US LEC bets politics gets it a busy signal.

• Author: Maley, Frank

Mustering the courage to take on the neighborhood bully can pay off -- especially if a big brother holds his arms until you're old enough to fight him for real. Just ask Charlotte-based US LEC Corp. (CLEC -- NASDAQ). Regulations force Atlanta-based BellSouth Corp. and other established local phone companies to play nice with scrappy upstarts like US LEC. The little squirts get to tag along on the big boys' phone lines, and the older guys can't play favorites.

US LEC has made it pay. In 1998, after just two years in business, it made a $13 million profit. Revenues jumped from $6 million in '97 to $85 million in '98. This year, its stock price more than doubled to $33.56 in early September before slipping to about $27 in October. Still, analyst Ken Hoexter of New York-based Goldman, Sachs & Co. expects it to climb back to $35 by the end of 2000.

US LEC is a competitive local-exchange carrier -- a CLEC -- that sells phone service to midsize and large businesses. The Telecommunications Act of 1996 gave birth to CLECs by keeping Baby Bells and other local phone companies out of long-distance markets until they meet a 14-point Federal Communications Commission checklist to prove they have opened their territories to competition.

While most CLECs are burying their own fiber-optic cable, increasing up-front costs and delaying profitability, US LEC leases network space. It uses switching devices that help it route calls more efficiently and broaden its range of phone services with smaller up-front costs.

Lower capital costs let US LEC grow more quickly than most CLECs. It went from no customers at the start of 1997 to 550 in 24 markets at the end of 1998. In early October, it had more than 1,000 customers in 32 markets in six states and expects to have 20 switches -- about $4 million each -- serving 40 markets in eight states by year's end.

Now it's time to grow those markets, says Frank Murphy, vice president of telecommunications research for Richmond, Va.-based First Union Capital Markets. "The company needs to focus on continuing to ramp up sales and revenue growth by moving customers onto their own network."

CLECs have a big advantage over established local phone companies...