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.