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Analytics within digital transformation engagements depend on high-quality people and data

This week, TBR publishes the first Digital Transformation Insights report for 2020, building on the 2019 series, which included analysis around blockchain, digital marketing, IoT and quantum. The first report centers on IT services vendors’ strategies and performances within their analytics practices. Senior Analyst Boz Hristov notes that, “The maturing A&I services market continues to hold strong digital transformation opportunities for vendors, as long as they can address buyers’ business model complexities through collaborative and coopetitive delivery frameworks. Additionally, vendors that can address skills gaps and ensure data quality and security standards are met are positioned to win.” Next month’s DTI report will look at edge computing within digital transformation. In March TBR will examine the SAP practices of a few leading services vendors.

Additional assessments publishing this week from our analyst teams

Sprint’s rising churn rates, weakening financial performance and high debt load highlight the necessity of the proposed T-Mobile merger. Subpar network quality remains at the root of Sprint’s issues as postpaid phone subscriber losses continue to escalate, despite the operator’s aggressive pricing and elevated network capex spending since 2018. A more significant capex budget is required for Sprint to successfully compete long-term in the U.S. market; however, Sprint’s inability to generate significant free cash flow hinders the company from doing so.” — Steve Vachon, Analyst

“As Infosys ramps up cyber offerings to better address the complexities associated with the next wave of emerging technologies, an aggressive pricing strategy paired with revamped account management enables the company to expand its client roster as it turns into a solutions broker.” — Hristov

Verizon remains able to capitalize on its reputation as a premium wireless service provider to attract customers willing to pay a higher price for the operator’s network coverage and premium unlimited data plans. However, Verizon’s wireless network is becoming a less significant differentiator as AT&T and T-Mobile are now on par with Verizon in LTE coverage and as the rival companies are improving signal quality and data speeds by deploying services on additional spectrum.” — Vachon

“Though AT&T is facing short-term challenges, the company’s ambition to transition from a traditional telco to a global digital service provider is a long-term endeavor requiring a broad array of assets that may not all pay dividends in the short term. AT&T also has abundant opportunity to reduce expenses without divesting core business units via initiatives such as WarnerMedia synergies, nonvital headcount and real estate reduction, and deeper integration of network virtualization.” — Vachon

“TBR anticipates Fujitsu Services will report revenue growth acceleration in 4Q19, as Fujitsu enhances its software, digital, hybrid IT and cloud offerings, which help offset declines in traditional areas. Reorganization and investments within its sales organization, such as the consolidation of its European sales force and the implementation of Account Planning and Opportunity Planning software to improve management in North America, will also contribute to revenue expansion in 2019. The business model adjustments allow the company to better execute and deliver on initiatives to drive adoption of hybrid IT and software offerings, providing recurring revenue opportunities.” — Kelly Lesiczka, Analyst

Senior Analyst John Caucis notes that the U.S. federal earnings season kicks off this week with three defense majors and one services-led defense contractor releasing the results from the final calendar quarter of 2019. First up is General Dynamics Information Technology (GDIT), releasing earnings on Jan. 29. Sales are expected to continue sliding for GDIT, owing to recent asset disposals, portfolio reshaping and operations realignment. TBR projects GDIT’s top-line revenue will decline between 11% and 12% year-to-year to roughly $2.1 billion. A strong rebound for GDIT will hinge on the full leverage of CSRA’s capabilities to win big-ticket, next-generation federal IT engagements in 2020. 

Two additional defense majors, Northrop Grumman and Raytheon, will release their earnings on Jan. 30. Northrop Grumman’s Technology Services (TS) unit completed what was likely its final quarter and last fiscal year as a dedicated, stand-alone business line offering technology, sustainment and modernization solutions in 4Q19. TS, which includes the bulk of Northrop’s technology-related services, was integrated into Northrop’s emerging Defense Systems (DS) business group, effective Jan. 1, 2020. TBR projects TS’ 4Q19 sales will continue the rebound begun in 3Q19, with year-to-year growth between 2% and 3%, bringing TS’ 4Q19 revenue to roughly $1.1 billion. Raytheon Intelligence, Information and Services (IIS), the services division of Raytheon Technologies, is expected to continue expanding its sales at a robust pace, putting the wraps on a red-letter year accentuated by consistent revenue and bookings growth, record backlog levels, improved margin performance, and of course, the pending merger with United Technologies (UT). TBR projects IIS will post revenue of about $1.9 billion in 4Q19, up between 10% and 11% year-to-year.

