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Billing Concepts Corp.

Billing Concepts Corp.

7411 John Smith Drive, Suite 200
San Antonio, Texas 78229-4898
U.S.A.
(210) 949-7000
Fax: (210) 949-7014
Web site: http://www.billingconcepts.com

Public Company
Incorporated: 1985 as U.S. Long Distance Corp.
Employees: 530
Sales: $122.84 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: BILL
SICs: 7374 Data Processing & Preparation; 7389 Business Services, Not Elsewhere Classified

Billing Concepts Corp. (BIC) is one of the largest third-party providers of billing clearinghouse and information services to the telecommunications industry. In addition to processing call records, the company provides a wide range of other services, including billing inquiry, data processing, tax filings, accounting services, and an advance funding program for a clients accounts receivables. BIC also offers custom convergent billing solutions through its Modular Business Applications (MBA) software. MBA supports billing for multiple services, such as local, long distance, cellular, personal communications systems (PCS), paging, Internet, cable/satellite TV, gas, and electricityall included on one bill. BIC has more than 400 customers, including direct-dial, long distance telephone companies; providers of operator and information services; suppliers of telecommunications equipment; and gas and electric utilities. BIC claims 67 percent of the annual $200 million market for billing done via local-exchange carriers. The company offers its products and services through four separate lines of business: Local Exchange Carrier (LEC) Billing; Direct Billing; Software Licensing and Developing; and Back-Office Services. BIC has billing and collection agreements with more than 1,300 local telephone companies that have access lines into approximately 95 percent of the United States, Canada, and Puerto Rico. Under its former name, U.S. Long Distance Corp., in 1993 and 1995 BIC was named one of the 100 fastest-growing companies in America by Fortune and Inc. magazines. BIC ranked 13th in Equities April 1997 list of Americas Most Profitable Companies. The company was listed in a May 1997 Business Week article titled 1997 Hot Growth Companies and was ranked 30th out of 10,000 publicly traded corporations. In July 1997 BIC also was named to Standard & Poors SmallCap 600 Index. At the beginning of fiscal 1997 the companys stock price was $22.25. By the end of that fiscal year, stock sold for $35 a share, representing a 57 percent increase in shareholder value.

Deregulation of Telecommunications: 1984-96

The 1984 breakup of American Telephone & Telegraph (AT&T) and of the Bell System revolutionized the operation of the telecommunications industry. Local telephone companies that made up the Regional Bell Operating Companies (also known as the Baby Bells) had to provide billing and collections on a nondiscriminatory basis to all carriers that supplied telecommunication services to their end-user customers. Only the largest long distance carriers, such as AT&T, MCI Telecommunications Corporation, and Sprint Incorporated, could afford the cost of agreements with local telephone companies for direct billing. Several entrepreneurs recognized an opportunity for establishing companies that would enter into these billing and collection agreements to aggregate telephone-call records for local exchange carriers and long distance carriers.

Furthermore, with the 1986 advent of technology that allowed zero-plus dialing (ZPD), customers could use an automated credit card for long distance calls or use the prefix 1 before a telephone number to make zero-minus calls (collect, third-party billing, operator-assisted calling card, or person-to-person calls). These calls were routed away from AT&T to a competitive long distance services provider. Typically, the billing information resided with the billed persons local telephone company. In order to bill for ZPD and zero-minus calls, a long distance services provider either had to obtain billing and collection agreements with LECs or use the services of third-party clearinghouses.

The Telecommunications Act of 1996 dramatically changed the ground rules for competition and regulation in virtually all sectors of the communications industry. After promulgation of the 1984 antitrust consent decree that dismantled the Bell System, major strides had been made in relaxing federal regulation and in ensuring fair competition in the long distance telephone market. But emerging technology for telecommunications led to conflicting interpretations of the Communication Act of 1934 that had prevailed for 62 years. With the Telecommunications Act, Congress set a course that clearly adopted competition as the basic charter for all telecommunications markets for the next five years. The Telecommunications Act cleared market-entry barriers for entrepreneurs and other small businesses in the provision and ownership of telecommunications services.

Roots of Billing Concepts Corp.: 1985-95

While the telecommunications industry was taking shape, in 1985 Parris H. Holmes, Jr., invested $50,000 to start a small pay-phone business in his Houston garage. However, Holmes was not comfortable with the Texas regulatory environment for billing services and he switched into the long distance business by founding a company named U.S. Long Distance Corp., later known as USLD Communications Corp. According to Don Sherons 1997 article in the San Antonio Express News, from 1986-87 Holmes raised $9.2 million from people who had known him for a long time. Within a few years USLD acquired 11 companies.

