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TBR launches semiannual U.S. Telecom Operator Public Sector Market Landscape

TBR launches five mission systems-specific reports: Boeing Mission Systems, L3Harris Mission Systems, Lockheed Mission Systems, Northrop Mission Systems and Raytheon Mission Systems.

Top 3 Predictions for Federal IT Services in 2022

Where the money flows, IT services follow

Federal spending priorities shifting to favor civilian agencies

In three areas, the Biden administration’s pivot from defense spending to shoring up civilian agencies will have immediate effects on the federally focused IT services vendors. First, accelerated cloud adoption and new spending bringing cloud to civilian agencies will create partnerships and acquisition opportunities, as well as additional revenue streams. Second, IT services vendors well positioned for that pivot will increase their market share. Third, increased AI, analytics and cybersecurity deployments, supported by new federal dollars flowing to civilian agencies, will further separate federally focused IT services vendors that have built capabilities and talent during the last several years.

Civilian sector IT spending has recovered vigorously from the COVID-19 trough in 2020, thanks to civilian agencies’ ongoing drive to digitize their IT infrastructures, and the shifting budget objectives of the Biden administration will further accelerate civilian IT outlays. Health IT is emerging as a major growth driver on the civilian side, owing to ongoing COVID-19 response initiatives, electronic health record modernization, and IT projects to enhance the interoperability of health IT environments in the federal, state and local government sectors. Even amid the expected deceleration in defense spending, the Pentagon will leverage cloud infrastructures to connect IT platforms for combat operations across service branches, while cloud computing will become essential to transmitting, sorting and analyzing mission data.

Federal systems integrators also have an eye on the transformative technologies and methodologies that are becoming commonplace in the digital modernization of federal IT infrastructures. For example, federal IT services vendors will increasingly utilize low code as they execute cloud implementations, enabling the rapid development and scale-up of cloud-based software tools. Federal IT contractors are also pondering the effects of 5G and quantum on cybersecurity, while upgrading existing mobile and IT communications systems into more open and interoperable networks embedded with AI and analytics technologies.

2022 federal IT services predictions

  • Increased U.S. federal cloud spending upends the IT services market
  • Vendors prepared for flattening defense budgets and accelerated civilian spend will see early gains
  • Investment in advanced digital technologies will accelerate across all federal sectors

Send me a free copy of TBR’s Top 3 Predictions in Federal IT Services in 2022

Telecom Business Research’s 2022 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud, telecom, devices, data center, and services & digital.

Big Blue and big government: Enhancing security and co-innovation operations improves IBM’s chances in the U.S. public sector

IBM is strengthening public sector resources in the U.S. to capture modernization opportunities

While the public sector accounts for less than 10% of IBM’s revenue, in TBR’s estimates, IBM is expanding resources in the U.S. to ramp up activities. IBM developed its delivery capabilities for the U.S. federal sector by establishing the IBM Center for Government Cybersecurity in June. The center, part of IBM’s offices in downtown Washington, D.C., will have a secure laboratory space for government clients to jointly develop solutions around advanced security threats leveraging IBM technologies and services. The center will provide access to IBM experts and external advisers, such as former government officials, as well as host workshops around topics such as zero-trust frameworks and cloud security. Clients will also have access to the IBM Research labs to collaborate on encryption solutions. ​

In October IBM opened a new IBM Garage location in Huntsville, Ala., a location designed specifically to support the federal government’s digital transformation and modernization. IBM is enhancing its value proposition by offering government-grade cloud environments, cleared local resources trained on IBM Garage principles and methodology, and thought leaders that will provide services in a hybrid model. In a similar move, Accenture Federal Services opened an innovation space at the University of Alabama in Huntsville’s Invention to Innovation Center in June. Such activities indicate a potential war for talent, especially for industry and technology experts skilled at working with public sector clients.​

A partnership with Raytheon, formed in October, expands IBM’s reach in the aerospace, defense and intelligence, and federal government sectors. IBM and Raytheon will jointly develop AI, cryptographic and quantum solutions. Raytheon is one of several federal aerospace and defense (A&D) contractors teaming with IBM Services to launch MARQTS (Marketplace for Advanced, Rapid, Quantifiably-assured, Trusted Semiconductors), a hybrid cloud-based and blockchain-enabled forum to support the secure development of microelectronics for the commercial industry and the DOD. IBM joins A&D and commercial IT companies Boeing, Cadence, Colvin Run Networks, Intrinsix, Lockheed Martin, Marvell Government Solutions, Nimbis Services Inc., Northrop Grumman and PDF Solutions. MARQTS will be available to the U.S. defense sector by 2023. IBM will use a proprietary cloud platform developed to enable secure collaboration for the group, while the platform will reside on an IBM blockchain to enhance security. IBM expects to roll out MARQTS across the DOD by 2023.

