GTE Put on a Diet : New Chief Pushes Once-Plodding Firm Onto the Fast Track

James L. Johnson hadn’t provided many clues that he planned to inaugurate a new era at GTE Corp. when he assumed the top post at the nation’s third-largest telephone operating company last April.

A plain-speaking Texas native, “Rocky” Johnson was a telephone company “lifer” who had served for two years as company president under Theodore Brophy, the polished lawyer who preceded him as chairman and chief executive. But those who expected Johnson to stay the course soon learned differently.

In four months, Johnson has overseen a sweeping reorganization of GTE’s telephone operations, sold off three small businesses, started an important joint venture and reduced GTE’s 50% stake in US Sprint, the loss-soaked long-distance telephone company. He accelerated changes already in progress at the company and set others in motion.

“He’s really moved quickly in a short time,” said Robert Morris III, an analyst in San Francisco with the Goldman, Sachs & Co. investment bank. “I think he caught a lot of people by surprise.”

Local Service an Issue

The plans for reorganization have naturally stirred uneasiness among some of GTE’s 101,000 telephone division employees, who are awaiting news of how many jobs the company will cut. But Johnson’s moves were an unquestionable hit on Wall Street, where many had regarded the former General Telephone & Electronics Corp. as overstaffed and plodding. After trading in the mid-$30s most of the past year, the stock in recent weeks climbed to the $40 range.

Still, if Johnson’s moves have answered some questions about GTE’s future, others remain. Without Sprint, how will the company provide for future growth? How will GTE fare in the coming free-for-all among telephone companies over new and newly deregulated telephone services?

And--of concern to Californians--will GTE finish the job of improving the quality of local phone service in the state where it has its largest operations?

Cutbacks Under Way

Johnson is different in background and style from his predecessor. New York-born Brophy went to Yale and Harvard and joined the company as an expert in utility law. Johnson, of tiny Vernon, Tex., graduated from Texas Technological University, started with the company as a junior accountant and rose steadily through the ranks.

Employees at the company’s Stamford headquarters are familiar with the sight of Johnson laboring in his sweat clothes on a treadmill at the company health center, sometimes surrounded by a clutch of dark-suited aides.

While Brophy was a circumspect speaker, Johnson is blunt. “Growth for growth’s sake is not what we’re after,” he says. Even fast revenue growth like Sprint’s “is not very helpful if you don’t have earnings that can grow along with it.” His words bespeak the bitter lesson GTE learned with Sprint, the No. 3 long-distance company. GTE purchased what seemed a hot prospect in June, 1983, from Southern Pacific Railroad as a means of taking part in the deregulated long-distance telephone business.

But while its revenue grew 30% to 40% a year, the company was dogged by billing problems and stubborn high costs. With profits still at least several quarters away, GTE announced last month that it would reduce its stake to 20% next year, leaving the remainder to U.S. Telecom, its partner in the venture since 1986.

GTE and U.S. Telecom “had some differences of opinion” on just when Sprint would become profitable, Johnson says.

Johnson announced in March a company reorganization that provided for closing some regional units, reducing headquarters staff and centralizing functions such as marketing. He says he will announce in 30 to 60 days further details of the reorganization but doesn’t expect GTE California’s staff, including 2,400 workers in Thousand Oaks, to be trimmed back more severely than those of other areas. GTE won’t say how many jobs it expects to eliminate nationally, but Wall Street analysts’ estimates range from about 2% to 10% of its jobs.

One sign of the company’s overstaffing is a measure of efficiency commonly used in the industry, the number of employees per telephone access line, according to analysts. While this number has been steadily declining for GTE, it remains at about 74 employees per 10,000 lines, or about 20% above the industry average, estimates James Stork of the Duff & Phelps brokerage house in Chicago.

Also on GTE’s agenda is further improvement of the quality of its basic telephone service in California. “Our service was at a lower level than it should have been and a lower level than our competition’s,” Johnson acknowledges.

