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Alltel's $2.1 billion signal.

Arkansas-Based Telecommunications Giant Sends Message: Diversification Pays Off

THE ROOTS OF ALLTEL Corp. may be firmly implanted in the banks of the murky Arkansas River, but its tendrils are everywhere, spreading like kudzu across the nation in a diverse communications and information network.

Understandably, many Arkansas see Alltel merely as a provider of basic telephone service to rural towns and cellular phone service to hard-charging executives. But that's just one leaf on a very long, $2.1 billion vine.

"We're probably a lot more than people realize," Alltel Chief Executive Officer Joe Ford says. "We are a successful, diversified, profitable company doing a lot of exciting things."

One source of excitement is the Little Rock-based company's second-place ranking in net income among Arkansas public companies. Being second to Wal-Mart with $229 million in 1992 is nothing to sneeze at.

Lately, there has been no shortage of positive financial news about Alltel.

On July 29 the company joined an MCI-led consortium to build and operate a nationwide network for personal communications service (PCS) equipment. PCS is the low-power, pocket-sized cellular telephone device projected to give the cellular industry more market penetration with average consumers, many of whom view mobile phones as a corporate luxury.

And just in the last two weeks, Alltel's Systematics Information Services Inc. division announced a significant 10-year contract to process cellular billing and customer service records for GTE Telecommunications Products and Services Group. The new "outsourcing" contract is monumental because GTE holds 1.4 million -- almost 13 percent -- of all the cellular phone subscribers in the country.

Anyone who blinked during the 1980s may have missed the amazing transformation of Alltel.

In 1983, when the company was formed in a merger between Allied Telephone Co. of Little Rock and Mid Continent Telephone Corp. of Hudson, Ohio, Alltel was a plain-vanilla, basic telephone company drawing $600 million a year in revenues. Ten years later, revenues have jumped to a gaudy $2.1 billion on the strength of an unusual diversification plan.

The Giant in Our Backyard

Just how big has Alltel become?

In 1992 Forbes ranked Alltel 197th in profits among the largest corporations in America. To put that ranking in perspective, consider that Alltel's $229 million in profits position it between two of the country's best known grocery store chains: Winn-Dixie Stores Inc. and Walgreen Co.

In a November 1992 Alltel research report, First Boston Corp. predicted that Alltel would experience compounded annual earnings of 12.3 percent through 1996 and 11.8 percent through the year 2000. None of the larger phone companies can be expected to perform on this level, the report said.

Alltel's four core businesses are basic telephone service, cellular, information service and distribution. The company dabbles in a few other fields -- such as cable television and publishing -- but those interests are relatively minor.

For investors, the biggest attractions to Alltel are its cellular and information services, despite the fact that basic telephone still accounts for 45 percent of Alltel's revenues and 69 percent of operating income.

Alltel, in fact, is the fourth largest independent telephone provider in the United States. The company serves 1.32 million telephone customers scattered across 25 states.

Back in 1987, basic telephone business made up 98 percent of the company's operating income. Today, the pie chart has more pieces. While the telephone business has steadily grown, it now accounts for only 69 percent of the operating income. Information services has taken over a 21 percent chunk of the operating income; cellular and distribution 4 percent each; and miscellaneous items another 2 percent.

Alltel is investing heavily in its telephone system, having increased its capital spending from $165 million in 1987 to $247 million last year. The improvements largely involve converting the telephone network to digital control, which is projected to be 95 percent complete by 1996.

The most recent expansion of Alltel's telephone business was an agreement with GTE to exchange service areas.

Subject to regulatory approval, Alltel plans to trade 95,000 of its access lines in Indiana, Michigan and Illinois and $440 million in cash for about 285,000 GTE access lines in Georgia.

Swapping Lunches

Ford says one of the main reasons for the swap was to free the company from regulators and legislators in those three Midwest states and allow it to take control of its own destiny.

It has been estimated that Alltel could save up to $10 million a year in administrative salaries by making the swap.

Systematics, a Little Rock firm purchased by Alltel in 1990, represents the majority of the information services division. A leading provider of outsourcing services, Systematics literally becomes the data processing department for its clients. Its services are so popular that Systematics has amassed a contract backlog of more than $1.5 billion.