Finally, Booz Allen Hamilton (BAH) will release earnings on Jan. 31. We project BAH will expand its top line between 8% and 9% in 4Q19 to over $1.8 billion, building on the momentum established during the first half of its FY2020. BAH’s strong performance stems from traction with its technically focused solutions, increasingly infused with advanced technologies that enable the mission aims of its federal agency clientele. Operationalizing AI has clearly become a strategic growth platform for BAH; AI featured prominently in the company’s alliance activity, new contract awards and introduction of new offerings in 4Q19.

Federal IT vendors capitalizing on a growth-friendly spending environment expected to see healthy top-line expansion

Senior Analyst  John Caucis reports on three federal IT services providers this week, each delivering robust, double-digit revenue growth amid the strongest federal technology market witnessed in many years. “The strongest performance was tendered by CACI, whose revenue rose 16.9% year-to-year to $1.36 billion in 3Q19, showing the tight alignment of its differentiated solutions with high-priority spending areas in the defense and intelligence markets. CACI is beating incumbents on large-scale program recompetes and defending its incumbency on its own legacy engagements, while the strength of its fiscal performance points to a high-value solutions mix highly relevant to its core customers. CACI’s $1 billion in acquisitions in 1Q19 is also boosting revenue, adding between $115 million and $120 million in inorganic sales in 3Q19 (by TBR estimates), though also generating margin pressures.

Booz Allen Hamilton’s (BAH) revenue rose 12.7% year-to-year to $1.82 billion in 3Q19, consistent with the company’s plan to aggressively execute on its FY20 growth objectives during the first half of the fiscal year (calendar 2Q19 and 3Q19). BAH is realizing balanced growth across its government-focused business lines. Growth in BAH’s Global Commercial business has been more variable but has stabilized and is on solid footing for continued expansion in 2020. Finally, Leidos’ revenue rose 10.1% year-to-year to $2.84 billion in 3Q19. The company’s backlog continues to surge to new highs owing to a strong sustained pace of net-new contract bookings across the defense, civilian and, particularly, healthcare areas. Leidos also successfully defended its position on a handful of large projects, including the $2.9 billion, 10-year NASA End-User Services & Technologies (NEST) program and the $927 million IT and logistics support contract with the Transportation Security Administration.”

Additional assessments publishing this week from our analyst teams

“With the Syntel acquisition fully integrated globally, Atos’ next step is to explain Syntel’s capabilities to its internal sales and delivery teams and existing clients to successfully cross-sell its solutions and to effectively deliver services for cloud revenue growth and improved profitability. TBR does not expect the stepping down of Atos CEO Thierry Breton on Oct. 31 and appointment of Elie Girard, previously deputy CEO and CFO, to change the company’s strategic direction or negatively impact Atos’ performance. Girard will continue to steer the strategic direction of the company over the next two years around delivering business outcomes for customers utilizing Atos’ technology and services expertise in cloud and cybersecurity.” — Elitsa Bakalova, Senior Analyst

“Throughout 2019, Cognizant’s emphasis on evolving from its traditional roots to a digital transformation leader has resulted in multiple acquisitions and a flurry of restructuring efforts, such as the Digital Transformation Office. The Digital Transformation Office’s latest announcement is a two-year plan, 2020 Fit for Growth, which will result in additional layoffs and reskilling efforts around key technology areas such as data, IoT, digital engineering and cloud. The 2020 Fit for Growth plan is Cognizant’s furthest reaching plan so far in 2019, impacting 12,000 employees and resulting in the divesture of nonessential businesses to free up capital for digital growth and improve Cognizant’s cost structure. TBR believes the success of Cognizant’s restructuring and go-to-market realignment will require active involvement of its partner ecosystem to rapidly expand the scale of its new offerings and strengthen its positioning against competitors in the digital space.” — Kelly Lesiczka, Analyst

“Ongoing restructuring efforts to improve delivery and cost structure enabled Fujitsu Services to grow revenues and profitability in 3Q19 but could set the company back relative to peers. However, the speed of Fujitsu’s transition will dictate the extent to which its portfolio and delivery network can generate profitable growth in FY22.” — Lesiczka

