Fast Tech 25: Beltway Bets

To come up with the eight companies in the accompanying table, we applied a “Business in the Beltway” screen to our 2008 Fast Tech 25. In other words, we scanned the filings of the Fast Tech list to see which companies played up their business with the public sector, particularly the U.S. federal government.

Why do this? As we have often noted on Forbes.com, the fact that a company sells goods or services to the feds is no guarantee of its success. Nevertheless, it is not a bad idea to invest in technology companies that are going after government customers. Tech procurement has its flaws, but it can act as a seal of approval for vendors winning government contracts. That’s why you’ll often find smaller tech companies, for example, touting wins with a defense or civilian agency.

Consider also that tech buying cycles in the public and private sectors sometimes diverge, as they did dramatically after the dot-com bubble burst at the turn of the century.

A year ago, we zeroed in on MTC Technologies (nasdaq: MTCT – news – people ), touting the stock as a cheap government contracting situation on the Fast Tech list. For most of 2007, our call looked like a bad one, something we fessed up to in our year-end wrap up of 2007 Beltway bets.

Two days after our article about our 2007 Beltway picks appeared, BAE Systems (other-otc: BAESF.PK – news – people ) made a $450 million acquisition bid for MTC Technologies. The deal hasn’t closed yet, but MTC shares show a 6% gain since our 2007 Fast Tech story, vs. a 7% decline for the S&P 500.

Full story at F0rbes.com

Beltway Bet: Beaten-Down Detica

Thomas Black, chief executive of British tech consultancy Detica Group, has 200 employees tending to civilian government and military clients in the U.S. He wants to bring that number up to 1,000 in the next few years.

“That is our ambition,” says Black, Scottish of origin and 48 years of age.

But lately, such lofty ambitions haven’t been reflected in Detica Group’s share price. The London-listed stock has dropped 12% (in U.S. dollar terms) thus far in 2008 and 53% from a 52-week high of $8 last July.

With the sell-off, Detica shares look interesting.

Why the stock drop? Detica’s customer mix is one culprit. Founded in 1977 as a boutique providing information security services to U.K. defense customers, Detica specializes today in business intelligence–the analysis of huge amounts of data to weed out fraud, manage risk and gain competitive advantage.

Government clients still account for three-fifths of the company’s $307 million in revenues for the year ending last March. But 27% of Detica’s sales came from financial services clients. Given the grim parade of big banks posting subprime-induced losses, the concern here is that spending on things like business intelligence will freeze.

There are also doubts about the public sector side, notably Detica’s plans to push into the U.S. market. Last spring, the company created its DeticaDFI unit with the acquisition of DFI International, a 200-person Washington consulting group focused on budgets and counterterrorism. Building from there could be tough.

Full story at Forbes.com

Mobile Video Outfit Refocuses

Washington, D.C. – In early 2004, Peter Durand took the top job at Integrian, a North Carolina company specializing in mobile surveillance systems for vehicles like police cars and buses. It’s been a busy run since, with two venture funding rounds closed, three acquisitions, and a headcount that went from 12 to 200.

“This has been four years of 90 miles an hour every single day,” says Durand, 38.

Not all decisions made at 90 miles an hour turn out well. Integrian hopes one acquisition gone amiss will help another bear fruit.

Two years ago, Integrian deployed a big chunk of its venture capital to acquire publicly listed Innovonics, a $9 million (revenues) Australian developer of transit surveillance technology. The rationale behind the buy: Innovonics’ specialty in passenger rail systems and subways would complement Integrian’s strengths in camera systems for cars and buses.

“We had this goal of combining the technologies into one platform,” says Durand.

Full story at Forbes.com

Good Luck Beating SAS

Washington, D.C. – Since 1995, SAS Institute has proved itself a juggernaut on our annual tally of America’s largest privately held companies. The Cary, N.C., software concern debuted on the list 12 years ago, ranked 402 with $482 million in revenues and an employee count of 3,400. Today it claims the No. 219 spot with sales of $1.9 billion and a staff of 10,000.

