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U.S. federal IT stalwart Leidos fortifies its foothold in Australia

Leidos expands in Australia with a defense IT modernization award and the launch of a new software development facility

Leidos will join APAC-based partner Fujitsu and U.S.-based partner KBRWyle on a three-year, AU$175 million program to upgrade and modernize IT and communications systems for the Australian Department of Defence (DOD). The enhancement will include service desk support for end users as well as workstations, VoIP and email upgrades, the implementation of new collaboration tools, and network infrastructure services and management.

Leidos has a 20-plus-year history serving clients in Australia, including the national government and provincial authorities, the nation’s healthcare sector, the intelligence community, and the country’s border defense agencies. In 2020 between 45% and 50% of Leidos’s $1 billion in overseas sales revenue derived from Australia. Leidos’ 2020 increase in international revenue, up 17.5% year-to-year, was driven largely by aggressive growth in Australia, and the company is primed for continued rapid expansion in the country and across APAC more broadly as Leidos leverages Australia as a staging point and case study for future regional expansion. The recent award with the Australian DOD comes on the heels of an AU$21 million contract with the agency for IT systems consolidation in 2020.

Leidos is also opening a new software development factory in Melbourne that will create 100 or more IT jobs and will be the company’s first such facility outside the U.S. — another sign the company expects steady growth in Australia for many years. In 2020 Australia Prime Minister Scott Morrison affirmed over AU$270 billion (about $190 billion) in new defense outlays over the next decade, including defense IT modernization and upgrades to weapons platforms. Australia’s relations with China have become increasingly strained in recent months, and government officials have also noted a sharp increase in regional economic and strategic instability. Leidos is ideally positioned to capture a large share of the expected budgetary investments to modernize defense platforms and civilian IT infrastructures.

Leidos’ Australian operations make the company relatively unique among top-tier federally centric IT integrators and professional services vendors, at least regarding the scale and tenure of its business in the ANZ region. Maximus provides business process management solutions, mostly employment services for the Australian government’s Disability Employment Services program, but the company has no presence in the Australian defense sector. Conversely, Raytheon Intelligence & Space (I&S) derives nearly 40% of its $19 billion backlog from international markets and 12% of its total revenue (about $800 million in 2020) from APAC (not exclusive to Australia), but does not provide traditional enterprise IT services to the Australian government or other foreign government clients in the region.

Leidos is among the 13 vendors covered in TBR’s quarterly Public Sector IT Services Benchmark and one of eight IT services companies primarily serving the U.S. federal government TBR analyzes in depth in semiannual reports featuring financial performance, go-to-market approaches, and alliance and resource management strategies. TBR’s Public Sector portfolio focuses primarily on IT services vendors’ work with U.S. federal government agencies. The international public sector market continues to attract investment from TBR’s covered vendors and remains an important, if small, revenue stream.  

The federal IT services market remains highly favorable in growth for technology contractors in 2020

Defense, intelligence and civilian agencies are accelerating modernization efforts in 2020. M&A activity in the market will also remain at a brisk pace.

“Leidos released its 4Q19 and 2019 fiscal results on Feb. 18, posting 4Q19 revenue growth of 11.6% year-to-year to $2.95 billion on the back of strong bookings and backlog growth throughout 2019 as well as several recent large-scale contract wins and successful award rebids that are converting to revenue at a vigorous pace,” said Senior Analyst John Caucis. “Growth with classified customers in the Intelligence Community (IC) also remains strong. Leidos surpassed its guidance for 2019 revenue of between $10.9 billion and $11 billion, with full-year sales of $11.1 billion, an increase of 8.8% over 2018. Leidos’ guidance for 2020 calls for full-year sales between $12.6 billion and $13 billion, implying growth over 2019 of 13.6% to 17.2%, largely driven by recent strategic acquisitions. For example, Leidos spent over $2.5 billion to acquire Dynetics in December and L3Harris Technologies’ Security Detection and Automation division in February, expanding its footprint in defense technologies, airport and critical infrastructure screening products, automated tray return systems, and industrial automation systems.”

According to Research Analyst Brian Baker, “ManTech’s revenue rose 21.6% year-to-year to $604.4 million in 4Q19. Growth was augmented by acquisitions of Kforce Government Solutions, which closed in April, and H2M Group, which closed in August, as both contributed inorganic revenue to ManTech’s top line in 4Q19. Classified customers continue to accelerate spend with ManTech, while spending on behalf of ManTech’s principal Department of Defense and IC clients continues trending upward, in addition to significant wins with federal civilian and health agencies, leading to impressive 15% organic growth in 4Q19 and 9% organic growth for 2019. Robust revenue expansion, strong cash generation and stable margin performance enable ManTech to continue with its aggressive M&A strategy to enhance access to high-growth and high-value markets, similar to tactics of peers CACI, Leidos and SAIC.”

Additional assessments publishing this week from our analyst teams

Forging partnerships with larger-scale technology vendors enables vendors to more quickly enhance portfolios and incorporate emerging technologies while also strengthening scale to pursue opportunities outside their existing markets.

”Quantum computing, the edge, AI and cybersecurity are some of the latest investment areas in which Atos is developing pointed solutions to differentiate between a typical blue-sky consultancy approach and its approach of a technology-enabled organization. Enhancing its cloud capabilities, such as around Google Cloud solutions through the launch of Workplace as a Service Google Edition and the acquisition of Maven Wave, and the launch of the Digital Hybrid Cloud offering jointly with VMware, creates cloud professional services opportunities that will sustain Atos’ cloud revenue growth in the coming quarters.” Senior Analyst Elitsa Bakalova

CGI is pursuing a strategic growth objective to double its revenue base over the next several years with accelerated investments in M&A and homegrown IP. However, the company must continue to execute on its expense management strategy as margins face pressure in the near term with the ramped-up acquisition pace and ongoing organizational restructuring.” Research Analyst John Croll

“Refreshing its business image to position as a digital transformation company and better align with client demand for emerging technologies, such as security, IoT and AI capabilities, will provide growth opportunities for Fujitsu’s services business if the company is able to successfully build out its global presence and talent bench to support new portfolio areas. While the company has expanded its global network, adding new delivery and innovation centers that increase client awareness of the brand and offerings, the company is unable to generate sustainable and consistent growth outside Japan. Bolstering portfolio innovation efforts through solution codevelopment partnerships will help Fujitsu scale its new portfolio and generate new opportunities, but the company needs to maintain differentiation within its portfolio to successfully capitalize on potential opportunities around emerging technologies.”Analyst Kelly Lesiczka

“Amazon Web Services (AWS) continues growing its sales team in an effort to outcompete IaaS and PaaS rivals such as Microsoft and as coopetitive partners such as SAP take AWS head-on. The recent general availability of AWS Outposts increases AWS’ hybrid value proposition and will help the vendor maintain its leadership in the consolidating IaaS market.” Analyst Jack McElwee

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  

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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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.