T-Mobile will end 2019 on a high note, with the company’s annual postpaid net additions and adjusted EBITDA surpassing initial guidance expectations. T-Mobile’s momentum will continue in 2020 regardless of the outcome of the proposed Sprint merger, as the company’s widespread 5G coverage and expanding portfolio and service options will attract new customers.”  — Steve Vachon, Analyst

AT&T’s 3Q19 earnings highlight the challenges the company is experiencing as a result of extensive expansion over the past five years due to the acquisitions of Time Warner and DIRECTV and the launch of AT&T Mexico. Market challenges and shifting consumer preferences contributed to AT&T’s revenue declines in most segments, and the company remains debt-laden from its large-scale investments.” — Vachon  

Investments in acquisitions and startups enrich Capgemini’s next-generation solutions portfolio and improve its competitive position

Capgemini has taken multiple steps to enhance its portfolio to drive transformations through next-generation technologies and create business value for clients. The acquisition of Altran to deliver digital transformation in the industrial sector, enhanced relationships with Microsoft around Microsoft Azure solutions and with SAP around certification of industry innovation accelerators in manufacturing and retail, and investment in startups and joint commercial activities exemplify Capgemini’s recent activities to advance its competitive position,” said Senior Analyst Elitsa Bakalova. “Offering deep industry expertise improves Capgemini’s ability to address clients’ business-specific challenges. The company will continue to experience momentum in cloud services, with cloud revenue driven by offerings in the Capgemini Cloud Platform portfolio that support clients when building, migrating and managing applications and infrastructures in cloud environments. Offering each client its entire portfolio of solutions enables Capgemini to provide holistic transformational solutions and effectively compete with peers. The expanded partnership with Microsoft around Microsoft Azure solutions will enable Capgemini to increase cloud professional services activities, especially around cloud application development and maintenance.”

Additional assessments publishing this week from our analyst teams

Apple continues to pursue both service and hardware initiatives to maintain growth. The company is leveraging services and its wide install base to grow continuous revenue streams as device refresh activity wanes amid lengthening device life cycles and slowing hardware advances. While services are growing as a cornerstone strategy for Apple, the company also remains focused on maintaining its market perception as the most advanced smartphone producer. TBR expects the iPhone 11, which is slated to be released later in 2019, to have steady sales, but Apple will likely not see breakout sales like that of the iPhone X until the release of the 2020 model, which will deliver larger hardware upgrades such as 5G enablement. — Dan Callahan, Analyst

Google doubled its revenue over the past six quarters, surpassing $2 billion in 2Q19 as the vendor migrates customers to Google Cloud Platform (GCP) and attains particularly strong revenue growth from selling analytics. Google’s PaaS business will continue to drive revenue growth as enterprises integrate their hybrid environment with Anthos and leverage Google’s analytics, AI and machine learning offerings. In addition, Google supplements growth with G Suite as the company’s growing sales base brings industry-specific versions of the collaboration suite to market and cross-sells G Suite into GCP-oriented customer engagements. — Jack McElwee, Research Analyst

Cognizant has reworked its corporate strategy to emphasize the criticality of digital technologies to its growth plans. Pursuing acquisitions, such as that of Meritsoft, enables Cognizant to diversify its revenue mix, fostering new sources of digital revenues within key verticals. We expect Cognizant will maintain steady revenue growth year-to-year, largely led by demand around its digital operations capabilities.    — Kelly Lesiczka, Analyst

An integrated sales structure, paired with investments in price-competitive AI solutions and on-site presence, will help Infosys transform its brand identity. At the same time as Infosys builds a healthy pipeline, the company may need to calibrate stakeholders’ expectations around margins to sustain trust. — Boz Hristov, Senior Analyst

Reinforcing Verizon’s reputation as a premium wireless service provider will be essential for the operator to sustain revenue growth in the 5G era, as competitive pressures from T-Mobile will intensify, especially given the pending Sprint merger. Though Verizon will continue to trail T-Mobile in postpaid phone net additions over the next several years, Verizon will be able to sustain revenue growth by attracting customers willing to pay a higher price for the operator’s network coverage and premium unlimited data plans. Steve Vachon, Analyst

Sprint continues to undercut its rivals as the operator remains reliant on competitive pricing to attract subscribers given its subpar network coverage, though the company is moving away from more aggressive promotions, such as its previous Cut Your Bill in Half offer, to improve average revenue per user (ARPU). Sprint will continue to struggle to balance ARPU and subscriber growth, however, as many customers are unwilling to pay higher prices for the company’s network quality and Sprint is experiencing high churn rates from customers rolling off promotional pricing offers. — Steve Vachon

Public sector IT services spotlight: The U.S. federal earnings season continues the week of July 29 with three services-led defense contractors — Booz Allen Hamilton (BAH), Leidos and ManTech — releasing their fiscal results for the second calendar quarter of 2019.