Lately, SAS’ big competitors have been bulking up with a string of acquisitions in its specialty–software that helps managers pull together and analyze big chunks of data. Yet there is scant evidence that its rivals can knock SAS off its stride.

“[SAS] is a force to reckon with,” says David Hilal, an equity analyst who oversees technology research and covers 15 business-software companies for Arlington, Va., investment bank Friedman, Billings, Ramsey.

SAS’s public-sector business illustrates. Founded in 1976 by Forbes 400 member James Goodnight, SAS (pronounced “sass”) has long targeted the government customer. Today, the company draws 14% of its revenues from governments around the world, with work for U.S. federal, state and local customers set to bring in $200 million in 2007.

Full story at Forbes.com

Beltway Bet: Opnet Technologies

WASHINGTON, D.C. – In March, we suggested that the pressure on the federal government to upgrade its computer networks was a good reason for investors to get into network equipment stocks. So far, the market hasn’t proved us wrong; shares of the two companies highlighted in that story, Juniper Networks and Cisco Systems, have advanced a hearty 96% and 24%, respectively.

If you believe that the network trend still has legs, consider shares of a smaller company on the software side: Opnet Technologies (nasdaq: OPNT – news – people ). The Bethesda, Md., outfit ranks 167 on our list of America’s 200 Best Small Companies, published Thursday. A slowdown in sales has hurt the stock, but the weakness could be a buying opportunity.

In business since 1986, Opnet sells systems that help big organizations map out their networks, analyze the network interaction of different devices and applications, and troubleshoot when things crash or get sluggish. Chief Executive Marc Cohen, 44, paints his company’s offerings as indispensable.

“The lights must stay on,” he says, “and the networks must continue to hum.”

Opnet has certainly hummed in the government market. Nearly half of the $245 million (market value) company’s sales comes from big government contractors and federal agencies such as the departments of Defense, Homeland Security and State. Last August, Opnet’s user conference in Washington, D.C. drew 2,000 people.

Full story at Forbes.com

Transformer

Washington, D.C. – Terry M. Ryan has made a career of getting big Beltway organizations through moments of change.

In 1991, after 10 years in the U.S. military, he was hired by the Senate Select Committee on Intelligence to advise it on adjusting to a post-Cold War world. Later, he helped set up a new Department of Defense office aimed at rejiggering airborne reconnaissance to use more unmanned aircraft. When he went to the private sector in the mid-’90s, he took the top job at defense engineering concern Adroit Systems. In three years, he presided over a tripling in Adroit’s sales, to $43 million, and its acquisition by SRA International in 2003.

Now a senior vice president at Mercury Computer Systems (nasdaq: MRCY – news – people ), Ryan, 48, must pull another rabbit out of the hat. Headquartered in Chelmsford, Mass., Mercury makes systems for processing high-volume data. Among its specialties: software that can convert big data sets into 3-D images, and systems that pull together information from different kinds of computer chips (digital signal processors, graphics processors and so on). Just under half the company’s $224 million in fiscal 2007 sales came from defense customers, primarily big contractors like Lockheed Martin (nyse: LMT – news – people ), Northrop Grumman (nyse: NOC – news – people ), and Raytheon (nyse: RTN – news – people ).

Yet despite those companies’ booming fortunes, Mercury’s own defense business sagged 15% for the year ended in June, a decline the company blamed in part on federal funding shifting to “more immediate” needs. (Translation: Iraq.)

Full story at Forbes.com

Beltway Bet: RightNow Technologies

Washington, D.C. – RightNow Technologies went public in August 2004. Within months, its shares rose 174%, to $21, carried upward by investor enthusiasm for the Bozeman, Mont., company’s business model. Like Salesforce.com, RightNow aimed to sell its customer relationship management (CRM) software as a low-maintenance, Web-based service, not a shrink-wrapped product.

That enthusiasm has since cooled; RightNow Technologies (nasdaq: RNOW – news – people ) stock is off 30% from its 2004 high. But Chief Executive Greg R. Gianforte still relishes tossing rocks at the way the software has been traditionally sold to big business and government.

“The traditional model of enterprise software has failed the customer,” he declares. “It has involved somebody writing a really big check up front, then a truck backing up and dumping a bunch of software, then somebody showing up with a busload of consultants who camp in your parking lot for two years.”

