No Hanging Up : Com Systems, Still a Long Distance From Financial Success, Sees Some Bright Spots

For investors, Com Systems has been a wrong number.

Four years ago, the company jumped into the long-distance telephone market to battle mighty AT&T;, MCI and U.S. Sprint. For its troubles, Com Systems has since piled up $7.1 million in losses; its stock has fallen from $14 a share to $1.75, and the Van Nuys company finds itself with a negative net worth of $3.9 million as its liabilities outnumber its assets.

Although Com Systems did manage a streak of six profitable quarters, the company expects a sizable loss for the December, 1986, quarter, giving it another net loss for its fiscal year ended Dec. 31.

Because of the company’s weak balance sheet, two years ago it was removed from the computerized NASDAQ stock listings. Now its stock trades via the harder-to-find pink sheets in over-the-counter trading. Not surprisingly, financial analysts all but ignore Com Systems.

Founder Is Optimistic

But listen to Rex Licklider, 44, company co-founder, chairman and chief cheerleader: “We’ve definitely turned the corner and will begin to throw off the kind of profits that you’d expect in this business.”

Understandably, many are dubious about Com Systems’ prospects. “We’re not asking anybody to believe in us. We’re not asking anybody to invest in us,” Licklider said. “Either we can do what we say we can do, or we won’t.”

Com Systems provides long-distance service to businesses in southern California and Arizona. It solicits companies with at least $500 a month in long-distance calls, offering more attentive service than its Big 3 rivals--even Licklider handles customer complaints. Com Systems also charges 10% less than MCI or U.S. Sprint for long-distance calls inside California.

Unlike AT&T;, MCI and U.S. Sprint, however, Com Systems owns very little equipment. It can still send long-distance calls anywhere in the country using a patchwork “phone network” that includes its own phone-switching centers. Com Systems relies on local Bell companies to originate and make final delivery of phone calls, and rents time on other long-distance transmission networks.

Com Systems, with $22.8 million in sales its last reported fiscal year, remains no more than a speck in the $50 billion-a-year long-distance business. AT&T; dominates with about an 80% market share. MCI, the original, lower-cost alternative, has 10%. And ambitious U.S. Sprint, which is building a $2.5-billion state-of-the-art fiber optic phone network, has another 5%.

That leaves Com Systems and 400 other pipsqueak enterprises battling for the final 5% of the long-distance market.

Licklider concedes that everything has not gone according to plan.

An ex-IBM computer salesmen, Licklider in 1975 persuaded two investors to pony up $10,000 to start a company that eventually prospered by selling telephone systems to offices.

Com Systems hit $20 million in sales by 1982 and earned $800,000. But, in 1983, he made what he thought was a shrewd change in course. When the Bell companies were broken up, the Baby Bells said they would re-enter the office phone business. Licklider preferred his chances in the newly opened long-distance market.

Licklider started building what he envisioned as a long-distance phone network stretching across the Sunbelt to the Carolinas.

What Licklider didn’t expect was the size of the long-distance rate cuts that the FCC forced on AT&T.; Because Com Systems must underprice AT&T;, it hurt margins. The FCC also raised the fee that Com Systems and the other alternative firms have to pay in order to have access to local phone companies. They now pay the same rates as AT&T.;

Investors Retreat

Soon, Com Systems was piling up losses and debt, and investors were scared off. Other communications firms offered to buy Com Systems, but Licklider--who owns 24% of the stock--held out, convinced he could still make the company work.

“We went back to basics,” Licklider said.

In 1985 he sold off the company’s interest in a North Carolina long-distance firm for $10.4 million. He laid off half of Com Systems’ workers.

Now, his revised strategy is to build a regional long-distance company serving the West.

Recently, Licklider signed a $1.5-million-a-year deal with Western Union and Wang, enabling Com Systems to bypass AT&T; and Pacific Bell and cut its transmission costs by 50%. Now only 5% of Com Systems phone network is routed on higher-priced AT&T;, down from 20% two years ago.

There are bright spots. Com Systems keeps adding commercial customers (residential long distance makes up only about 4% of its sales). In the past year Com Systems has inked deals to buy six tiny long-distance firms for $1.8 million, adding $6 million a year in new buiness. The company now counts 12,000 corporate clients, and, with its sales staff hustling, the numbers keep rising.

For the six months ended Sept. 30, the last figures released by the company, Com Systems showed a $552,000 profit on a 30% increase in sales, to $15.1 million.

Satisfied Customer

Barney Sofro, chairman of House of Fabrics, chose Com Systems as his company’s long-distance carrier. “The savings was significant. And they do an excellent job of service. With the big monster phone companies, we’re just another account,” he said.

Licklider now boldly predicts $40 million in sales in 1987 and $4 million in pretax earnings.

“The time to worry about Com Systems’ survival was a year and a half ago. I’m optimistic management is on the right track now,” said Joseph Kapka, an analyst turned stockbroker who followed the company for Bateman, Eichler, Hill Richards.

But, for all its progress, Com Systems remains a hold-your-breath-investment, however intriguing. The total market capitalization of Com Systems’ stock is only about $8 million, a fraction of its total sales. For healthy companies that situation is reversed.

Late last year, Com Systems wrote off $2.8-million worth of antiquated phone equipment. That will mean another loss for its latest fiscal year, which ended Dec. 31, and will boost the company’s negative net worth. Com Systems also owes $3.8 million in long-term debt, and is co-guarantor on another $5.4 million in debt for two limited partnerships.

Unanswered is whether the company’s recent good news will continue long enough for Com Systems to earn its way back into a positive net worth. Even Licklider concedes that will take another two or three years. The firm must improve its performance if it hopes to raise another $20 million from the stock market.

Fate Rests With FCC

Much of Com Systems’ fate rests with the FCC. Recently AT&T; asked the FCC to let it charge whatever it wants for interstate long-distance calls. Licklider hopes--as does MCI--that AT&T; gets its way. They are betting that AT&T; won’t cut prices--indeed, if AT&T; raises prices--it would enable Com Systems to fatten its own prices.

“The thing I’m most concerned about is the FCC and where they take this industry. Our future is largely out of our hands,” Licklider said.

If Com Systems does turn the corner, it will pay off for Licklider one way or another.

“In five years, I suppose it would be logical that Com Systems might be acquired by a larger entity,” Kapka said.

Richard Savage, U.S. Sprint’s vice president of marketing, said his company will continue buying smaller phone companies. “We’re entertaining acquisitions of resellers. Some have attractive customer bases,” he said.

But, for the moment, Licklider is staying in the hunt. “I guess we want to prove to everybody that we can do it,” he said.

COM SYSTEMS AT A GLANCE

Com Systems, based in Van Nuys, is a long distance telephone company that sells its services to customers in Southern California and Arizona. It has 145 employees and 4.6 million shares of common stock outstanding.