DR. EDWARD H. BERSOFF is the President, CEO and founder of BTG, Inc.
Prior to founding BTG in 1982, Dr. Bersoff was President of CTEC, Inc.;
earlier, he was Director of Engineering Operations for Logicon's
Washington division. Previously, as an officer in the US Army, he was
assigned to the NASA Electronics Research Center in Cambridge,
Massachusetts. He also taught mathematics at New York University,
Kingsborough Community College in New York, Northeastern and Boston
Universities in Massachusetts, and American University in Washington,
DC. Dr. Bersoff holds AB, MS and PhD degrees in mathematics from New
York University and is a graduate of the Harvard Business School's
Owner/President Management Program. He was selected Virginia's
Outstanding Industrialist for 1999 by the Commonwealth of Virginia and
the Science Museum of Virginia, and was presented the 1999 Distinguished
Leadership Award by the Washington Chapter of the American Jewish
Committee. In 1996, he was selected to the Fed 100 by Federal Computer
Week newspaper and AFCEA, honoring 100 technology professionals from
government and industry, and was chosen from industry representatives to
receive the coveted Eagle Award for his role in the Federal government's
effective use of information technology. Also in 1996, the Federation of
Citizens Associations and the Washington Post named him the Fairfax
County Citizen of the Year for his contributions to education. In 1995,
the Northern Virginia Community Foundation presented him with its
Founders Award for outstanding community service.
Sector: communications services
TWST: Could we begin with a profile of the company?
Dr. Bersoff: BTG is an information system and technical services company
that's been in business since 1982. Our primary market has been,
historically, the Federal government, although that has evolved over
time. Today a significant portion of our business is in the commercial,
state and local markets. Originally, our company was focused in the
defense portion of the Federal market, but today, it's only about
50%-55% defense, with the balance in the civilian agencies of the
Federal government, as well as the state, local and commercial markets.
Again, we provide software development and systems integration and
support services related to information systems, and do so in a wide
variety of settings.
TWST: Have the products that you've sold to the government changed much
over the last 18 years?
Dr. Bersoff: Yes. We're end item developers, so we provide enterprise-
wide technology based solutions, typically under contract, as opposed to
developing a product, and then we sell our solutions as an end item to
the government or any of our other customers on a repeatable basis. So,
in other words, we get contracts with our customers when they need an
information system, and we develop that for them, generally from
scratch, or we integrate other pieces of software or products that will
make a working system. In the very beginning of the company, we would
operate on fairly large computers and large desktop microprocessors.
Over time, of course, we're now doing work in NT and in the last several
years, on the Internet. So, the problems haven't changed much, but the
platforms that we operate on have changed a great deal.
TWST: Are there a number of other companies that work very close to what
you're doing?
Dr. Bersoff: Yes, there are several companies, some private and some
public. Computer Sciences Corporation, for example, is a typical large
public company that has similar offerings to ours, a similar profile to
ours. Their focus is more heavily on the commercial side than on the
government side, but the nature of the work is the same, it's just a
matter of who the customer itself is. So, at the big public company end,
CSC is certainly a competitor. There's another public company competitor
called CACI, which is about twice our size. There are many private
companies, ranging from DynCorp to SAIC, as well as many others that few
people have ever heard of. Though smaller than some of the companies
mentioned, BTG is committed to satisfying our customers and as a result
they have been extremely loyal to us. We believe this is one of our
competitive advantages.
TWST: Could you say how you match up against these other companies with
respect to the investor?
Dr. Bersoff: It's a matter of what market the companies are focused on.
CSC enjoys a much better multiple than we do, largely we believe,
because they're in the commercial market to a heavy extent. On the other
hand, the commercial market can be very fickle, as a great company like
AMS recently demonstrated. They had a major dispute with one of their
customers and lost that dispute, and that can have devastating effects.
The Federal customer is predictable, reliable and tolerant. As a result,
they don't give you as good a margin as the commercial customer does,
but they also don't give you as many risks either. So, it's a question
of choosing where you're best equipped to serve the market. As I say,
our space in the government side has multiples that are not nearly as
attractive as they are on the commercial side, but that's partly a
result of who we do business with.
TWST: Does it mean that you have fairly good long-term prospects?
Dr. Bersoff: We are as reliable as our market is, and so we have a far
more predicable environment than most commercial companies do.
TWST: What percentage of your work now is with the Federal government
versus the local governments?
Dr. Bersoff: The Federal government constitutes about 80% of our
business at this point, and state and local and commercial about 20%.
TWST: Will those numbers change over the upcoming years?
