'Mark of the Beast'

'Mark of the Beast'

Entrepreneurs by Jean Gruss | Editor/Lee-Collier

Steve Ward is a phoenix-or a vulture, depending on your point of view.

The president of T3 Communications in Fort Myers built a local phone company from the ashes of the recent telecom crash, buying equipment from dozens of busted telecom companies for pennies on the dollar in 2002 and 2003.

The result is that T3 today can undercut its competitors by offering cheaper voice and data services to business customers in Southwest Florida. And because it paid so little for the equipment, executives say T3's gross profit margins are in excess of 50%, despite the lower prices.

The company focuses on smaller markets such as Fort Myers and Naples. It provides telecom services exclusively to business customers. That's because smaller markets are less competitive and business service doesn't require as big a customer-service operation as residential.

Although T3 executives won't reveal much financial data, they say revenue grew 486% from 2004 to 2005 and the company's monthly revenues recently hit the $350,000 mark. Annual revenues are expected to reach $5 million to $6 million this year and double that in 2007.

It takes the company six to nine months to break even on a new customer, or half the national average, executives say.

Now that the company recently became profitable, T3 is looking at other markets in Florida that are similar in size to Fort Myers where it can replicate its success, including Sarasota. The company raised and spent $2 million to build the business and recently raised another $800,000 in a third round of funding.

What's more, Steven Jones, the company's chairman, says the board of directors is considering taking the company public in 2007. Jones is a former Merrill Lynch telecom investment banker who also is backing another Fort Myers venture, cancer-testing firm Neogenomics. Jones' investment partnership owns 20% of the company, while a group of 30 partners led by Fort Myers real estate investor Tad Yeatter and Fort Myers City Councilman Randall Henderson Jr. own 50%. Ward, Chief Financial Officer Dale Conrad and other investors own the remaining stakes.

Discount shopping at Enron

Companies such as T3 have their roots in the deregulation of the telecom industry in the mid-1990s, which forced large companies such as Sprint to sell services or lease their lines to upstart companies.

But as the telecom industry boomed in the late 1990s, most new competitors couldn't buy sophisticated equipment because it cost too much. Often, they simply purchased telecom services from the telecom giants at a discount and resold them at a small profit. Those upstart companies that took the risk and invested millions of dollars in expensive equipment went bust in the crash of 2002 and 2003.

When that bust occurred, Ward seized the opportunity to acquire equipment at fire sale prices. But it wasn't easy to convince investors in the midst of a telecom rout to invest. Jones jokes that the industry code for telecom had become the "Mark of the Beast." Jones, who says he personally lost millions of dollars in the telecom bust, says he was impressed with Ward's plan from the start and became a backer. Ward had years of experience in the data processing field, which made him expert in the new digital telecom technology that was emerging.

Forsaking a salary, Ward went shopping for equipment in 2002 and 2003. One of his most lucrative stops was the Enron auction in Houston in 2003. While there, Ward heard a rumor that WorldCom had abandoned valuable equipment in an empty building across the street.

There, he discovered a gem: a rack of powerful back-up batteries that would cost at least $100,000 used. Not knowing their value, the owner of the now-empty building told Ward he could have it for nothing if he could truck it out.

Walking around the company's facility in downtown Fort Myers, Ward points to a backup generator that came from an auction in California and an air-conditioning unit that came from another auction in Michigan.

Two hundred specially made cabinets that store sensitive communications equipment came from Deutsche Bank in New York, which had ordered too many for its data center. Ward bought the cabinets for $200 each, including delivery to Fort Myers. In the go-go 1990s, they would have cost $1,200 each without delivery.

Ward didn't always have to travel. He bid on a Cisco router on the online auction site eBay for a fraction of the cost of a new one. "Some guy had it and didn't know what it was," he chuckles.

In all, Ward estimates he saved $1.5 million in startup costs by flying all over the country, shopping for discounted equipment.

Co-locating with Sprint

For an upstart telecom company such as T3, the closer you can locate your equipment to the customer, the less you have to pay companies such as Sprint for access.

