Tech Sector Shows a Pulse
Executives of Battered Businesses Are Cautiously Confident of Better Days Ahead
By Ellen McCarthy
Washington Post Staff Writer
Monday, March 15, 2004; Page E01
Robert W. Lewis believes the worst is over. These days Lewis, president of Ashburn-based Enterworks Inc., isn't asking employees to hang in there while people in neighboring cubicles are being laid off. Dozens of new customers have signed on in recent months. The business software company has stopped losing money and is even trying to add a few developers to its 100-person staff.
"I think everyone is becoming a lot more confident that it's coming back," Lewis said. "We have definitely seen how bad it can get. We're coming out of it, but we're still looking over our shoulder." It's a sentiment echoed by many tech executives and economists in Washington.
When the new economy stormed into the Washington area in the 1990s, it transformed the tech sector, which for decades was made up of staid government contractors. Northern Virginia, in particular, sprouted an assortment of start-up firms with new technology, grandiose visions and outsize salaries.
When the tech sector crashed, some companies went out of business. Others struggled to find a new strategy. Many, such as Convera Corp., shifted their focus to the federal government, especially when post-9/11 defense and homeland security money poured into the region. Vienna-based Convera's revenue sources were 20 percent government before the downturn. Now, they are 77 percent government. The software company added 21 employees in the past six months and plans to hire seven more.
Many companies grew just by relying more heavily on government money, said Edward H. Bersoff, a former government contracting executive and investment banker. But, he said, a robust Washington tech sector ideally would have both. The non-government technology work is often "more fun, more profitable and more exciting," said Bersoff, who is now chairman of Greenwich Associates LLC, a business advisory firm in McLean.
The new-economy companies, even those that crashed, often brought new ideas and new talent to the region, and energized the slower-moving government-contracting culture, tech executives said.
Thus as signs of an economic recovery appear, the question is whether the non-government tech sector, which created thousands of high-paying tech jobs -- millionaires such as Steve Case, Michael J. Saylor, James V. Kimsey, Jeong Kim and Raul Fernandez -- will again become a vibrant part of the Washington economy.
"It's definitely picking up, but we're picking up from a low market that we don't ever want to go through again," said Gary P. Mann, chief executive of Formtek Inc., a District company that sells content-management software to manufacturing, aerospace and government customers. "It's got a long ways to go."
"I think the general business tone is positive," said Fernandez, founder of the Web design company Proxicom Inc., which he sold in 2001. He is now chief executive of ObjectVideo, a Reston company that sells video surveillance software to the government. "It's a steady level of momentum, certainly not explosive."
At Enterworks, there are signs of a revival, although modest. The company was started in 1996 as a unit of Telos Corp., which sold computer networking products and services to government agencies. In 1999, with the commercial tech sector becoming increasingly hot, Enterworks raised $25 million in its first round of venture capital funding and was spun off.
Originally Enterworks sold software to help large clients, such as Boeing Co., share information across business divisions and with other companies. At its peak, the company had 225 employees. In March 2000, Enterworks filed for an initial public offering that might have raised as much as $70 million.
"The idea was to get as big as you could," Lewis said. "It was a lot of feel-good stuff that was going on in those days."
But the bubble burst soon after the company filed to go public and by the end of the 2000, Enterworks withdrew its application. The company quickly spent its $40 million in venture capital, and Lewis said the possibility that Enterworks might not make it ran through his head "every day." So Enterworks searched for a new strategy.
In 2001, it developed software to help automate the paper work that flows between retailers and product suppliers. Competition for customers in this market -- small manufacturers and apparel makers trying to sell goods to large chain retailers -- was much less intense, Lewis said.
It also sent more than half its jobs overseas, an effort to cut costs, Lewis said. Today 60 of the company's 100 employees are answering calls and writing code in the Philippines.
Lewis said Enterworks expects to be profitable this year. In the last quarter of 2003, Enterworks got royalty fees, worth more than $1 million, from the sale of about 50 new licenses, compared with "four or five" in the same period the previous year. A ten percent pay cut that was implemented two years ago was restored in January and the company is now trying to add half a dozen new employees to its consulting and product development units. If things go well, they may even hire a few new sales staffers in the second half of this year.
"With the scars on our back over the last few years, I don't think I'll ever feel like things can't go bad for you, but we definitely feel like we have come through . . . and are on the rise back up again," Lewis said.
