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GTSI Bets On Vanstar, Agency Deals

By Dennis McCafferty

Staff Writer

Looking to rebound from mounting net losses and a slip in market share of federal schedule sales, GTSI has joined with Vanstar Corp. on a General Services Administration contract to provide enhanced information technology services and support to federal agencies.

"It's clear that the federal government is beginning to undergo a dramatic change in its approach to services in this environment." -William Touscher Vanstar Vanstar photo

Chantilly, Va.-based GTSI will serve as prime contractor and Vanstar of Pleasanton, Calif., will act as subcontractor. Vanstar brings its systems life-cycle management and services expertise to the partnership, while systems integrator GTSI will use its knowledge of GSA schedules and government customers. Company officials could not estimate the potential value of the GSA contract.

The marketing partnership between GTSI and Vanstar is intended to capitalize on the growing popularity of GSA schedules. GSA officials have predicted that total information technology schedule sales will hit the $3 billion mark this year, an increase of $1 billion over last year.

The service part of the marketing pact targets Redmond, Wash.-based Microsoft Corp. and its federal government product sales. It will allow government customers to quickly upgrade server applications running on Microsoft Windows NT, for example, or on Microsoft's desktop operating systems.

GTSI and Vanstar also will transition government customers if they want to switch to Microsoft systems. Windows NT is the fastest-growing operating system in the global and federal marketplace, according to Framingham, Mass.-based International Data Corp., a market research firm.

GTSI officials are hoping the new arrangement with Vanstar will provide a spark. GTSI lost $17.8 million on sales of $492 million in 1996, compared with a loss of $7.1 million on sales of $527 million in 1995. GTSI also has slipped from first to third place on the ranking of GSA schedule sellers of personal computers and software. By comparison, Vanstar's annual sales totaled about $2.2 billion in 1996.

Bill Gormley, the GSA assistant commissioner overseeing acquisitions, has predicted that the volume of service-related sales will dwarf product sales within the next two years. Support services are the fastest-growing segment of total government infotech spending, according to Federal Sources Inc. in McLean, Va.

With these developments, it is vital to seize the opportunity, said company executives who sealed the agreement.

"It's clear that the federal government is beginning to undergo a dramatic change in its approach to services in this environment,'' said William Y. Touscher, chairman and CEO of Vanstar. "In the past, it was a soup-to-nuts project with a systems integrator doing the whole thing, or maintenance and services were sold as part of a hardware package.''

Separating service bids from installation and hardware sales "is a wonderful trend,'' Touscher said. "It's the right thing for the government to do. The commercial market has been doing it for a long time and it's growing like mad.''

Vanstar was formerly known as ComputerLand until it sold the domestic part of the business in 1994. By then, the company was buying its way into the reseller and services business. In 1991, the company acquired the computer reseller and service arm of New York-based Nynex Corp. The next year, it purchased the customer service division of Cleveland-based TRW Inc.

Under the arrangement, Vanstar and GTSI also will offer a warranty program on GTSI-distributed products that seeks to provide several provisions that go beyond standard factory warranties: Coverage of third-party component items not covered by the original computer manufacturer; flexible, coverage options from one to five years; and a choice of response times from a same day to second business day.

"Before, if you wanted something fixed, you'd have to go through a fairly painful finger-pointing session where we'd do our best to resolve it for you,'' said Dendy Young, president and chief executive of GTSI, a government reseller that links buyers to 75,000 technology products from 500 companies. "We'd go back to the manufacturer ... and try to fix the problem. Now, you know that when you buy the product with whatever configuration you want, it's covered by a complete warranty.''

Young came to GTSI in December 1995, after the company lost $3 million in the first nine months of its 1995 fiscal year. It posted a net income of $6.7 million during the same period the year before. Much of GTSI's troubles began with the August 1994 acquisition of rival Falcon Microsystems Inc., the Landover, Md.-based company where Young was founder and former president.

The leadership change hasn't put GTSI in the black. For the first quarter ended March 31, net losses climbed to $3.4 million - nearly twice as much as during the first quarter of 1996. Company officials have cited greater personnel costs as a prime reason for the losses.

But the news is not all bad. The recent first quarter loss was increased after a previously reported $1 million tax benefit was excluded. But that means the company faces no tax liability on profits in the second half.

Inventory turnover is twice as fast as it was last year, leading to less financing costs, said Bill Loomis, an analyst who tracks GTSI for Legg Mason Wood Walker in Baltimore.

Still, a turnaround depends on a healthy dose of government business, and GTSI is not a prime bidder on any major contracts coming up this year, Loomis said. He's optimistic that will change next year.

"We're not recommending that people buy the stock,'' Loomis said. "They need more contracts to build up the sales. It's time to start building up the bottom line.''

The warranty program option is not new. Palo Alto, Calif.-based Hewlett-Packard Co. also has a similar offering through the GSA, government officials said.