Dr. Bersoff: We try to have them change because we're realists about the
markets, and the bigger the number on the commercial and non-Federal
side, the better it is from a valuation point of view. But we have a
very efficient machine, which generates business on the government side.
So we can focus on the commercial markets, though we are much better at
getting business on the government side. So every time we try to change
the ratios, they seem to migrate back to the same ratios that we have.
As long as we continue to grow at a reasonable pace we'll just do our
thing and earn money and, hopefully, some day, the Federal market will
get better respect than it has heretofore. Actually, I think that's
coming very soon.
TWST: Can you comment on any significant changes or developments that
will be taking place in the next few years, where the government will be
asking new or different things from you?
Dr. Bersoff: Certainly, defense is a good case, where the budget has
declined dramatically over the years overall, but the Information
Technology portion, the part that we address, has increased
significantly. The identifiable Federal Information Technology budget is
about $50 billion per year, and about 40% of that is in the defense
sector. The other thing that's happening is, in spite of the fact that
there's some recent moves to pay IT workers in government more money,
give them special increments of pay, it's still difficult for the
government to retain IT workers when competing with the private sector.
So the trend that seems to be going on is that while the overall IT
budget may not be increasing by much ' perhaps 3%-4%-5% a year ' the
outsourced portion, the addressable market from our perspective, is
going up at a fast pace. So I think we have a very reliable, stable, and
growing market. We're a very small player in that market, even at our
size, and so market share is the name of the game, and the outsourced
portion of the addressable market is the name of the game. We view the
market as very, very healthy, and the trends are very, very positive.
TWST: Do you think you have a pretty good chance to increase your market
share?
Dr. Bersoff: Absolutely. We have been. That's how we've been growing
over the years, increasing our market share in a relatively stable
market that increases at the inflation rate, around 3%-4% a year. But
our compound growth on our services business alone has been about 30%
over the last five to seven years. That's compounded growth. So we're
doing a lot better than the growth of the market.
TWST: Will acquisitions, partnerships and alliances play a part in your
future?
Dr. Bersoff: Absolutely! They have played a part in our past as well.
Part of our growth has come through the acquisition route. We've
acquired seven companies in the last 10 years. They've been of various
sizes, ranging from a small $10 million revenue company to one with $84
million in annual revenue. So we've done a variety of different kinds of
acquisitions over the years. We are looking, in our acquisition plan,
for companies that will increase the penetration in a market that we're
already in, or give us new markets for the kind of services that we
already provide. So, it's kind of an edging out philosophy with respect
to acquisitions, and we've been pretty successful at it.
TWST: What about attracting good people and keeping good people? Do you
have the necessary incentives to do so?
Dr. Bersoff: Yes, we have great incentives for attracting staff, and we
try to have great incentives for retaining staff, but in our business,
it's a difficult problem. It's probably our key problem in terms of
growth. Actually, lately, as part of the shakeout in the dot-com world
that we've seen in the last several months, we're noticing a phenomenon
that's begun, and we hope will gain momentum, and that's what we call
boomerangs. That is, people have left the company to seek their fortune
in the dot-com world and are coming back, recognizing that the grass is
not always greener on the other side of the fence. We represent a very
good place to work, and people enjoy working here. It's not unusual for
smart people to look for other opportunities, but we're happy to see
many of them coming back. But staff retention is probably our biggest
issue. On top of that, we have a lot of people, for the defense work
that we do, who require significant security clearances. On the good
side, that's a barrier to entry for other companies, but it also makes
staffing a little more difficult.
TWST: Does your location in a very nice part of the country play in your
favor?
Dr. Bersoff: It is pretty good. The quality of life here is terrific,
and our only serious problem is transportation. On the good side,
Virginia is a very low tax state and we have great schools in Fairfax
County, which is where we're located, some of the best in the country.
If we could ease the traffic a little bit, then we would be very, very
happy; I think we'd have an outstanding quality of life. But, for the
most part, this is a great place to live and for your family to grow.
TWST: Are there any other problems you'd like to address, or risks that
could worry you?
Dr. Bersoff: I think the risk is, very much at this point, retaining the
staff we need and attracting new staff. Fiscal year to date the company
has been awarded over $250 million in new services and solutions
contracts. BTG's contract backlog is growing and remains extremely
strong. In some industries, backlog is a bad thing, but we're a services
business, so our backlog is actually a good thing. We have a half-a-
billion dollar backlog of business, so that is a very positive thing for
the future years, in terms of continuing our profitable growth.
TWST: What rate of gain in sales and earnings do analysts project for
you?
Dr. Bersoff: The guidance for this year is in the neighborhood of $0.65
a share, a 33% increase over last fiscal year, and for next year, the
analysts are looking at about a 15%-25% improvement there. On the sales
side, we're probably around $235 million this year, and growth to about
$300 million over the next two years.
