Deltek Broadens Reach To Parry ERP Giants

By Richard McCaffery, Staff WriterSelling business software to federal contractors may be a small niche in the $35 billion enterprise resource planning market, but it's a major industry in the Washington region.Deltek Systems Inc. has built an $80 million business, which has averaged more than 30 percent annual growth for the past 10 years, by helping integrators like the Boeing Co., Lockheed Martin Corp. and Raytheon Co. manage federal contracts. The McLean, Va., company sells accounting, human resources, manufacturing and other business software that assists contracting companies with day-to-day functions. Now, the 550-employee firm is reaching into new markets to broaden its niche and fend off the giants of enterprise resource planning (ERP) — PeopleSoft Inc., Oracle Corp. and SAP AG."The ERP market has changed a lot," said Ken deLaski, Deltek's president and chief executive officer. "We're being asked to do a lot more, and we want to do a lot more."Deltek plans to roll out a new product in the first half of 1999 to punch into the hot front-office software market. Fast-growing Siebel Systems Inc. of San Mateo, Calif., made a name for itself selling front-office software — basically, products that help businesses manage relationships with customers. Siebel had sales of $119 million in 1997, up more than 200 percent from 1996. Front-office software, such as sales force automation products, is a new market for Deltek, which traditionally sold back-office products such as accounting software. But it's an area Deltek executives and analysts said the company must succeed in if it expects to keep growing 30 percent a year."Long term, I think it's critical to provide a complete solution," said Richard Leggett, senior research analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. "They want to own that market. It's a logical next step."Founded in 1983 by Donald deLaski and his son, Ken, Deltek established itself by providing financial accounting software for government contractors. The company's software helps project-oriented customers juggle consultants, fill out time sheets, calculate billable hours and a range of other business functions.Federal integrators and contractors still make up the bulk of Deltek's customer base and account for 40 percent of Deltek's new sales. Just over 50 percent of Deltek's expected $80 million in 1998 revenue comes from federal contractors, Ken deLaski said.Of its 5,000 customers, 968 are based in Maryland, Virginia and Washington, and more than 1,200 companies use Deltek's System 1 software, a product designed to manage federal contracts. Though sales of the DOS-based system have slowed since the company debuted its Costpoint ERP product, System 1 remains so widely used that Deltek is developing a Windows-based version that it plans to ship in the second half of 1999."They really own a market niche — government contracting companies," said Christopher Desautelle, vice president of enterprise software at Legg Mason Inc. in Baltimore. "They do something very unique that a lot of people haven't been able to do, and they're competing against the monsters like PeopleSoft, Oracle and SAP."Deltek's revenue has grown from $19.4 million in 1993 to $49 million in 1997. Income during the same period has more than doubled, from $4.5 million to $10.5 million. Analysts like the company's management, control of expenses and high profit margins. Its net profit margin last year was 22 percent."Deltek falls into a unique category among public companies," Leggett said. "They have met or exceeded expectations, have above average profit margins, good visibility in the market and a clean balance sheet. In my book, that makes them a good buy."For the quarter that ended Sept. 30, Deltek posted record revenue, earnings and software sales. Revenue rose to $21.6 million, income to $3.1 million, and software sales jumped to $7.4 million, up 43 percent from the third quarter last year.Analysts expect the company to post revenue of $80 million in 1998 and earnings of 79 cents a share, up from 62 cents a share in 1997.Deltek's stock took a hit when the market plunged last fall, and, like many small caps, it never recovered. It dropped from a high of $25.25 last spring to $16.50 in October. Deltek closed Jan. 8 at $16.75, giving it a market value of $300 million. Now the company is expanding to other vertical markets, such as engineering, construction and architecture. In May 1998, Deltek bought Harper and Shuman Inc., Cambridge, Mass., for $15 million in stock. Harper and Shuman makes accounting software for architectural and engineering firms.And the company made its first big move into the front-office software market last February when it bought SalesKit Software Corp. of St. Louis for $6 million in cash and warrants to purchase 130,000 shares of Deltek stock. SalesKit, a privately held company, makes sales force automation and customer management software. Analysts said the integration of SalesKit's products has been tougher than expected but should pan out.True to its niche, Deltek plans to target its front-office products to project-oriented customers. "There are lots of ERP front-office products, but very few are focused on service-oriented companies," deLaski said.Desautelle said the company must gain a stronger foothold abroad, especially in Europe where it has struggled; sell its new front-office products to existing customers; and expand into markets outside the federal government to maintain its growth."It's a very solid, well managed firm," he said. "Their big problem [in terms of stock price] is that they're small. The market's down on small caps."Desautelle isn't down on Deltek. He expects its stock to hit $30 in the next 12 months.