Military Buildup Gives Many Tech Companies a New Lease on Life
When the telecommunications boom got underway in the late 1990s, Sierra Monolithics Inc. shifted some resources away from its aerospace business to concentrate on designing chips for commercial fiber-optic lines.
Now executives at the Redondo Beach firm are thankful they didn’t give up on defense entirely.
“The optical networking work took a downward spin,” said Chief Executive Charles Harper. “Fortunately, we were running a parallel business line in the aerospace side -- and that aerospace side took off again.”
Sierra’s chips are receiving and transmitting video from the military’s unmanned Predator spy planes over Iraq. The privately owned company also made the radio beacons being carried by U.S. special forces so that they can be recognized by coalition planes and escape friendly fire.
Scores of businesses like Sierra are benefiting from the war dividend: Military spending has grown from $261 billion in fiscal 1999 to $361 billion in fiscal 2003, according to Defense Department figures.
For generations, technology developed by or for the military has been adapted for widespread civilian use. The helicopter, the Internet and the Global Positioning System satellite network all spawned mass commercial applications.
Now -- with the telecom and dot-com industries staggering and much of the rest of the economy just getting by -- the military seems to be returning the favor.
U.S. defense and security officials are rapidly buying up commercial technology and modifying it to suit their needs.
“Companies all over the country are reorienting their marketing people to look at the federal government -- even small and mid-sized companies that never did business with the government before,” said John Palafoutas, senior vice president of the American Electronics Assn.
“The government is the only customer with money.”
Many of the firms best able to capitalize on the military’s largess are those, like Sierra, that already had their foot in the Defense Department’s door.
In addition to the Sierra gear now with military forces, CEO Harper has high hopes for an ongoing military effort to replace heavy coaxial cable in planes with glassy fiber, an overhaul that will require optical chips.
“The amount of coaxial cable weighs more than all the electronics on an airplane -- and you can imagine how much electronics are on an airplane,” he said.
Last year, 81% of Sierra’s $6.2 million in revenue was from the military. This year, Harper expects it to reach 86% of $14 million.
Sierra was profitable for years before it changed strategy during the telecom bubble and then slipped into the red.
Now that it’s refocused on defense, “we will be at cash-flow break-even this quarter,” Harper said.
A recent shift in the Defense Department’s procurement philosophy has made it far easier to sell to the military, said Stephen Forte, chief executive of Ascendent Telecommunications Inc. The Pentagon is demanding fewer extensive product redesigns, instead settling for the best already available.
“The Defense Department’s willingness to bring in commercial technology off the shelf to solve their problems -- that’s the biggest change,” Forte said.
Like Sierra, Encino-based Ascendent could easily have perished in the telecom meltdown.
The 4-year-old firm makes phone systems that act as backups for office communications. The gear allows an outside cellular phone to function as an internal desk phone would, with access to company networks.
Ascendent’s systems were originally designed to make life easier for workers toiling away from their offices. But they also are helpful for planners gearing up to recover from terrorist attacks or other emergencies.
In order to preserve the chain of command in a disaster, some government agencies require certain workers to stay away from their regular offices during periods of heightened security. That’s helped sales of telecommuting aids such as Ascendent’s.
And the Defense Department is buying Ascendent systems for the Pentagon that can track down workers in the event of an emergency. The systems send out mass notifications with voice or short text messages and can receive responses.
In the last three months, Ascendent’s sales were five times greater than its sales for all of last year -- and virtually all of the business has been related to defense or security, Forte said.
Even if there had been no terrorist attacks on Sept. 11, and no subsequent military buildup, privately held Ascendent probably would have recorded its first profit this year. Now that profit will be much greater, Forte said.
Even some companies created specifically to escape the defense business are returning to where the money is.
El Segundo’s Telasic Communications Inc., which makes wireless communications chips, was spun off from Raytheon Co. in 2001 to commercialize some of the military contractor’s work. But while Telasic’s 75 employees are still developing their first commercial products, military contracts coming in from Raytheon have pumped in $4 million to $5 million in annual revenue, said CEO Tony Giraudo.
Among traditional hardware companies, defense spending has taken on new importance because of the lack of business elsewhere.
Silicon Valley workstation and supercomputer maker Silicon Graphics Inc. has always straddled the military and civilian worlds. Twenty years ago, its first customer was NASA, but its second was Walt Disney Co.
The government and the entertainment industry both prized the key strengths of SGI machines: power and the enhanced visualization made possible by the system’s architecture. Computers made by the Mountain View, Calif., firm are now helping the Navy provide detailed weather information to troops in battle in Iraq.
They also are capable of graphically depicting every missile in a field of conflict, though SGI says it can’t discuss how this is being used overseas at the moment.
Defense revenue, which accounted for about 23% of SGI sales two years ago, is up to 35% this year.
That includes a $26-million Defense Department computing contract awarded last month for machines that will support airborne weapons systems and aid Army engineers in testing and development, among other tasks.
The military also is an increasingly important customer for many software companies.
Some software specialties are of particular interest to the government now, including programs that can sort through and analyze vast amounts of data quickly.
Inxight Software Inc. of Sunnyvale, Calif., makes a powerful search engine that can scour multiple file formats and spit out material grouped by topic, or extract just names or phone numbers.
The 1997 spinoff from Xerox Corp.’s Palo Alto Research Center started pitching to the government more than two years ago. Federal contracts grew to provide about $3 million of the private company’s $12 million in revenue last year.
Inxight has adapted its research and development agenda to meet the needs of its government customers, recently adding Arabic and Farsi capability to its tools.
The government deals are expected to double in the near term, said spokeswoman Andrea Cousens. “It ended up growing a lot faster than we had planned.”
Even when the military’s appetite inevitably wanes, Sierra, Telasic and other firms say they will continue to reap benefits from the current spending spree.
The new military contracts make it easier for the companies to strike commercial deals, because potential customers see the defense purchases as validation of the products and a sign of stability, Sierra’s Harper said.
And he said the military-inspired product improvements will translate into better business systems. By 2005, Harper thinks re-commercialization will allow Sierra to sell as much in the private sector as it does to the government.
