Government Work Suits Telos Fine

Government Work Suits Telos Fine

By Bob Starzynski
Staff Writer

While most government information technology contractors are turning to the commercial sector for more profitable work, Telos Corp. has found better margins by focusing its attention back to the government arena.

According to a document filed with the Securities and Exchange Commission late last month, Ashburn, Va.-based Telos increased its federal government work to 95 percent of total revenue last year from 81 percent in 1995.

At the same time, commercial contracts have shrunk to 4 percent from 15 percent of the company's total business.

Officials at Telos, which does almost two-thirds of its systems integration work with the Department of Defense, said the transformation is a consequence of a search for healthier profit margins.

"For us, it wasn't what markets we were in," said Don Fernandez, vice president of marketing at Telos. "It was what we did in those markets."

Over the past two years, he said, Telos has cast off two businesses.

It sold a contract labor division to Federal Data Corp., Bethesda, Md., in February for $15 million after selling another contract labor division to CoreStaff Inc. in December 1996 for $32 million. Both divisions provide customers with staff augmentation services, a low-margin business.

"That was $50-an-hour business," said Dave Aldrich, vice president of corporate development for Telos. "We're looking for business that is two times that level. We want to re-allocate our people to get better return on investment."

That means four key areas of focus for the company going forward - data integration of legacy computer systems, wireless networking, advanced messaging systems and tying together data access with data security.

To do that kind of work, Telos does not need to seek new customers in the commercial world, Fernandez said.

The privately held company, which has several classes of publicly traded preferred stock, can do such work with existing clients, such as the departments of Defense and Justice and NASA. "We are clearly saying that government agencies are going to be our focus," he said.

At the same time, other traditional government contractors have moved heavily in commercial work. Computer Sciences Corp. of El Segundo, Calif., now does more than half its work with commercial clients.

BDM International was landing many large commercial contracts before it was purchased late last year by TRW Inc. of Cleveland for $1 billion. Many others have followed suit.

"The pure solutions business on the commercial side will always have higher margins than on the federal side," said Paul Lombardi, chief executive officer of Reston, Va.-based government contractor DynCorp. "Do we all want to move up the food chain? Sure we do."

Telos' new business thrust is paying off. After revenue dipped to $151 million in 1994, it has climbed steadily to $254 million last year.

And since 1994, the company has been profitable every year, although profits have grown minimally. (In 1996, Telos had a loss of $9.8 million from continuing operations. However, the gains from the sale of a consulting services business pushed up that number to $2.2 million in net income.)

"We have yet to see those margins come through from our investments," Aldrich said. "We expect to see it on the sheets this year."

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