Contractors assess mixed results

War, storms and policy shifts made fiscal 2005 market tough to predict

The complex buying season that was fiscal 2005 saw limited discretionary budgets, a shifting General Services Administration environment and natural disasters that arrived shortly before the year's end.

Information technology vendors reported mixed results in this turbulent environment. For the most part, integrators reported brisk business as government organizations looked to make better use of existing resources. Product vendors in areas such as network security and ruggedized notebook computers also experienced strong demand.

But several product vendors and resellers experienced lackluster sales this summer. Agency belt-tightening, attributable partly to the conflict in Iraq, constricted IT commodity buys. Hurricane Katrina's arrival in late August further complicated matters, as agencies diverted funds to the relief effort. Some industry observers say the storm affected the traditional buying surge at the end of the fiscal year. But the impact on late-season spending will not be clear for a few weeks because many vendors have not yet issued quarterly financial statements.

"There is certainly a tougher budget arena," said Denny Groh, a vice president at integrator STG and a former assistant commissioner at GSA. "Discretionary funds are not where they used to be," especially with agencies trying to make the most of what they have before buying new technologies.

War, weather affected 2005

The conflict in Iraq set the tone for fiscal 2005, fostering fiscal discipline within agencies.

"With the war in Iraq, agencies have to take three looks at what they are doing and make sure what they are doing is good" for them, said Ann Smith, vice president of federal sales at Tumbleweed Communications, a security products vendor. Agencies have become "really vigilant on what they are spending," she added.

Iraq wasn't the only variable, however. Agency buyers and IT suppliers also had to deal with changes related to GSA.

A year ago, the Defense Department issued guidelines compelling military agencies to establish procedures for reviewing and approving contracts managed by other agencies. The Pentagon's position discouraged military buyers from using GSA schedules, which prompted a spending shift in fiscal 2005.

"Clearly, dollars have shifted from GSA to defense vehicles," said Steven Perkins, vice president of business development and strategy at Northrop Grumman IT.

Perkins said Northrop Grumman weathered the situation by relying on a project management office to oversee and coordinate the company's governmentwide acquisition vehicles. "As DOD began to look at their own vehicles, we were able to make them aware of the vehicles that we have," he said. The office helped the company manage its customers' transition from GSA to DOD vehicles, he added.

Another wrinkle was a GSA reorganization that consolidated the Federal Supply and Federal Technology services and restructured their 11 regions into six zones. Some observers thought the restructuring would disrupt business relationships and alter vendors' marketing approaches. But Groh said the changes went into effect too late in the fiscal 2005 buying cycle to have a material impact.

But if the storm expected from GSA's reorganization amounted to little in fiscal 2005, the same cannot be said of another storm. Katrina hit the Gulf Coast Aug. 29, forcing a sudden shift in buying priorities in the fiscal year's final weeks. Hurricane Rita followed in September, hitting the Texas Gulf Coast near the Louisiana border.

"We also did notice that there was funding pulled to move toward Katrina," Smith said. In one case, a Navy customer had planned to purchase products from Tumbleweed but put the money toward Katrina relief instead.

Integrators prevail

Integrators have posted solid revenue and earnings in recent quarters, and executives suggested that the momentum carried through into the final fiscal quarter, even though final numbers are not yet available.

Some integrators saw top-line sales growth of 20 percent to 50 percent for their quarters ending in June. Anteon, for example, reported a 21.2 percent revenue increase in the quarter that ended in June. Anteon's financial guidance predicts September quarter revenue growth of as much as 16.7 percent.

"Overall, it's a pretty typical year for us, and our revenue numbers through the year have shown that," an Anteon spokesman said.

Groh identified information assurance and enterprise architecture as a catalyst for integrator business in fiscal 2005. He said the Department of Veterans Affairs Global IT Support Services program is probably the most widely used of the company's contract vehicles. The multiple-award program includes security and architecture services.

