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San Fernando Valley Business Journal - January 19, 2004 / Tech Firms Capitalize on Higher Business Spending

Tech Firms Capitalize on Higher Business Spending

By SLAV KANDYBA
Staff Reporter

Things are looking up for Hormazd Dalal and his Encino-based Castellan Inc. in this young year.

Castellan specializes in IT consulting and also leases hardware and software. The small firm took in $3 million in sales in 2003, ending on a profitable note and Dalal recruited a Hewlett-Packard employee to join him this month as director of business development.

The small company is one of scores of technology-related firms in the Valley that are taking advantage of a increase in capital spending by businesses as the economy picks up and companies finally undertake long-awaited upgrades to their computer systems that were put off in the economic downturn.

Business investment grew 14 percent in the third quarter, the Commerce Department reported, better than the 11.1 percent rate the government had predicted it would. Equipment and software investment climbed at an 18.4 percent pace, its best showing in five years. The buying was fueled by corporate profits, which the government said grew at an annual pace of more than 30 percent.

“(My) business is maturing,” Dalal said. “We’re changing our focus to larger businesses.”

As the economy begins showing signs of loosening up, driven partly by the tech sector, local small to medium-sized businesses like Dalal’s that specialize in services from hardware and software maintenance to consulting are expecting their business to fare well this year. Likewise, larger Valley-area firms that produce and distribute semiconductors are seeing better times.

“I think there is a need there – part of the need is that in this last downturn, IT projects were being put on hold, things they would have wanted to have weren’t implemented,” Dalal said.

At Encino-based Data Systems Worldwide Inc., President Phil Mogavero said his firm is changing. ”The one way we have been changing is to provide more long-term contracts,” Mogavero said.

DSW, in existence since 1971, has a diverse clientele, from mid-level to Fortune 500.

“Our goal is to become strategic,” Mogavero said. “What we are really trying to do is perhaps have less clients.”

Doing that will result in “better pricing and higher level of service,” Mogavero said.

DSW, a $20 million company with 55 employees, has seen a steady increase in 2003, with a 12 percent increase in revenues from the second to third quarters and 13 percent from the third to fourth. Business had been shrinking for two years, he said.

“What we’re finding is we can get more dollars from fewer customers than from a shotgun approach,” he said, adding the number of clients is continuing to rise nevertheless.

Growth is surging in the semiconductor industry which has three major local players.

“When the semiconductor industry starts going, everything else starts going,” said Molly Tuttle, director of communications at the Semiconductor Industry Association, a San Jose-based organization. “I think business spending is a large factor … it has been quiet but it is beginning to pick up, and we’ve seen an increase in the second half of 2003.”

Revenues for semiconductor companies as a whole, Tuttle said, are expected to grow by 19 percent this year from last. In 2003, they were 17 percent, a two percent increase over what was expected. The industry was flat in 2002, with only 1.3 percent growth. Although it took in $140 billion that year, it was reeling from “one of the steepest downturns” in 2001, according to Tuttle.

Vitesse Semiconductor Corp. of Camarillo reported revenues of $42.8 million for the fourth quarter of 2003, compared to $35.6 million in the same quarter in 2002. For the fiscal year ended Sept. 30, 2003, it had brought in $156.4 million compared to $151.7 million in the year ended in 2002. Camarillo-based Semtech Corp.’s revenues for the third quarter of fiscal year 2004 increased 8 percent compared to the second quarter, to $48.1 million from $44.6 million. Its revenues were $47.2 million in the prior year third quarter. On Jan. 7, Westlake Village-based Diodes Inc. reported a 10 percent increase in guidance in revenue from the third quarter, which stood at a record $34.9 million.

Things are going so well, Diodes is increasing its own business spending.

“Things are wearing out,” said Mark King, vice president for global marketing and sales. “Over the last six months, we started to replace laptops and desktop computers.”

Different local businesses are approaching the good news in different ways, perhaps best exemplified in how Castellan and DSW’s presidents see the near future. While Castellan’s Dalal is ready to take his small business to the next level, DSW’s Mogavero is looking to stay the steady course.

“I’m not excited yet, but optimistic,” Mogavero said.

Although all the indications point to the tech industry flourishing in 2004, businesses are cautious and waiting to see if the strong start will be a false one. Mogavero expressed cautious optimism about the improving economy.

“It’s warming up, not heating up (and) it’s well below the levels of 2000,” said DSW’s Mogavero. “After a couple of years of decline, we see encouraging signs that we hope will be sustained.”

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