TWST: What other yardsticks could the investor use to judge your success
over the next few years?
Dr. Bersoff: I think we have dramatically done two things. First, we
improved our operating margins. In the last two quarters, they were at
5.7%, up from the 3's just a couple of years ago. We should see that
trend go to 6%, to 7%, over the next two or three years. So, I think,
looking at operating margins will be a healthy indicator ' and
equivalently, our EBITDA ' a healthy indicator of how we're doing.
Secondly, we have continued to strengthen our balance sheet. Look at our
debt. Our high was $115 million about three years ago, and we're down to
below $30 million in debt today. That trend should continue, absent any
acquisitions. By the way, the numbers I was giving you did not take into
account any potential acquisitions that we might do. Since we have a
history of making acquisitions, I think it's likely that that would be
the case going forward.
TWST: As CEO, how do you direct your energies and do you feel that that
will change over the next few years? Will you have to change somewhat
the role that you play on a day by day basis or will it remain the same?
Dr. Bersoff: I think it's changed dramatically in the last five years. I
now have a senior staff who are very capable. My job is more prospecting
today, and looking at new initiatives, and also dealing with the
financial community, which is another interesting aspect of what I do.
TWST: What do you think of the value that is being put on your stock?
Dr. Bersoff: I think our valuation is dramatically beneath where it
should be, but I think any CEO will probably say that. One of the
reasons, in our case, is that we acquired a product reselling business a
few years ago, which we sold a couple of years ago. That business was
high-volume and low-profit, which contaminated, if you will, our growth
story with respect to our core services business. I think that we're in
the process of once again proving ourselves, proving the fact that we
can grow profitably. We've been doing that. I think as the budget
climate in the Federal government gets settled, some new respect will be
given to the market that we're in, and we should see a significant
improvement in valuations. I think if we can continue to grow our
earnings, the multiples will take care of themselves. Another big
problem is, as the dot-com world gained all the attention, our market
cap is so low that we get very little analyst attention. So our
objective is going to be to increase the interest in our company, and
have it be seen as a value company that is here for the long haul.
TWST: In the position that you're in, would you say that the barriers to
entry are significant?
Dr. Bersoff: I think that the low end companies, the start-up companies,
will have niches, but to get to the next plateau, to get to be a public
company that has revenues of a quarter-of-a-billion dollars or more, is
a difficult process today. There are barriers to get it to that point.
The government contracting mechanisms have changed significantly, to the
benefit of people like us, and to the detriment of people trying to
break through.
TWST: Since so much of what you do is connected with information
technology, I would think that changes in government policy couldn't
affect you too much, could they?
Dr. Bersoff: Government procurement policy does affect us, but we are
good at understanding the trends and responding to that. Technology
policy doesn't affect us much because we stay on top of those things,
and while we are not inventors of new technology, we are certainly
people with the understanding of what's going on at all times. We've
been Internet developers for many years now, even before the population
at large ever heard of it. And that's because the government, in fact,
did invent the Internet, and we were working with that tool for years
and years. So we're there with the latest kinds of tools that we need to
do the job, and we're pretty pleased about that.
TWST: If you were looking back three years later at what has been done,
what would lead you to say at that point: Yes, we have done a pretty
good job with ourselves?
Dr. Bersoff: If you look back three years, it's where we were in terms
of profitability, and in terms of business mix, and the future of the
businesses we are in. We faced a very tough decision about shedding the
portion of our business that was high volume but low profit. That was a
core decision that we made, and I think it took some courage to do that
because we substantially slashed our revenues as a result. But, today,
we are very much healthier, both financially and from an image
perspective. There's a very clear picture of what we do from a strategic
point of view for our customers. So, I think that over the last three
years, getting our finances under control and being in the right
business is the thing I'm most proud of.
TWST: What would be the two or three most important points that you
would like to make to the potential long-term investor?
Dr. Bersoff: We're looking for continued growth through acquisition and
internally of 15%-25% a year top line growth, and at the same time,
increasing our operating margins. That's a pretty compelling story in
terms of what the net result is because it's a doubling effect. It's not
keeping our margins flat and growing our revenues: and it's not just
keeping our revenues flat or just growing our margins, it's both. I
think that is a very powerful story, and I think that, ultimately, our
cash flow and our profitable growth will be such that we will be pretty
attractive for most people when they look at BTG.
TWST: Thank you. (MC)
DR. EDWARD H. BERSOFF
Chairman, President & CEO
BTG, Inc.
3877 Fairfax Ridge Road
Fairfax, VA 22030
(703) 383-8000 |
