OTTAWA — January 2010 — Defence is the new black.

At least that’s what OSI Geospatial Inc., a small, Ottawa-based positioning systems and software company, is banking on by intensifying its focus on the growing global defence and security markets.

It hopes that doing so, while still maintaining a strong presence in marine navigation, will help it emerge from its unprofitable lull. Yet analysts say OSI’s size and stagnant growth could still keep it stuck in the red

In a 2008 statement to investors, OSI President and CEO Ken Kirkpatrick and Board of Directors Chair Raymond Johnston said that the company is setting its strategic compass to military, marine security and soldier modernization markets.

Courting the military

As part of this narrower direction, OSI wants to divest its mapping division, which is headed by subsidiary Mapcon Mapping Ltd. Dev Bhangui, a Haywood Securities’ financial analyst who tracks OSI, calls it a smart move.

“That particular business is shrinking and is affected by the recession,” he says. “It’s not holding its own weight.”

Getting rid of the mapping unit would free up capital for the company’s two other divisions: land and air, headed by subsidiary CHI Systems Ltd., and marine, under the Offshore Systems Ltd. name.

Yet it might be a while before the move pays off. Bhangui says OSI is “stuck” with the division, at least for now, because companies aren’t looking to buy it in a weak economy.

Defence spending, on the other hand, is traditionally “recession-proof,” says Bhangui.

Now that the economy is starting to recover, however, things are a bit different, says Tim Page, president of the Canadian Association of Defence and Security Industries. Governments facing budget pressures from recession-induced deficits are cutting defence spending in some areas.

Riding soldier modernization

On the whole, however, defence investment is still going strong, says Page. Soldier modernization, for instance, is one area that governments are not scrimping on. He calls it a “good opportunity” for companies.

“There’s quite a collective effort being made across NATO countries to look at soldier systems,” he says. Canada, for instance, has set out a road map for the modernization of the Canadian Forces, called the Canada First Defence Strategy.

OSI has already taken advantage of some of this potential. Many of the company’s main clients are key players in defence and security markets: the Canadian, American, British, and Australian navies, as well as the Canadian and U.S. armies and coast guards.

Through its CHI Systems branch, OSI teamed this year with Raytheon Company – a U.S. defence and security technology company headquartered in Waltham, Mass. – to pursue soldier modernization contracts in the United States.

Under the agreement, CHI systems is a “principal supplier” on Raytheon’s Ground Soldier System team, chosen for its “precise, GPS-denied navigation and other software components,” says David Desilets, a public relations and communications manager from Raytheon’s McKinney, Texas office.

Additionally, on Oct. 15, OSI announced that it had signed research and development contracts with the U.S. Army. The company will enhance its command and control technology under the roughly $2-million deal.

OSI also won its first research and development contract with Defence Research and Development Canada (DRDC) this September, valued at about $600,000. It involves the development of an immersive, counter-improvised explosive device training system.

Marine opportunities

“OSI was one of lots of companies that submitted a proposal,” says Mark Estenant of DRDC, adding that the agency considered criteria such as end-capability, cost, and the company’s state of development in awarding the contract.

OSI is also looking for long-term growth by increasing its presence in the marine navigation and security markets.

In August, OSI signed a $1.3-million contract with the Dutch navy to equip its warships with the company’s flagship ECPINS product (Electronic Charts Precise Integrated Navigation Systems), software that integrates electronic positioning with a vessel’s navigation sensor data.

OSI estimates that more than 70 per cent of naval fleets worldwide still navigate their warships with paper charts, which it says provides ample opportunity to increase its customer base.

Growing fleets could also be a boon to the company.

“As part of the Canada First Defence Strategy, the Canadian government has announced its intention to rebuild Canada’s navy,” says Page. “This presents excellent opportunities for Canada’s … marine industries.”

OSI by the numbers

Despite its advantageous strategic position in light of burgeoning defence and marine markets, Bhangui says OSI will have a tough time getting out of its slump.

“OSI has been in a constant recession. They have not been growing,” says Bhangui.

For the fiscal year ended Nov. 30, 2008, OSI had sales of $31.5 million and a net loss of $2.0 million. It was the second fiscal year in a row the company of 117 employees experienced a net loss. For fiscal 2007, it had sales of $25.4 million and a net loss of $2.9 million.

OSI’s latest financial results, for the quarter ended Aug. 31, 2009, were also grim. The company brought in only $6.2 million in revenue for the quarter, a 1.8 per cent decrease from the $6.3 million generated in the same quarter last year. The net loss was $263,000, or $0.01 per share.

“The reason the company isn’t doing well is because the company’s management is not aggressive enough,” says Bhangui. “They should find a way to keep recurring revenues while ensuring its long-term growth.”

Part of the problem, he says, is OSI’s size compared to other market players and customers.

“They’re like elephants compared to this ant of a company,” he says of OSI’s clients. This makes it difficult for OSI to plan ahead and predict sales. With a big client such as the British navy, for instance, OSI can’t control when ships will be available to be updated with new software.

The company’s share price has also been on the decline. OSI’s stock closed at $0.135 on Nov. 25. The current 52-week high is $0.24, whereas the 52-week low is $0.08.

“I don’t think the share price will move up until the company can have a demonstrable track record,” says Bhangui, explaining that this would be at least two successive profitable quarters.

“Any CEO has to plan for a company’s strategic growth in the long term, but also figure out how to jazz up revenue for the short term,” he says.