While competitors stumble and struggle, Raytheon continues to outperform in IT services for the U.S. federal government

The U.S. federal earnings season kicks off the week of July 22, with legacy defense contractors General Dynamics, Northrop Grumman and Raytheon releasing their fiscal results for the second calendar quarter of 2019.

  • General Dynamics IT (GDIT) passed the one-year anniversary of its $9.7 billion acquisition of CSRA in 2Q19. Absent the inorganic impact of the integration of CSRA — and GDIT’s attempt to camouflage the multifaceted disruption — and GDIT’s portfolio makeover to improve the top line, not surprisingly, we expect sales to fall precipitously in 2Q19. In 1Q19 the bulk of GDIT’s new awards were concentrated in the defense sector. Bookings trends inverted somewhat in 2Q19 for GDIT, with a blitz of civilian sector deal activity with a potential aggregate contract value near $2.4 billion. Much of this new work will be to digitally modernize back-office processes or IT infrastructures for civilian agencies; for example, GDIT won a subcontractor position in 2Q19 on a potential $2 billion IT modernization engagement for the Department of Energy.
  • 2019 is shaping up to be another difficult year for Northrop Grumman Technology Services (TS) as headwinds from large-scale contract expirations continue to impede the company’s goal to revive top-line growth amid its ongoing restructuring program. Northrop Grumman will have to fall back on its margin performance as the best indicator of the success that its operational and portfolio realignment is improving TS’ overall cost structure. Northrop Grumman raised full-year 2019 margin guidance for the TS segment last quarter, and Northrop’s management appears comfortable standing by the elevated outlook, validating the company’s efforts to streamline operations and expand higher-value revenue streams in its order book.
  • Raytheon Intelligence, Information & Services’ (IIS) is expected to again be one of the top performing vendors in TBR’s Public Sector IT Services Benchmark in 2Q19 — IIS’ parent company’s massive merger with United Technologies (announced on June 9) notwithstanding. The Raytheon-United Technologies megadeal will result in a $73-plus billion technology giant broadly diversified across global aerospace, defense and commercial markets. Not to be lost amid the hubbub of the merger is how IIS is expected to again deliver robust growth and TBR public sector benchmark-leading margin performance in 2Q19 while expanding its book of business in the lucrative cyber and space sectors as well as with classified programs. — John Caucis, Senior Analyst  

Additional assessments publishing this week from our analyst teams

Leaders in TBR’s Public Cloud Benchmark continue to deliver strong results, but their closest competitors are aggressively innovating to challenge them. Google and IBM have enlisted Kubernetes to help them decouple PaaS business from Microsoft’s and Amazon Web Services’ (AWS) IaaS-led strongholds on the market, while pressure on Salesforce from both full-suite and modular CRM competitors is building. — Meaghan McGrath, Senior Analyst

Microsoft’s Commercial Cloud business continued to grow in FY4Q19, to $11 billion. Office 365 and Azure products accounted for 52% and 33% of total Commercial Cloud revenue, respectively. Though not yet the primary revenue driver of its Commercial Cloud business, Microsoft’s Azure portfolio is critical to the vendor’s long-term cloud growth, prompting investment in its developer community and tools as well as in high-profile partnerships that challenge AWS. — Meaghan McGrath

Tata Consultancy Services’ (TCS) revenue increased 8.6% year-to-year to $5.5 billion in 2Q19, highlighting the successful alignment of TCS’ service delivery frameworks with the needs of its global client base. Digitally based engagements constitute an ever-expanding share of TCS’ revenue base and backlog, and TCS claims nearly one-third of its revenues are digital-related, which would explain the top-line growth despite marketwide pressures facing legacy services, such as traditional outsourcing engagements. — Kevin Collupy, Analyst

Atos is well positioned to compete in the dynamic digital transformation (DT) services market. With Atos’ shift to an industry-specific go-to-market strategy, developing outcome-based vertical solutions will help Atos not only build a business case that persuades clients to invest in DT but also expand mindshare among existing clients, a necessary move as Atos tries to grow sales from digital services. Expanded cloud capabilities with partners such as Microsoft and Google Cloud enable Atos to design, build, manage and deploy cloud solutions and grow revenues in the segment. Two cybersecurity capabilities set Atos apart from its IT services peers: its portfolio of security services and IP-based solutions, and its verticalized cybersecurity offerings. Partnerships with established technology vendors and increasingly with startups enable Atos to innovate its portfolio and expand client reach. — Elitsa Bakalova, Senior Analyst

Fujitsu continues to invest in its portfolio offerings to provide vertical-oriented solutions, including within travel and transportation as well as healthcare. As the company looks to focus on its primary markets, Fujitsu expands its talent bench to support market presence and portfolio development, evidenced by the opening of a security operations center in its office in Canberra, Australia. The center will enable Fujitsu to maintain its client base in the region while also capturing upselling opportunities. We expect these investments will allow Fujitsu to build out its presence outside Japan to bolster revenue streams. — Kelly Lesiczka, Analyst

Recently, Analyst Stephanie Long hosted a webinar on how the quantum computing market will evolve from research-centric to commercial use cases as the technology reaches economic advantage — algorithm by algorithm — in the next two to five years. Once this occurs, developments will be rapid and organizations with the foundation built to take advantage of quantum computing will quickly reap the rewards of their early investments. Quantum computing, as a transformation-inducing technology, will impact multiple aspects of the IT environment, including power consumption, data generation, security and classical computing tie-ins. The swift impact of quantum computing will be a key factor in determining who wins and who loses in this technological transformation. Check out the replay of this webinar anytime in TBR’s Webinar Portal.

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