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ManTech acquired by The Carlyle Group

ManTech will be taken private through a $4.2B all-cash buyout

On Monday, ManTech (Nasdaq: MANT) agreed to be acquired by private equity specialist The Carlyle Group Inc. (Nasdaq: CG) — the same investment firm that purchased Booz Allen Hamilton (BAH) after BAH split from Booz & Co. in 2008, took BAH public in a 2011 IPO and remained a stockholder until 2016. ManTech has been a publicly traded company since its IPO in 2002. Carlyle agreed to pay $96 per share for ManTech (on Friday, May 13, ManTech’s stock closed at $81.97 per share); taking into account ManTech’s $240 million in net debt, the total transaction value will be $4.2 billion, or roughly 1.6 times ManTech’s trailing 12-month (TTM) revenue of $2.596 billion as of 1Q22.

The sale to Carlyle ends 3 months of speculation about ManTech’s future

ManTech co-founder and longtime CEO (40 years) and Chairman (42 years) George Pedersen stepped down as chairman of the board in 2020 and officially retired from the company’s board in February 2022. His retirement from the board sparked rumors that the company was for sale, and industry observers wondered what would become of Pedersen’s controlling block of voting shares. According to ManTech’s 2021 10-K report, Pedersen held 32% of the common stock as well as nearly 83% of the combined voting power vis-à-vis Class B stock ownership. A Reuters report on Feb. 2 suggested that Pedersen’s family wanted to resolve his estate plan following his retirement, including exploring options for his controlling stake. Carlyle’s per-share purchase price represents a 32% premium on the price of ManTech’s stock as of market close on Feb. 2.

Private equity steps up to buy ManTech, perhaps in lieu of peer interest

When rumors surfaced that ManTech was for sale, it was initially thought that ManTech’s acquirer would be a federal IT peer. Leidos, federal IT’s largest traditional systems integrator, was on the short list of potential buyers. Even after spending over $2.5 billion during 2020 and 2021 on acquisitions, Leidos (NYSE: LDOS) entered 2022 flush with liquidity after back-to-back years of record sales and backlog, sustained profitability, and stronger-than-expected cash from operations in 2021. Leidos certainly had the fiscal war chest to support another strategic purchase, even as it retires debt from its recent acquisition spree.

General Dynamics Technologies (GDT), specifically GDT’s Information Technology (GDIT) segment, was considered a potential buyer, having fiscal resources on par with Leidos, thanks to a corporate parent with a $60-plus billion market capitalization. GDIT has completed its acquisition of CSRA, purchased in 2018 for $9 billion, but the integration process was protracted, reviving speculation that originally surfaced around GDIT’s troubled purchase of Vangent in 2011 that the company struggles to assimilate acquired peers.

Parsons (NYSE: PSN), a longtime construction contractor for the Department of Defense (DOD) and a more recent entrant into the federal IT fray, was also thought to have an interest in ManTech as a way to continue diversifying its portfolio by building out its federal IT capabilities. Buying ManTech would have immediately garnered Parsons the scale to support large federal IT modernization programs, as well as a sizable presence in the Intelligence Community (IC). (ManTech is estimated to generate $1 billion annually from the IC.) However, Parsons would have been forced to rely more heavily on stock to facilitate the transaction, and it was thought the Pedersen family would be less amenable to such an arrangement.

Buying ManTech would have imparted similar benefits upon KBR Inc. (NYSE: KBR) (about $5 billion in federal IT revenue), also believed to be a potential buyer looking to diversify its solutions focus into federal enterprise technology but facing the same potential challenges structuring the transaction in a way that would be favorable to the Pedersen family’s preferences.

Serial federal IT acquirer CACI International (NYSE: CACI) was also rumored to be in the mix to purchase ManTech, which would have expanded CACI’s annual federal IT revenue base ($5.8 billion as of 4Q21 on a TTM basis) past $8 billion in total value, surpassing BAH ($7.9 billion as of 4Q21 on a TTM basis) and SAIC ($7.3 billion as of 4Q21 on a TTM basis), and significantly narrowing the gap with Leidos ($11.8 billion as of 4Q21 on a TTM basis) and GDT (also $11.8 billion as of 4Q21 on a TTM basis, though this includes roughly $4 billion from GDT’s Mission Systems group).

With its recent purchases of Bluestone Analytics (3Q21), an unidentified space-focused company (also in 3Q21), SA Photonics (4Q21) and ID Technologies (1Q22), it appears that the focus of CACI’s M&A strategy is on expanding the company’s high-end, high-margin technology capabilities, particularly in areas that enable wallet-share gains with existing clients in the DOD and IC. CACI’s acquisitions of SA Photonics and ID Technologies also showcase CACI’s preference for leveraging M&A to capture first-mover advantage in solution areas or markets in which the company expects to experience accelerating demand from its core DOD and IC customers.

