Taking the Basics Away From Big Guys

Upstart company LCI undercuts the big three by paying attention to garden-variety customer telephone service

Don't call LCI International if you're looking to ride the information superhighway.

Unlike many of its brethren in the telecommunications industry, the long-distance carrier isn't busy hyping itself as the source of seamless, interactive, real-time, multimedia services that are supposed to increase our productivity and enrich our lives.

If, however, you wish to place an inexpensive long-distance phone call, LCI may be worth the quarter."People try to make this a very sexy, complex business, but it's not this massively complex, futuristic world of information technology," said H. Brian Thompson, chairman and CEO of LCI International. "The fact of the matter is that 90 percent of the people who use the phone use it for only one purpose, and that's to call somebody."

LCI is capturing enough of that 90 percent's business to make it one of the nation's fastest growing long distance carriers. The McLean, Va.-based company recently reported third-quarter revenues of $119 million, up 32 from 1993. Earnings more than doubled to $9 million, and volume of switched-minute use surged 40 percent, to 844 million.

LCI, which provides long distance service to residential, business and government users, was one of the first domestic carriers to introduce pre-paid calling cards, and as the name implies the carrier is also active internationally. The company just announced the expansion of its frame-relay data service to more than 57 nations, and recently received FCC approval to negotiate direct operating agreements with carriers in more than 200 countries.

Thompson said LCI's international business, which accounts for 8 percent of revenues, is expanding by 50 percent annually.

But while LCI - with a current market value of approximately $800 million - may seem like a pituitary case, the company had a negative net worth only three years ago. Founded in 1983 as LiTel Communications, by 1991 it was a moribund midwestern carrier suffering from severe operational and financial problems.

Enter Thompson, a former MCI executive who helped fuel its meteoric rise from a $230 million to $8 billion company in the 1980s.

Thompson took the helm of LiTel in July 1991 and set about restructuring and resurrecting the carrier. He inherited a company with $220 million in declining revenues, $300 million of debt and a negative equity of $40 million. Even as it hemorrhaged money, LiTel was pouring $1 million a year into the development of PCS technology and another $7 million into video conferencing. Thompson, who labels PCS "a concept in search of a technology in search of a market," axed those efforts and redirected the company's energies on providing plain, but profitable, long distance service.

"You gotta have focus and understand what you are," said Thompson. "This is no AT&T Bell labs, so I try to keep people's face right where it belongs, which is on the business at hand." Thompson's strategy paid off. Since 1991, the company has nearly doubled its revenues to $400 million, reduced its debt by $200 million, and increased equity to $200 million. In January 1992, LiTel was renamed LCI International, which went public in May of 1993.

Unlike most small long distance companies - there are nearly 1,000 of them out there - LCI actually owns a fiberoptic network and switching facilities, rather than leasing all of its capacity from one of the "big three," AT&T, MCI or Sprint. And the quantum leaps in quality, capacity and cost resulting from advances in fiberoptic technology are key to LCI's market strategy. Thompson said technology has rendered insignificant the cost of transmitting a call over long distances. This flat rate means that a caller from Boston pays the same per- minute rate to call New York or San Francisco. Calls cost either 12, 15 or 17 cents per minute, depending on the time of business day. The fact AT&T, MCI and Sprint charge according to distance, he said, has nothing to do with the actual cost of transmitting a call. "We have no monthly fees, no minimum, and no discounts if you only call your friends or family and then increase the price of a call to everybody else, which somehow, people haven't picked up on." And in a business that measures success in minutes, LCI International Inc. is also trying to set itself apart from the competition by seconds. All long distance carriers pay access fees to local carriers, who bill them for each six seconds of use. Although AT&T, MCI and Sprint all charge business customers by the same six second increments, Thompson said, they all round up the cost of residential calls, regardless of how short, to the next minute. LCI, he said, charges all its customers, business and residential alike, on a six-second basis."It's in the billions of dollars of revenue that is going to AT&T, MCI and Sprint for periods of time for which they paid no access charge," Thompson said.

LCI will soon have to contend with other billion-dollar players as well, namely, the Baby Bells. Thompson said he has no qualms about the Bells entering long distance, as long as there is an alternative provider of local access. "I'm competing with MCI, AT&T and Sprint, I don't mind competing with a big guy," said Thompson. "I just don't want the big guy delivering my pizza."

Thompson, however, may need to be more concerned about a big guy eating his pizza. "I think one of the Bell companies might buy them," said John Bain, telecommunications analyst with Raymond James & Associates. Bain said the Bells have billions of dollars but zero experience in the long-distance business, and could use LCI's customer base, facilities and institutional knowledge. "There are lot of people that like this stock," said analyst Barry Cohen of Ehrenkrantz King Nussbaum Inc. Only time will tell if a Bell CEO is among them.


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