Pete Gaffney, CEO, Integral Systems

By | April 1, 2007 | Satellite News Feed, Telecom

Integral Systems built its business and reputation providing satellite control software for commercial operators. But after becoming the dominant provider in that market, Integral has to move to new areas to continue its growth.

Today, Integral Systems garners most of its revenue from government customers, a transformation sparked by its 2002 win of the U.S. Air Force’s Command and Control System-Consolidated (CCS-C) contract. The multi-million dollar effort will bring control of many the service’s satellites — including the Defense Satellite Communication System (DSCS), Milstar, Advanced Extremely High Frequency (AEHF) and WGS spacecraft — under a single system.

“The original scope was for the DSCS and Milstar birds and Advanced EHF and Wideband Gapfiller were options,” says Pete Gaffney, Integral’s CEO. “I think our system has proven itself to operate just about any satellite type and they really ought to consider it for the standard for all of the space programs.”

Gaffney who has been with Integral since 1986, was named CEO of the company in May 2006. While Integral’s business was strong, he inherited the reins of a company in some disarray following the resignation of former CEO Steve Chamberlain due to felony charges, and Integral also was receiving pressure from shareholders who felt the company was undervalued.

“We have added five new directors, and our shareholders were pushing for more independent, outside directors,” Gaffney says. “The directors we had at the time had been directors for a long period of time, well over 10 years. Three of those new directors were suggested by shareholders, while two were other outside directors. Right now, we have nine directors, seven outside and two inside. So we’re really trying to be responsive to our shareholders.

“They believed the stock price of the company was depressed due to the issues around Steve Chamberlain and those raised by a former director, Bonnie Wachtel, and believed adding more outside directors would improve our corporate governance. They also believed the company was undervalued due to those issues and they wanted to capitalize on the real value of the company by exploring strategic alternatives,” including the potential sale.

In February, Integral reported revenues of $27.4 million and profits of $2.1 million for its fiscal 2007 first quarter. Those numbers were down slightly from a year ago,  but Gaffney attributed the decline to Integral’s work to ongoing bids and proposals for new business that would push Integral to even higher levels.

Gaffney spoke with Via Satellite Editor Jason Bates about Integral’s transformation and the company’s next steps.

VIA SATELLITE: Is Integral Systems still up for sale or are you looking at other alternatives now that you have altered the makeup of the board?

GAFFNEY: We spent a good part of last year exploring those, primarily the sale of the company. We went through a process with our investment bankers, and we ran an auction to sell the company. We had a lot of interested buyers, but during that time the stock price went up about 50 percent on the speculation of a sale. That run up reduced the number of potential buyers. We ended up with three strong candidates, and then just for various reasons they all dropped out by the end of October. So we regrouped with our banker and decided to look at other strategic alternatives besides the sale of the company — alternatives such as a merger of equals, reverse mergers. Our largest shareholder suggested a very large stock buyback programs, so we are considering all those things, including the sale of the company.

During that entire period our revenue and earnings kept climbing, even though it was a bit of distraction. We set every financial record last year — revenues, operating income, earnings per share. We knocked all the records out of the park. I think that’s a real testament to the loyalty of the employees and the job they are doing. It’s unsettling to be going through that process of selling yourself, but for everybody to stay focus and really work is a good testament to the employees.

VIA SATELLITE: Are all of these issues in the past?

GAFFNEY: I believe they are. I believe we have addressed just about all of the shareholder concerns.

VIA SATELLITE: Why are you still looking at strategic alternatives ?

GAFFNEY: Our shareholders continue to believe that the stock is undervalued and we started on that process, so I think we ought to continue to find what is the best course of action for the company and our shareholders.

VIA SATELLITE: Which is the best alternative for Integral Systems?

GAFFNEY: I think the best way to go would be a scenario where the company continues to do business the way it has been doing business, whether that is part of a larger company or as a standalone or where we make acquisitions, which is a possible scenario. I think that would be the best thing for the company and the shareholders because we have a real viable business plan and a way of doing business that is unique in our space in the industry, and it’s very valuable and has been proven to be successful. I think it would be good for the industry for our way of doing business not to be diluted by an acquirer. I think that is where the most value would come from for our shareholders

VIA SATELLITE: What type of acquisitions would Integral Systems look at?

GAFFNEY: We did four acquisitions over a six-year period, and it really was to expand our offerings in the ground systems segment. They were strategic offerings that allowed us to go after larger programs and provide end-to-end capabilities for those programs. I think the RAIDRS (Rapid Attack Identification Detection and Reporting System program) was where it all came together and all of those capabilities were brought to bear. I believe there are other strategic acquisitions that we could do as well that will help us move into other areas of the market that we would like to get into and also to pursue larger government programs.

VIA SATELLITE: What type of impact has the CCS-C contract had on Integral Systems?

GAFFNEY: It certainly transformed our business. We were mostly commercial at the time, and now we are mostly government, with a little over half of our business with the Air Force. So it really was a big transition for us.
I think it also demonstrated the credibility of our commercial solutions to the government market, and I think it’s opening up doors for us and allowing us to bid larger command and control programs within the Air Force.

