Beleaguered GTSI sheds reseller model

GTSI, a bellwether of the government information technology market, has been struggling to find a business model that will allow it to shake recent financial challenges. It is trying to shift from its old role as a reseller and become an IT services provider.

The company has discussed services for several years, but under the new leadership of Jim Leto, who became GTSI’s president and chief executive officer earlier this year, company executives say it is successfully making the transition.

GTSI plans to concentrate on IT solutions and “let others fight it out for the direct sales market and [its] very low margins,” Leto said.

“In most cases, large commodity buys are not part of solving a problem for the government,” he said. Because much of GTSI’s business was already in solutions that combine products and services, “we decided, not only are we in the solutions business, but we’re going to make it the cornerstone of everything that we do.”

The move was not unexpected. Some observers predicated a new direction for the company when Leto succeeded Dendy Young as president and CEO in February. Leto had spent three years as CEO at the consulting firm Robbins-Gioia.

Mark Amtower, founding partner of Amtower and Co., called Young the master of the traditional reseller channel in the government market. But Leto “is better equipped to develop services,” he said.

GTSI’s new business plan calls for migrating from a vendor-led fulfillment business to a customer-focused solutions business by 2007, dropping low-margin commodity products in favor of high-margin differentiated solutions.

Leto said the cornerstones of the business strategy include becoming a systems aggregator that sells solutions and commercial products and winning high-margin deals with flexible financing terms.

Leto said 2005 was an unmitigated disaster that prompted him to take the reins of the 23-year-old government vendor in February.

He blamed the company’s dramatic decline last year on the failure of the earlier strategy and on government procurement changes. In addition, he said, Hewlett-Packard, an important supplier for GTSI, started selling directly to federal agencies, costing GTSI some $70 million in revenue.

At the same time, he said, the former management team decided to seek greater market share and double the size of the company by 2007. The plan called for implementing a market-based pricing model and a pledge not to be undersold by anybody. Management significantly increased the sales force from about 700 in 2004 to 950 in 2005. It also installed an end-to-end, state-of-the-art PeopleSoft enterprise resource planning (ERP) system that proved troublesome.

“All this was happening at the same time — a perfect storm,” Leto said. The confluence of factors led to a backup of 10,000 orders, angry customers and high employee turnover. He said the purchasing department experienced a 165 percent turnover and the company as a whole had a 55 percent turnover.

In addition, GTSI’s bankers decided not to renew its revolving credit.

In June GTSI entered into an agreement with Bank of America and Sun Trust Bank for a $125 million credit line and $10 million in subordinated debt.

The company also hired Joseph Ragan as vice president of finance and corporate controller to take charge of all accounting functions, credit and collections, and other company finances.

“As of last week, we had $145 million credit facility, more than enough to get us through this year, next year and probably years to come,” Leto said. “It speaks volumes of the banks’ confidence in our ability to survive as a company.”

“In the first two months we were here, we took our aged receivables down to the $10 million level, which is an acceptable level,” he said. “As a result of that, we paid down a $58 million [revolving debt] so that at the end of May, we had zero debt on our balance sheet.”

Leto said GTSI has restored its top-rated green status as highly qualified to recompete for its two biggest contracts.

GTSI’s moves seem to please investors and analysts. The NASDAQ-listed stock was trading last week at just under $8 a share, close to its 12-month high of $8.80.

Brian Kinstlinger, an analyst at small-cap equity research firm Sidoti and Co. in New York, welcomed the company’s cost-cutting measures and acknowledged that the reseller model wasn’t going to pull the company out of its financial troubles.

“I would prefer to see the company do half the revenue and twice the profits,” Kinstlinger said.

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