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Turning the corner from crisis response to client recovery and renovation: CY2Q20 federal IT COVID-19 roundup

The impact of COVID-19 on revenue, profitability and award activity was material but also erratic and inconsistent across vendors

Federal IT vendors tracked in TBR’s Public Sector IT Services Benchmark generally reported at least some erosion of top-line growth or profitability in CY2Q20 that was directly or indirectly attributable to the pandemic. Many providers were compelled to revise downward revenue or margin guidance for their current fiscal year, though for some, the COVID-19 impacts during the quarter were less substantial than originally expected. In an early response to the coronavirus outbreak, vendors quickly shifted their focus to operational stability, cash preservation and maintaining program delivery.

Among the contractor set TBR follows, the vendor bookends for CY2Q20 fiscal performance were Maximus (NYSE: MMS) and General Dynamics IT (GDIT) (NYSE: GD). Maximus’ sales rose more than 23% year-to-year as the company fully leverages the citizen engagement centers it purchased from GDIT in late CY18. Maximus’ 2020 Census contract, which is expected to generate $360 million in revenue during the company’s FY20 (ending Sept. 30), continues to ramp up to full operations, providing most of Maximus’ federal segment growth in CY2Q20.

Also of note was ManTech (Nasdaq: MANT), which also appeared to fully elude the pandemic by posting 17.8% year-to-year growth (16.4% on an organic basis) in CY2Q20 and continued hiring aggressively to quickly scale new engagements and execute on key classified contracts. Conversely, GDIT suffered a 12.7% year-to-year decline in sales in CY2Q20, the fifth straight quarter of revenue contraction since the company completed the CSRA acquisition and sold its call center business to Maximus. COVID-19 drove a slowdown in award activity in CY2Q20, worsening delayed contracting actions GDIT has struggled with since late CY19. GDIT project teams were often unable to enter customer work sites, dampening sales (and margins) in CY2Q20, while the company has yet to replace revenue lost by the completion of several legacy programs in CY19. While growth at many of the remaining federal IT competitors TBR tracks was tempered in CY2Q20, most delivered at least marginal top-line growth while deflecting, to varying degrees, pandemic-related profit pressures.

New projects to aid the federal COVID-19 response did provide a handful of vendors with new revenue streams, but classified programs (particularly in the intelligence space) were a commonly cited challenge area. Many classified clients closed their sites to all but mission-critical employees during CY2Q20, generating growth and margin pressures that varied according to a vendor’s exposure to the classified arena.

The process for getting employees cleared for new classified projects or for simply getting clearances for new employees was also made more difficult by the pandemic, keeping some vendors from generating new revenue from some recent awards. Deploying project teams to nonclassified defense and civilian programs was also problematic, causing significant portions of vendor workforces to remain idle or underutilized and deferring revenue recognition, though this trend was less intense outside the classified space. Still, the federal government remained open during the early months of the pandemic, and most programs remain fully funded even as the coronavirus created a government shutdown of a different sort with effects that are and will remain unpredictable, even into CY21.

While the coronavirus hit during CY1Q20, the bulk of the pandemic-related turmoil in relation to program delivery, business development and operations was expected during CY2Q20. Federal IT vendors adapted quickly to manage the direct impacts of COVID-19 by shifting large swaths of their workforces to telework, activating new incident response protocols, and rolling out new virtual collaboration tools to maintain communication with clients and project teams. The resiliency of the federal IT market and proactive response to the crisis to ensure service continuity offset some of the headwinds to vendor fiscal performance, but uncertainty about the continued impact of the pandemic remains.

Technology Business Research, Inc. announces 3Q20 webinar schedule

Technology Business Research, Inc. (TBR) announces the schedule for its 3Q20 webinar series.

July 15          The long view: Which post-pandemic trends will shape the world in 2030?

Technology trends that were shaping the digital transformation world pre-pandemic as well as predictions for 2030

July 29          From boom to bust and back: COVID-19 changes dynamics of consulting-led digital transformation programs

Key findings around leading IT services and management consulting vendors’ performances as well as evolving buyer expectations around service delivery and vendor consolidation

Aug. 26        5G is coming faster than originally expected

Impact of key market occurrences over the past six months on the 5G market and the broader ICT ecosystem

Sept. 16       Cloud vendors expand their go-to-market tool kits

How vendor go-to-market strategies are evolving and becoming increasingly creative in the cloud era

Sept. 23       PCs in a pandemic

How the global COVID-19 pandemic is affecting the PC business and the use of PCs in general

Sept. 30       Federal IT moves past COVID-19

Trends shaping the federal IT market as the federal government’s fiscal year comes to a close

TBR webinars are held typically each Wednesday at 1 p.m. EDT and include a 15-minute Q&A following the main presentation. Previous webinars can be viewed anytime on TBR’s Webinar Portal.

For additional information or to arrange a briefing with our analysts, please contact TBR at [email protected].

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.

The federal IT market braces for impact

Uncertainty underpins the short- and long-term outlook for the impact of the coronavirus pandemic on the federal IT space. Federal agencies and their IT contractors face disruptions across their supply chains, operations, procurement functions and fiscal management.

