The Fastest-Growing Technology Companies Recovery is here--at last--but the economy alone can't explain the success of these hard chargers. Instead, look to great ideas, tight execution, and, sometimes, a little luck.
(Business 2.0) – For Comtech Telecommunications, the race to the future was sealed on a late September day at Fort Hood, Texas, in 1999. At stake was a $418 million contract to build communications gear known as a mobile tracking system (MTS). On paper, Comtech, which claimed all of 250 employees and $38 million in revenue at the time, had already won the job, beating out behemoth defense contractors like GTE, Litton, and Northrop Grumman, collectively representing about 200,000 employees and $40 billion in sales. Now all it had to do was prove the thing worked. Comtech equipped a Humvee in Texas with an MTS transceiver. The challenge: to locate another MTS-equipped Humvee halfway across the world, in Germany, and send it a message by bouncing signals off two satellites.
As it turned out, it did work--in just under 10 seconds--and so the little Melville, N.Y., outfit was the military's sole MTS supplier when U.S. armor rolled into Iraq in March 2003. Suddenly, Comtech's biggest, richest customer had a drastically more urgent need to track and communicate with many vehicles spread over vast distances. "We are the standard," says CEO Fred Kornberg, a former engineer who started at Comtech back in 1971. "There is no other supplier." Revenue from the mobile datacommunications segment, for which MTS is the largest product, jumped from $2.2 million in 2000 to $48 million in the most recent fiscal year. That segment alone accounts for more than a quarter of Comtech's $174 million in revenue. With the onset of wartime spending, says Seth Tutlis, who follows the company for investment bankers Sidoti & Co., "Comtech hit the jackpot."
Comtech is hardly the only tech company to strike it rich last year. The little military electronics contractor ranked No. 1 in Business 2.0's 2004 ranking of the 100 fastest growing technology companies, but there was plenty of room left over for companies agile, inventive, or opportunistic enough to benefit from the rebounding tech economy. The war, feeding a desperate appetite for defense technology, helped put nine companies besides Comtech on our list, including No. 6 Ceradyne, which makes body armor plates strong enough to stop a .50-caliber bullet. Meanwhile, the widening commercial payoff from biotech research lifted nine companies from that industry (and another six lab suppliers) onto the list, including No. 2 Genentech, whose Avastin is the first drug to successfully fight cancer by cutting off blood flow to tumors. And corporate America's drive to raise productivity continued to boost a wide range of companies, including No. 8 Websense, a maker of software that lets employers track employees' online activity, and No. 9 Cognizant Technology Solutions, which takes on other companies' tech projects and outsources them to Asia.
To earn a place among the elite crowd of the B2 100, a company had to excel on a number of rigorous financial measures. With the help of Zacks Investment Research, we started with a universe of 2,000 publicly traded tech companies and ranked them all by an algorithm that weighs stock performance over the last 12 months and growth in revenue, profits, and operating cash flow for the past three years. Our system emphasizes the last of these yardsticks, not only because cash flow is much more difficult to fake with accounting tricks, but also because the ability to generate cash is ultimately the key to any company's prosperity. And when we say the B2 100 excelled, we mean it: The average company on our list saw earnings grow 44.6 percent, revenue climb 18.2 percent, and cash flow increase 79.6 percent annually since 2001.
As did the previous lists, this year's B2 100 provides a kind of snapshot of what's working across the tech economy. For example, 25 of our companies are in business services, 21 in electronics, 20 in software, and eight in telecommunications. While California, not surprisingly, is home to the greatest number of companies--33--states east of the Mississippi claim 44. Five companies make their headquarters overseas.
Changes in the list from previous years underscore the cyclical nature of technology. More than half of our companies--including five of the top 10--weren't on the list in 2003. No. 1 from last year, UTStarcom, a maker of cell-phone systems for China and other developing economies, dropped to No. 34 because competition eroded its margins. The top company of 2002, computer peripheral maker Logitech, fell last year to No. 30. Then, in 2003, it introduced the EyeToy, a wildly popular webcam for the Sony PlayStation 2 that captures a gamer's physical movements and reproduces them in onscreen actions. The company rebounded to No. 22. Innovation will always take you a long way in this competition.
