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May 2004
Regional Telecom Defies Boom-Bust Trend

      One of Charlotte’s best kept business secrets operates quietly in the South Park area providing business telecommunications services from New York to Miami and westward to New Orleans, and nearly all points in between. It is a survivor in a tough, litigious and boom-bust industry that has seen more than its share of failures including the infamous downfall of telecom service provider WorldCom, the largest bankruptcy in history. The story of US LEC is one “…that people in the marketplace believe in,” says president and CEO Aaron Cowell. It’s a story he tells hoping to improve the reputation of the industry and one he hopes will bring his company additional recognition within North Carolina, and particularly Charlotte, where the company’s headquarters is located.

     Like thousands of other telecom companies, US LEC was spawned by The Telecom Act of 1996, which established for the first time that competition in the telecommunications industry would be allowed. No longer would  ILECs (incumbent local exchange carriers) – the Bells and Verizon for example – operate as monopolies. In fact, the incumbents would be required to make facilities available for interconnection with any competitors, which are known as CLECs, competitive local exchange carriers. The Act ushered in the infamous telecom boom.

     “Everyone looked at that landscape of millions and billions of dollars to be spent on telecom and began launching business plans,” says Cowell. “At one point there were something like 2,000 certified carriers across the country.”

     Boom. Millions of miles of fiber-optic cable are laid down across the country, billions of dollars are invested in hardware and software to feed consumer demand for Internet, voice and data communications, and entrepreneurs race to market with business plans designed to harness a critical mass of users and win big in the burgeoning market. Bust. New telecoms incur unprecedented amounts of debt to get to market raising capital via banks and the capital markets.

     Despite anticipated levels of consumer demand, supply far exceeds demand and few companies are winning. By 2000, the race ends for many telecoms. “People thought they could build companies and sell them quickly doubling and tripling their money overnight. The bubble kind of burst over the industry,” says Cowell. “The hundreds and potentially thousand of competitive carriers suddenly became 200 again.” Although, Cowell adds, the bust continues in one form or another even today as US LEC survives.

 

A crucial decision to survive the telecom bust

     Richard T. Aab and Tansukh V. Ganatra, industry veterans who understood the benefits of competition in telecommunications, founded US LEC in 1996. Ganatra had retired to Charlotte following service in the industry in Rochester, N.Y. “It was a happenstance decision to locate in Charlotte,” says Cowell, who joined the management team as executive vice president and legal counsel in 1998. The company was built to be a North Carolina-only competitive provider with its first switching centers located in Charlotte, Raleigh and Greensboro. “We rapidly out-paced that business plan once we realized the market opportunity,” says Cowell, who went on to head up sales and marketing, and then was named president and chief operating officer in 2000 and chief executive officer in 2002.

     Like other telecoms, US LEC’s first mission was to compete with the ILECs. “Everybody had to show dramatic cost-savings because CLECs were a riskier venture then,” says Cowell. “Nobody really understood there was competition. It goes back to the days when you saw a pin drop and nobody knew what it meant. Now when you see a pin drop you know it means Sprint. And how many people knew what MCI was?”

     Cowell says the telecom bust was in one way well timed and that it was fortunate US LEC was one of the first companies that didn’t perform to expectation. “It was early in 2000 when we didn’t live up to what we, ourselves, thought we would do,” says Cowell. “That realization caused us to sit back and consider what was really important for us long-term.”      

     “We then began a process of looking at what we call our road to profitability. Different companies took different paths and at least in hindsight we chose the right one.” Gone would be the days of competing on a price basis and US LEC would refuse to cut its costs through lay-offs. Instead, the company focused on holding costs at current levels and waiting for the customer base to expand, knowing that one day, revenue growth would out-pace cost growth.  It took six quarters for US LEC to ride out the worst of telecom times, its stock price as high as $45.62 and as low as $1.61, but by the first quarter of 2002, the company had realized a key financial milestone – positive EBITDA.

     “Once we held the cost structure and focused on building and keeping customers, we worried less about eliminating cost and more about growing the customer base; that’s when we really began to see the bottom line result we had planned for,” says Cowell. “That difference was important. Customers saw that we didn’t abandon the marketplace. Employees saw that we were still investing in the team and investing for growth.”

