Virginia’s Tech Firms Weathering the Slump

Like Silicon Valley and many other high-tech centers across the country, northern Virginia--home to America Online Inc., MicroStrategy Inc., Nextel Communications Inc. and 3,000 other tech firms--is undergoing a shakeout.

But while Silicon Valley is taking a beating, northern Virginia so far has escaped the worst.

When the nationwide high-tech slump knocked Veronica Berry out of her job as an administrative assistant with local wireless telecommunications provider Teligent Inc. in February, she didn’t panic. In fact, she took three weeks off to relax.

“I was like, ‘Go ahead and give me my severance pay and push me out,’ ” Berry said. “I was pretty optimistic about finding a new job.”

Sure enough, Berry quickly landed a similar job a block away at Advanced Switching Communications Inc., a marketer of broadband communications systems.

The broadly defined high-tech sector, including big communications satellite operators such as Hughes Electronics Corp. and Intelsat, employed roughly 550,000 people in the Washington area late last year. That’s about 60% more than the number working in the same region for the federal government, according to a recent study by accounting firm PricewaterhouseCoopers, law firm Hale & Dorr and a coalition of local governments.

“Virginia still has an extraordinarily healthy economy,” said Gerry Simone, who got several job offers from Virginia high-tech firms after being laid off in New York by start-up IVillage. She recently joined Net2000 Communications Services as communications director.

The state’s high-tech corridor, which is clustered around Dulles International Airport and the Tysons Corner shopping center, owes much of its relative success to its proximity to Washington--and the estimated $13.5 billion the federal government spends annually on technology here. By comparison, the government spends less than $3 billion in Silicon Valley, according to the PricewaterhouseCoopers study.

Cell phone provider Nextel, for instance, has sold 125,000 wireless phones to the federal government in recent years. And the government’s clamor for computer networking and security services is so great that Veridian Inc. is planning to hire 1,000 more technicians in northern Virginia over the next year to meet the demand.

But it’s not only outside forces that are making a difference. The companies that sprang up here made a safer bet on the future than their Silicon Valley dot-com cousins, which concentrated on offering free Internet content or services in hopes of luring advertisers to pay the freight.

The advertising strategy was often a loser. San Francisco-based Internet media company Salon.com, whose critically acclaimed Web sites attracted 50 million visitors in January, has never turned a profit since going public in 1999.

Firms here, by contrast, went after the huge and growing pool of customers willing to pay hard cash for Internet hardware, telephone service, high-speed Internet access and other “must-have” communications technologies.

For AOL, that strategy generated $1.8 billion in profit last year from its 27 million Internet access subscribers and assorted marketing deals. UUNet followed a similar strategy: Its parent, WorldCom Inc., last week reported that UUNet helped power a 22% gain in sales of data and Net services, which helped offset a 13% decline in WorldCom’s long-distance phone operations.

Companies that manage corporate and government computer networks, such as CACI International Inc., are doing brisk business. CACI, which has 1,600 employees in northern Virginia, reported revenue of $148 million in the quarter ended March 31, a 21% increase from the same period last year.

But some northern Virginia tech companies acted as though growth would be endless. When the go-go days stopped, they were left bleeding red ink.

About 300 of the 2,500 workers laid off by AOL in the last year worked in Virginia. Similarly, software developer MicroStrategy--whose stock has fallen as much as 98% from its high of $333 last year--has eliminated about 850 jobs, roughly half of them in northern Virginia.

The damage has been particularly acute among broadband wireless firms, such as Teligent and New York-based Winstar Communications Inc., which have big administrative and network operations facilities in northern Virginia. After spending hundreds of millions of dollars on complex high-speed wireless networks that have proved unprofitable, the companies are on the ropes.

Teligent is desperately seeking financing. And Winstar laid off 2,000 people in April--about half of its work force--and filed for bankruptcy April 18.

“The openness to write checks--whether for philanthropic purposes or to fund a new high-tech company--has changed,” said Mario Morino, a prominent philanthropist and former venture capitalist who is often called the father of Virginia’s high-tech community. “You can see a wall coming down.”

Symbolizing the recent brashness of the high-tech industry, a software firm called OneSoft Corp. signaled its arrival last spring when it ponied up about $50,000 to sponsor the annual Virginia Gold Cup, a steeplechase race that draws Virginia’s business elite. Within a year, however, OneSoft had fired more than 150 workers--about half of its work force--and sought financial refuge by being acquired by a rival software firm.

The local high-tech start-ups “wanted to be taken seriously and be seen as heavy hitters,” said Stephanie Sand, the Gold Cup’s marketing director. “But this year they’ve cut way back.”

But not all the way. The parking lot at high-tech watering hole ECiti Cafe & Bar near Tysons Corner was choked with Mercedes, Porsches and Ferraris one recent Friday. Inside, customers still ordered sushi and $27 racks of lamb. “Our after-work and restaurant business is still pretty strong,” said Vito A. Zappala, ECiti’s general manager. “We had a senior AOL executive in here last night having a very good time.”

