COVID-19 dealt only a glancing blow to federal IT, but market dynamics are still shifting

COVID-19 will accelerate a range of secular trends in federal IT

Despite the inevitable short-term impact of COVID-19 on federal technology outlays, IT infrastructure modernization will eventually return to the top of the list of federal IT spending priorities, as will investments in cybersecurity, analytics, AI, big data, cloud and machine learning. The epidemic will disrupt contract delivery, create resource deployment challenges at federal IT vendors and their agency clients, and may cause nonhealth-related discretionary spending to be redirected to healthcare areas, benefiting vendors such as Leidos, Accenture Federal Services, Maximus and ManTech (Nasdaq: MANT).

As federal agencies transition large portions of their workforces to remote environments IT infrastructure improvements and migrations to cloud and everything “as a Service” will follow, along with projects to improve private networks and broadband connections and engagements to enhance security requirements as the “threat surface” exposed to new security breaches expands. Federal IT decision makers are increasingly seeking methods of combating COVID-19 that have been proved in the commercial sector.

Federal spending levels are expected to increase on preparedness and response activities and other disaster recovery or mitigation work in the fiscal 2021 budget, with a growing volume of IT modernization opportunities around disease surveillance improvement, including the implementation of new IT systems and advanced analytics. Still, the overall landscape for products and services to counter biothreats remains unclear and federal IT vendors will be tapped to provide the vision and road map for the adoption of biothreat surveillance solutions. Spending on electronic warfare, countering drones and unmanned systems and other areas of the National Defense Strategy will remain strong for the next two years and in fact may expand to include bio-monitoring and bio-surveillance technologies.

Most of the results from the 1Q20 earnings season are in, and federal technology contractors have provided initial reactions to the impact of the coronavirus pandemic on their fiscal performance and their outlook for federal fiscal 2020 and beyond. By and large, the fiscal effects of COVID-19 were limited to the final few weeks of the quarter, according to a plurality of federal IT vendors, minimizing the top- and bottom-line impacts for most federal technology contractors. Negative impacts were most concentrated in the global aerospace sector, and as such, companies with a footprint in commercial or government aeronautics encountered severe growth and margin headwinds. However, all federal contractors had to scramble to acclimate resource management, operations, service delivery, business development and supply chain management strategies to the new COVID-19 environment.

Benchmark security revenue continues to increase, driven primarily by acquisitions in 2H19

Key 2H19 benchmark takeaways

Total benchmarked revenue

Double-digit growth among covered vendors was due to steady industry acquisitions and strong performance from many of the vendors, including IBM (NYSE: IBM), F5 Networks (Nasdaq: FFIV), CyberArk (Nasdaq: CYBR), Fortinet (Nasdaq: FTNT) and Splunk (Nasdaq: SPLK). TBR believes security demand continues to rapidly accelerate as companies execute digital transformation projects and cyber threats continue to increase. The COVID-19 pandemic is resulting in an increase in cyberattacks aimed at multiple verticals such as healthcare and financial services, as institutions are forced to operate online in a greater capacity than prior to the outbreak.

Application security and mobile security segments

Higher demand for email- and web-related security as well as application vulnerability scanning led to an increase in application security segment revenue. The mobile security segment is seeing high revenue growth as the number of mobile devices continues to rise and the need to provide endpoint detection to all mobile and IoT connected devices increases.

TBR’s Security Benchmark provides clients a deep dive into the enterprise security market, highlighting the financial performance of public and private, multiline, and pure play vendors within the industry.

With use cases built on public chains in production, attention turns to public and private sector interaction

Near-term market implications: What is next, rather than beyond

TBR believes the intersection of public policy and commerce is the next area where technologists will apply their energies within the blockchain realm. The core platform elements are in place with clearly articulated road maps for ongoing development work. At issue will be the policy regulations and compliance methods needed to ensure blockchain-enabled business activity can be seamlessly imported into legacy systems of record for financial reporting purposes.

Similarly, nation states and native-cloud platforms such as Facebook will vie to become the de facto economic exchange mechanism for blockchain transactions. Notably, Libra Association, the Facebook-created digital currency, recently named former U.S. Department of the Treasury Under Secretary Stuart Levey as its first CEO, indicating Facebook’s strategy for bridging the nation state-commercial entity divide. Taking a conservative posture to minimize security threat vectors to protect the value of the currency in question appears, on its face, to be the most prudent course of action. On the other hand, taking a more aggressive position that allows for deeper embedding into commerce chains and exposes the currency to more programmability — and consequently creates a greater surface area for malicious attacks — is a risk nation states and businesses will undertake to gain greater participation in the digital economy.

In the short term, then, the conservative posture is prudent. In the long term, however, such conservative viewpoints could result in shifting geopolitical power. The U.S. dollar, for example, has been the de facto foreign exchange clearing mechanism for decades. A conservative posture on the part of the U.S. Federal Reserve on digital currency opens the door for other entrants to displace the U.S. dollar as the international clearing mechanism and, in so doing, removes a valuable foreign policy tool from the U.S. diplomatic toolbox at a time when U.S. diplomacy is already severely challenged.

The fourth annual EY Global Blockchain Summit had a vastly different look and feel as the COVID-19 pandemic shifted the engagement to a virtual forum and turned the spotlight on the rapidly coalescing use cases that blockchain technology underpins. The core coterie of blockchain builders does not have to prove technical value through “use case show and tell” of how the technology works, but rather needs to discuss what the technology delivers in terms of business process improvement. However, technology companies do need to outline product road maps to ameliorate persistent concerns. More important, though, is the need for automated interaction, adjustment and compliance with business rules and the ever-evolving public policies designed to mitigate risk. It appears clear that as revolutionary as blockchain can be to business commerce by shifting the tracking of such activity from general ledgers to distributed ledgers, it can be equally transformative to nation states, depending on what form of currency exchange settles out as the de facto clearing mechanism for multi-enterprise blockchain business networks.