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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.

What a Leidos corporate reorganization signals to the government contracting market

Joey Cresta, an analyst with Technology Business Research Inc. in Hampton, New Hampshire, who closely tracks the government services market, says that being known as an innovative company — and demonstrating a track record of such — will become even more critical moving forward. That’s because government contractors will be challenged to truly differentiate what they do and how they do it as the technology stacks of today and the future continue to evolve. 

“As computation, storage and now the network become virtualized, they become more of a commodity, just as automation commoditizes legacy services,” Cresta said. “More value will be placed on a specific set of skills around writing algorithms leveraging mission or customer knowledge to solve specific client pain points.”

Cresta sees Leidos utilizing this push to potentially grab high-end, government-funded R&D work in areas like intelligence, surveillance and reconnaissance (ISR) as well as data analytics and AI — all things Defense Department officials in particular talk up as crucial to winning on the battlefields of the future, both real and virtual.

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