As reported on Monday, July 29, Booz Allen Hamilton delivered 10.8% year-to-year growth during 2Q19, the first quarter of its fiscal 2020, and 100% of BAH’s growth was organic as the company continues to eschew acquisitions. BAH’s strong performance in 2Q19 reflects how ideally positioned the company is to serve its federal clientele, as well as a growing number of commercial entities, with a high-value, differentiated solutions suite spanning the strategy, mission and critical IT needs of public and private sector clients alike. As a result of its strong 2Q19 year-to-year growth, BAH is also likely to be the top-performing organic growth vendor in TBR’s upcoming 2Q19 Public Sector IT Services Benchmark (publishing in early October). BAH’s growth and margin performance (operating margin of 9.8%) in 2Q19 mostly outstripped that of the trio of federal competitors that released 2Q19 earnings and fiscal performance last week: Raytheon (YTY growth of 5.3%; operating margin of 9.1%); General Dynamics Information Technology (YTY contraction of 11.6%; operating margin of 7.1%); and Northrop Grumman Technology Services (YTY contraction of 0.4%; operating margin of 10.8%). We believe BAH’s performance relates directly to its solution set, which sits at the juncture of federal agency IT and mission objectives with a differentiating blend of consulting, technology and emerging solutions.           John Caucis, Senior Analyst  

Leidos will release its earnings on Tuesday, July 30, and is expected to post top-line, year-to-year growth of between 5% and 7% to reach about $2.7 billion in 2Q19 revenue. Growth will derive from Leidos’ continued strong pace of new awards, net increases in volume across several high-profile programs, and improving win rates, which are accelerating the conversion of pipeline opportunities into bookings and revenue. Leidos should also be able to offset the wind-down of existing programs and some limited currency headwinds from unfavorable swings in the U.S. dollar. The company has guided for 2019 revenue of between $10.5 billion and $10.9 billion, implying a median 5% growth rate, and record backlog levels achieved in prior quarters positions Leidos well to achieve its projections. — John Caucis  

Finally, ManTech will release its 2Q19 fiscal performance and earnings after business hours on Wednesday, July 31. ManTech’s latest strategic acquisition (Kforce Government Solutions, or KGS) will add roughly $100 million in new revenue and expand ManTech’s opportunity set in the federal civilian segment, augmenting robust Department of Defense (DOD) and intelligence growth while inorganically boosting ManTech’s top-line growth (projected to be between 6% and 8% in 2Q19). ManTech’s top-line growth in 2Q19 should be significantly augmented by the KGS acquisition, as the purchase closed in April and immediately began to contribute inorganic revenue to ManTech’s top line. On an organic basis, classified customers continue to accelerate spend with ManTech, while spending on behalf of ManTech’s principal DOD and Intelligence Community clients continues trending upward. Prior to the KGS acquisition, ManTech tendered a 2019 outlook for full-year 2019 revenue of between $2.05 billion and $2.15 billion, implying growth of between 4.7% and 9.8% over FY18 revenue of $1.96 billion. KGS is expected to contribute between $60 million and $80 million in inorganic revenue during the latter nine months of FY19; this compelled ManTech to elevate its prior guidance for FY19 revenue to instead reach between $2.13 billion and $2.21 billion, implying growth of between 8.8% and 12.8% over FY18. — John Caucis  

Enterprises leverage disruptive emerging technologies within their operations to improve processes and accelerate digital transformation

Extension remains the most natural jumping-off point for digital transformation (DT) initiatives, as enterprises can experiment with disruptive technologies within familiar business operations, see their value in generating new business insights, and then use those insights to re-imagine processes. TBR’s Digital Transformation Insights Report: Voice of the Customer shows that vendors need to orient toward development of pointed, industry-centric solutions to retain mindshare. This report, authored by Senior Analyst Boz Hristov, shares survey results across a spectrum of DT issues as well as excerpts from extensive, in-depth discussions with clients currently purchasing DT services.

