GTSI Earnings Down $6M

Excess inventory, underestimated maintenance and warranty costs force the company to take a $9.9 million write-off

By all accounts, the largest PC reseller to the federal government should have had a record year in 1994. Government Technology Services Inc. acquired a key competitor and had a stake in multimillion dollar Air Force and Navy contracts.

Instead, the Chantilly, Va., company's net earnings took a $6 million nose dive, sales to state and local governments plummeted more than 50 percent, shares earned 37 cents compared to $1.30 in 1993 and personnel was reduced to the same levels before the acquisition of Falcon Microsystems Inc. GTSI purchased the Landover, Md., firm for $16.5 million in August 1994 and completed the transition last month.

The firm's stock has been punished accordingly, trading at about half its 52-week high of $13 3/8.

This is a dramatic turn of fortunes for GTSI, which looked like it had all but sewed up the government market for reselling computers.

But dominating a market is one thing; making money out of that position is quite another.

Harry B. Heisler, former vice president of marketing for GTSI, said, "The sales per employee are still very high, but it's in the back room where things get eaten up." Heisler resigned in May 1994 and now has a consulting business.

Todd Koffman of Dean Witter in New York agreed with Heisler. "As you become an increasingly large reseller, it becomes difficult to manage."

So GTSI may have simply bitten off more than it could chew, simultaneously attempting to digest acquisition of its largest competitor and deliver on a key contract win. Although sales last year climbed 18 percent to $617.2 million, GTSI got hit with a $4 million net loss and a 16 percent drop in total sales to $177 million during the fourth quarter. In fact, the company had such sluggish sales from an Air Force desktop contract that fourth quarter sales from government contracts alone dropped almost 30 percent to $46.4 million.

Those slower-than-anticipated sales saddled GTSI with a bloated inventory. So the firm was also forced to post a $9.9 million pretax charge in the final quarter to account for $78.8 million of excess inventory and underestimated costs for warranty and maintenance on some of its key contracts. That charge dramatically affected the company's net earnings, said GTSI president and CEO R.M. Rickenbach.

The firm's performance in the state and local market did not sit well with Rickenbach either. The company lost its focus on the estimated $30 billion market and generated $9.7 million in sales last year compared with $23.4 million in 1993. "That was a major disappointment to us, but we are going to recover our position in the state and local market," he said.

To address last year's inventory problems, Rickenbach has taken personal responsibility for the company's purchasing and distribution areas. "We view this positively, as it shows that Rickenbach is serious about correcting flaws in GTSI's inventory processes," said Bill Loomis, equity analyst with Ferris, Baker, Watts. He gives the company's stocks, now valued at $7.50, a hold rating. GTSI's stocks during the last year have fluctuated from $6 to $14.

The financial and management challenges faced by GTSI reflect the increasingly competitive government resale market. It is a market where customers demand more service than before, hardware vendors such as Apple and IBM no longer maintain exclusive reseller agreements and federal agencies want rock bottom prices. As Dean Witter's Koffman pointed out, the company's profit margins have declined over the years.

And although industry analysts suggest that resellers such as GTSI increase their contracts business, winning federal contracts is still a tricky business because of the prolonged process, Koffman said. Nevertheless, GTSI is tracking about $2 billion worth of contracts right now.

GTSI's 1994 financial picture, however, was not all grim. The company saw some bright spots in fourth quarter figures for the General Services Administration schedule and open market sales. Sales doubled to $62.6 million and $51.4 million respectively. But the growth, Rickenbach acknowledged, came largely from the Falcon acquisition.

Falcon, founded by Dendy Young in 1983, had annual revenues of $160 million before it was purchased. The leading reseller of Apple Computer products for 10 years, the 250-person company expanded its offerings in 1993 to include hardware from Compaq Computer Corp., IBM Corp., Dell Computer Corp. and Silicon Graphics Inc.

Traditionally an IBM PC reseller, GTSI entered the workstation market in 1992 by selling Sun Microsystems Corp. machines. The company expects its workstation sales to escalate from zero three years ago to $100 million this year.

Although GTSI, which had 450 employees, inherited Falcon's successful schedule and open market business, the Virginia firm eliminated about 200 people to restore its total personnel back to 500, keeping it a small business. Rickenbach said the sales staff did suffer significant cutbacks, but the greatest percentage of the reductions were taken from duplicate departments such as finance, collections and human resources.

But the growth in business from the Falcon acquisition puts more pressure on GTSI's sales force, which consistently has increased productivity. In 1993, the company generated $1.3 million in sales per employee and expects an increase to $2 million during the next few years.

Reader Comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above.

What is your e-mail address?

My e-mail address is:

Do you have a password?

Forgot your password? Click here

Washington Technology Daily

Sign up for our newsletter.

Terms and Privacy Policy consent

I agree to this site's Privacy Policy.


contracts DB