Some patrons still strike business deals at ECiti even as others commiserate about the latest job layoffs.

Jeff Barrows, a regular at the cafe who is senior vice president at Aleron Inc., an Internet service provider, said his company secured $60 million in venture capital financing this month. The company sealed the deal even as rival PSI Net Inc. announced that it was paring its payroll by selling off units in an effort to stave off bankruptcy.

Similarly, Verisign Inc., a San Francisco-based Internet authentication and payment services firm, says it plans to add 400 to 500 employees at its northern Virginia facilities this year. Verisign’s Virginia-based subsidiary, Network Solutions, continues to do strong business registering Web addresses, executives say.

Virginia’s shifting economic fortunes so far have not alarmed government policy makers, who say they remain optimistic about high-tech growth in the state.

Said Donald W. Upson, Virginia’s secretary of technology: “Is there a slowdown in the high-tech economy? Yes. We projected a 5.5% growth rate [for the first quarter], and it’s actually coming in just under 4%. But that’s still growth. And it’s robust growth.”

California does not keep comparable statistics. But Ted Gibson, the state’s chief economist, said that although high-tech employment is still growing, “we are concerned going forward” because of the sizable layoffs recently announced by companies with big operations in the state, such as Cisco Systems Inc., 3Com Corp. and Northpoint Communications Group Inc.

Though Virginia has mostly been spared massive layoffs, the region is beginning to feel high tech’s woes. After clearing several thousand square feet of land in December for a high-tech office complex in the town of Dulles, Peterson Cos., the developer, mothballed the 566,000-square-foot project, citing the slowing demand for office space. Earlier this year, WorldCom abandoned plans to expand its Dulles campus by 600,000 square feet.

Northern Virginia’s office vacancy rate of 6.3% in the first quarter is up from 4.7% in the third quarter of last year but remains relatively healthy compared with double-digit vacancy rates in the early 1990s and 6.6% as recently as the end of 1999.

Although half of the 10.5 million square feet of new office space being readied for northern Virginia is already leased, Keith Lavey, research manager for the Washington office of Grubb & Ellis, foresees difficulty ahead if tenants back out of their commitments or “if three or four big tech companies go belly up.”

“Developers are nervous,” Lavey said. “The market is softening, and they are worried about existing tenants backing out of their current leases.”

The softening office market, in turn, has sparked brisk business in the sale of used office furniture of failed high-tech companies.

“This industry emerged overnight, and all of the office furniture that they acquired was brand-new stuff bought for cash with a bunch of venture capital,” said Christopher Rasmus, president of R.L. Rasmus Auctioneers.

Such local high-tech concerns as MicroStrategy and the Electronic Messaging Assn. have called on Rasmus to sell computers, file cabinets, chairs, desks and even artwork.

The cutbacks also have affected politics. Virginia gubernatorial candidate Mark R. Warner, a Democrat, said several high-tech executives who pledged money to his campaign have backed out because of the hard times.

Among the anxious executives is Aaron L. Quinn, a soft-spoken network operations director at Eyecast Communications Inc., which distributes video content over the Internet. His company has gone through three rounds of layoffs in six months, which have left the company with a skeleton staff of 20--a fraction of the 140 workers it employed last summer.

“I’ve had to lay people off that I hired just a few months ago,” Quinn said. “It’s been a big wake-up call because now investors are saying, ‘Profits matter.’ We’re just going to have to cut to the bone and go into stealth mode and pull our company back together.”

Companies that were once fast-growing have scaled back their lavish perks. WebMethods Inc., a software company, recently retooled its stock option program to make it more appealing to employees and less costly for the company.

Similarly, telecommunications firm Net2000 eliminated an incentive program that rewarded its best employees--including secretaries--with a three-year lease on a new car after two years of service. “We started tightening our belts last summer,” said Don Clarke, Net2000’s chief financial officer. “We’ve slowed down some . . . laid off 10% of staff, or about 90 people, this year.”

Few fear that the tech industry--which had virtually no presence here a decade ago--will disappear. The industry has become such a dominant part of the Washington region that many residents regard it as a mature service industry comparable to food service or health care.

Though an out-of-work actor in Hollywood might wait tables to pay the rent between jobs, here, 37-year-old ECiti bartender Russell Shrieves makes ends meet by selling high-tech communications equipment during his off hours.

“When you bar-tend, you meet a lot of people in the high-tech business,” Shrieves said. “There’s a lot of opportunity there. Some of these companies are still doing a lot of business.”

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Virginia’s Tech Corridor

Northern Virginia is home to more than 3,000 tech companies. Most are clustered just outside Washington, D.C., near Dulles International Airport. Here is a list of some of the region’s biggest:

Compiled by SUNNY KAPLAN/Los Angeles Times