Additional assessments publishing this week from our analyst teams

While trailing 12-month IT services revenue growth decelerated from 4Q18 to 1Q19, according to TBR’s IT Services Vendor Benchmark, year-to-year growth in 1Q19 of 2.6% surpassed that of 1Q18, which was 2.2%. Vendors are investing in niche digital design areas and industry expertise to drive advisory services activities with C-Suite executives. They are also leveraging established footholds and trust with new buyers to pursue managed services around clients’ application and infrastructure estates. Improving profitability provides vendors with flexibility to invest gains in high-growth and high-value technology-enabled solutions. — Elitsa Bakalova, Senior Analyst

In TBR’s 2Q19 Accenture Initial Response we continue to assess if scale and appetite for innovation still define and shape Accenture’s success as it becomes a solutions broker. We will also look into how platforms supporting omnichannel architecture will underpin Accenture’s efforts to capture custom work and reach $47 billion in sales by 2020. — Boz Hristov

In 1Q19 Dell EMC’s Infrastructure Solutions Group faced year-to-year revenue declines across all segments, including storage, servers and networking, due to a combination of seasonality headwinds and go-to-market challenges. As Dell EMC’s cloud revenue is largely tied to hardware sales, these same challenges compromised its cloud top-line performance. An increasingly strategic partnership with VMware coupled with the new Dell Technologies Cloud portfolio will help boost performance in coming quarters. — Cassandra Mooshian, Senior Analyst

TBR’s Hyperconverged and Converged Market Landscape explores the vendor landscape of these two markets, including leaders and laggards, and the existing and emerging disruptors in the space. This report details recent announcements in the space made by key vendors as well as the disruptive dynamics of emerging hardware trends from nontraditional vendors, such as Amazon Web Services (AWS) with its AWS Outposts.— Stephanie Long, Analyst

TBR’s Hyperconverged Platforms Customer Research surveys hyperconverged customers to analyze purchasing patterns, spending habits, adoption trends and the evolving drivers behind vendor selection. Key highlights of this report include customer desire to leverage hyperconverged infrastructure (HCI) for private cloud environments and the ongoing shift to consumption-based pricing. We also surveyed current HCI customers to determine their likelihood of adopting AWS Outposts, along with where customers will pull funding from to support this new hardware model. — Stephanie Long

SAIC officially began its integration of Engility’s nearly $1.9 billion in revenue and 7,500 employees in 1Q19, aiming to leverage Engility to accelerate its expansion with a more balanced, diversified and lower-risk portfolio and an enhanced competitive stance in markets adjacent to its core Department of Defense and federal civilian sectors, particularly space and intelligence. A new leadership era is also beginning at the top of SAIC’s executive management, as CEO Tony Moraco will retire effective July 31 and will be succeeded by COO Nazzic Keene, who was elected to the CEO post by SAIC’s board of directors in March. Keene has already implemented numerous changes during the CEO transition period as part of the broader initiative she has spearheaded to flatten SAIC’s management pyramid and streamline operations amid the integration of Engility.— John Caucis, John Caucis

TBR’s 1Q19 Booz Allen Hamilton (BAH) report details how the company completed its fiscal 2019 with strong top-line expansion and record revenues, better-than-anticipated earnings, and its largest quarterly dividend increase in years. BAH’s performance throughout its last fiscal year reflects a soundly differentiated market position and multilayered alignment of the company’s technology and advisory portfolio with the primary missions of its federal customers. In May 2015, when BAH launched its Vision 2020 strategy, industry and company observers criticized the plan over concerns BAH would be investing ahead of demand, which had yet to materialize. BAH has sustained a top-line growth CAGR of nearly 6.2% and an average operating margin of 8.5% (both in excess of peer averages for these metrics in TBR’s Public Sector IT Services Benchmark) since Vision 2020 was enacted, affirming the strategic framework was well conceived and has been well executed. — John Caucis

Tune in Wednesday at 1 p.m. EDT to hear Stephanie Long share highlights from TBR’s HCI research including exclusive recent findings from TBR’s Hyperconverged Platforms Customer Research. The webinar will highlight how the HCI market has shifted over the last few years and where TBR sees it headed. Additionally, this will be a great opportunity to ask our analysts your questions about the HCI market. Sign up today!

