven’t reported yet. So they may say something about it. But that’s very encouraging and something that causes us to know that we’ve got to drive more DO phones into the marketplace, which we will do.

Q - Phil Cusick

The other thing I’d like to follow up on, you mentioned you don’t report Western’s wholesale numbers anymore. Have you guys given any sort of break out of what your wholesale lines on the network are?

A - Kevin Beebe

No, we have not. We don’t view that as a customer because they buy bulk minutes from us and the numbers, the phone numbers that they reserve are moving in and out so much it really varies. And we’ve had long talks with many people about whether or not we, we’re disadvantaging ourselves by doing that, but we just don’t think it’s the right thing to report. If we reported it, I would tell you that our net gain would be bigger, because there is growth activity in that part of the business. We want those minutes. We just don’t count them as customers in our net numbers.

A - Scott Ford

We don’t think there’s a right or wrong way. We took what we thought was the most conservative approach like we typically do. I’d rather be slapped around for being too conservative than being too aggressive when you’re the number five player in the market, frankly.

Q - Phil Cusick

Yeah, we just try to get a little more information on parsing the roaming numbers, and this makes it a little fuzzier. Thanks a lot, guys.

A - Scott Ford

You’re welcome.

Operator

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

Q - David Barden

Hey guys, good morning. I know there’s a lot of moving part in the numbers and everything else but I wanted to talk about the margin for Wireless in the quarter. You know, the ARPU’s up year over year, gross adds are up, but not dramatically so. And yet we’ve got a margin, my calculations are showing about a 33% EBITDA margin, which is pretty soft relative to how you guys have performed both sequentially and year over year, even going back a couple of years in the quarter. So, I know there was prepay. I know there was Cingular. I know there’s some integration and maybe there’s some of these expenses that didn’t get normalized out in the quarter and some of this is going to go away as we go into 2006. But can you kinds of get a little bit more granular about the moving parts in the Wireless margin this past quarter? Thanks.

A - Sharilyn Gasaway

Sure, David. There are a number of moving parts as you mentioned. Certainly there’s some impact from the CTA costs that we have and that’s a component, the increased advertising that Jeff mentioned earlier. Increases in system and data costs. With the increase in the revenues from the data products we also see increases in data products. We’ve seen a slight creep up in our bad debt expense, and then keep in mind that we do have some redundant costs, because of the Western Wireless markets, as we’ve not completed our billing system conversion. And so we do have some redundant costs there. So some of that certainly will improve in ‘06.

Q - David Barden

And so are you able to kind of size this? I mean should we be looking at, you know, because a 33% margin relative to, say, closer to 40% last quarter or 37% a year ago is a, it’s a bit of a gap. Are we talking tens of millions of dollars or millions of dollars, I guess? I know you guys will talk more about this at the analyst day. But in terms of getting a level set for expectations for Wireless margins in ‘06, it seems like something is definitely different about this quarter than all the other quarters we’ve seen before and I’m trying to figure out how much of it will recur in 2006.

A - Sharilyn Gasaway

Right, David, yes, if you don’t mind I think we’ll try to cover that in a lot more detail at the February 1 day and give you some more insight at that point.

A - Scott Ford

David, this is Scott, one of the things we talked about at the conference out in Phoenix last week is, you build a network expense not on a ramp but on a staircase. You have to put the network in place. You have to incur the expense, and then you have to have applications and a go-to-market business model that makes sense, then you get revenues to run back through them. And just like we transitioned from analog to digital and as we transitioned from digital to 1X, as we transition from 1X to EVDO, we are carrying multiple networks in the transition period, and that’s a major driver of new expense as we start to deploy EVDO in ‘05 and as we continue to deploy it in ‘06. But we’ll give you all the color on all that here on February 1st.

Q - David Barden

Alright. Looking forward to it guys. Thanks.

Operator

Your next question comes from Jonathan Atkin of RBC Capital Markets.

Q - Jonathan Atkin

Thanks very much. On data ARPU, seems like messaging is one of the larger if not the largest contributor and the way you price it, seems like you’re a little bit different from your peers. You have got a number of different discrete buckets, and I’m wondering which of the tiers you’re seeing the greatest tick rate on for messaging. And secondary to that, wondering what portion of the existing base has a phone that’s data capable and are you seeing, what kind of upgrade percentages are you seeing, of your base?