VIA SATELLITE: Are commercial-off-the-shelf (COTS) solutions more accepted by the government now?

GAFFNEY: I think there has been a lot of progress made in that area. The area where not so much progress has been made is reducing the amount of programmatics on the programs. There is still a lot of design reviews and software development oversight for what are mostly integration jobs. The amount of programmatics far exceeds what we see on a commercial program. We still see a lot of development of very specific requirements rather than adjusting the operational ways to match what the industry has to offer already.

VIA SATELLITE: Are there any limitations to what CCS-C can do?

GAFFNEY: Back in the early 90s, a set of requirements were developed for the standardized satellite operations centers, and CCS-C was designed and built to meet those standards. So really they have the standardized systems they envisioned in the early 90s, so I don’t see any reason why they couldn’t put all the future satellites on it. They have separate procurement coming up for the GPS satellites. The command and control part could just as well go on a clone of the CCS-C system, as could the transformational satellite and space-based surveillance.

VIA SATELLITE: Are you bidding for the command and control segment of GPS 3?

GAFFNEY: We’re on Northrop Grumman GPS team. We would have liked to prime, but believe for a company of our size and a program as high profile as GPS it  might have been difficult for somebody to select us. We certainly believe we have the capability.

VIA SATELLITE: Is there any difference between providing your services for commercial and government customers?

GAFFNEY: The government has longer schedules than the commercial guys, but I think they have the same amount of urgency. We see them trying very hard to meet their Gapfiller schedule, and usually the delays are on the satellite side.

VIA SATELLITE: Have you reached saturation on the commercial side of your business?

GAFFNEY: The growth potential is not as great. In about 2000, we had hit about 50 percent to 60 percent of market share worldwide, and we’re still at that point. We still see good business, but there is not a lot of growth. The growth is definitely on the government side. Moving into the Air Force market with CCS-C worked our well for us, as the commercial market hit a downturn in 2001. In 2002, that’s when we won CCS-C. So while a lot of other companies in our space were suffering the effects of the commercial downturn, we were growing like crazy due to our Air Force business.

Our feeling is that we started out in commercial and saturated that market. Then we moved into the Air Force market and we’ve done quite well there and there is more growth there. The next area we’re moving into is the classified market. We believe everything we’ve done in the commercial and Air Force markets we can do in the classified markets, and that is where a lot of our growth will come from in the future. We won our first classified command and control systems in October and certainly our credibility in the Air Force market helped us.

VIA SATELLITE: Do you see growth left in the commercial side?

GAFFNEY: We do see some growth, coming from there. Mainly it is on our signal monitoring and equipment and network monitoring and control businesses. We see a couple areas where a lot of the network providers when they build out their satellite network systems, there is an increasing requirement for automated monitoring and control of those systems for quality of service for both the ground equipment and the satellite signals themselves. Our Newpoint subsidiary and our SAT subsidiary provide products that address these markets.

There may also be work for the commercial satellites used by the military, which uses commercial satellites to carry 80 percent of its traffic. Military satellites have interference detection systems, but there are few comparable systems on the commercial side for interference detection that include geolocation. We think there are going to be requirements coming from the government for commercial satellites carrying military traffic that they have better interference detection and geolocation, so we think there will be quite a bit of growth in those areas.

VIA SATELLITE: Any chance of capturing more civil space work?

GAFFNEY: We’re doing the GOES N through P ground systems under a subcontract with Boeing and have been working on that for a number of years. We have a fairly lengthy history of doing business with NOAA, but we’re not doing so much NOAA business any more. The next big contract was NPOESS, and we were not on the winning the team for that program.
We’ve never really had much luck getting into NASA as a prime contractor. Where we’ve been successful with NASA is through teaming with John Hopkins University’s Applied Physics Lab. When they go after a NASA programs they want to find the best, most cost-effective way of doing it. They’re in a competitive environment bidding for that program, so they’ve standardized all of their ground systems for their science missions on our systems.
We are going after the next Landsat program as a prime.

VIA SATELLITE: Will there be any impact on your business due to the ongoing consolidation of the Fixed Satellite Services operators?

GAFFNEY: There are both challenges and opportunities. The opportunity comes from the budget squeezes, where these companies are looking to improve their balance sheets and cut costs. We believe our system has one of the lowest sustainment costs going forward, and the acquisition costs also are very low when compared to an in-house development. On the Intelsat-PanAmSat merger, for example, we have a number of systems. I think we are operating 11 PanAmSat satellites, but Intelsat does not use our system. They’ve always developed their own systems in-house, and we believe there is an opportunity there to demonstrate the cost effectiveness of our systems to Intelsat, so that our system becomes the standard within Intelsat.

VIA SATELLITE: At what point does Integral become one of the big guys and smaller companies look at you as the entrenched companies?

GAFFNEY: I don’t think people see us as entrenched because our CCS-C system has been so successful. We’ve met all of our schedule and budget requirements on the program. Where that entrenchment comes from or the feeling comes that you need to unseat people that are entrenched is when they are not performing and yet they still continue to get work, and that’s not the case with us.

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