TBR’s Quantum Computing Market Landscape details emerging uses cases, economic disruption and alliances

TBR’s first Quantum Computing Market Landscape focuses on multiple facets of the quantum computing market, exploring the vendor landscape of a variety of competing hardware vendors with differing quantum theories, as well as software services and security vendors playing in the quantum computing space. Emerging customer sentiments, as well as recent alliances, emerging use cases and economic disruption are all themes explored within this first iteration of the report. A previous TBR special report by Analyst Stephanie Long looked at the “economic advantage” of quantum computing, and our May Digital Transformation Insights Report: Emerging Technology put the consulting and services around quantum in the context of digital transformation. The new market landscape builds on all TBR’s research and analysis to date.

 And don’t forget to sign up for Stephanie’s July 24 webinar, Quantum computing leaps into customers’ transformation-centric conversations.

Additional assessments publishing this week from our analyst teams

TBR’s Hewlett Packard Enterprise’s (HPE) full report, scheduled to publish June 14, further explores the vendor’s quarterly performance and deep dives into HPE’s infrastructure strategy amid recent and ongoing changes. The report provides greater details on themes covered in the initial response, which published May 24, including how commoditization continues to take its toll on infrastructure vendors’ bottom lines, increasing competition and encouraging more nuanced strategies to get ahead. It also talks about competitive changes in the server landscape hindering HPE as well as its peers and touches on the various strategies playing out in the consumption-based pricing realm, which is a key strategic focus for HPE. Stephanie Long, Analyst

TBR’s Hosted Private Cloud Market Forecast, publishing Wednesday, details how growth will persist up and down the hosted private cloud stack despite the relative cost-effectiveness of public cloud options. IBM remained the vendor to beat overall in 2018, while Microsoft is expected to take on significant additional market share through 2023 as it expands its portfolio of hybrid delivery options and migrates its legacy Office and Dynamics customers to cloud-native versions. — Cassandra Mooshian, Senior Analyst

TBR is publishing the 1Q19 DXC Technology (DXC) report June 14. DXC reported revenue of $5.3 billion, a year-to-year decline of 5.4%, pressured by the completion of several large contracts without replacement and ongoing headwinds in legacy applications work. DXC continues to execute its aggressive cost-cutting initiatives including headcount reduction and facility rationalization, which are being reinvested into funding its active M&A strategy, optimizing service delivery, and developing standardized and automated service delivery capabilities.” Kevin Collupy, Analyst

HPE Pointnext report will publish June 14 and will discuss how HPE is beginning to reap the benefits of its Next initiative, reducing its global footprint to focus on profitable regions. Pointnext continues to act as a key profit generator for the company, enabling investments both internally and through acquisitions to generate new innovative solutions around its core infrastructure offerings.” — Kevin Collupy, Analyst

On June 13 TBR will publish its semiannual Alibaba Cloud report. This report discusses the current investments Alibaba is making to win share from public cloud leaders, namely Amazon Web Services (AWS), and the progress the business is making in doing so. TBR also discusses recent changes to Alibaba Cloud’s leadership structure and the growing importance to the broader Alibaba Group that these changes signify. Meaghan McGrath, Senior Analyst

TBR’s upcoming 1Q19 Booz Allen Hamilton (BAH) report details how BAH wrapped up its FY19 with robust top-line expansion and record revenues and solid earnings, which in turn enabled BAH to reward shareholders with the largest quarterly dividend increase in recent memory. BAH’s performance reflect a soundly differentiated market position and close alignment of its technology and consulting solutions with the missions of its federal customers. BAH is well positioned to sustain its FY19 performance in FY20 in a federal IT market burgeoning with opportunities for IT modernization and the integration of advanced technologies. John Caucis, Senior Analyst

Lastly, if you haven’t already, sign up now for the this week’s webinar, The Makings of the Telecom Edge Compute Market.

Booz Allen Hamilton keeps winning, even when the government shuts down

TBR’s initial response to Booz Allen Hamilton’s (BAH’s) 1Q19 earnings published on Tuesday, and we expect another strong quarter from BAH to close out its FY19. BAH boasts a soundly differentiated market position and multilayered alignment of its technology and advisory portfolio with the primary objectives of its federal customers. Consulting-led offerings are increasingly interwoven with an innovative technical capacity designed to enable federal clients to meet operational challenges and security threats ever-increasing in sophistication and volume. BAH even emerged from the recent 35-day temporary government shutdown with minimal fiscal damage, further illustrating the resiliency of its solutions model and fueling its confidence about 2020. We further expect the company will issue strong guidance for its upcoming fiscal 2020, with revenue growth in the high single digits and margin performance sustained at current levels.

