LCI Rings Up Profits

Former MCI executives take the McLean, Va.-based firm from rags to riches with a flat phone rate and a six-second pricing policy

When H. Brian Thompson left a top slot at MCI to lead a small, private telecom company on the verge of bankruptcy, he had lofty goals: to take the company public, establish a global presence and hit $1 billion in revenue by 1998.

Thompson recruited a team of former MCI executives to execute his plan. Despite $303 million in debt at the outset, Thompson is poised to reach his target two years ahead of schedule.

Since Thompson came on board in 1991, LCI International, McLean, Va., has almost tripled its revenue. Its stock has risen from $6 to $37.25 per share since the company went public in 1993. Thompson expects the company to report $1 billion in revenue in 1996.

LCI is now the nation's sixth largest long-distance telecommunications carrier that owns its own fiber network. Its most recent growth rate was 38 percent, which is more than five times the industry average. During the first quarter of 1996, LCI increased its sales force by 30 percent and opened eight new sales offices.

So how has LCI become the fastest of the fast? Many industry analysts and company officials say the secret to LCI's success is the management team.

"LCI has a world-class team," said Jerry Stangohr, first vice president of investments for Cassaday & Company in McLean, Va. "They're doing it better the second time around."

Thompson, LCI's chairman and CEO, worked for MCI from 1981 to 1990, when it was a $200 million company. As the corporate development and strategic planning executive, he developed a strategy to compete against AT&T. He left the company in 1990 to consult, but Li-Tel (as LCI was then known) made him an offer he couldn't refuse.

Thompson brought over Thomas Wynne, a 14-year veteran of MCI, who served as president of the company's 15-state west division. He also lured Marshall Hanno, who had been vice president of sales for MCI in Chicago. Joe Lawrence, MCI's senior vice president of finance, joined LCI "when the debt was gone and the company went public."

Lawrence, who is now LCI's chief financial officer, said, "the good news is that we work really well together. The bad news is that for someone who doesn't know us, we're like brothers who scream at each other."

Lawrence Bouman, who served as the senior vice president for domestic networks at MCI, and Roy Gamse, who served as the senior vice president of marketing at MCI, round out LCI's management team.

When the group first started out together in the early 1980s, MCI's revenues were $1 billion. When Thompson left, the company's annual revenues had climbed to $11 billion. When Lawrence left in 1993, revenues stood at $14 billion.

"We blew everyone away and we did it with focus and execution," said Lawrence.

By 1993, industry pals and competitors had dubbed LCI "MCI Lite." But the team had designed a much different business model than MCI.

LCI was the first company to offer a flat phone rate, regardless of the destination of the call. The group also implemented the six-second pricing policy. The company rounds up calls to six seconds versus the Big Three that round up calls to the full minute. LCI says that difference is costing consumers $2 billion a year.

"There's enough room to charge fairly and still make money," said Lawrence. "[AT&T, MCI and Sprint] would never match us because it would be too expensive for them."

Officials from those companies declined comment.

Despite a small advertising budget and no telemarketing schemes, LCI reports 500,000 residential customers and 700,000 corporate customers.

As investors take a closer look at LCI, what's next for the company and its management team?

LCI has 1 percent of the $76 billion long distance market. According to Lawrence, that will never change. "Two or three years from now, we're still going to be 1 percent of the market and be a $3 billion company."

The company plans to enter the local telephone market through acquisitions. Industry officials estimate that the local telephone market is worth $95 billion.

Thompson does not want the company to grow into a supercarrier or a niche company.

"Understanding the opportunity in those numbers is the key to understanding the potential of LCI," said Thompson. "We will continue to focus on basic telecommunications services."

While LCI is still way behind the Big Three in revenues and customers, analysts and investors say LCI could give them serious competition or possibly get gobbled up by one of them. Thompson wouldn't speculate, but observers do.

"When you have $1 billion in revenues, you [probably] show up on [the Big Three's] radar screen," said Stuart Conrad, telecom analyst for Deutsche Morgan Grenfell in New York. "The competitive edge of LCI is being felt."

The telecommunications reform legislation passed by Congress in 1996 has been a boon to small companies such as LCI.

According to Stangohr, the smaller telecom companies are able to bundle long distance, short distance and local service without having to present a list of competitors. The Big Three have more of a challenge to enter other markets because they always must prove that someone else is competing favorably.

Some investment analysts are touting LCI. A 1996 study conducted by Furman Selz LLC in New York says, "investors should closely monitor the stock and take aggressive positions upon price weakness."

Stangohr strongly suggests that long-term investors take a hard look at the company. "I see LCI like a large uncut diamond lying on the ground in our own back yard," he said. "Investors just have to pick it up and let Thompson tap its assets."

The former MCI team is expected to bring the company to $2.3 billion in revenues in 2000 by becoming a global provider of telecom services. According to Lawrence, the company is negotiating a deal to start reselling local service as soon as 1997.

"You're not going to see us get into content or television," said Lawrence. "The generation who preferred AT&T is moving on and the generation who wants choices is coming up."

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