Dan Hesse experienced serious culture shock when he arrived at the offices of Sprint in June 2005.

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Recruited to be CEO of the local telephone division, which Sprint was spinning off as a separate company as part of its merger with Nextel, Hesse was a product of AT&T’s market-driven culture (he ran its first wireless division and launched its Worldnet Internet service and the innovative flat-rate cellular plan). At Sprint’s local phone division in Overland Park, Kansas — what telecom guys call “the wireline business” — his first task was to do away with the suffocating meeting schedule.

It seemed to Hesse as if the corporate culture had changed little since 1899, when Brown Telephone, the company that would become Sprint, was founded.

All that changed in a hurry when the new company, christened Embarq, went public on May 18, 2006. Out went paper- and slide-show-heavy meetings; in came Hesse’s fresh approach. He determined that the sleepy but sound company needed to focus on revenue growth though a market-centric strategy that built on and extended its strengths. His plan: to deter customers from fleeing to wireless and cable competitors, exploit the competitive advantages of wireline over wireless and put Embarq in an sound position for the future convergence of wireless and wireline.

Many market watchers assumed Embarq’s business was going the way of the typewriter and expected Sprint Nextel to soar, but so far they’ve been dead wrong. Sprint foundered, plagued by market-share losses, a falling stock price and executive turmoil. In October, Sprint CEO Gary Forsee — the man who tapped Hesse to run Embarq — was out after news leaked that the board was recruiting his replacement.

Embarq, meanwhile, has been an S&P 500– beating star performer. Says UBS telecom analyst Gaurav Jaitly: “The company has managed to fend off the competition while achieving strong broadband penetration, a key driver in the industry.”

Another group that noticed Embarq’s performance: Sprint Nextel’s board of directors. Handicappers peg Hesse as a strong contender for the CEO job, and he is reportedly favored by some board members — thanks in part to Embarq’s strategic overhaul.

Hesse, 54, worked at AT&T for 23 years, most recently as CEO of AT&T Wireless. He defected in 2000 to run a Seattle-based startup called Terabeam. The company had a sci-fi plan to deliver online access with invisible laser beams. After a competitor bought Terabeam in 2004, Hesse took some time off. He traveled with his family and coached his boys’ athletic teams; he served on the boards of VF Corp. and Nokia, and the National Board of Governors of the Boys & Girls Clubs of America.

When Forsee contacted him in 2005 to gauge his interest in running Sprint’s spin-off, he was intrigued. “While many were pronouncing the death of wireline,” he says, “I saw a chance to reposition the offering and transform the direction of the industry.” He signed up, the spin-off went forward and Embarq embarked.

“The company was fundamentally stable,” Hesse says. “The balance sheet and cash flow were in order, the customer base was strong, the workforce was in place, and though it was heading south, the business decline was at least predictable. I foresaw few surprises.” Embarq also has scale: Revenues last year were $6.4 billion, and as of July, it has 6.7 million access lines in 18 states.

Hesse quickly began executing a three-step strategy:

• First, he sought to slow the drain of customers to wireless and cable phone competitors by improving Embarq’s marketing and customer service. “Don’t Get Cabled” was the theme of an Embarq ad campaign in Las Vegas, one of its biggest markets, promoting the research-backed superiority of its home service over local rival Cox Communications’ cable-service equivalent.

Hesse also took a page from his successful “Digital One Rate” plan at AT&T, simplifying rates by promising never to raise subscription costs for Embarq’s high-speed Internet customers. The payoff: In December 2006, Embarq celebrated its millionth HSI subscriber. Better customer care was also key.

Instead of hustling subscribers with service problems off the phone to save money, Embarq’s customer-care reps “spend the time necessary to resolve customer problems.” Hesse says that’s time well spent: “We used the extra minutes to market new products, and we grew our average revenue per household by 6 percent last year.”

•Second, he built on wireline’s strengths. Although there have been few technical breakthroughs in the home phone over the past 20 years, while innovation in wireless abounded, land lines still have undeniable advantages, including better voice quality and reliability. Best of all is wireline’s superior transmission capability. “Wireline is inherently superior for transmitting data to fixed locations in the home and the office,” Hesse says. “People may be able to live with lower voice quality, but they will not stand for slow data transmission, especially as files grow larger and more complex. If we can establish ourselves as a trusted source of data for music, video and photos, we could redefine the value of wireline.”

•Finally, Hesse focused on integration and interoperability — the convergence of wireline and wireless. Embarq’s innovations thus far include seamless switching from cellular to Wi-Fi service as a phone user travels from outside to inside; an integrated voicemail system for home and wireless phones; and an integrated calling feature that transfers inbound cell calls to the home phone (saving both minutes charged and the pain of searching for that misplaced cellphone). Hesse has essentially answered the competition by bringing their services into his fold — and that includes Sprint, via an agreement enabling Embarq to sell wireless service on the Sprint network under its own name.

Another piece of his vision for Embarq’s future fell into place during a trip to an Apple store with his children. “I realized that the iMac — the PC — was the center of Apple’s universe, surrounded by the hoopla of mobile devices like the iPod and the iPhone.” Mobile, he concluded, does not necessarily equal wireless. “Mobile means any device fed by that high-speed data pipe coming into your PC at home,” he says. “That was when I truly understood what I wanted Embarq to be — a data-centric company, aimed at the office but especially at the home.”

Embarq’s solid financial performance should provide a stable platform to launch these future moves. Since the spin-off, the company has consistently performed above expectations: Average revenue per household has been growing, and profits are strong — they grew by 10 percent in the second quarter. Embarq’s credit profile is stable; the $7 billion in debt it assumed from Sprint is down to $6.1 billion. From its separation from Sprint Nextel to early October 2007, Embarq’s total return to shareholders has beaten the S&P 500 by nearly 40 percent.

As big brother Sprint has noticed, so has the industry at large. “Embarq has become a major player in voice, video, wireless and entertainment services,” says Walter B. McCormick Jr., president and chief executive of the United States Telecom Association. “Dan understands the changes that are driving today’s communications industry, and his vision for the future of the company and the industry makes Embarq a top company to watch in the communications sector.” Or any sector that understands the critical importance of continual reinvention.

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