Gianforte says RightNow gets the job done faster. “Our typical deployment takes about 60 days to stand up,” he says.

One place Gianforte’s approach seems to be gaining traction: the U.S. federal government.

Full story at Forbes.com

HP Rides The Innovation Wave In Washington

WASHINGTON, D.C. – Last week, Hewlett-Packard savored some legislative good news when President Bush signed a bill boosting federal subsidies for research and education in science and math. The Palo Alto, Calif., computer giant, which in 2006 spent $3.6 billion on research and development, has been one of the louder voices calling for the U.S. government to step up its role in fostering tech innovation.

“We’re very pleased with the commitment to put more money into research and to contribute math and science scholarship,” says Gary Fazzino, Hewlett Packard’s (nyse: HPQ) vice president for government and public affairs. “These are victories.”

Now, Fazzino and HP’s six-person government affairs outpost in Washington hope that momentum on innovation will carry along two other top priorities: patent reform and an extension of the research and development tax credit. While both items enjoy decent support inside the Beltway, they’ll need tending to, given the prospect of a hectic autumn on Capitol Hill.

“There could be a number of landmines along the way,” says David Isaacs, who runs HP’s public policy efforts in Washington.

Full story at Forbes.com

Tiny Battery, Big Biz

Washington, D.C. – In early 2008, Littleton, Colo.’s Infinite Power Solutions plans to begin high-volume production of batteries not much bigger than postage stamps. Like players before kickoff, execs at Infinite, now 25 employees strong, are in full chest-pounding mode.

“Our flexible, rechargeable, thin-film batteries will boldly go where no batteries have gone before,” says Timothy Bradow, Infinite’s vice president for marketing and business development.

Key to the boldness: the defense and intelligence market. Bradow and Chief Executive Raymond Johnson believe certain federal customers will pay $50 to $100 per battery. They and their investors have maneuvered to get Infinite up and running with a surge of public sector demand.

So what’s a thin-film battery? Batteries, or devices that convert chemical energy to electrical energy, are essentially three items: a positive electrode, a negative electrode and an electrolyte that separates the two. In the lithium-ion batteries that power cellphones and laptops, the electrolyte is a liquid or a polymer gel.

Thin-film batteries, by contrast, use a glassy, inorganic solid for an electrolyte. The technology was pioneered in the 1970s at Stanford University, developed subsequently by the Department of Energy at its Oak Ridge National Laboratory, then released for commercial use starting in the 1990s.

Full story at Forbes.com

In The Beltway Orbit: GeoEye

Washington, D.C. – Companies that sell technology to the U.S. government are more attractive to investors if their products have commercial applications as well. Examples we’ve cited recently: Ceradyne and Flir Systems.

Dulles, Va.’s GeoEye is another one in this category and its shares look modestly priced. But be careful–one technical glitch and this satellite imagery stock could fall out of orbit.

GeoEye captures, manages and sells high-resolution satellite imagery, the kind found on Yahoo! Maps or Microsoft’s Virtual Earth. The company has $158 million in trailing 12 month sales, a fleet of two satellites and two airplanes, and an archive of imagery covering 300 million square kilometers.

Its next satellite, GeoEye-1, is scheduled to launch sometime later this year. The 4,310-pound spacecraft will make 12 to 13 orbits per day, collecting daily up to 350,000 square kilometers (the size of Texas) worth of color imagery at a 16-inch or 0.41-meters ground resolution. Translated to English, that means that in the images you can see the lines on a parking lot. (No, the satellite can’t parallel park for you.)

But the upcoming launch is a high-stakes event for GeoEye, which only gets one shot to do it right. “After ‘3-2-1-liftoff,’ there’s no chance to go back and fix anything,” says Mark Brender, a GeoEye spokesman and its vice president for marketing.

The consequences of a botched launch? In September 2001, GeoEye’s predecessor company, Orbimage, put up a satellite that failed to make it into orbit. The company filed for bankruptcy in April 2002, and its common shareholders got wiped out.

Full story at Forbes.com