According to TBR’s 2Q21 Public Sector IT Services Benchmark, “The appetite for digital modernization by agencies of the U.S. federal government remains strong, as evidenced not only by record revenue and backlog levels reported by many federal technology contractors in 2Q21 but also by the robust level and velocity of proposal submissions tendered by federal IT vendors. Commercial technology adoption is red hot in federal IT, particularly around cloud computing, where TBR observed a significant uptick in efforts by multiple contractors during 2Q21 to shore up collaborations with the leading commercial cloud leaders.”

Senior Analyst John Caucis, who leads TBR’s Public Sector IT Services research, notes, “The federal civilian sector has recovered vigorously from the COVID-19 trough a year ago, thanks to civilian agencies’ ongoing drive to digitize their IT infrastructures. Cyber budgets are also growing, reflecting federal agencies’ strong will to secure their data and IT systems from the ever-growing barrage of cyber threats. AI is increasingly permeating security, intelligence gathering and analysis, the burgeoning space sector, and citizen services, cementing AI as a critical technology to drive mission success and driving AI leaders like Booz Allen Hamilton to accelerate the time to market of new AI technologies.”

The content above draws heavily from TBR’s most recent quarterly analysis of IBM’s services business. Contact the author at [email protected] for additional insight and information. 

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.

Federal IT moves past COVID-19

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. The pandemic has disrupted award activity and contract delivery while creating resource deployment challenges at federal IT vendors and their agency clients. While the pandemic will cause a shift in some IT outlays, it appears the foundation of digital transformation, analytics, AI, big data, cloud, cybersecurity, mobility and machine learning will remain intact and federal IT budgets will continue to give precedence to the adoption of these technologies.

Join John Caucis and Brian Baker Sept. 30 as they review the results from TBR’s 2Q20 Public Sector IT Services Benchmark report and discuss the trends shaping the federal IT market as the federal government’s fiscal year comes to a close.

Don’t miss:

  • Revenue growth and profit drivers for federal IT vendors
  • Federal IT providers that are winning in the COVID-19 environment and why
  • Factors driving new solution introductions, alliance formation and acquisitions by federal IT vendors
  • The lingering impact of COVID-19 on federal IT spending patterns and vendor activities
  • Outlook for federal fiscal 2021

Multiyear bull market in public sector IT spend faces an abrupt end in 2020 as COVID-19 upends global governments

“The COVID-19 outbreak represents a significant threat to public sector IT investment that has trended steadily upward for the last several years,” says Senior Analyst John Caucis in TBR’s recently published Public Sector IT Services Benchmark. “The full impact, however, may not manifest in public sector vendor fiscal performance until 2H20.”

Caucis, Analyst Brian Baker, and Principal Analyst and Practice Manager Patrick Heffernan delved into the coronavirus impact on U.S. federal IT services vendors, such as Raytheon, Booz Allen Hamilton and Accenture, in a recent TBR Talks COVID-19, available on our YouTube page. In addition to speaking to near-term earnings releases, Caucis reminded listeners that much of the impacts for these vendors will be delayed until the next fiscal year. Baker speculated on how the M&A trends of the last few years could be upended by the pandemic, and Heffernan added context by contrasting commercial sector-focused IT services vendors with those in the U.S. federal space.   

Additional reports recently published by TBR’s analyst teams

1Q20 Tata Consultancy Services Initial Response

Previous investments in its operating model have prepared Tata Consultancy Services (TCS) to execute during the COVID-19 pandemic, but TCS’ biggest hurdles in 2020 will be maintaining its install base and top-line growth.

4Q19 Public Cloud Benchmark

Microsoft is improving its competitive position against Amazon Web Services (AWS) through partnerships, notably its direct data center connections with Oracle. Although only a limited number of regions support these direct connections currently, the Microsoft-Oracle partnership is expanding with new direct connections in Canada. However, AWS holds significant IaaS market share and remains the leading IaaS provider as of 4Q19.