In 1992, information services contributed $94 million in operating income to Alltel by providing services and software to more than 1,000 institutions in the financial, telecommunications and health care industries.

"When we bought Systematics, I think a lot of these people thought it was a very bold step," Ford says. "Now a lot of people are realizing that it was a very good step."

Systematics was fundamentally strong on its own, but there was apparently room for improvement. Ford says Alltel has more than doubled Systematics' revenues by bringing in larger clients.

In the past, Systematics' clientele had been limited mostly to banks with less than $1 billion in assets. Since Alltel's purchase, the division has added to its customer list the country's first-, second- and fourth-largest financial institutions: Citibank, Chemical Banking Corp. and NationsBank Corp., respectively, with combined assets of $474 billion.

To complement Systematics, Alltel in 1992 acquired Computer Power Inc., the largest mortgage processor in the country and a $100 million source of revenue.
Alltel, Then and Now

 Dec. 31, 1983 Dec. 31, 1992

Assets $1.4 billion $3.1 billion
Revenues $600 million $2.1 billion
Net Income(*) $55 million $234 million
Employees 6,100 12,876
Stock Price $10 15/16 $47 3/4

* Excluding one-time items
The Sum of the Parts

($ in millions)

 1992 1991 %Change

Telephone

Revenues $948 $891 6
Op. Income 316 295 7

Information Services

Revenues $579 $477 22
Op. Income 94 56 68

Distribution

Revenues $377 $333 13
Op. Income 18 16 18

Cellular

Revenues $125 $76 65
Op. Income 21 9 144


In a recent research report on Alltel, Stephens Inc. projected 15 percent annual revenue growth for the company's information services division in 1993.

But, as well as the telephone and information divisions have performed, Alltel's cellular properties hold the real promise for growth.

Cell Growth

Alltel Mobile has 185,000 cellular customers and, by one method of estimation, could someday have 7.5 million in the markets it now serves.

The company's cellular revenues are averaging $80 per customer per month, and Stephens predicts they will grow 40 percent in 1993 while operating income swells by about 83 percent.

With heavy start-up costs, the cellular division actually lost money until 1989 and remained fairly sluggish until 1991, when it busted through to post $8.6 million in operating income. Last year, cellular business increased 139 percent to $20.9 million in operating income -- a significant contribution to the overall earnings growth of the company.

Alltel has an unusually large stake in the cellular market for a company of its size. That seems to be a good omen because cellular service has not even come close to reaching the saturation point in the United States.

Only 5 percent of U.S. residents have cellular service, but industry projections say the market penetration will rise to more than 25 percent by the year 2000.

The company's cellular strategy focuses on several fast-growing Sun Belt state capitals, including Little Rock, Jackson, Miss., and Montgomery, Ala. Alltel tries to surround its metropolitan service areas with clusters of rural service areas, linking them with interstate highway coverage. This allows Alltel to pull in revenues from roaming traffic.

A much more modest performance is expected from the company's product distribution operation, which provides a wide range of supplies to Alltel phone subsidiaries and independent telephone companies. One of Alltel's distribution specialists is HWC Distribution Corp., a leading provider of specialty wire and cable products.

"I think Alltel is very well-positioned in everything that it does, and the credit goes to the management of Alltel at the executive level," says Stephens analyst Dathan Gaskill. "I wouldn't expect further diversification. I don't think they are going to go outside their core businesses."

In the final analysis, Alltel is a uniquely diversified company that appears to have hedged its bets for both the long and short term. The solid, steady performance of the telephone operations have kept the company stable as it prepares for the future with ventures into fast-growing ancillary businesses.

Perhaps nothing says it better than Alltel's national print advertisement.

At the top of the page is a nimble sprinter, poised at the starting blocks. At the bottom is a powerful linebacker, crouched in a three-point stance.

"Actually, we're a bit of both," says the copy.
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Title Annotation:Alltel Corp.
Author:Haman, John
Publication:Arkansas Business
Date:Aug 16, 1993
Words:1521
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