2020 will be critical as Perspecta attempts to make up for its NGEN-R bid loss, with federal spending priorities providing an avenue for growth

“Perspecta delivered steady top-line results in 4Q19 as it posted a very strong book-to-bill ratio (1.4) and continues to win new deals in areas of strategic importance for both Perspecta and the federal government, such as cybersecurity, enterprise IT and radio frequency technology,” said Research Analyst Brian Baker. “The federal budget continues to be extremely growth-friendly for IT vendors, especially in areas like IT modernization, cybersecurity and commercial off-the-shelf solutions.”

He continued, “Perspecta’s growth outlook is clouded significantly by the NGEN-R bid loss, but the effects of this loss are not likely to impact Perspecta’s top line much more in 2020 as the company is already executing on an extension of its existing NGEN contract, which will last until at least September 2020. The NGEN-R bid loss comes at a relatively ideal time for Perspecta, as only 8% of its book of business is up for recompete in the coming year, allowing significant opportunity to pursue new business. If business development efforts are successful, Perspecta may be able to mitigate a good portion of the NGEN loss, but TBR believes growth in 2021 will remain a significant hurdle for the company.”

Additional reports recently published by TBR’s analyst teams

4Q19 Google Cloud: Acquiring, partnering and innovating in triple-play strategy

“In 4Q19 Google Cloud saw rapid revenue growth that paralleled and validated its continued and planned investments in infrastructure, R&D, talent, partnerships and global expansion. TBR predicts this accelerated pace of growth, fueled by offerings like Google Cloud Platform, will help the company close the gap with market share leaders Amazon Web Services and Microsoft.” — Nicole Catchpole, Senior Analyst

4Q19 Hewlett Packard Enterprise Initial Response

“According to the original timeline, HPE Next was supposed to be nearing completion, but in 4Q19 HPE announced the HPE Next initiative will continue through the end of HPE’s fiscal 2021. The vendor promises ‘incremental savings’ from this move, but TBR believes the extension is likely to involve further restructuring and potential employee rationalization as HPE eliminates redundancies from acquisitions such as Cray.” — Stephanie Long, Senior Analyst

4Q19 Cisco Systems: Facing lower demand as macro headwinds mount

“Enterprises and SMBs embraced Cisco’s intent-based networking offerings for most of 2019, while communication service providers (CSPs) redistributed capex toward RAN for 5G and virtualized infrastructure rather than core network initiatives. In 2020 we expect Cisco CSP revenue to continue to shrink, though at a slower rate due to rising spend on 5G core networks. Enterprise spending will decline as well due to macroeconomic factors such as COVID-19-related capex delays.” — Michael Soper, Senior Analyst

4Q19 Cisco Customer Experience: Enhance core capabilities to drive client value

“Software- and subscription-based engagements provide consistent support and maintenance revenue, and emerging solutions that embrace AI, IoT, security and cognitive capabilities provide opportunities for Cisco Customer Experience to bolster performance through upselling. Additionally, Cisco’s expanded footprint helps foster client relationships and showcase its expertise, leading to higher-value transformation engagements. We expect Cisco will continue to lead with its deep domain expertise, particularly in cybersecurity, to create new opportunities within its existing client base as well as strengthen its share in underpenetrated markets including APJC.” — Kelly Lesiczka, Analyst

4Q19 Hewlett Packard Enterprise Cloud Initial Response

“HPE recently began reporting annualized revenue run rates (ARR), as it looks to transition its entire portfolio toward consumption-based pricing by CY2022. HPE’s ARR grew 19% year-to-year in 4Q19 to $511 million, driven largely by GreenLake revenues, but high-growth, software-defined platforms such as Aruba Central and the newly launched HPE Container Platform will become rising contributors. At its Security Analyst Meeting in October, HPE provided guidance of a 30% to 40% CAGR in ARR between FY2019 and FY2022. TBR expects the transition to favorably benefit margins during this time period, but it will likely take time for HPE’s top line to reflect the change.” — Catie Merrill, Analyst

In our new weekly blog series Two Back, Three Forward, we look at two numbers in TBR reports from the prior week as well as three numbers from our upcoming reports, highlighting the analysis TBR provides and the vast amount of data — the numbers — we’re working with every day. It’s all about the data and what that data means to you.

Two Back

$1.47B, Cognizant’s 4Q19 earnings from financial services clients: As noted in our full report, Cognizant’s Financial Services (FS) revenue increased last quarter, but at a slower pace than the company overall, partly due to softness from European banking clients, according to Cognizant. We’ve heard this complaint from other India-centric vendors and will be publishing a special report this month on what those companies have been doing to offset those pressures. To keep some context, FS remains Cognizant’s largest vertical, at 34.3%, but this trend bears watching.

3, consecutive quarters IBM’s healthcare IT services revenue has declined: 2019 was unquestionably an off year for IBM’s healthcare IT services (HITS), but our most recent analysis indicates the company will rebound in 2020 through new leadership, partnerships and technologies. Considering IBM’s long history of excelling in all three of those areas, we’re predicting a modest 2.2% expansion this year. See the full IBM HITS report for all the analysis.

Three Forward

71.2%, contribution of DXC Technology’s Cloud Professional Services segment to overall cloud revenue, per TBR estimates: Nothing surprising about cloud professional services earning the greatest share of revenue, but what stands out is the 9.6% growth rate of that service line within DXC’s overall cloud practice. Ahead of the other service lines and far better than the company as a whole (-3% over the same period). As we note in the upcoming full report, “DXC’s established relationships with major public cloud providers such as Microsoft and AWS [Amazon Web Services] enable the company to build out integrated solutions and maintain healthy growth in 2020 providing cloud management and migration services.” Further, the company continues investing in cloud-savvy professionals even as it bolsters its traditional IT services talent. DXC’s long-term strategy, including around cloud, appears solid.

More than 50%, Capgemini’s digital and cloud revenues as a percentage of total revenue: Like most IT services peers, Capgemini has strategically shifted resources and investments toward new opportunities in cloud and digital, in part through expanding capabilities alongside partners, developing solutions with partners like AWS, and acquiring talent and IP. Even if revenue growth slows from 5.3% year-to-year in constant currency in 2019 to something closer to 4% in 2020, as Capgemini expects, we don’t expect digital and cloud revenues will ever again dip below the 50% line, even if Capgemini joins market leaders in moving beyond the term digital.

3, consecutive quarters in which Perspecta elevated its FY20 guidance: Due to accelerated demand and strong bookings of net-new work, Perspecta is now guiding for annual revenue growth of between $4.45 billion and $4.5 billion, or 4.1% and 5.3%, over FY19. Even with healthy revenue growth, TBR projects the company’s full-year gross margin will erode 2020 (declining from 24.9% in 2019 to 23.6% in 2020) due to  accumulating costs from its acquisition of Knight Point Systems, the launch of new delivery facilities, and investment in Perspecta Labs. Perspecta’s 2020 operating margin should increase 10 points over 2019, from 6.2% to 6.3%, as unprofitable contracts are completed and Perspecta converts strong bookings of more lucrative and net-new contracts featuring the company’s expanding store of homegrown IP. In all, TBR sees steady growth as more important than financial guidance adjustments, given our concern for strategy and performance, not stock price.