Product developers' mixed results

Some product suppliers reported solid sales, while others found a more disappointing spending environment. Results depended on the product lines offered and fortuitous positioning.

"Most year-end funding was dedicated to support efforts for the response to hurricanes Katrina and Rita," an Environmental Protection Agency spokeswoman said. "This included telecommunications, data collection and data analysis support."

Robert Guerra, a partner at Guerra, Kiviat, Flyzik and Associates, said the failure of terrestrial systems during Katrina inspired greater interest in satellite communications.

Secure networking was another hot spot in late fiscal 2005. Tom Kreidler, vice president of Juniper Networks' federal operation, called the fiscal fourth quarter the second-best ever for the company's government business. He said Juniper Federal Systems saw a bit of a diversion because of Katrina and Rita "but not as much as we expected."

Rugged laptop PCs also generated orders late in the fiscal fourth quarter. Mark Wenners, sales manager of Panasonic and Mobile Solutions at reseller GTSI, said September set a company sales record for Panasonic laptops.

Wenners said the Federal Emergency Management Agency has started replacing tablet computers with the Panasonic Toughbook CF-18 Rugged Convertible Tablet.

Others see soft year-end

Resellers and hardware vendors that have historically counted on a late-season sales surge may not have enjoyed that windfall this year, or at least not to the extent they have in the past.

The summer was slow for Dell, which reported weak demand in the federal sector for the six-month period that ended July 29, according to a Securities and Exchange Commission document filed last month. The result was a decline in annual federal revenue that the company predicted would extend into the next quarter.

Among resellers, CDW Government reported last month that its average daily sales in the federal sector were flat in August, compared with numbers from last year. CDW-G will report its September quarter financial information Oct. 18.

Meanwhile, GTSI experienced an 8 percent decline in August sales compared with last year's figures. Sales fell to $78.1 million, compared with $84.9 million the previous year. Monthly bookings, however, increased 15 percent in August compared with last year's demands.

Payton Smith, director of public-sector market analysis at Input, said resellers at a recent conference he attended expressed concerns regarding the fourth fiscal quarter. He said the quarter may not have been as strong as they were hoping, but he added that he had no direct evidence of that.

Guerra agreed that money already committed to specific programs was spent as intended for the most part. Overall, Guerra called fiscal 2005 "a pretty healthy year," considering the impact of Iraq and Katrina.

Rebuilding effort may spark 2006 spending

Looking ahead to fiscal 2006, some industry executives say recovery from hurricanes Katrina and Rita undoubtedly will generate information technology spending.

Part of the rebuilding effort will involve IT infrastructure, said Alan Bechara, president of PC Mall Gov. However, it is unclear when the IT-related spending might begin, he added.

Tom Kreidler, vice president of Juniper Networks' federal operation, said the hurricanes obliterated aging IT gear. For that reason, he said, he expects to see extensive wireless networks deployed in the affected areas. Networking companies and systems integrators should see a rise in business because of the rebuilding activity, he said.

Kreidler and other industry executives say the Homeland Security Department and the Federal Emergency Management Agency will be among agencies awarding rebuilding-related contracts.

-- John Moore

Crystal ball

Some trends that impacted fiscal 2005 will endure -- for better or worse.

Good: Interest in security was high this past fiscal year and looks to remain steady. Input projects that federal information security spending will grow 20 percent during the next five years, from $6.1 billion in fiscal 2005 to $7.3 billion in fiscal 2010.

Bad: Although some observers believe the Gulf Coast revitalization will eventually include information technology spending, it may not happen right away. IDC reports that the hurricanes' initial impact has put a damper on technology spending.

Tough To Call: Fiscal 2006 could get an extra kicker if projects deferred in fiscal 2005 because of the hurricanes resume. On the other hand, the arrest and indictment of David Safavian, former Office of Federal Procurement Policy administrator, and the imminent departure of Stephen Perry, General Services Administration administrator, introduce an element of uncertainty.

-- John Moore


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