A - Kevin Beebe

Jonathan, this is Kevin. On the texting side we do offer it a bit differently than our competitors, as you know well. We’re seeing a nice uptick in packages that are either unlimited or a very, very high amount of texting. So the unlimited package I think we price it around 25 bucks and then we range between the low of 5 all the way up to that 25. We’re certainly seeing people take higher, and upgrade eventually if they take something, if they just buy per text. But it’s very, because we all know, right, because we’re big users of texting or BlackBerry services, it really grabs you and gets you using it. In terms of retention activity and proportion of our base that has data capable handsets, I don’t know the exact percentage. It’s very high. We have a good amount of activity, retention activity targeted at moving out old handsets. In fact, in the fourth quarter of this year we targeted handsets of three different handset providers, were able to work with them to migrate customers off of those handsets onto newer handsets that are data capable, a combination of needing to get those in their hands and plus the old handsets just weren’t performing in a way that we thought was reasonable. I really appreciate the partnership that we got from those handset providers to do that. It was the right thing to do for our customers, and it was the right thing for them to do for us. So we’ll continue to drive that going forward.

Q - Jonathan Atkin

Then finally on network capacity, can you update us on your average spectrum position and roughly how much of that capacity you’re currently utilizing?

A - Kevin Beebe

It really hasn’t changed from the past, I don’t know, our average amount of multiple speakers is about 27, high 20s across all of our markets. It will change a bit when we close the Midwest transaction, assuming that we can get through that without a significant amount of divestitures, Midwest Wireless that is, we announced at the end of the year. We’re really looking forward to welcoming that team to us when we get through all the regulatory approval. So it really has not changed. We feel very good about our position. We feel that in many markets that are second and third tier, we have enough spectrum to really enable us to plan for DO launches either this year or down the road as well as adding GSM.

Q - Jonathan Atkin

Thank you.

A - Kevin Beebe

You’re welcome.

Operator

Your next question comes from Simon Flannery of Morgan Stanley.

Q - Simon Flannery

Thanks. Good morning, guys. If we can just stay on the data side for Wireless. You haven’t really talked about push-to-talk in a little while. Maybe you could update us there. And there’s been a lot of talk about music and TV. Can you talk about MobiTV but also about media flow and DVB-8, some of those alternative technologies, which may be more capacity efficient, and anything you might be thinking about on the music front. Thanks.

A - Kevin Beebe

Hey Simon, Kevin. We’ve not talked about our touch to talk service; we’ve continued to add customers at about the same pace we have been. We have seen the incumbent competitor price very aggressively to maintain their customer base. You probably see that reflected in their ARPU. You have up until, they haven’t reported yet obviously for the fourth quarter. But we certainly saw that in previous quarters. The Cingular launch on touch to talk, we thought was a big one in that they’re using the same technology we are. So that should help with more handsets. We’ve added more handsets to our base, or to our offering, I should say. So we’re looking for good things to come. The difficulty, most of our customers are coming through our consumer channels, not as many through the business channel, because of the aggressive pricing from the incumbent competitor, as well as they had done a great job of really adding not only, you know in the case of a construction company, not only the construction company, but the suppliers of that construction company to the network. And hence you really have to convince the entire network to change. We’re continuing to focus on that. We’ve pulled back just on our touch to talk only advertising. We don’t do much of that anymore and we really just sell it as a feature. It’s going well. On the data side, we’re looking at all of those technologies that you mentioned. Have made no decision on any one of them yet. We’re well aware of the fact that one carrier has made a decision on media flow. We’re going to continue to study that. The good news is, back to my comment on our first DO phone launch and the experience we’ve seen with the amount of downloads that occur on that DO phone because of the speed and just the enhanced, not only, steady probably isn’t the best word but the functionality of the phone in terms of the screen technology and the way it all works. That’s been very encouraging. The device we think can drive some enhanced data services. So we’re going to continue to focus on that kind of a package solution in the marketplace. MobiTV, very early, working quite well. We offer it on our 1X network as well. The speed certainly slows. It’s not as good a service as it is on DO. But the combination is pretty nice for our customers and seeing some, early on some nice uptick in the offering.