1Q20 Accenture Cloud: Partners and cloud- and cyber-skilled talent enable growth

As Accenture strives to maintain a strong brand for multicloud management opportunities through its certified cloud delivery bench and the launch of myNav, the global coronavirus pandemic will test its ability to succeed.

1Q20 Wipro IT Services Initial Response

Wipro maintained growth in FY4Q20, but cited losses associated with COVID-19 at the tail end of the quarter. Moving through 2020, a reliance on automation to control costs and the ability to offer cloud migration services will be mission-critical capabilities for Wipro and its IT service provider peers in absorbing the shock of COVID-19.

4Q19 Devices and Platforms Benchmark

The device market continued to grow in 4Q19, backed by higher smartphone, PC and smart device sales. However, COVID-19’s effect on the global economy will begin to appear in 1Q20 results, with a more severe impact on midyear performance.

4Q19 Telecom Infrastructure Services

The telecom infrastructure services market finished 2019 on a strong note as CSPs deployed 5G RAN and new optical technology in 4Q19, but rollouts will face delays in 2020 amid COVID-19-induced supply chain issues, human resource challenges and spectrum allocation delays.

4Q19 IT Services Vendor Benchmark

While IT services providers will have growth challenges during 2020, the integral role technology is playing in everyone’s work and personal lives due to the COVID-19 virus provides growth opportunities for vendors that are agile and quick to adapt to the changing market dynamics.

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.

Two Back, Three Forward: Growth in the Western Hemisphere

In our new weekly blog series Two Back, Three Forward, we look at two numbers in TBR reports from the prior week as well as three numbers from our upcoming reports, highlighting the analysis TBR provides and the vast amount of data — the numbers — we’re working with every day. It’s all about the data and what that data means to you.

Two Back

11, vendors profiled in TBR’s 1Q20 Enterprise Edge Compute Market Landscape. A newly launched product from TBR looks at the far edge of the edge compute spectrum, which is “also known as the local edge, new edge, network edge, mobile edge, multiaccess edge or distributed new edge.” Within the market landscape, senior analysts Nicole Catchpole and Stephanie Long examine recent developments and provide a SWOT assessment on vendors as diverse as Atos, Equinix and Microsoft. 

5, clients TBR visited with last week in New York City. In a bit of a whirlwind tour continuing the spring travel season, TBR shared parts of our Digital Transformation Insights portfolio, our soon-to-be-released digital delivery platform, and six big ideas challenging the consulting and IT services space in 2020. Surprisingly, no clients challenged TBR’s assertion that the term digital is dead, while the most lively (and heated) debate centered on the unchanging nature of the largest strategy consulting pure play firms.  

Three Forward

21.6%, ManTech’s year-to-year revenue growth in 4Q19: As detailed in our upcoming full report on the company, ManTech grew rapidly through a couple of key acquisitions, namely Kforce Government Solutions and H2M Group. The latter, which brought along $30 million in revenue and around 180 professionals, follows ManTech’s typical acquisition strategy, which focuses on new capabilities and/or agency access that the company has been unwilling or unable to gain organically. As the full report will note in a scenario on acquisitions, “H2M Group has an extremely deep relationship with the National Geospatial-Intelligence Agency and strong expertise in the geospatial industry as well as in intelligence collection and analysis and business operations support.”

65%, of customers in Latin America/South America have stayed away from adopting IoT solutions, according to IT services vendor Logicalis: Senior Analyst Boz Hristov traveled to Brazil to meet with Logicalis’ local and global leadership and hear their perspectives on the local market for both traditional IT services and emerging technologies such as cloud and IoT. Analyzing Logicalis’ solid credentials, well-established client base and willingness to take a riskier approach to outcomes-based pricing, TBR offers expectations around the company’s consulting, applications services and acquisitions in the special report available this week.

$389 million, Atos’ 4Q19 revenue within Big Data & Cybersecurity: The company’s leading service line for revenue growth saw contract wins across multiple geographies and industries, bolstered by a strategic decision to leverage ecosystem partners and expand its own capabilities simultaneously. In a scenario discussion in the upcoming full report, Senior Analyst Elitsa Bakalova explains how Atos has made substantial headway with cybersecurity offerings outside its core European market. By folding new offerings into its established and well-regarded Prescriptive Security Operations Centers, the company provides clients, in TBR’s assessment, “visibility, control and compliance.”