Near-term turbulence is inevitable

Defense majors Northrop Grumman and General Dynamics, on March 19 and March 23, respectively, published 8-K filings updated with assessments of the potential negative impact of the coronavirus on their businesses. Risk factors are far-reaching and extend beyond company fiscal health, including diminished employee productivity and contract performance, supply chain disruptions, increased cost of and diminished availability of investment capital, temporary suspension of operations at customer facilities or work sites, and reduced demand for company products and services stemming from possible economic downturns in the U.S. and abroad. These contractors and others issuing similarly cautionary remarks have further noted they cannot predict the full impact of COVID-19 on their business or the industry at this time.

TBR foresees additional near-term challenges in the form of purchasing delays and deferred starts (and thus revenue recognition) on recent awards as the entire procurement cycle shifts to the right, along with project execution on programs already underway. Travel bans or restrictions will further impact project delivery and impede business development efforts.

As the federal IT market moves into calendar 2Q and the fiscal reporting season for calendar 1Q20 begins in late April, COVID-19 will be a major factor driving revised outlooks for 2020 fiscal performance for contractors amending their guidance (and we expect many, if not most, will be compelled to do so). During its earnings release on March 19, Accenture revised its projections for fiscal 2020 global top-line revenue and growth from its previous forecast of 6% to 8% growth over fiscal 2019 to a new projection of 3% to 6% top-line growth over fiscal 2019 (both ranges in local currency).

Raytheon Technologies is another federal contractor that is particularly vulnerable to the impact of COVID-19. Raytheon’s legacy defense business will face the same challenges as its defense sector peers as the COVID-19 situation plays out, but as the merger with United Technologies (UT) includes the integration of UT’s Pratt & Whitney and Collins Aerospace operations, Raytheon will be highly exposed to the aerospace sector. The commercial aviation market has been particularly hard-hit by COVID-19-related travel bans and restrictions, and the negative effects will linger for years. This underscores the urgency for Raytheon to complete the merger quickly and fully assess the potential impact of the inevitable decline of the global aerospace sector.

Microsoft beats out Amazon after contentious competition for DOD’s JEDI award

Last Friday’s announcement of the massive U.S. federal government cloud contract led Senior Analyst John Caucis to publish a special report explaining how Microsoft won, why Amazon lost, and what it all means for the IT services vendors in the U.S. public sector space. “Regardless of why the DOD [Department of Defense] chose to announce the winner of the biggest single cloud contract to date in federal IT (and one of the biggest IT contracts in federal IT history) when it did, Microsoft is now poised to capture potentially billions in revenue as the DOD’s leading cloud vendor on JEDI [Joint Enterprise Defense Infrastructure], an award with a $10 billion ceiling and a potential 10-year life span if all options are exercised. Vendor selection for JEDI has been ongoing for over a year, plagued by multiple protests, internal investigations, and conflict-of-interest allegations by and between the initial four contestants, Amazon, IBM, Microsoft and Oracle. The acrimony kept the DOD from awarding JEDI by its original target date of April 2019, though the agency eliminated IBM and Oracle in April in the first ‘down-select’ of the vendor review process.”

Additional assessments publishing this week from our analyst teams

“Restructuring and automation efforts help Fujitsu reposition for profitable growth in its services business. However, the company may need to look outside its traditional client base to see tangible results throughout 2020.” — Kelly Lesiczka, Analyst

“From a cloud perspective, Fujitsu will align its strategy to its competitors’ strategies, which consist of encouraging customer migrations to hybrid and multicloud environments. However, TBR believes Fujitsu’s expertise in IT outsourcing will serve as a differentiator as Fujitsu looks to explore operational services within multicloud environments more heavily compared to industry peers. Fujitsu announced plans to invest ¥500 billion in its DX business over the next five years and to launch an independently operated consulting business, expected in January 2020, to meet its technology goals.” — Nicki Catchpole, Senior Analyst

“While Cognizant faced challenges within its mature industry segments in 2Q19, we expect the company improved its ability to scale digital solutions through additional acquisitions, such as Zenith Technologies, to offset pressure in 3Q19.” — Lesiczka

Tata Consultancy Services’ (TCS) Business 4.0 strategy focuses on expanding the company’s solution suite around next-generation offerings such as AI, analytics, big data, blockchain, cloud, IoT and security. Integrating this strategy across service delivery and got-to-market teams enables TCS to sustain its global brand awareness and creates opportunities to upsell existing clients and attract new logos seeking increasingly comprehensive digital transformations, which generates opportunities for longer-term and often larger-dollar outsourcing engagements.” — Kevin Collupy, Analyst

“TBR’s Global Delivery Benchmark shows that agile-based service delivery is speeding up vendors’ ability to deliver at scale, which is forcing vendors to hire more talent with specific skills to keep pace in this delivery model. As vendors continue to adjust business models to operate in an automation-enabled services environment, their inability to systematically and consistently monetize IP will further pressure profits.” — Boz Hristov, Senior Analyst