Q - Simon Flannery

Great. Thank you.

A - Kevin Beebe

You’re welcome.

Operator

Your next question comes from David Janazzo of Merrill Lynch.

Q - David Janazzo

Good morning. Question for Jeff. Don’t want to forget you today.

A - Jeffery Gardner

Thank you, David.

Q - David Janazzo

I think you referred, Jeff, to the potential for consolidation in the RLEC space and I guess some of us have been waiting for that for a while. What do you think will drive that to happen in general and then where will the new Alltel/Valor Company fit within that?

A - Jeffery Gardner

I think the unique thing about these capital structures that are really dependent upon cash generation over a long period of time is that you have to be in a good position to manage the business from the expense side and drive incremental revenues and I think scale is important there. So there’s a lot of smaller companies out there that I think over time will see the benefits of scale. So I think that should create some opportunities for someone who is going to be very disciplined in terms of looking at these opportunities and looking at opportunities to grow the business where there’s a good geographic fit, where you think there’s, the business is well run. You can deliver some accretion to the business from a cash flow perspective. I think the unique thing about our new co, and we’re working very hard to get a name for this so we can stop calling it new co, and so that I can get a business card, is the unique thing is our scale. We are 50% larger than CenturyTel and Citizens. We think that the capital structure that we’re going to market with is one that will enable us, one, to deliver on these synergies as a part of the Valor integration. But from a scale perspective, I think we’re in a much better position to kind of look at opportunities in that space over the long run, and that scale we think over the long run will mean better long-term sustainability of cash flows, which is what makes that whole model work and it’s why that space is attractive to investors in the first place.

Q - David Janazzo

Thanks, Jeff.

Operator

Your next question comes from Jason Armstrong of Goldman Sachs.

Q - Jason Armstrong

Okay. Thanks for taking the question. Just wanted to dig into margin trends a little bit more on each side of the business. On the Wireline, or I’m sorry, on the Wireless side, let me just follow up on David’s question, maybe ask it a different way. Realizing obviously the add growth picked up quite a bit this quarter. Most of the growth came from a lower acquisition cost channel with prepaid. So let me just ask the question a little bit more directed at cost of acquisitions. I really would have thought the CPGA number would have moved down a bit this quarter given the sub/add mix. Can you give us more color here, maybe break out post-pay versus prepaid CPGA and what the trends are. And then for you Jeff, on the Wireline side it looked like a solid quarter on really every metric. Margins were up 300 basis points and that’s really 300 basis points higher than any sort of trend rate we’ve seen in the past. I’m wondering is there anything nonrecurring here and if not is 60% plus EBITDA margin sort of a decent run rate to think about for 2006?

A - Sharilyn Gasaway

I’ll take the first part of that on the Wireless CPGA. Certainly since we did have more prepaid customers one would think that you would see an offset there. But what we did have, as Jeff mentioned earlier, is we had more advertising costs, more focus during the holiday season and so we did see an uptick from that standpoint. And then the new handsets that we’re coming out with, in particular the RAZR, which is a very hot item, does have a higher subsidy on it and so I think that that’s what’s putting some pressure and overshadowing the decline that you would expect to see.

A - Jeffery Gardner

On the Wireline side I’d first like to say that the management team on the Wireline side has done an incredible job. There’s a lot of enthusiasm and excitement and focus surrounded around this whole issue becoming an independent public company. And so people are working very hard. They really understand what this business is about. I’m just really proud of the way that John Koch who runs our operations has performed this quarter on the cost management side. We’ve done a great deal. Feature sales were strong. We benefited from a property tax adjustment in one of our markets that also helped with those margins, when you look at it over a sequential or a year over year basis. And just in general on the Wireline side, we’re making tremendous progress, kind of integrating our two companies. Our management team is nearly complete. We announced last month that we recruited a gentleman named John Fletcher to serve as a general counsel. He’s from a very prominent law firm, one that’s helped us a lot over the years. He’s going to be a good addition. John Koch has decided to leave the company. John is going to pursue other interests. We wish him well. He’s done a great job. We’re actively engaged in identifying a replacement for John and think we’ll be in great shape for that in front of the spin-off. But I couldn’t be happier. I think that we have a very quality management team and that what’s really important, as we’re working through all of these processes and have some redundant expenses, is that we all stay very focused in trying to limit those and really enter this spin-off time with momentum in both our Wireless and Wireline business. And I think that’s why Kevin, Scott, Sharilyn and I are just so pleased with the way we’re starting off here with the fourth quarter and looking forward to the next two quarters to continue this process.