In addition to its large IC footprint, ManTech is a long-standing IT contractor to the DOD, particularly with its suite of cybersecurity solutions. ManTech’s legacy with the DOD and IC, along with its highly regarded security offerings, would have added value to any of the federal IT peers rumored to be interested acquirers, or other well-funded federal IT competitors (e.g., Accenture Federal Services [AFS], CGI Federal or SAIC). However, ManTech has been a margin laggard in TBR’s Public Sector IT Services Benchmark report in terms of relative operating margin performance. ManTech has been ranked ninth or lower (out of 13 benchmarked companies) in the benchmark report since 2013.

We believe that despite the lucrative nature of its cybersecurity offerings and its operations in the IC, ManTech has largely retained a high emphasis on labor-based services, keeping its margin performance below that of peers. Also impeding relative profitability is ManTech’s focus on being a low-cost but technically acceptable contractor, while peers like CACI, Leidos, BAH and GDT have increasingly recruited superior talent to support a more aggressive pivot up the value chain with their offerings (AI, analytics, cloud, high-end defense platforms, C5ISR [command, control, computers, communications, cyber, intelligence, surveillance and reconnaissance]). In short, ManTech’s federal IT peers might have viewed acquiring ManTech as too margin-dilutive, particularly as a strategic acquisition. TBR also notes that ManTech’s top-line performance has been impeded by the drawdown of military operations in Iraq and Afghanistan over the last decade, while its efforts to expand its footprint in the federal civilian market seemed to stall during late 2021.

Ultimately, it was The Carlyle Group, with over $325 billion in assets under management as of March 31, 2022, that made the purchase. We are not aware of the terms of any competing offers, though we believe ManTech did garner some interest from fellow investment group Veritas Capital — the private equity backer of the three-way merger between Peraton, Perspecta and Northrop Grumman’s IT services unit in early 2021. We expect Carlyle will implement across-the-board cost rationalizations following the acquisition (likely accelerating workforce attrition in an already fiercely competitive federal IT labor market). Carlyle’s deep fiscal pockets will provide ample funding for additional acquisitions to expand ManTech’s suite of offerings in AI, analytics, automation, advanced cybersecurity (e.g., cognitive security), systems engineering and solutions at the tactical edge.

In the end, ManTech may return to publicly traded status as a larger and more profitable federal IT peer with a broader and more lucrative suite of solutions better aligned with the federal embrace of digital technologies, in a scenario more reminiscent of BAH’s IPO in 2011 after three years of Carlyle’s restructuring. Conversely, Carlyle’s ultimate goal may be to sell ManTech to a larger federal IT peer with the fiscal wherewithal for a strategic purchase that will either further cement its leadership position (e.g., Leidos, GDT, BAH or SAIC) or catapult its scale (e.g., CACI, AFS, CGI Federal or even IBM Consulting) into direct contention with established federal IT leaders.

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

Embedding multicloud and software-driven services in portfolios helps vendors execute on strategy, expand addressable markets

Google Cloud revenue surpassed the $2 billion mark in 2Q19, doubling in size in six quarters. Under the guidance of CEO Thomas Kurian, Google Cloud is improving its enterprise appeal by launching its multicloud management tool set, Anthos; leveraging acquisitions to build out its migration, storage and analytics capabilities; and expanding its global sales and delivery capacity. Similarly, Salesforce complements internal innovation around solutions such as Customer 360 with ongoing acquisition activity and investment in its partner network. TBR estimates the vendor attained $3.95 billion in revenue as sales teams expanded single-product customer engagements, many of which are led by Service Cloud, into multiproduct deals.

Additional assessments publishing this week from our analyst teams

Capgemini continues to gain momentum in cloud services, with cloud revenue driven by offerings in the Capgemini Cloud Platform portfolio, which supports clients when building, migrating and managing applications and infrastructures in cloud environments. By delivering a cloud-first option, Capgemini enables enterprise and public sector clients to become agile through offerings related to data center modernization, cloud-native solutions, application modernization, intelligent applications, and emerging technologies such as IoT, blockchain and AI. Offering each client its entire portfolio enables Capgemini to provide holistic transformational solutions and effectively compete with peers. Elitsa Bakalova, Senior Analyst

