A Topsy-Turvy Infotech 100

It looks like a spoonful of alphabet soup sitting at the top of the list.

CACI International Inc. and GTSI rank first and third, respectively, in

BusinessWeek’s Info Tech 100, ahead of such powerhouses as Microsoft Corp. and

Dell Computer Co. These little-known companies are making money, lots of it,

prepping America for war.

CACI, in Arlington, runs computer systems for the Pentagon and the Federal

Aviation Administration). In just the past two quarters, it has raked in $1.1

billion in new government contracts. GTSI, in Chantilly, which sells 93% of its

computers and software to the federal government, boosted its net profits 56%,

to $3.1 million, in the third quarter.

And expect the rich to get richer: the $52-billion federal tech budget, which

rose 10% this year, could grow faster next year as the new Homeland Security

Department takes shape. "The US is at war," says GTSI CEO Dendy Young.

"There’s a heightened level of urgency."

Say "Boom!" today, and investors hear the explosions from

heat-seeking missiles. It’s quite a change from the dot-com days. But strip

away government contractors, and the familiar names in the IT 100, from phone

giant Nokia Corp to dot-com auction champ eBay Inc, are settling into patterns

that point to important trends in technology.

Two themes emerge in this midyear check on BusinessWeek’s best-performing

tech companies (see BW, 6/24/02, for the original 2002 IT 100). First, in the

industries most savaged by the downturn–the Internet and telecom–sturdy

champions are emerging from the rubble. From travel site Expedia Inc to Spain’s

Telefónica Móviles, these rising stars have growing clout in their industries,

make real profits, and throw off lots of cash. The other trend, far less

surprising, is that in the current tech slump, industry behemoths rule their

roosts. That’s why Dell, Nokia, IBM, and Microsoft represent safe havens in

today’s storm.

Each June, our survey ranks the world’s best 100 information technology

companies by their revenues, sales growth, profitability, and stock

appreciation. In the fall, we tally share performance during the previous six

months. Following a punishing stock market ride, each of our eight sectors

declined, and the whole list dropped 16.2%.

In this sinking market, Internet companies on the list fared better than the

others, dropping only 4.4%. They’re winning with old-fashioned growth and

profits. Two of the brightest stars are in travel. No. 26 Hotels.com is

projected to boost sales 85% in 2002, to $992 million, and to rack up operating

earnings of $80.6 million, a five-fold increase from last year, says Legg Mason

Wood Walker Inc. analyst Thomas S Underwood. He also expects strong results for

Expedia (No. 53), which is on track to hike its annual revenues by 98% and more

than double profits. And both companies are expanding fast: Hotels.com’s sales

are booming overseas, while Expedia is eyeing the corporate market.

The biggest dot-com star remains eBay. It’s a natural winner in a down

market: hard-pressed users raise cash by selling baseball cards and old

trumpets. And it has become a familiar rite for companies gone belly-up to

unload their PCs and Cisco routers on eBay. Feeding this boom is a growing

online population–and a growing trust in online transactions. EBay’s online

marketplace now numbers 24.2 million active users, up from 13.2 million at the

start of 2001. Gross sales per user have risen 14.6%, to $511. Next year,

analysts expect revenues to rise 55%, to $1.8 billion, with net income climbing

49%, to $330 million.

"Our dream of becoming the commerce engine of the Internet is coming

true," says chief executive officer Margaret C. Whitman.

In Europe, telecom players are on the comeback. The group of 27 on our list

declined a mere 8.4% since April, not bad compared with the 21.1% plunge the

Nasdaq took. The best performers: Europe’s fast-growing, cash-churning

mobile-phone powers, which took 6 of the top 15 spots. Why the surge? Investors

fled the sector two years ago, when telcos plunged into debt to buy the next

generation mobile networks, known as Third Generation (3G). Many of these

companies have worked down their debt, postponed 3G investments–and are raking

in cash.

Among the brightest stars is Britain’s mm02 PLC, spun off from BT Group PLC

last year. In the fiscal year ending Mar. 31, revenues are expected to grow 4%

while spinning out a solid $925 million in operating cash flow, predicts Mark D

James, an analyst at Nomura Securities International Inc in London. But for mm02

and other mobile players, there’s a catch. Earnings will dip as investment in

3G ratchets up. Future growth hinges on growth in mobile data, an unproven

market.

The picture is far clearer for the tech titans on the list. Dell increased

its global market share in PCs from 14.8% to 16% in the third quarter to retake

the lead from Hewlett-Packard Co (No. 35), according to market researcher IDC.

Now, it’s targeting HP’s cushy positions in printers and personal digital

assistants. And smaller-fry tech players? Forget about them, says Barry

Jaruzelski of consultancy Booz Allen Hamilton Inc: "Are you going to risk

key pieces of your infrastructure to a company that may not be around?"

Such are the grim calculations that separate winners from losers in today’s

chilly tech market.

By Andrew Park in Dallas, with Andy Reinhardt in Paris in

BusinessWeek. Copyright 2003 b