Q - Jason Armstrong

Okay. Thanks, Jeff. Any chance you can quantify the property tax adjustment for us?

A - Jeffery Gardner

It’s a few million dollars. So pretty big when you look at that in terms of the margin perspective. So that will be nonrecurring. But the other things should be around to stay.

Q - Jason Armstrong

Thanks.

A - Rob Clancy

Angela, we have time for one final question.

Operator

Your final question comes from Christopher King of Stifel Nicolaus.

Q - Christopher King

Good morning guys, two quick questions for you. First of all I noticed Scott’s comments that the Austrian Western Wireless assets were on pace to be divested finally in the first quarter of this year. I just wanted to confirm that that means that the extended review that the European Commission is undergoing at this point, that you’re comfortable with that process and where it stands currently. And secondly wanted to follow up in terms of data ARPU on a consolidated basis going into 2006. It seems like you’re going to have some push backs there in terms of, on the one hand rolling out more DO handsets, on the other hand an increased focus on the marketing side for prepaid adds. Just was wondering how you think about trends going forward in ‘06 as data ARPU, as a percentage of the consolidated ARPU. Thanks.

A - Scott Ford

As far as we understand the situation with Austria, we remain on track to be finished with that by the end of the first quarter. That’s really, I guess that’s in it in a nutshell. Kevin, you want to take the ARPU?

A - Kevin Beebe

On the data ARPU side, Chris, I want to paint a very full picture at analyst day on February 1st and take some time to go through it. But in summary let me try to share with you how we’re thinking about opportunities for growth within the existing markets that we have, right. First, there’s market share that we think we can continue to gain on the post-pay side. That’s just good networks, competitive pricing, family plan growth, etcetera. That’s also prepay, where we have been absent in the past, really. I mean we had a prepay service offering, but it hasn’t had the fullness of features and pricing that we will soon launch in the marketplace that the new platform enables us to do, both in terms of how it works and the cost that we incur. So think of that as market share opportunities within the existing marketplace. On top of that, our broadband application opportunities that we have begun to step up. You saw that in the fourth quarter, the launch of a DO phone, MobiTV, etcetera. Many more things planned. So we’re definitely not giving up on data ARPU in 2006, have some really aggressive plans right now from a revenue perspective. And again we’ll talk much more specifically about that on February 1st.

A - Jeffery Gardner

If I just could, from a financial perspective, we’re very pleased with 147,000 net adds. I think that did drive some margin pressure in the Wireless business, but it’s good to see us deliver a number, I think the sales team did a great job. In terms of your question on, I think what you’re also trying to get to is how do we think about this when in the prepay segment there’s going to be data opportunities, for the family plan customers there’s data opportunities. We’re very committed and always have been and will be going forward and we’ll share more with this going, in February, to looking at segment profitability. And so, yes, there are some data opportunities here. But we’re also going to be very cognizant of the ARPU for each of these segments and pay attention to the subsidy side as well. So, match our phone and our commission offerings with the type of customer that we’re delivering. And so you shouldn’t expect us just to take the governors off and just pursue data for data’s sake. We’re going to do it in a profitable way.

Q - Christopher King

Thank you.

Rob Clancy, Vice President of Investor Relations

First I’d like to thank you for joining us this morning. We appreciate your interest and support. Let me remind you that Alltel will be hosting an analyst day in New York on February 1st. That event will be webcast. We certainly look forward to seeing you. Tony Thomas, who will be replacing me, Tony and I will be available today for questions. You may reach us at 501-905-8991. Thank you.

Operator

Ladies and gentlemen, this concludes today’s Alltel Fourth Quarter Earnings Conference Call. You may now disconnect.

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Source: Alltel Corp. Q4 2005 Earnings Conference Call Transcript (AT)
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