Leto's goal for GTSI: A profit in 2006 through services

GTSI Corp.

Headquarters: Chantilly, Va.

President and CEO: James Leto

Employees: About 750

Ticker: GTSI on Nasdaq

2005 revenue: $886.2 million

2005 net loss: $16 million

2004 revenue: $1.1 billion

2004 net profit: $10.3 million

An ERP in the system

GTSI Corp.'s problems in 2005 began with the implementation of its new enterprise resource planning system, which provides infrastructure support for its financial, human resources and supply-chain functions.

"It was the [Hurricane] Katrina event of this company," said James Leto, GTSI's new president and CEO.

Troubles started on April Fools' Day when the IT products and solutions company turned off its old system and switched on the new one. The customized PeopleSoft ERP worked without a hitch for the first couple of weeks, but suffered a series of failures when GTSI's order load picked up.

When the company's busy season began in September, it was "just a nightmare," Leto said. About 2,000 bugs were found, and about 55 percent of the company's employees quit, including everyone in its purchasing department.

As a result, GTSI concentrated on filling large orders worth several million first, while ones of lesser value were left to pile up.

Although GTSI lost a lot of money as a result of the ERP fiasco, it didn't lose customers or contracts, Leto said.

Most of the defects have been corrected, and the rest will be cleared up by July in time for this September's busy season, he said. ? Roseanne Gerin

James Leto of GTSI

Rick Steele

After a woeful 2005, capped by a $16 million net loss, GTSI Corp. is fiercely fighting its way back to stability and profitability with a turnaround strategy led by its new president and CEO, James Leto.

Leto, 61, in February took the reins from GTSI veteran Dendy Young, who remains with the company as chairman of the board. Leto, who also retains his seat on the board, wants to make GTSI profitable by the end of 2006 and move it way from its profile as a reseller toward that of a solutions provider.

"If I can do that, then it's a huge delta from where we were ending up in 2005," said Leto, who is former CEO both of program management consulting firm Robbins-Gioia LLC of Alexandria, Va., and of science and technology firm PRC Inc., a systems integrator now part of Northrop Grumman Corp.

To get to his profitability goals, Leto wants GTSI focused on three things in 2006:

» Stabilize and improve the company's supply chain

» Develop and sell value-added solutions and integration services

» Boost financial, or leasing, services.

It won't be easy, especially considering the Chantilly, Va., company's $16 million net loss on total revenue of $886.3 million last year, compared with net income of $10.3 million on revenue of almost $1.1 billion in 2004.

The reseller business that GTSI has long excelled at also has changed in recent years, with manufacturers increasingly selling directly to customers. Plus, GTSI has faced fierce competition from large commercial resellers and retail outlets ? their economies of scale letting them lower costs.

Year of trouble

GTSI's problems in 2005 included malfunctions of its new enterprise resource planning system implementation, high attrition rates, deficiencies in some sales teams, and revenue and expense imbalances resulting from lower sales and higher headcount-related costs.

All of this was magnified by changes over the last few years in government procurement policy, including federal agencies' use of reverse auctions and their negotiation of mass licensing agreements with software companies to lower costs, Leto said.

GTSI lost about $90 million in revenue in 2005 as a result of changes in government buying that have altered the environment for the transitional resellers over the last several years, he said.

GTSI's biggest competitor in the government space is CDW Government Inc. of Vernon Hills, Ill., which has seen its business steadily grow in recent years. CDW's government business has a cost advantage over GTSI's, experts said, because it is part of a $6.3 billion commercial reseller and, thus, enjoys greater economies of scale.

Some federal market observers also have raised doubts about GTSI's plan for a speedy reversal of fortune.

"If they're trying to meld the major products that they carry with the solutions, I would hope that would be somewhat easier. But still I don't think an eight-month window is going to be sufficient to grow market share, or even mindshare, as a provider of solutions," said Mark Amtower, president and CEO of Amtower & Associates, a consultancy for companies that want to sell to the federal government.

GTSI will not compete with the systems integrators, but it will look to offer more integrated solutions to its clients and to chase bigger deals for large solutions, Leto said.

As part of its shift from reseller to solutions provider, GTSI is integrating commercial products with off-the-shelf software to provide tailored engineering solutions for customers. The 10 percent of the company's orders that generate about 80 percent of its revenue represents large orders with high engineering and services, which carry higher margins for GTSI, Leto said.

