Integral Systems' Specialized Satellite Business Soars [LOR supplier]
By Jerry Knight
Washington Post Staff Writer
Monday, February 8, 1999; Page F07
When the stock of Integral Systems Inc. climbed from less than $7 a share
past $20 last year, no one was happier than the employees of the Lanham
satellite software company.
When Integral hires an engineer -- and 95 percent of the 200 people who
work there are engineers or other professionals -- the job comes with 500
shares of Integral stock. One hundred shares vest each year, building up a
nice nest egg that is further fattened by the company's 11 percent annual
contribution to the 401(k) retirement plan.
Perquisites like that are one of the reasons employees rarely leave, said
Integral Chairman Steven R. Chamberlain, one of the company's founders.
The company is the biggest independent producer of computer systems
used to fly satellites.
Many Integral investors have stayed in for the long haul, but after the
run-up in the stock last year, some couldn't resist the opportunity to cash
in.
The profit-taking began after the first of the year. It quickly drove up the
trading volume and knocked back the stock to about $15 a share in the
past two weeks. But even at Friday's $14 closing price, Integral Systems
stockholders have earned a return of better than 100 percent over the past
12 months.
Maybe merely doubling your money in a year is a modest return,
compared with what some Internet stocks have done, but aside from
America Online Inc. and Network Solutions Inc., not many Washington
area issues outperformed Integral Systems last year. Like NVR Inc., the
McLean home builder that was the subject of last week's column, Integral
Systems is a little-known company that has produced big returns for
Washington investors.
Integral is the smallest of the dozen or so regional companies in the satellite
business, which is dominated by giants such as Lockheed Martin Corp. of
Bethesda and Orbital Sciences Corp. of Dulles.
Integral's niche is quite specialized: It makes software used to fly satellites
-- command and control systems, in space industry jargon. The software
sells for $250,000 a program, but many customers buy complete systems
that include computers and communications gear.
By the time Integral's engineers set up the system and train the client's
satellite drivers to use it, each sale runs from $1 million to $2 million,
Chamberlain said in an interview last week.
That is one-tenth what it costs to buy a satellite command and control
system from anyone else, he said. And Integral has one other key
competitive advantage: Its Epoch 2000 system is the space industry
equivalent of a universal remote control.
"Right out of the box it'll fly every satellite in the world," Chamberlain said.
The cost and compatibility advantages are intertwined, he said. The reason
Integral's system is much less expensive is because it is a universal satellite
command and control center. Lockheed Martin, Orbital Sciences and
other satellite-manufacturing companies custom-build their control systems,
a process that can take years. Integral can deliver it in weeks or months.
Integral had built custom systems, but after a decade of doing so,
Chamberlain and his partners decided it would be more efficient to
standardize the product.
"Everybody said we couldn't do it," he said, smiling. "We announced our
first product in 1992 and promptly got no response at all. Everybody said
it was 'vaporware.' We couldn't sell it to anyone."
Even at a fraction of the cost of other systems, Integral had no customers
until the Chinese government, which couldn't afford a custom system,
finally bought one, Chamberlain said. To crack the U.S. market, Integral
invested about $1 million to build a pair of its systems and turned them
over to Loral Skynet for an extended test drive.
Loral now is the company's biggest private customer. Once satellite
operators found that Integral's universal remote control worked, the
business began to grow. In the past three years, sales have taken off:
$11.2 million in 1996, $20 million in 1997, and $28 million in the 1998
fiscal year ended Sept. 30. The backlog of orders grew 60 percent to
$42.6 million by the end of the fiscal year.
About two-thirds of the business is government and one-third commercial.
The company's principal federal client is the National Oceanic and
Atmospheric Administration, which accounted for more than 40 percent of
revenue in the past two years. Low prices helped win contracts from
NOAA, Chamberlain said.
The company has been conspicuously unsuccessful in getting orders from
the Pentagon and the National Aeronautics and Space Administration,
which is just a few miles up the road from Integral's headquarters near
Route 50 and Interstate 95 in Prince George's County.
The Pentagon and NASA remain ripe targets for Integral. When the
company was preparing a secondary stock offering last year, part of the
proceeds were earmarked for a marketing drive aimed at those markets.
Integral pulled its stock offering, which would have raised about $26
million, after the underwriting market dried up last summer. But
Chamberlain said he'd like to resurrect the deal if the market remains
strong. The extra cash would also allow Integral to expand into other
satellite computer and communications systems.
The company's core market is growing steadily -- 1,700 satellites are
expected to be launched in the next decade -- but that growth is undercut
by Integral's innovation, Chamberlain said. Integral's "off-the-shelf"
approach to control systems is bringing down prices so rapidly that
spending for the systems is anticipated to decline even though the number
sold should rise sharply.
Revolutionizing the economics of satellite control systems is a major
accomplishment for a 17-year-old company that was started on a $20,000
shoe string invested by Chamberlain and Robert Sadler, the company's
secretary-treasurer.
Chamberlain, Sadler, Vice President Steven K. Kowal and a fourth
partner, who has since retired, were working for a government contractor
that was about to lose its job because of poor performance. The federal
government wanted the entire satellite systems team to go to work for a
new contractor, but they instead started their own company.
"We were profitable right from the beginning," Chamberlain said. "Of
course, we didn't pay ourselves for several months."
The company, owned by its employees and financed without outside
capital, floated a small public offering in 1988 that was underwritten by
Koonce Securities Inc. in Rockville and Wachtel & Co. in Washington.
The initial public offering raised only $500,000, but it provided a public
market for the stock of employees, who still own about 25 percent of the
company.
The original $20,000 investment has grown into a company with a market
capitalization of more than $80 million. And after two 3-for-1 stock splits,
investors who picked up shares for $5 in the IPO own stock worth $84.
Jerry Knight can be reached at knightj@washpost.com
© Copyright 1999 The Washington Post Company
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