“In the latest Digital Transformation Insights report on Digital Marketing Services, TBR notes that as the most mature digital transformation process, customer experience process has compelled buyers to embark on omnichannel projects to unify insights and processes across the customer life cycle and deliver more personalized experiences to end consumers. While macroeconomic headwinds will taper revenue growth, AI-enabled user experience solutions will continue to create entry points for customer acquisitions compelling vendors to recalibrate investment strategies.” — Hristov

Leidos’ 3Q19 revenue is expected to rise between 4% and 6% year-to-year to between $2.68 billion and $2.73 billion as the company’s backlog continues to reach new highs, owing to a strong, sustained pace of net-new contract bookings across defense, civilian and particularly, healthcare areas. Leidos also successfully defended its position on a handful of large projects during 3Q19, 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 Agency (TSA).” — Caucis

CACI’s revenue is projected to increase between 15% and 20% year-to-year to between $1.34 billion and $1.4 billion in 3Q19. A revenue result for CACI anywhere in the projected range would represent another record level for the company, reflecting the tight alignment of its differentiated solutions with high-priority spending areas in the defense and intelligence markets. CACI is beating out incumbents on large-scale program recompetes and effectively 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 customer set. $1 billion in acquisitions made in 1Q19 are also bolstering CACI’s top-line, though concurrently generating margin pressures.” — Caucis

Booz Allen Hamilton’s (BAH) revenue is expected to increase between 9% and 11% year-to-year to between $1.76 billion and $1.79 billion in 3Q19, consistent with the company’s plan to aggressively execute on its FY2020 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, while growth in its Global Commercial business has been more variable. Irrespective, BAH continues to book a strong volume of IT modernization, advisory and security-focused engagements.” — Caucis

“To further reduce churn and increase revenue, T-Mobile is building a more robust customer ecosystem by launching new value-added services, expanding its IoT portfolio, and entering new markets such as video and residential broadband.” — Steve Vachon, Analyst

AT&T’s network investments in areas including 5G, NFV, SDN and IoT are providing the foundation for businesses to support digital transformation initiatives to enhance efficiency and customer experience. AT&T is preparing to support next-generation digital solutions by fostering network innovations at its six global AT&T Foundry centers as well as working with multiple leading technology providers including Dell Technologies, IBM, Microsoft, Samsung and Hewlett Packard Enterprise.” — Vachon

Microsoft outduels Amazon for JEDI

Microsoft beats out Amazon after contentious competition for DOD’s JEDI award

Late on the afternoon of Friday, Oct. 25, the Department of Defense (DOD) announced it had selected Microsoft (Nasdaq: MSFT) for its lucrative Joint Enterprise Defense Infrastructure (JEDI) cloud contract, the Pentagon’s plan to adopt a general-purpose cloud infrastructure first announced in November 2017. The notification of JEDI’s winner came at an odd time — we saw the first notification of Microsoft’s win at 6:30 p.m. EDT. Releasing news or documents late on a Friday afternoon is sometimes referred to as a “Friday news dump” by members of the media, a technique that can thwart in-depth media analysis of bad news or unfavorable developments affecting the story’s source.

Regardless of why the DOD chose to announce the winner of the biggest single cloud contract to date in federal IT (and one of the biggest IT contracts in federal IT history) when it did, Microsoft is now poised to capture potentially billions in revenue as the DOD’s leading cloud vendor on JEDI, an award with a $10 billion ceiling and a potential 10-year life span if all options are exercised. Vendor selection for JEDI has been ongoing for over a year, plagued by multiple protests, internal investigations, and conflict-of-interest allegations by and between the initial four contestants, Amazon (Nasdaq: AMZN), IBM (NYSE: IBM), Microsoft and Oracle (NYSE: ORCL). The acrimony kept the DOD from awarding JEDI by its original target date of April 2019, though the agency eliminated IBM and Oracle in April in the first “down-select” of the vendor review process.

Amazon was once the ostensible front-runner, but Microsoft’s approach to hybrid cloud may have won out in the end

Amazon won the $600 million cloud award with the CIA in 2013, beating out AT&T (NYSE: T), IBM and Microsoft, an engagement many industry observers expected would act as a springboard for Amazon to future cloud work in the federal IT sector. After JEDI was announced in late 2017, industry analysts believed Amazon, the market share leader in the cloud space, and its ongoing cloud work in the U.S. Intelligence Community (IC) would help clear the way to victory on JEDI. Amazon’s alliance with VMware (NYSE: VMW) was key to winning the CIA cloud work, as VMware was estimated to be hosting between two-thirds and three-quarters of government workloads running on the cloud at the time. Amazon had also enhanced the security of its cloud offerings to accommodate defense- and intelligence-grade data assurance needs by steadily obtaining new authorizations to host government data at increasingly higher security levels. As the vendor selection process for JEDI moved along, however, concerns arose that JEDI’s single-source structure would diminish the DOD’s flexibility in choosing cloud vendors and technologies. There were also indications during 2019 that the DOD’s cloud migration strategy was increasingly favoring a more piecemeal and unhurried transition to the cloud. The DOD’s evolving cloud preferences seemed to shift the JEDI competition in favor of Microsoft’s hybrid cloud approach that blends exiting IT infrastructures with new cloud systems while leveraging partners to a greater degree in the migration process.