Read more of Senior Analyst John Caucis’ assessment of federal IT services vendors through the quarter and the upcoming quarterly benchmark.

Additional assessments publishing this week from our analyst teams

Tuesday

  • In our 1Q19 Hewlett Packard Enterprise Cloud Initial Response, we discuss how the company’s margin improvements resulted from a more software-defined portfolio and improved operating efficiency as the HPE Next initiative enters its final year. — Cassandra Mooshian, Senior Analyst

Wednesday

  • Cost-cutting initiatives including headcount reduction and deeper integration of digital sales and customer service channels enabled Sprint to reduce $1.2 billion in gross operating costs in FY18, but this was largely offset by reinvestments in network and other operational initiatives. Sprint’s financial position will remain challenged long term due to its high debt load and struggle to generate positive net income and free cash flow, highlighting why the T-Mobile merger is in the best interest of the company. — Steve Vachon, Analyst

Thursday

  • Now with its third CEO in two years, Rackspace rebrands Fanatical Support to Fanatical Experience as it commits to providing ‘unbiased expertise’ and a more total support system.      — Cassandra Mooshian, Senior Analyst

Friday

  • We expect VMware to report another quarter of strong, above-average growth in comparison to its software peers. Ongoing portfolio investments, partnerships and tuck-in acquisitions position the company for continued customer attraction and retention. — Cassandra Mooshian, Senior Analyst
  • Portfolio and talent developments equip HCL Technologies (HCLT) to sustain revenue growth through 2021. HCLT needs to quickly scale its investments and market presence to solidify growth. Kelly Lesiczka, Analyst
  • Despite enhanced efficiencies in traditional IT operations, T-Systems could not offset pressures on profitability from reorganization and adoption of IFRS 16. Expanding its portfolio in growth segments will enable T-Systems to benefit from a more flexible business model to adapt to and address client demands. Kelly Lesiczka, Analyst

And if you missed the May 22 webinar, Bringing the best: Talent and technology in management consulting, check out the replay here.

Don’t stop thinking about tomorrow: Amazon, RPA, AI and ethical IT in the federal sector

Notwithstanding the increased integration of artificial intelligence (AI) and process bots into government operations, the U.S. federal services sector decidedly remains a people business. At a recent Washington Technology Power Breakfast forum, industry leaders talked talent strategies and how they hope to succeed as digital transformation fundamentally changes the types of people sought for government work. A few key themes emerged as near-universal top-of-mind concerns for forum participants and audience members, such as the importance of developing a brand and messaging values that resonate with the emerging workforce; the criticality of public-private partnerships to develop talent in the greater Washington, D.C., area and beyond; and the concern and uncertainty about the human capital impact of Amazon’s (Nasdaq: AMZN) recent decision to become a much closer neighbor of Uncle Sam.

The trends and issues discussed often repeated themes TBR touches on regularly in its analysis of the IT industry, both within the federal market and across public and private sectors globally. While the perspectives shared were both validating and enlightening, there was just as much value in paying attention to what the panelists did not talk about at length. Today’s pressing HR demands leave little time for talent strategists to worry about the looming disruptive impacts of AI and robotic process automation (RPA), the fundamental changes in labor amid the rise of asset-based services, forward-thinking venture-capital-like approaches to partnerships, or the uncomfortable and growing issue of ethics conflicting with the eagerness to apply innovative IT to government missions. HR leaders and strategic decision makers at the leading services firms will need to grapple with these difficult topics today if they want to stay ahead of disruption that is just around the corner in the dynamic and rapidly changing IT industry.

 

 

Washington Technology Power Breakfast: TBR Public Sector Analyst Joey Cresta was recently invited to participate in a panel discussion on talent strategies of government contractors at a breakfast forum hosted by Washington Technology. The event provided an outlet for executives, HR experts and industry thought leaders to share how they intend to win talent in a competitive labor market while maintaining profitability and bracing for the impact of Amazon’s impending move into Crystal City.