Unlike some competitors, which simply bought services from Sprint and resold them, T3 signed an agreement with Sprint that allows T3 to locate its equipment in half a dozen Sprint switching offices in Southwest Florida. Locating in these facilities reduced T3's access costs by about 50%, Jones estimates.

"It's been the competitive killer," Jones says.

That's how T3 can offer voice and data services for less and still make money. For example, for $500 a month, a business customer can get eight voice lines and data bandwidth with a two-year contract. That's as much as 40% less expensive than the competition. "We do extremely well with that $500 special," Jones says.

Having the right equipment also cuts down on small aggravations, such as having to dial the "239" area code and paying long-distance charges. For example, a call from Fort Myers to Naples requires a caller to dial the area code, even though the "239" area code encompasses both cities. T3's equipment eliminates that hassle.

What's more, focusing on business customers means the company doesn't have to build up a big customer-service staff. In fact, the sophisticated equipment Ward bought at auctions can immediately warn T3 technicians of a problem before the customer is even aware of it. The company currently has 20 employees, including six who are in sales.

Ward says sometimes customers are reluctant to leave a large company such as Sprint, but he reassures them by telling them T3 is the only local telecom company with secure access to Sprint's facilities.

Besides the lower cost, Ward says customers like the fact that the business is locally owned and managed; they know exactly who to call if there's a problem. So far, the company has about 500 small to medium-sized business customers in an area that stretches from Port Charlotte in the north to Ten Thousand Islands in the south and Clewiston to the east.

Future growth

Jones says the company can piggyback on its existing infrastructure to expand into second-tier markets such as Sarasota that are similar in size to Fort Myers and Naples. He estimates that it would cost about $500,000 to enter a new market.

Jones is reluctant to cite what other specific markets the company plans to enter for competitive reasons, but he looks for cities such as Fort Myers that are growing rapidly.

One of the big challenges is finding qualified technical staff. Ward says employees from phone companies are not well versed in the newest digital technology and don't have a passion for customer service. Instead, he prefers to hire young college graduates who have good computer skills. "As we expand it becomes easier," Ward says, because word spreads.

Now that T3 has become profitable, Jones says the company's board is considering a public offering as early as 2007. Other options include the sale of the company or starting to pay an annual dividend.

Jones a veteran of boom and bust

Steven Jones, the chairman of T3 Communications in Fort Myers, is no stranger to wild world of telecommunications.

Jones, a Naples resident, was a telecom investment banker with Merrill Lynch in the late 1990s after deregulation of the industry sparked a boom. In his role at Merrill, he helped many now-defunct companies go public.

Looking back, Jones says investors threw too much money at the business without the prospect of a return. "In the late '90s it was OK to not be profitable for three years," Jones recalls.

Jones left Merrill in 1998 to become the chief financial officer of a New England startup telecom company called CTC Communications, which grew from a $75 million market capitalization when he joined the company to $350 million in just one year. He left CTC one year later and moved to Naples.

Everyone knows what ensued. "Capital dried up and it was just a debacle," he says. "I lost a lot of money in the telecom market crash."

Jones doesn't plan to let that happen again.

Growing telecom

competition

Startup telecom companies, called Competitive Local Exchange Companies (CLECs), have been grabbing market share in Florida from companies such as BellSouth, Verizon and Sprint since the deregulation of the mid-1990s. CLECs share of business customers has increased from 30% in 2004 to 34% in 2005, according to the Florida Public Service Commission. Below is the number of CLECs that target business customers and their growth in Southwest Florida:

City 2004 2005 %Chg.

Bonita Springs 13 16 23%

Cape Coral 16 22 38%

Clearwater 27 32 19%

Fort Myers 25 27 8%

Naples 20 30 50%

New Port Richey 19 23 21%

Port Charlotte 16 22 38%

Punta Gorda 12 18 50%

Sarasota 23 28 22%

St. Petersburg 29 31 7%

Tampa 29 36 24%

Venice 19 21 11%