 

Loyal customers, local teams the key to success

     US LEC’s management team has been together for five or more years; and under that leadership has created and maintained a business plan intended to distinguish US LEC in the competitive carrier marketplace. Some key strategies include: purchasing its own switches and related software and hardware to connect customers to its network; achieving cost-savings for its customers while being proactive to issues such as correct billing; co-locating sales teams and technical teams in each of its markets; maintaining redundant power and environmental systems; investing in state-of-the-art technology (including the recent rollout of a Voice over IP (VoIP) initiative) and an increased ability to offer customers self-care technology. But technology isn’t the main driver for US LEC.

     “We are a company that is somewhat technology agnostic,” says Cowell. “Customers want reliable service, a responsive team, and accuracy upfront. If that can be supported by improvements in technology then we will invest in those.” US LEC initially invests approximately $5 to $6 million in each switching center. 

     “People see a company that provides a higher quality of care,” says Cowell. “That is something people are willing to pay for. This is an industry that has focused too much on saving customers $2 a month. Our proposition is that not only will we save you some money, but also over time, you’ll see the benefits of accurate bills, of our responsiveness and ability to adapt to your changing needs. And when we have a service issue, which every company is going to have – backhoes do exists – we respond promptly and honestly.”

 

On the road to profitability

     There is no arguing that US LEC is well on the road to profitability according to Cowell. “We’ve had extraordinary good luck over the last few years,” he recounts. “ We’ve been doubling our customer base on a fairly regular basis. We add roughly 4,000 to 5,000 customers in a year. These are not small businesses. They are hospitals, law firms and auto dealerships.”  US LEC has more than 18,000 customers and an average share of close to 10 percent in each of its 26 markets.

     “We are looking to be the premier competitive carrier in each market,” says Cowell. “We think we’ve achieved that in many of the markets we are in today. We are at our best now, in terms of adding new customers, in the history of our company. It’s strong, yet consistent, growth that has even surprised us somewhat.” While the market share may be in the single digits in some markets, Cowell says it’s an enormous business base to have acquired. He says 80 percent of the company’s business comes from incumbent carriers – customers either have a contract that is expiring, are having trouble with an incumbent and want to make a change, or are a new business. “We think there is no end in sight because there is so much business still sitting out there,” says Cowell. 

     Recent expansion has included moving into the New York City market during the fourth quarter of 2003. US LEC also recently acquired FASTNET Corporation, which will provide the company with deeper market penetration in Pennsylvania, Delaware, New Jersey and southern New York.

     “US LEC is no longer a company that can be ignored,” says Cowell. “I think when you look out in the world today, if you’re running a customer-focused side of an incumbent such as BellSouth or Verizon, you see US LEC, a company that is very difficult to compete with. To a great extent, we are almost the incumbent now of the business customer base. People seeus as the quality provider, an alternative to the incumbents, and not just because of a price differential, but because of the total package we provide.”

     Additional signs of future profitability include US LEC’s ability to raise $10 million in common stock, which also took place during the fourth quarter of 2003. Cowell says that probably makes US LEC the only competitive carrier to raise money in the form of common stock in several years. “That tells me that the market still respects and rewards good business plans,” says Cowell.
    Cowell adds that the analysts realize that when they look at a competitive carrier such as US LEC, they need to look to the future. “It’s not something that today makes a difference, or that tomorrow makes a difference,” says Cowell. “They look at trends, customers additions, cost discipline and customer retention.”  He says US LEC is doing well in all of those areas yet realizes that it will be some time before investors as a whole look at the telecom industry as a reliable sector.

Plans for Charlotte and North Carolina
     US LEC has no intention of forgetting its Charlotte and its North Carolina roots. Half of its 1,000 employees are located in Charlotte at its corporate office, its network operations center and  its digital switching center. “That should be something people understand and value,” says Cowell. “There aren’t many companies homegrown in Charlotte that have gone public, that have created a thousand jobs and that provide a lot of benefits to customers in the way they do their business.”

 

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