Small Defense Firm Goes on Offensive, Savors the Spoils
Defense contracting may seem like a ride on the gravy train to outsiders, but the executives at Comarco, a small military provider high in Anaheim Hills, say they know better.
To begin with, there are those Pentagon auditors who pore over books looking for waste, fraud and abuse. Furthermore, most defense contracts limit profit margins to a mere 8% before taxes. And, then, winning those contracts, especially with the uncertainties spawned by recent Gramm-Rudman spending cuts, is often one of life’s larger gambles.
For those reasons and others, Comarco executives are trying to wean their 25-year-old company from its historic and almost complete reliance on the Pentagon. So far, analysts agree, the results have been impressive. Several, in fact, cite Comarco as a good example of how a defense company can move to beat the vagaries of military contracting through a limited diversification plan and standout new products.
The most dramatic of Comarco’s moves have all taken place within the last year. In that short span, the company bought three small, struggling but promising firms whose activities complement and expand Comarco’s basic computer software engineering and technical support services.
Emergency Phone System
In addition, Comarco developed the computerized innards of an emergency roadside cellular telephone system currently being marketed by a small Irvine-based company. In the three months that the cellular system has been available, Comarco has already received orders for more than $1 million worth of business.
“There are thousands of companies that can do this business, from tiny to huge,” said Robert Hanisee, a well-known defense industry analyst at Seidler Amdec Securities Inc. in Los Angeles. “But within its own arena, Comarco is among the top.”
Credit for the company’s growth and glowing reputation among defense contractors generally falls to Glenn Buell Jr., a straight-talking former Air Force pilot who has been Comarco’s president and chief executive since 1980.
Analysts say that when Buell assumed the presidency Comarco was a solid but unrecognized bit player in the defense market with little or no distinguishing characteristics. Buell says his job was to give Comarco the standout products--and zip--it sorely lacked. Profits, too, were ordered.
So far, Buell has followed his orders. Today, the company is expected to announce fiscal 1985 profits of $2 million, up 25% from the $1.6 million of 1984. Revenues for the year ended Jan. 31 were $41 million, up nearly 40% from the $29.5 million posted the year before.
And the projections are for even more growth. With its acquisitions, Comarco is expecting revenues of more than $70 million for the current fiscal year, with profits of about $3 million.
Product for Civilians
Contributing to Comarco’s improved bottom line and newfound pizazz are three new software engineering products--two for the Pentagon and its first for the civilian marketplace.
The civilian-oriented product is a computerized system that scans line drawings, such as those made by engineers and architects, and automatically loads them into the memory of a computer. Once in the computer system, the drawings can be modified just as any other drawing made by computer-aided design.
The system, which eliminates the need to redraw old paper drawings on a computer screen, has caught on quickly, both with defense contractors and civilian engineers. In fact, the first customer for VectuScan, as it is named, was the NBC television network, which used the system to help redesign sets for Johnny Carson’s “Tonight Show.”
Comarco will not sell the VectuScan system. Instead, customers contract for the company’s computer program and engineering staff who actually perform the service, a move that analysts say ensures a long-term relationship between Comarco and its customers.
Plots Safest Course
One of the three new software products is a unique computer program that allows military pilots to plot the safest course over enemy radar and gunfire. Called the Computer Aided Mission Planning System--and nicknamed CAMPS--the program contains intelligence data on enemy positions throughout the world. Pilots plot their missions on a video screen hooked to the computerized data and then print out their path on a map, worn on the pilot’s knee and resembling those provided tourists by the Automobile Club.
The company’s other one-of-a-kind product, unveiled in 1984, significantly reduces the amount of time, money and effort needed to prepare the backup material required for the Defense Department’s computer software. Such software “documentation,” as it is called, provides the plain-language ingredients and recipes for complex military computer programs, thereby allowing users an easy guide for future changes. The company figures its potential market is 20% of the $10-billion-a-year military software industry.
Until the three software programs were developed, Comarco’s business was almost entirely devoted to providing engineering and technical support at the U.S. Naval Weapons Center at China Lake in the Mojave Desert, and at other Navy bases throughout the world.
“We wanted to diminish our dependence on those contracts,” said Don Bailey, Comarco’s vice president for corporate development. “You don’t want to have to play ‘bet your company’ whenever the contract comes up for renewal.”
Slim Tax Margin
In addition to feeling too dependent on its narrow customer base, company officials were concerned about the slim 8% pre-tax profit margin allowed under primary contracts, an amount that gives the company about a 5% after-tax income. “Our goal is 6%,” Buell said, “and that’s why we’re going with our software products, where we get more.”
Although analysts say Comarco’s engineering and technical services for the Navy should escape any Gramm-Rudman cutbacks, company executives are not taking any chances. Realizing that the military is increasingly coming under budget scrutiny, company officials are looking to civilian products for a cushion.
With one of its three acquisitions last year, a Washington, D.C., company, Comarco got the parking-lot management franchise at National and Dulles airports in the nation’s capital and contracts for other maintenance services at several national parks. The other acquisitions, though still defense contractors, helped diversify Comarco away from its China Lake activities.
But perhaps the company’s boldest leap into the civilian market comes with the printed circuit boards it is selling to Cellular Communications Corp., the Irvine firm that manufactures emergency roadside cellular telephone systems. Although Cellular Communications’ first customer was in New York, such systems are expected to become very popular in California because of a recent state law giving counties $1 from each vehicle registration for emergency phones.
As a result of the recent acquisitions, and anticipating several more in the future, Buell said that Comarco can be a $300-million-a-year company by 1991, with about 20% of its income, or four times its current rate, coming from civilian sources.