Among these acquisitions was the 1988 purchase of Zero Plus Dialing, Inc., which brought with it a portfolio of billing and collection agreements with several local telephone companies. Using these agreements, USLD billed and collected from the local telephone companies for its own operator services. Billing and collection agreements were subsequently made with additional LECs, including GTE and the Baby Bells. Furthermore, USLD marketed its billing and collection services to LECs, arguing that outsourcing the administration of these operations would save time and money. The company also began to offer its third-party clearinghouse services to other operator services that did not have proprietary agreements with the local telephone companies.

By 1989 USLD was a $200,000-a-year business. The company continued its rapid expansion through the early 1990s, especially through the profitable operations of US Billing, Inc. and Enhanced Services Billing, Inc.companies acquired in 1993 and 1994, respectively. However, the disparate functions of these subsidiaries raised concerns among clients and industry analysts. Was USLD a telecommunications company or a billing company, and was the financial data acquired through billing operations available for USLD to use against its competitors? To allay concerns, USLD separated its business into two groups that functioned independently of each other: The Billing Group and The Telecommunications Group.

Meanwhile, USLD improved its information management services with the 1990 development of a comprehensive information management system capable of processing, tracing, recording, and accounting for telephone-call transactions. USLD was also the first third-party billing clearinghouse to offer an advance funding program for its customers accounts receivable. In 1992 the company began to offer LEC billing services to providers of direct-dial long distance services. From 1993 to 1995 the company offered enhanced clearinghouse billing and information management services to other businesses, including providers of telecommunications equipment and information, as well as other providers of nonregulated communication services and products (for example, 900 access pay-per-call transactions, cellular long distance services, paging services, voicemail services, and equipment for Caller ID and other telecommunications applications). The billing of nonregulated telecommunication products and services became a significant factor in the successful evolution of USLDs business. Revenues grew steadily reaching $33.16 million in 1992, $46.46 million in 1993, $57.75 million in 1994, and $80.85 million in 1995.

Two New Public Companies Emerge: 1996-97

By 1996, USLDs two Groups (Billing and Telecommunications) operated profitably in their respective markets. According to Sheron in the San Antonio Express News, Parris Holmes later commented that the Groups simply outgrew the marriage. This was just a healthy growth situation. On July 10, 1996, USLDs board of directors approved the spinoff of the commercial billing clearinghouse and information management services into a public company. The Billing Group Business became Billing Information Concepts Corp., and on February 27, 1998, was renamed Billing Concepts Corp. (BIC). The Telecommunications Business Group remained the focus of the new USLD, later renamed USLD Communications Corp. (USLD), which in 1998 was acquired as a subsidiary by Qwest Communications International, the nations fourth largest long distance provider.

Holmes remained Chairman/CEO of USLD until June 1997. I felt like the separation process had been completed, said Holmes in a December 1997 interview with Diane Mayors in the Wall Street Corporate Reporter. It was a natural progression to move on to focus my time and energy as chairman and CEO of Billing Concepts.

Company Perspectives:

Billing Concepts Corp. will continue to build BIC, leveraging our expertise and resources with three key goals in mind: satisfy the needs and expectations of our customers; explore new opportunities in the telecommunications industry and beyond; and build increased value for our shareholders.

Positioning for Continuous Growth: 1996-97

Holmes focused on getting a head start for building the information infrastructure of the 21st century by tapping into the opportunities opened up by the Telecommunications Act, which allowed local, long distance, and cable service providers to enter each others markets. BIC also strengthened its presence in billing services through the June 1997 acquisition of Computer Resources Management, Inc., a company that developed software systems for the direct billing of telecommunication services and was already performing billing for the utility industry. As a single-source, direct-billing solution (also referred to as convergent billing or one-stop billing) for long distance and cellular calls, PCS, paging, cable and satellite television, Internet, and utilities, Computer Resources Management software aggregated all bills on one invoice. In September this new acquisition was reorganized into Billing Concepts as a subsidiary called Billing Concepts Systems, Inc. (BCS); it offered software licensing, equipment sales, service-bureau billing, custom programming, and other ancillary services. Since Billing Concepts Systems was a Premier Business Partner of IBM, the acquisition also brought BIC an alliance that allowed for immediate expansion of its technological resources.

BIC relocated 528 employees to new headquarters, added three industry professionals to its senior management team, and doubled its technical staff. The company defined its products and services as four separate lines of business: Local Exchange Carrier Billing, Direct Billing, Software Licensing and Developing, and Back-Office Services. LEC Billing, the companys core product, consisted of three distinct divisions: U.S. Billing, Inc., Zero Plus Dialing, Inc., and Enhanced Services Billing, Inc.

