Homeland Spending Secures Storage

Storage executives will likely sleep better knowing the Department of Homeland Security (DHS) budget for next year should increase by 9.4 percent. At the least, it should relieve much of their anxiety about the direction of government spending.

According to a new report from IT market research firm Input, a Senate committees proposal for the DHS budget for the fiscal year 2005 that begins this October 1 will jump to $33 billion, up $2.8 billion from 2004. The Appropriations Committee recommended more than President Bush requested. The full Senate has yet to vote on the bill, but the committee's recommendation shows an inclination to spend.

While the budget does not break out IT spending, an Input analyst says technology spending plays a large part in Homeland Security’s effectiveness.

“In order for the Department of Homeland Security to continue to function effectively under increasing labor costs, a heavier reliance on technology is required,” says Kim Hovda, Input manager of grant products. “The technologies necessary for the future will be the technologies that replace human effort with automated effort.”

The DHS consists of a variety of agencies that rely on storage-intensive operations such as disaster recovery, analyzing intelligent data, research, and engineering. Hovda says the Science and Technology Directorate and the Transportation Security Administration (TSA) agencies especially rely on technology.Changes of government spending in either direction will likely be felt by storage vendors (see Storage Counts on Gov't Spending). The government has been a big spender on storage over the past few years, and Homeland Security agencies have been a major part of that since the department’s creation in 2003.

But storage executives have been wondering if that will keep up. CEOs of Brocade Communications Systems Inc. (Nasdaq: BRCD), McData Corp. (Nasdaq: MCDTA), Network Appliance Inc. (Nasdaq: NTAP), Veritas Software Corp. (Nasdaq: VRTS), and others cited concern over government spending this quarter when giving financial guidance in recent reports. Some specifically mentioned homeland security and defense.

This is the fourth quarter in the government’s fiscal year, so any increase in homeland security spending won’t kick in right away. But at least it’s looking as if the money will be there for continued spending.

“We have great opportunity, as everybody does, with homeland security and the federal government on a variety of fronts,” McData CEO John Kelley told analysts last week during his company’s earnings call. “I think that the government itself is looking at routing networking opportunities, tying together secured databases. I think the uncertainty sits out there, coupled with what exactly is it that these departments and agencies and military installations want to do. And I'm not overly optimistic that we are going to blow it out in federal in the short run, but certainly over the long run.”

McData lists the U.S. Customs Service, Immigration and Naturalization Service, and TSA as clients among Homeland Security agencies. Veritas provides backup software throughout more than 1,000 U.S. Coast Guard sites (see Coast Guard Picks Veritas). Other agencies don’t make their deals public, but Brocade, EMC, NetApp, Cisco Systems Inc. (Nasdaq: CSCO), and IBM Corp. (NYSE: IBM) consider the government a major vertical market.Input report identifies the Coast Guard and TSA as the agencies receiving the biggest bumps in the new budget. The Coast Guard, with a funding increase of $705 million for a total of $7.5 billion, is undergoing a modernization program.

The TSA’s projected 2005 budget is $5.2 billion, up $649 million from 2004. Airport Information Technology (AIT) is the best funded TSA program, nearly doubling to $292.2 million next year. AIT could provide a storage boon, especially if a test program to screen airline passengers becomes permanent. Selected airlines are using biometrics such as fingerprints and iris scans for preferred customers.

Ken Steinhardt, EMC’s director of technology analysis, is among the passengers in Northwest Airlines' (NYSE: NWB) pilot program. He says it gets him through airline security faster, but there’s something else he likes about it even more. “This is real good news for storage,” Steinhardt says. “Obviously, this involves significant volumes of information.”

But nothing is certain when it comes to the federal government spending money.

“Our government business is growing,” Veritas CEO Gary Bloom said during his recent earnings call. “We have lots of opportunity. But it’s government spending. And we all know how those projects do or don’t get awarded as the period goes on.”— Dave Raffo, Senior Editor, Byte and Switch