Integral Seeks Fatter Slice of Federal Business

By Richard McCaffery, Staff WriterNo one writes their own word processor software anymore, and executives at Integral Systems Inc. are betting the same will hold true for software used to control and track satellites."We're at the cusp of the takeoff point," said Steve Chamberlain, chairman and chief executive officer of Integral.Chamberlain thought he would be saying that in 1991, when Integral started selling what he called the first off-the-shelf software that controls and tracks satellites.The former NASA flight software engineer knew Integral's product meant that programmers would not have to write code from scratch every time a new satellite was launched. But his quest has not been easy. It took Chamberlain two years to find a customer for his packaged software products ? in China."It's been a very tough road," said the 43-year-old Chamberlain, who said that many satellite manufacturers, operators and government agencies still custom-build their own command and control software.But the ice is breaking, and Chamberlain expects more government agencies will pick his company's product in 1999.Founded by Chamberlain and three partners in 1982, Integral sells hardware and software that controls and tracks satellites and analyzes data. Epoch 2000 is its flagship product. In addition, the company sells three related software packages that together control all aspects of satellite command and control. The company claims it has supported more than 100 satellite missions launched by space agencies and commercial firms worldwide.Integral just wrapped up its best year ever, finishing 1998 with revenue of $28 million and net income of $1.9 million ? more than three times earnings from the year before. Integral's product backlog at the end of September (its fiscal year) was $43 million, up from $26 million at the end of 1997.In June 1998, Integral won a four-year, $4 million contract from the National Oceanic and Atmospheric Administration to provide hardware and software for the GOES and Defense Meteorological Satellite Program spacecraft. In August 1998, it won a two-year, $2.4 million subcontract to replace workstations at the agency's satellite control centers.NOAA is Integral's biggest customer, but Chamberlain wants to broaden the company's federal business in 1999. Agencies he is targeting include NASA, the Navy, Air Force and the National Reconnaissance Office. "It may take three years, it may take five years, but someday no one will build custom software," he said.NOAA contracts accounted for 43 percent of Integral's revenue last year. Other customers include NASA, Loral Space & Communications Ltd., and EchoStar Communications Corp. Government sales are 57 percent of revenues.Competitors include integrators like Raytheon Co., Lexington, Mass., and Computer Sciences Corp., El Segundo, Calif., and software companies like Exigent International Inc., Melbourne, Fla. For the most part, Integral's toughest competitors are in-house IT departments at satellite manufacturers and systems integrators, Chamberlain said.Integral's stock had a nice ride in 1998 for a small cap firm in a turbulent market. Its shares soared from a low of $6.93 to a high of $18.50 adjusted for a two-for-one split last May. Integral closed trading Jan. 12 at $16.7, giving the company a market value of $98 million."The market is huge in terms of the number of satellites being launched," said Matthew Desmond, an analyst at The Red Chip Review, a small cap market research firm in Portland, Ore. "Integral has a more flexible and a less expensive system. They have a big competitive advantage."Walter Ramsley, executive vice president at investment bank Fechtor, Detwiler & Co. Inc., Boston, said the satellite launch business is growing 10 percent annually, and Chamberlain estimated that the command and control center industry, excluding classified military satellites, is worth $4 billion annually.But 1998 was not a perfect year. After a two-week road show last July, the stock market plunged, and Chamberlain canceled a secondary offering of 1.3 million shares. "It turned out to be the worst timing possible," said Chamberlain, who wanted to raise between $15 million and $16 million for working capital, grow Integral's sales force and build a prototype control center in Lanham, Md.Pulling the plug on the offering took a $340,000 bite out of Integral's fourth-quarter earnings. Minus the one-time charge, income for the quarter was $310,000, or 5 cents a share. If market conditions permit, Chamberlain expects to revive the secondary offering and start building the prototype ground center this summer. He has delayed increasing Integral's sales force. Chamberlain said the company is in a good position to weather the delay. Integral has little long term debt, $3 million in cash and a $3 million line of credit from NationsBank that it hasn't tapped. Still, the company's accounts receivable (money owed them) rose to $10.9 million in 1998, up from $9 million last year, and the company has $7 million in current liabilities. Chamberlain said the increase in receivables is because of the company's growth rate, and that Integral has enough resources to meet its current needs. "We've always been profitable," he said. But Ramsley said Integral's balance sheet is its one weak spot. "Their working capital is pretty thin, considering their growth rate," he said. "They could really use some dough."Cash aside, Ramsley likes the company's fundamentals and rates it a buy. "They have a really neat set of products, and the market they're addressing is wide open," he said.