U.S. Billing was BICs fastest-growing division and accounted for more than half of the companys annual revenue. The division served carriers of direct-dial, long distance companies. This service consisted of billing 1 + long distance telephone calls to individual residential customers and small commercial accounts. The growing volume of these telephone calls soon placed long distance carriers in the position of having to increase their collection rates if they billed through the local telephone companies. U.S. Billing offered these carriers a more effective way to bill and receive payment from residential customers.

Zero Plus Dialing was devoted exclusively to billing and information management services for operator-assisted calls (known as zero-plus/zero-minus calls), such as third-party calls, collect calls, and credit card calls. Zero Pluss customers included private-pay telephone owners, hotels, universities, airports, and prisons. This service was BICs original form of LEC billing and drove the development of the systems and infrastructure used by all of the companys LEC billing services. Enhanced Services Billing, founded in 1994, billed local telephone companies for nonregulated and enhanced telecommunications services. These businesses included providers of telecommunications equipment and Internet providers; paging and voicemail services; cellular and PCS long distance services; caller ID and premium pay-per-call services (900-prefixed calls), such as weather, sports, and information services. Enhanced Services Billings profit margins were significantly higher than those of BICs other core products because fees could be based on a percentage of revenue rather than charged to each processed record.

At the request of its customers, BIC spent the last months of 1996 and the greater part of 1997 developing invoice-ready billing, a product that gave BICs customerslong distance companies and providers of operator-assisted servicesthe ability to prepare a customized bill statement. This product was more than a generic statement on which BICs customers could place their name; it allowed them to personalize the statement with their name, their logo, and/or marketing messages. BIC was the first company, outside of the big three AT&T, MCI, and Sprint, to market this product. The first invoice-ready bill was produced in October 1997.

For many of its LEC customers, BIC processed the tax records associated with telephone-call records and other transactions and files, as well as certain federal excise, state, and local telecommunications-related tax returns covering these records and transactions. The company submitted over 1,800 tax returns each month on behalf of its customers and provided customer service to end-users inquiring about calls for which they were billed.

BICs 1997 acquisition of Billing Concepts Systems (BCS) gave it a head start to bundle services in a direct billing environment. As early as 1988 the subsidiary company had developed billing and customer care solutions. When the Telecommunications Act of 1996 allowed providers of local, long distance, and cable services to enter each others markets, BCS positioned itself to become a competitive player in the market as a one-stop supplier of convergent telecommunications products and services. BCS developed state-of-the-art billing software, dubbed Modular Business Applications (MBA), to provide a single-source, direct-billing solution that allowed billing for multiple products such as local, long distance, cellular, PCS, paging, cable/satellite TV, Internet, and even utilities. The convergent-billing platform had the capability to produce a universal bill whereby multiple services and products could be billed directly to the end-user on one consolidated billing statement. MBA was offered as a service-bureau (back office) or in-house software solution utilizing the IBM AS/400 as the operational platform. BCS was ready for the not-too-distant future when long distance carriers would enter the $100 billion local markets, and when LECs would enter the $80 billion long distance markets.

In addition to billing services, BIC offered customer service, accounting services and reports, data processing, tax filings, and an advance funding program. The customer service center handled over 30,000 calls per day during fiscal 1997. As many as nine taxes could accrue for each long distance call. Each quarter, BICs tax department prepared over 5,000 tax returns on behalf of its customers. Furthermore the company, predominantly with its own cash, funded a program that proved to be very valuable to customers who could not afford to wait the typical 60-day billing cycle to receive their payments from the local telephone companies. After qualification for this advance funding program, participants were advanced up to 80 percent of their receivables within five days of submitting their call records. When Billing Concepts received payment from the LECs for these call records, the company submitted the balance to customers, less its fees and incurred interest. BIC maintained a $50 million revolving line of credit to fund any growth in this program.

At the end of fiscal 1997, BIC revenues of $122.84 million and net income of $21.86 million were up 18 percent and 22 percent, respectively, from the revenues and net income of 1996.

Toward the 21st Century

On January 30, 1998, BIG distributed a one-for-one stock dividend to its shareholders of record. During the third quarter, actions by the FCC and the Regional Bell Operating Companies on slamming and cramming issues led to a temporary interruption in the revenue growth of BICs business. Slamming refers to the unauthorized switching of consumers long distance provider and cramming refers to the practice of billing consumers for unauthorized charges, such as the Universal Service Charge, a new federal tax added to phone bills to fund library and school access to the Internet.

However, for the first nine months of fiscal 1998, BIC reported that total revenues increased 37.4 percent to $119.7 million from $87.1 million during the comparable period of fiscal 1997. Chairman/CEO Holmes said that BIC was conducting its billing business in a manner consistent with what the FCC was to publish in its upcoming Best Billing Practices document. Furthermore, seven major industry analysts went on record as supporting BICs strong position in its specialized niche and its ability to maintain a revenue growth rate of at least 25 percent annually over the next several years.

