Market Share

By Bill LoomisWith the last of the second-quarter earnings now reported, the results appear to be solid throughout most of the information technology services industry. CACI International Inc. of Arlington, Va., and GRC International Inc. of Vienna, Va., both reported results above analysts' expectations.CACI reported revenue for its fiscal fourth quarter of $126 million, up 39 percent and greater than analysts' 29 percent growth estimate. Earnings per share in the quarter were 36 cents vs. 29 cents a year ago and well ahead of analysts' expectations of 33 cents.CACI benefited from strong task-order generation off indefinite delivery, indefinite quantity (IDIQ) contracts and continued profit margin improvement following the QuesTech acquisition in November 1998. QuesTech's operating profit margin had been 4.6 percent vs. CACI's pre-merger operating profit margin of 6.2 percent. Now CACI is back to its earlier performance, showing a 6.4 percent operating profit margin in its fiscal fourth quarter.CACI's backlog at quarter-end was $1.1 billion. While backlogs seem to be improving throughout the industry, they hold less importance, given the surge in the use of General Services Administration schedules and IDIQs not represented in backlog.GRC also reported strong results for its fiscal fourth quarter, with revenue climbing 20 percent to $46.7 million, above analysts' 17 percent expectation. Meanwhile, earnings per share came in at 14 cents vs. 5 cents (last year's earnings per share were 38 cents including a tax benefit), a penny ahead of expectations. GRC indicated a backlog of $570 million at quarter-end.Some of the larger federal companies also have posted improved results. Privately held DynCorp of Reston, Va., showed a 6 percent increase in revenue in the quarter to $321 million, with earnings per share improving to 32 cents from 30 cents a year ago. DynCorp's backlog at quarter-end was $3.9 billion.Science Applications International Corp. of San Diego reported revenue of $1.2 billion, up 17 percent, during its fiscal first quarter ended April 30. SAIC's earnings per share were 74 cents vs. 59 cents, up 25 percent and excluding a $7.09 per share gain from the sale of some of its shares in Network Solutions Inc. of Herndon, Va. Employee-owned SAIC is scheduled to report its fiscal second quarter results in late September.While quite diversified, SAIC continues to be a major competitor and acquirer in the federal markets, having closed the purchase of $300 million-in-revenue Boeing Information Services. In its fiscal first quarter, about 55 percent of SAIC's revenue was in its "regulated" category, the bulk of which is federal business. This segment increased 15 percent last quarter.Most federal companies have experienced some contract work delays due to year 2000 projects, but that seems to have been offset somewhat by federal agencies that contract Y2K work through existing contracts rather than new procurements. As a result, I have not seen a large drop in use of federal IT companies as Y2K work turns to non-Y2K work. However, it is a different story for the commercial companies that have been heavily involved in Y2K. These companies' shares have been under pressure since the beginning of the year, and investors continue to be nervous as the reporting season for third-quarter earnings gets closer. We could see one more round of lowered expectations for many of these companies before investors completely focus on the strong business opportunities the companies should have in 2000.I have been asked why investors have been so focused on Y2K, generally depressing the share prices of IT services companies this year, even those not involved in Y2K work. The reason is investors are still trying to figure out just how much of the IT services market's strong growth was Y2K-related from 1996 to 1998. Y2K problems were solved not only by fixing existing systems but also by replacing systems, making the question difficult to answer. Until investors understand the true non-Y2K growth rate of each IT services company, the shares of those companies likely will be depressed.Commercial IT services firms focusing on e-commerce development do not face these investor concerns and show very strong growth. It will take another quarter before investors really get past their Y2K concerns for the overall IT services sector.Bill Loomis is managing director of the Technology Research Group at Legg Mason Inc., Baltimore. Legg Mason makes a market in CACI. This information is not intended to be an offer to buy or sell any security.