"We're still distributing hardware, not unlike we did as a reseller, except that what we're distributing now is not a commodity onesy-twosy product; it's an integrated suite of hardware-software that does a function, either directly for our government customer or in partnership with a systems integrator," Leto said.

This sets GTSI apart as a hybrid, he said, because systems integrators don't do this.

"My guess is that at the end of three years, whenever my tenure lapses, we will be regarded as the preeminent provider of unique solutions to solve government problems throughout both the federal and state and local governments," Leto told investors during a conference call April 13, the day after GTSI reported its financials for the fourth quarter of 2005 and the full year.

Leto also predicted that GTSI's business will pick up as a result of Northrop Grumman's shutdown in early March of its computer reseller business. GTSI is pursuing the work under the estimated two-thirds of Northrop Grumman's contracts that overlapped with its own, and it also is hiring former Northrop Grumman employees.

"There's a significant market opportunity for us, because those government customers are buying off the same contracts we're holding," Leto said.

Over the next three to five years, Leto wants to acquire companies that have systems engineering and services work as part of the effort to grow GTSI's services business. GTSI is looking closely at one company as a possible acquisition candidate, but Leto declined to give further details.

The strategy is similar to one pursued by Apptis Inc., a company that was primarily a reseller, but has built a substantial services business through acquisitions. Apptis of Chantilly, Va., also is privately held and is backed by a private investment group.

Not everyone is sold on Leto's ambitious timeframe for a quick return to profitability.

Scott Lewis, president and CEO of PS Partnerships LLC, a consultancy for technology companies that sell to federal, state and local governments, said the plan likely would take three to five years.

"It's a heck of a challenge," Lewis said. "I'm sure Leto can really make [GTSI] profitable, but can he really change GTSI to a solutions provider? That's a huge challenge, and I just don't know if that's possible in so short period of time."

Lewis is a former vice president of market research company Input Inc., and a former group publisher of Washington Technology and its sister publication, Government Computer News.

In 2005, GTSI's service business accounted for $25 million in revenue; this year, it will be $50 million, and in 2007, Leto wants it to hit $100 million.

He said that GTSI's state and local government business is the fastest growing segment because of the U.S. Communities Technologies contract, administered by Fairfax County in Virginia. It is one of more than a dozen U.S. Communities contracts, which lets public agencies reduce the costs of purchased goods through pooling their buys.

This segment of GTSI's business has evolved from a tiny business two years ago to now more than $100 million, he said.

Leto also plans to build up GTSI's financial, or leasing, business, which over the last two years has grown to more than $300 million, he said. Instead of making outright purchases of hardware, the government leases equipment from GTSI.

The company sells the lease receivables to third-party financial institutions and makes money.

So far, so good

Leto's turnaround plan is off to a good start. GTSI, which has a market capitalization of almost $50.6 million, has replaced employees in its purchasing department and has fairly seasoned veterans on its sales team, Leto said. The company had two rounds of layoffs, each cutting about 10 percent of its workforce, which now stands at about 750.

"GTSI has been hemorrhaging over the last several months, and it's had a couple of layoffs. If it's going to be profitable by the end of the year, that gives them eight months [so] they'll probably have more layoffs," Amtower said. Leto, however, said he isn't planning more job cuts.

To meet its working capital requirements and potential long-term borrowing needs, GTSI has obtained a commitment letter from a consortium of banks for a $125 million senior secured revolving credit facility. GTSI expects to close on the facility by May 31.

The company also had record bookings during the first quarter of 2006, its highest level ever, Leto said. In March, Leto reorganized the company's supply chain so that it reported to a single organization in the company, not three as it did previously.

GTSI traded at a 52-week high of $10.10 versus a low of $4.86. On April 18, the common stock closed at $5.85 per share.

Next on Leto's agenda is a weeklong powwow in May at his Michigan home to discuss GTSI's strategy with his key managers.

But if Leto's strategy fails, he has no back-up plan.

"I've never had a company that I've run, fail," Leto said. "Every company I have ever run became enormously successful. You can't sell broken companies."

A veteran of the government technology market, Leto has swung several companies to stability and profitability, and then sold them about three years after stepping in to run them. However, Leto is not positioning GTSI for a sale, he said.

"The company's not on the block, despite the fact that I've sold every other company I've worked for," Leto said.

Staff Writer Roseanne Gerin can be reached at regerin@postnewsweektech.com.

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