BICs energies, Holmes emphasized, are being focused on competitive local exchange carriers and telecommunication carriers who are diversifying their product and service offerings.... Our competitive advantage is time-to-market and a highly marketable convergent billing solution.... We remain focused on our long-term goals and are excited about our opportunities.

BIC continued to seize opportunities for expansion by providing add-on services to both new and existing customers and by acquiring new business. For instance, during the second quarter of 1998, BIC announced that Intermedia Communications, a provider of integrated telecommunications solutions, chose BCSs Modular Billing Application to replace a number of its billing systems. Another significant event occurred when LCI International Telecommunications Corp., a subsidiary of Qwest Communications and one of the nations fastest-growing major telecommunication companies, signed a multiyear agreement for BIC to provide billing services for customers of LCIs operator-assisted services while LCI provided long distance and 800 services for BICs customers. During the third quarter, BIC signed 26 new accounts and received renewal of 18 contracts. BCS also continued to add new business by selling three in-house systems and signing two service-bureau agreements.

Then in July 1998, WinStar Communications, Inc. chose BCS to consolidate its multiple billing platforms onto the MBA system, thereby receiving a complete solution set to support WinStars long distance, local resale, calling card, and enhanced services for retail and wholesale customers. In August of the same year, Philadelphia-based Eagle Communications, entered into a five-year contract for BICs entire suite of product offerings, which included MBA, BICs customer service and billing software, and back-office support. Also in August, BIC signed an agreement to acquire 22 percent of the capital stock of Princeton Telecommunications Corporation (PTC), a private company specializing in electronic-bill publishing over the Internet and advanced payment solutions. According to Chairman/CEO Holmes, this association with PTC is a key to our on-going strategy to grow our solution set. Consumers are rapidly embracing the ability to pay their bills over the Internet and this phenomenon is causing vendors to publish their bills electronically.... Instead of developing these services, we will deliver them through PTC. He went on to say that this way of sharing billing strategies will not only enhance our investment in PTC, but will catapult Billing Concepts into the emerging Internet market.

As the 20th century drew to a close, Billing Concepts Corp. was well positioned to move into the 21st century as a significant player in the multibillion-dollar telecommunications and billing markets.

Principal Subsidiaries

Billing Concepts Systems, Inc.; Enhanced Services Billing, Inc.; U.S. Billing, Inc.; Zero Plus Dialing, Inc.

Further Reading

Ashton, Douglas C, and Connie Fang, Cramming & Slamming Hits the Clearinghouses, Equity Research Department, Jeff cries & Company, Inc., June 9, 1998, pp. 1-3.

BILL: Conference Call Confirms Earlier Analysis, No Change in Outlook, Equity Research Department, Robert W. Baird & Co. Incorporated, June 11, 1998, pp. 1-4.

Bolen, Robert V. Reducing Estimates Due to Moratorium on New Services by Bells; BCS Remains Strong, Equity Research Department, J.C. Bradford & Co., June 9, 1998, pp. 1-2.

Cullen, Lisa Reilly, How You Can Make Money in Telecommunications Without Getting Tangled in Turf Wars, Money, April 1988, pp. 60-62.

Grozovsky, Ilia, Billing Concepts Pre-Announces Quarter Below Expectations; Estimates Reduced; Maintain Hold Rating, Research Notes, Furman Selz LLC, June 12, 1998, pp. 1-3.

Johnson, Robert M., and Joseph P. Beaulieu, BILL Has a Strong Position in a Specialized NicheReiterate Buy, Research Notes, ABN AMRO Incorporated, June 23, 1998, pp. 1-3.

Mayores, Diane, Market Will Explode: Interview with Parris H. Holmes, Wall Street Corporate Reporter, December 8-14, 1997.

Mensheha, Mark, Billing Firm Lines Up Credit Package, San Antonio Business Journal, January 31, 1997, pp. 1-2.

Much, Marilyn, The New America, Investors Business Daily, November 17, 1997, p. 1.

Picchi, B., and M. Logani, Billing Concepts: ReduxSlamming Revisited; Lower 1999 EPS to Be Safe, Document #0610Bill, A-Lehman Brothers, Inc., June 10, 1998, pp. 1-3.

Sheron, Don, Billing Concepts Corp. Proves It Can Stand Alone: USLD Spinoff Carves a $1.2 Billion Niche, San Antonio Express News, August 17, 1997, pp. 1H, 5H.

Weiss, Sebastian, Corpus [Christi] Gains Call Center Due to Tight Labor Market Here, San Antonio Business Journal, May 15,1998, p. 5.

Gloria A. Lemieux

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