New Gear in Southland

Faced by a storm of complaints, particularly from customers in Southern California beach communities, GTE California stepped up its program of equipment improvements in the early 1980s. Customers of GTE California--which has long charged higher rates than Pacific Bell, the state’s biggest phone company--griped that they couldn’t make phone connections or couldn’t hear each other over static, among other dissatisfactions.

GTE has recently been investing about $750 million a year to install new phone-switching equipment and other new gear, according to officials, who say complaints continue to decline. Calls to “611,” the telephone service number, have fallen about 26% since 1986, says GTE California.

The division of ratepayer advocates at the California Public Utilities Commission, the PUC office set up to represent consumer interests, concurs.

The office last year found that GTE met minimum service standards, says Daljit Singh, a senior staff engineer. He adds that while the utility has “improved considerably” since 1984, officials of the consumer advocate unit believe that its service still suffers from too many phone line outages and other snafus.

As GTE attends to the basics, it must also look forward. Future growth is a key question for a company that last year derived about 75% of its revenue from telephone operations, which have been growing at 3% to 4% a year.

But Johnson asserts that GTE may be able to coax its overall growth rate to 5% to 10% by expanding into some of the emerging areas of unregulated or partially regulated phone service.

Such new services have aroused great interest among the nation’s telephone companies since deregulation began. It is unclear, however, which services government regulators will allow the companies to provide and which ones will be money-making propositions.

GTE has begun several new kinds of telephone service. Its GTE Mobilnet cellular telephone operation offers mobile telephone service in 31 markets and is expected by some analysts to be profitable this year. GTE’s Airfone unit offers air-to-ground telephone services on about 500 commercial airliners.

Experiment in Cerritos

Like most other telephone operating companies, GTE is preparing to offer video and data, as well as special voice hookups to homes. Those services may be offered through existing phone lines or the advanced technologies of coaxial cable (used for cable TV) or fiber-optic lines.

While theories on such applications abound, Johnson says home financial services--at-home banking, for example--and home shopping services appear to be the most promising possibilities.

In April, GTE got Federal Communications Commission permission for an experiment in the new technologies in Cerritos. The company plans to wire the community’s 16,000 homes and 2,000 business to enable it to test such ideas as home banking, at-home shopping, home-security services and pay-per-view television.

While the experts are sharply divided on the financial prospects of such ventures, some Wall Street analysts believe that the new telephone services could add 10% to GTE’s telephone revenues within a decade and garner healthy profits.

In its pursuit of these new enterprises, GTE won’t be burdened with one major research and development cost that it has been carrying for years. This spring the company began a joint venture with American Telephone & Telegraph in which AT&T; will develop the next generations of GTE’s biggest telephone switches, which are the heart of local telephone operations.

Because the venture will free up so much cash, this venture has been one reason for Wall Street’s recent enthusiasm about the company. The analysts have also been cheered by the company’s recently announced dividend increases, stock buyback program and Johnson’s declarations that he won’t stay with businesses that aren’t sufficiently profitable.

If a line of business isn’t working out, “we’re going to see what the possibilities are in closing it, or selling it . . . to somebody who can do better with it than we can,” Johnson says.

Calling GTE . . .

Size: The nation’s third-largest telephone operating company; 13.5 million customer lines in 31 states.

Revenue source: Local telephone and related operations last year provided 76% of revenue and 90% of operating income.

Local presence: GTE California is the second-largest telephone company in California after Pacific Bell, with 3.2 million lines in 330 communities, almost all in the seven counties surrounding Los Angeles. Revenue was $2.8 billion in 1987.

Major non-telephone units: Electric Products unit, maker of Sylvania lighting products and precision materials for manufacturing (14% of 1987 revenue); Communications Products, maker of telecommunications equipment and government systems (10% of 1987 revenue).

Trouble: GTE’s share of pretax losses from joint venture in US Sprint totaled $245 million in 1985, $286 million in ’86 and $578 million last year.