TBR’s Public Sector IT Services Research practice will publish its 2Q19 ManTech report this week.  With top-line revenue expanding 9.4% year-to-year to $537 million, ManTech should be one of the top-performing vendors in 2Q19 in terms of sales growth. ManTech’s top-line expansion owes largely to accelerating spend among classified customers in the Department of Defense (DOD) and Intelligence Community that are increasingly engaging ManTech to enhance warfighting capabilities across all domains, but particularly in space and cyber. ManTech’s addressable market is set to expand and diversify into the civilian sector as the integration of Kforce Government Solutions (KGS) continues. KGS will add 500 employees with large-scale IT infrastructure modernization and transformation expertise, primarily with the Department of Veterans Affairs, to ManTech, while contributing roughly $100 million in revenue (based on revenue of $98 million reported by KGS in 2018). Inorganic sales will largely accrue in ManTech’s Mission Solutions and Services segment, where the core customer focus is the DOD, the Department of Homeland Security and federal health agencies. Look for TBR’s 2Q19 Perspecta report next week, as we examine how the company is leveraging its R&D-led approach to maintain its growth momentum as it begins its second full year as an independent, federal IT competitor. John Caucis, Senior Analyst

Weakness in Cognizant’s core industry segments overshadowed increased growth in digital in 2Q19. The company’s ability to rapidly scale its digital revenue will be key to offsetting this weakness, specifically in Financial Services and Healthcare. In the near term, Cognizant must emphasize cross-sales of acquired assets, such as Zenith Technologies, within its existing and acquired install bases. Kelly Lesiczka, Analyst

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  

TBR Weekly Preview: March 11-15

We’re going all over the technology space this week, with reports spanning U.S. federal government IT services to long-established hardware and data center providers, plus a couple of European-centric companies.

Wednesday:

  • Talent continues to be the constraining factor on ManTech’s bright revenue growth outlook. Focus in defense and intelligence segments of the U.S. federal market on innovation creates healthy demand for ManTech’s labor-based technical services offerings, such as R&D, testing and evaluation of emerging technology. As a smaller competitor compared to many of its large prime peers in the federal sector, ManTech acutely feels the resource impacts of the security clearance backlog and overall tight labor market. TBR’s 4Q18 ManTech report, written by Senior Analyst Joey Cresta, will explore how ManTech uses adaptive learning, continuous monitoring software and new leadership hires to address the human capital challenges associated with scaling up its labor base to meet robust client demand.

Thursday:

  • As detailed in our initial response, Lenovo achieved its sixth consecutive quarter of year-to-year revenue gains, reporting $14 billion in revenue in 4Q18, up 8.5% from the year-ago compare, even as consolidation opportunities cool in the PC market. Despite these high notes for Lenovo exiting 2018, the company will still face hurdles over the next two years. Its PC and Smart Devices businesses will have to deal with challenging and shifting PC environments. Data Center Group continues to deliver on its promises, but it remains in the red despite improvements to its bottom line. Lenovo’s Mobile business is still teetering in profitability. Read our full report by Analyst Dan Callahan to find how Lenovo will navigate these challenges and tee up for a seventh consecutive quarter of revenue growth in 1Q19. 
  • Our detailed assessment of Atos will note that the company’s Digital Transformation Factory portfolio accounted for 30% of revenue in 2018, up from 23% of revenue in 2017, positively affected by increased activities with clients in areas such as orchestrated hybrid cloud, Digital Workplace and cybersecurity. As Senior Analyst Elitsa Bakalova will report, Atos’ efforts to position as a trusted partner for clients’ digital journeys are starting to pay off, and the new digital services strategy will shape the company’s activities over the next three years.
  • As reported in our initial response, Hewlett Packard Enterprise’s (HPE) revenue fell 1.6% year-to-year to $7.6 billion. While revenue growth is always a goal, TBR believes HPE is more focused on improving profitability in the near term before it shifts to boosting revenue growth. In our full report Analyst Stephanie Long will dive into the long-term strategy of CEO Antonio Neri and how it will impact 2019. Key cost-cutting initiatives and strategic investments, such as in high-performance computing and the edge, will be likely highlights in 2019.
  • Analyst Kelly Lesiczka will be reporting that T-Systems’ portfolio and organizational investments continue to improve its ability to gain wallet share in newer areas and stabilize revenue growth in 2018. Building out its emerging technology portfolio offerings, such as for IoT using DT’s product offerings, enables T-Systems to provide more comprehensive and personalized solutions to clients and generate larger-scale engagements to accelerate growth.

As promised, we published a new report last week by Senior Analyst Boz Hristov on Accenture Technology, and today published a report on TELUS International from Boz as well as a report on Mobile World Congress Barcelona 2019 by Principal Analyst Chris Antlitz.

While we do not have a webinar scheduled for this Wednesday, the next one will be on March 20 featuring Senior Analyst John Caucis talking about healthcare IT services.

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.