How about this year's No. 1? Comtech is expected to nab new communications system contracts with the Department of Defense and several multinationals that could easily add $100 million to sales during the next few years. It also has some $152 million in the bank that could fund growth through acquisitions. Even so, its sales are highly cyclical--relying as they do on Pentagon politics and the vagaries of war--so its return to the pole position next year is far from guaranteed.
That's not to say there is no such thing as staying power in the rarefied ranks of technology's fastest growers. This year's No. 4, eBay, and No. 5, Electronic Arts, both placed in single digits last year as well. In fact, this is eBay's third appearance in the top five--a tribute to the power of its brand and to its leadership's ability to create new markets as it goes. During the last two years, for instance, the company added $644 million in overseas revenue. EA's repeat appearance likewise speaks to the appeal of brands--in its case, in the field of videogames. That applies not just to the company's own franchises, like the top-selling Madden NFL, but also to brands that EA has adopted--recently it's been producing profits that are hardly hobbit-size with its series of Lord of the Rings games.
The unflagging demand for games landed one of EA's distribution partners in our top 10 as well. No. 7 Electronics Boutique was once an also-ran that hawked sports collectibles and kids' toys, but the chain found focus under CEO Jeffrey Griffiths and has become the nation's largest independent retailer of videogames and related accessories. Now Griffiths, who started as a merchandising manager, is looking beyond the United States for growth, with plans to add 100 overseas stores in 2004.
If you look carefully at the ranks of this year's B2 100, it's also possible to make out the glimmerings of the long-awaited revival of corporate spending on technology. Very few of the big server makers or corporate-data storage vendors made the list--No. 81 Hewlett-Packard, the largest company in the B2 100, is an obvious exception --but there are plenty of small companies that did make it by helping other companies become more productive. Take No. 8 Websense: The $82 million San Diego company launched a decade ago offering software that stopped office workers from downloading porn to their desktop PCs. (Today its products are more likely to be configured to keep workers from wasting time on eBay.) Customers prepay for one to three years of service, which gives CEO John B. Carrington a great view of his company's future cash flow, the better to forecast headcount and capital spending. Gross profit margins are an enviable 93 percent, and the company has $182 million in the bank.
The quest for ever-greater productivity has also, controversially, led American corporations to ship more and more white-collar jobs overseas. Cognizant,No. 9, has ridden that trend to 40 percent annual earnings growth for the past three years. But while the $368 million company--locked in battle with No. 59 Infosys Technologies, among others--is moving jobs offshore, it's also adding them here in the United States, with plans to expand its payroll by about 18 people a week. Lakshmi Narayanan, the globetrotting IT smoke jumper who took over as CEO in December, says he's hiring Americans who can canvass big U.S. companies for software development projects that can then be done by programmers in India.
By reading between the lines of this year's B2 100, it's even possible to draw some inferences about the kinds of companies that might be the fastest growers of 2005. For example, with few exceptions, each of the biotech companies on our list either is ranked higher than last year or is a new entry altogether, suggesting strong momentum for that category. Two of the largest videogame publishers, Electronic Arts and Take-Two Interactive Software, are repeat B2 100 members; they've been joined this year by Activision, which implies that gamers will continue to be at the forefront of entertainment and technology. Business also looks encouraging for gadget makers, judging from the ranking of companies such as chipmaker Silicon Laboratories (No. 3, up from No. 24 last year), contract manufacturer Sanmina-SCI (new at No. 23), and component maker Vishay Intertechnology (No. 46, also new).
But we'll know all that for sure next year. For now, there are plenty of discoveries to be had in this year's B2 100, the first of our rankings to capture the early stages of the ongoing tech rebound. So read on--and meet the companies you have to beat.