Perspecta prepares to move beyond NGEN loss

2020 will be critical as Perspecta attempts to make up for its NGEN-R bid loss, with federal spending priorities providing an avenue for growth

“Perspecta delivered steady top-line results in 4Q19 as it posted a very strong book-to-bill ratio (1.4) and continues to win new deals in areas of strategic importance for both Perspecta and the federal government, such as cybersecurity, enterprise IT and radio frequency technology,” said Research Analyst Brian Baker. “The federal budget continues to be extremely growth-friendly for IT vendors, especially in areas like IT modernization, cybersecurity and commercial off-the-shelf solutions.”

He continued, “Perspecta’s growth outlook is clouded significantly by the NGEN-R bid loss, but the effects of this loss are not likely to impact Perspecta’s top line much more in 2020 as the company is already executing on an extension of its existing NGEN contract, which will last until at least September 2020. The NGEN-R bid loss comes at a relatively ideal time for Perspecta, as only 8% of its book of business is up for recompete in the coming year, allowing significant opportunity to pursue new business. If business development efforts are successful, Perspecta may be able to mitigate a good portion of the NGEN loss, but TBR believes growth in 2021 will remain a significant hurdle for the company.”

Additional reports recently published by TBR’s analyst teams

4Q19 Google Cloud: Acquiring, partnering and innovating in triple-play strategy

“In 4Q19 Google Cloud saw rapid revenue growth that paralleled and validated its continued and planned investments in infrastructure, R&D, talent, partnerships and global expansion. TBR predicts this accelerated pace of growth, fueled by offerings like Google Cloud Platform, will help the company close the gap with market share leaders Amazon Web Services and Microsoft.” — Nicole Catchpole, Senior Analyst

4Q19 Hewlett Packard Enterprise Initial Response

“According to the original timeline, HPE Next was supposed to be nearing completion, but in 4Q19 HPE announced the HPE Next initiative will continue through the end of HPE’s fiscal 2021. The vendor promises ‘incremental savings’ from this move, but TBR believes the extension is likely to involve further restructuring and potential employee rationalization as HPE eliminates redundancies from acquisitions such as Cray.” — Stephanie Long, Senior Analyst

4Q19 Cisco Systems: Facing lower demand as macro headwinds mount

“Enterprises and SMBs embraced Cisco’s intent-based networking offerings for most of 2019, while communication service providers (CSPs) redistributed capex toward RAN for 5G and virtualized infrastructure rather than core network initiatives. In 2020 we expect Cisco CSP revenue to continue to shrink, though at a slower rate due to rising spend on 5G core networks. Enterprise spending will decline as well due to macroeconomic factors such as COVID-19-related capex delays.” — Michael Soper, Senior Analyst

4Q19 Cisco Customer Experience: Enhance core capabilities to drive client value

“Software- and subscription-based engagements provide consistent support and maintenance revenue, and emerging solutions that embrace AI, IoT, security and cognitive capabilities provide opportunities for Cisco Customer Experience to bolster performance through upselling. Additionally, Cisco’s expanded footprint helps foster client relationships and showcase its expertise, leading to higher-value transformation engagements. We expect Cisco will continue to lead with its deep domain expertise, particularly in cybersecurity, to create new opportunities within its existing client base as well as strengthen its share in underpenetrated markets including APJC.” — Kelly Lesiczka, Analyst

4Q19 Hewlett Packard Enterprise Cloud Initial Response

“HPE recently began reporting annualized revenue run rates (ARR), as it looks to transition its entire portfolio toward consumption-based pricing by CY2022. HPE’s ARR grew 19% year-to-year in 4Q19 to $511 million, driven largely by GreenLake revenues, but high-growth, software-defined platforms such as Aruba Central and the newly launched HPE Container Platform will become rising contributors. At its Security Analyst Meeting in October, HPE provided guidance of a 30% to 40% CAGR in ARR between FY2019 and FY2022. TBR expects the transition to favorably benefit margins during this time period, but it will likely take time for HPE’s top line to reflect the change.” — Catie Merrill, Analyst