Business is also improving, again only modestly, at Vastera Inc., a Dulles-based company that sells software and services to manage the logistics of international trade. The company handles regulatory and supply chain information for customers that include Ford Motor Co., Lucent Technologies Inc. and Dell Inc.
Last year, Vastera's revenue rose about 12 percent. The company is adding 30 employees to its staff of 600, mostly on the services side of its business, which now brings in about 80 percent of company revenue. Even so, Timothy A. Davenport, the company's chief executive, is cautious.
Davenport said revenue growth has come from existing customers. As those customers sell more products abroad, the number of transactions that Vastera handles increases, boosting its revenue. Those customers have predicted that they will complete about 25 percent more transactions this year, he said.
The company, however, is struggling to sign up new clients. Potential customers are cautious about making new deals, requiring lengthy negotiations. "It remains to be seen if that means new customers will speed up their decisions. We're certainly hopeful," Davenport said.
There were 6,743 tech firms in Northern Virginia in June 2003. That was up from 5,884 at the end of 1999, according to data from Richmond-based Chmura Economics & Analytics and the Virginia Employment Commission. The 2003 figure reflects the growth in small consulting firms started by out-of-work techies, said Christine Chmura, president of the economic consulting firm.
Government contractors have done relatively well lately. Some have flourished. CACI International Inc., for example, is trying to add 400 employees to its 7,500-person staff. ManTech International Corp. expects to hire as many as 1,000 people this year. Because of government business, McLean-based BearingPoint Inc., a technology consulting and integration company, increased its workforce by about 6,000 employees since May 2002. Its fourth-quarter revenue from government customers was $20 million more than in fourth quarter of 2002, according to the company's preliminary results.
Results from BearingPoint's commercial sector, however, were mixed. Revenue from financial services customers rose in the fourth quarter from the fourth quarter of 2002, but sales of services to clients in the communications and technology industries fell.
Randolph C. Blazer, BearingPoint's chief executive, said retail and some transportation companies are spending more but airlines are not. Of communications and media companies, he said: "I don't think anybody expects to see that move up for some time yet." Spending by manufacturing customers was been relatively steady through the boom and bust, he said.
The Washington area, with its proximity to the Federal Communications Commission and large telecommunications companies, like MCI Communications Corp., Nextel Communications Inc. and Intelsat Ltd, gave rise to a number of telecom companies, including XO Communications Inc. of Reston, Ciena Corp. of Linthicum, Corvis Corp. of Columbia, Aether Systems Inc. of Owings Mills and Acterna Corp. of Germantown. Most of them stumbled when the telecom sector collapsed. For example, Acterna, which makes testing equipment for companies that build and operate communications networks, did a lot of business. as companies raced to build networks. Revenue soared to about $1.29 billion in 2002. Then two years later, with an oversupply of networks causing customers to cut spending, the company's sales plummeted to $680.3 million. In May 2002, it filed for bankruptcy protection. When it emerged in October, it was smaller and no longer a publicly traded company. Today it has 1,700 employees, compared with 4,800 at its peak in late 2001.
Analysts say the telecom-network sector is still weak, and locally the number of employed telecom professionals is still down 17 percent from 2000.
John R. Peeler, Acterna's chief executive, does not predict huge growth, but he said the worst seems to be over. "Things stopped declining in our market sometime in early fall," he said. "Customers are cautiously increasing their spending," but doing it based on current demand, not projected growth, he said.
New orders for Acterna's products were 20 percent higher in December and January than in the same months of the previous year, Peeler said. He said he expects growth to be "in the mid to upper single digits" this year over 2003.
Acterna resumed its college recruiting program this year after a two-year suspension and is trying to hire about 60 people. "It's certainly not like it was three or four years ago during the boom, but [business] is back to moderate growth," Peeler said.
The number of Washington area residents working in technology dropped by only 6 percent from December 2000 to December 2003, according to the Labor Department, mostly because government contractors continued to hire as dot-com laid off workers.
Internet services jobs declined by 32 percent in the region. Some of the laid-off workers stayed here and started consulting and other businesses, according to economists, and they could help the region's tech revival.
"We have about 700,000 people who don't work for established companies. That shows an entrepreneurial flavor that we didn't used to have." said Stephen F. Fuller, a George Mason University professor who studies the region's economy. "The question is how much non-government stuff will evolve here? I think the answer is we will continue to get more, but it will be a slow evolution."
© 2004 The Washington Post Company |
