Online Extra: An "Undiscovered Company" Breaks Out
GTSI Corp. is just one of a legion of government contractors located in the Washington (D.C.) suburbs. Financially, however, the provider of technology equipment and services to government agencies is moving to the head of the herd: It's No. 3 on BusinessWeek's latest ranking of the 100 best-performing info-tech companies.
Based in Chantilly, Va., GTSI (GTSI ) delivered a 56% gain in third-quarter net income, to $3.1 million, on a 36% increase in revenues, to $277 million. It's on pace for a record year. Analysts expect revenues of $962 million and profits of about $9.5 million. And its backlog of government work has risen 39% from a year ago, to $181 million.
Like many government suppliers, GTSI is growing faster than most of its compatriots in the ailing tech sector because of booming federal work in the wake of last year's September 11 terrorist attacks. Zimbabwe-born CEO Dendy Young makes no bones about it: "9/11 has done a lot to energize our marketplace," he says.
And it wasn't a one-time windfall. With 93% of its business in federal contracting work and the rest from state and local governments, GTSI is poised to take advantage of a planned 9% to 10% increase in federal IT spending in fiscal 2003, ending next Sept. 30. And once Congress passes legislation to establish the Homeland Security Dept., GTSI may nab even more contracts as the new agency begins to link together the technology systems of various federal, state, and local agencies.
GTSI's primary business -- accounting for 93% of its revenues -- is reselling brand-name computing gear and software to government offices. Hence its reliable, but low, 8% gross margin. But it also has a toehold in the more lucrative field of systems integration, or project management, for government communications and computing installations, including substantial work for security agencies and the military.
Systems integration, which delivers gross margins as high as 40%, now accounts for about 7% of GTSI's revenues -- though Young declines to say whether he's planning to expand that business. More typical of GTSI's work, for now, is a $26 million order it won last year as the subcontractor to Dyncorp for the FBI's TRILOGY project to replace aging computer systems -- from network equipment to desktops and laptops -- in field offices.
GTSI was originally scheduled to complete the work in three years. But the FBI sped up the project due to criticism after September 11 -- and GTSI and Dyncorp have just about finished, says Young.
Now, GTSI is providing Web-enabled handheld devices -- including BlackBerries and Palms -- to Army medical corps members who do battlefield and remote hospital work. The devices connect to a central database of medical records so that medics can look up key information on wounded soldiers and enter updates on their condition.
It just completed another major Army project -- a $60 million contract to rebuild and expand an extensive Web portal called Army Knowledge Online to connect the Army's 1.2 million officers, soldiers, and support personnel. The contract was signed before September 11, but the age of terrorism has elevated the site's importance, since all Army staff are now required to log on every day to stay abreast of any late-breaking threats.
The Army won't disclose the more detailed uses of the Web site. But almost certainly, it enables commanders at central headquarters to post orders for troops in the field.
Next, GTSI is focusing on developing a business with the nation's first responders in the fight against terrorism -- from soldiers in the field to domestic police, fire, and emergency workers. Its best weapon to date: An exclusive reseller relationship with Panasonic, which makes the ToughBook notebook computer, a so-called rugged machine that can survive being dropped, bounced, and rained on. GTSI customizes the computers by loading the software requested by clients.
In September, it snagged a $28 million order from the Marine Corps to provide the ToughBook to combat troops. The machines got a trial by fire in Afghanistan, where Special Forces soldiers jumped out of planes with Panasonics strapped to their chests -- and used them to coordinate military operations after landing.
One potential threat: With so much money to be made from the government now, computer makers might be tempted to sell directly, instead of through middlemen. GTSI says it has an insider advantage through its contacts and history. It employs many former staffers of the Pentagon and other agencies, and it has 20 years of expertise in navigating the confusing government bidding process. That said, GTSI's prospects would look a lot less rosy if any of its major suppliers -- such as Hewlett-Packard (HPQ ) -- decide to go it alone.
Another question: How long will the government gravy train last? CEO Young doesn't think the escalating federal budget deficit will dampen the government-contracting market over the next three years, if only because the prospect of an Iraqi war and terrorist threats make spending on security a necessity. "The U.S. is at war," he says, parroting President Bush. "Fundamental survival requirements override concerns about budget deficits."
The outlook for cash-strapped state and local government spending is less rosy. Yet Young says GTSI is still targeting that sector at a time when competitors are pulling out, since the Panasonic ToughBook is so popular with state and local first responders.
All in all, GTSI could be a good find for those looking for a little upside in the tech sector, says Sidoti & Co. tech analyst Brian Kinstlinger. "It's an undiscovered company," he says. Kinstingler expects GTSI's 2003 revenues to increase to about $1 billion and its net income to $10.8 million. And he thinks that the stock could rise from its $10.75 close on Nov. 14 to $15 over the next 12 months.
After September 11, speculation was rife as to whether technology companies would benefit from the war on terrorism -- and which ones would prosper most. As GTSI is proving, some are cashing in -- though hardly anyone expected that once-obscure government contractors would be setting the pace for their better-known industry cousins.
By Cathy Yang in Washington