Services Weekly Preview: November 19-21

Before we celebrate Thanksgiving on Thursday and recover from all that food on Friday, we will publish some of our periodic analysis of IT services vendors, management consulting profiles, and special reports. Here’s what’s coming:

Monday: TBR’s 3Q18 Booz Allen Hamilton full report will provide analysis on one of the federal market’s most forward-thinking and risk-taking services providers. While peers struggle to cultivate a relevant data science workforce, BAH aims to cement its advantage by leading the charge around data science standardization. Its fast-mover advantage enables BAH to set the rules and challenges competitors to fall in line. Such efforts support scalability of more mature capabilities while BAH continues to evolve by exploring new business models, investing in IP and delving into emerging technologies such as blockchain, artificial intelligence and directed energy.

Wednesday:

  • TBR’s 3Q18 CACI full report examines how a traditional defense-led federal services contractor is adjusting to the incursion of commercial IT best practices into its core market areas. The report analyzes how these market disruptors can work to the advantage of a company like CACI, which is investing in software-defined open architecture systems in high-end defense technologies, such as electronic warfare and signals intelligence, to disrupt traditional military suppliers rooted in old procurement models focused on hardware-defined, proprietary and bespoke solutions.
  • In June we described BCG in our Management Consulting Benchmark as the best-positioned for acceleration among immediate peers, including McKinsey and Bain. Our new profile on the firm furthers that assessment, with a caveat the firm will need to retain talent, especially in emerging technology areas, to remain competitive, particularly with Big Four firms like PwC and EY.
  • Last week in Dallas we heard directly from Atos and the new Atos-Syntel leadership about the strategy and expectations for this multibillion-dollar, North America-centric acquisition. Our special report will detail why we think Atos’ renewed approach to the U.S. market will have a substantial impact on the company’s performance in the near term.

Federal initiatives around IT modernization translate to revenue growth for public sector services providers

Growth opportunities across defense and civilian agencies uplift vendor performance

The results of TBR’s 2Q18 Public Sector IT Services Benchmark demonstrate clear top-line benefits for services providers as government agencies accelerate IT modernization initiatives. Revenue for the 16 benchmarked vendors improved 5.3% year-to-year, which does not even factor in General Dynamics IT essentially doubling in size through its acquisition of CSRA. Including the impact of the acquisition, revenue grew 13.5% from 2Q17.

Graph showing weighted average total year-to-year revenue growth versus organic year-to-year revenue growth for 2Q17 through estimated 3Q18

Industry consolidation remains a prevailing theme in the market as the near-term opportunities tied to U.S. federal budget growth and the pursuit of innovation create a sense of urgency for vendors to capitalize. Scale advantages, complementary capabilities and broadened customer relationships make consolidation a compelling tool to facilitate near-term deal capture. Consolidation will remain a prominent strategic concern, evidenced by the announcement after the close of 2Q18 that SAIC (NYSE: SAIC) plans to acquire Engility (NYSE: EGL). However, in the long run, TBR anticipates the importance of scale will diminish as rapid technological change disrupts legacy business models.

TBR believes that the door is open for industry stalwarts to be disrupted if they elect to ignore the prevailing signs that the federal government, in particular the U.S. Department of Defense, seeks change in how it procures and fields technology.

 

TBR’s Public Sector IT Services Benchmark examines the key strategies, investments and performance metrics of leading government consultants, systems integrators, and IT and professional services providers. The benchmark examines 16 vendors across three groups: services units of aerospace and defense firms, U.S. federal government pure play vendors, and public sector verticals of commercially led IT services companies. We mix qualitative analysis of key investments and strategic initiatives with quantitative analysis of financial performance to uncover the drivers of business success for vendors that offer services to government customers.

Booz Allen Hamilton targets Philippines for advisory around cyber and data privacy in APAC

When Booz Allen Hamilton (BAH; NYSE: BAH) separated its commercial practice from its U.S. federal government business in 2008, noncompete clauses restricted the federal practice’s ability to pursue opportunities outside the U.S. government. Since then, the commercial practice known as Booz & Co. joined PwC as Strategy& and the noncompete clauses expired, opening new markets to BAH. Global commercial expansion is an underpinning of BAH’s successful Vision 2020 strategy, which pairs a management consulting heritage with investment in technical skills around data science, cybersecurity, artificial intelligence and digital services.