Market Share: War risk doesn't dim outlook for government IT firms

Bill Loomis

Many investors will be asking two key questions as they review fourth quarter 2002 earnings reports and management earnings guidance for 2003: Is there any sign of a rebound in commercial information technology spending, and will federal continue to show good growth?

I expect another soft quarter for commercial systems integration and consulting, moderate growth in commercial outsourcing -- more for business process outsourcing than infrastructure outsourcing -- and continued strong, commercial offshore development growth.

The acceleration in commercial IT spending, particularly discretionary spending, will come as business investment rises and as the economy and overall corporate profitability improve. At this point, I believe the systems integration and consulting business likely will not show significant improvement before the second half of 2003, as near-term uncertainty, such as the economy and a potential war with Iraq, keeps businesses from making larger investment commitments.

The uncertain near-term nature of the discretionary IT services market is illustrated by Accenture Ltd. While Accenture positively pre-announced its November quarter -- in fact, much of the strength was coming from shorter-term consulting engagements -- it lowered expectations for the February quarter. Other systems integrators and consulting firms, such as BearingPoint Inc. (formerly KPMG Consulting), American Management Systems Inc. and DiamondCluster International Inc., also are not seeing a rebound in business.

Recent months have brought announcements of several larger IT outsourcing deals, such as IBM Corp. winning JP Morgan and Electronic Data Systems Corp. winning ABN AMRO and Bank of America, and business process outsourcing deals, such as Accenture winning Telecom Italia and Affiliated Computer Services Inc. winning Motorola and Ingram Micro. These announcements at the end of the December quarter suggest some seasonality, and it will be important to see if the deal flow continues in the first quarter of 2003, and if decision cycles hold to schedule or are extended.

I estimate that the federal IT firms will generally report fourth quarter results in line with or slightly above consensus estimates, with most of the leading firms reporting internal growth rates of about 15 percent, similar to the third quarter of 2002.

One concern is how the delays in the fiscal 2003 federal civilian spending bills are impacting business. Congress is expected to pass these spending bills this month, and the companies I speak with have not yet seen a material impact from this delay.

With the defense spending bills passed last year, I expect defense contract award activity to be strong in the first quarter, and companies will likely talk positively about defense opportunities when they report their results. However, the potential war with Iraq could impact business. Companies have addressed this issue over the past several months, and there have only been a couple instances of a negative impact from the deployment of forces to the Middle East.

At this point, companies do not know exactly how a war will impact their business. Most will experience both negative and positive impacts. Following the actual shooting, there likely will be a significant amount of sustainment and modernization work to build systems back up. Despite these risks, I believe the outlook over the next year for the federal IT companies continues to be stronger than for the commercial companies. *

Bill Loomis is a managing director of the Technology Research Group at Legg Mason Wood Walker Inc. He can be reached at wrloomis@leggmason.com. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. For additional information and current disclosures for the companies discussed herein, please write to: Legg Mason Wood Walker, Inc., 100 Light St., P.O. Box 1476, Baltimore, MD 21203, Attn: Research Department.

Reader Comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above

What is your e-mail address?

My e-mail address is:

Do you have a password?

Forgot your password? Click here
close
SEARCH
contracts DB

Trending

  • Dive into our Contract Award database

    In an exclusive for WT Insider members, we are collecting all of the contract awards we cover into a database that you can sort by contractor, agency, value and other parameters. You can also download it into a spreadsheet. Read More

  • Is SBA MIA on contractor fraud? Nick Wakeman

    Editor Nick Wakeman explores the puzzle of why SBA has been so silent on the latest contractor fraud scandal when it has been so quick to act in other cases. Read More

Webcasts

  • How Do You Support the Project Lifecycle?

    How do best-in-class project-based companies create and actively mature successful organizations? They find the right mix of people, processes and tools that enable them to effectively manage the project lifecycle. REGISTER for this webinar to hear how properly managing the cycle of capture, bid, accounting, execution, IPM and analysis will allow you to better manage your programs to stay on scope, schedule and budget. Learn More!

  • Sequestration, LPTA and the Top 100

    Join Washington Technology’s Editor-in-Chief Nick Wakeman as he analyzes the annual Top 100 list and reveals critical insights into how market trends have impacted its composition. You'll learn what movements of individual companies means and how the market overall is being impacted by the current budget environment, how the Top 100 rankings reflect the major trends in the market today and how the biggest companies in the market are adapting to today’s competitive environment. Learn More!