Market Share

While the commercial information technology services sector continues to struggle with slow IT spending, the federal IT services companies continue to post strong results.During the first quarter of 2002, all major publicly traded, federal-oriented services firms posted results that met or exceeded analyst expectations. Some, such as Dynamics Research Corp. or CACI International Inc., had slowdowns in their commercial and state and local units, which dampened overall growth. Anteon Corp. reported first quarter earnings per share of 19 cents, above the consensus estimate of 16 cents, on revenue of $193 million, a 21 percent increase. CACI reported fiscal third quarter EPS of 33 cents, up 58 percent year-over-year and in line with the consensus estimate. Revenue was up 25 percent to $183 million, with the 33 percent increase in CACI's federal government business being offset by a decline in its commercial and state and local business. Dynamics Research reported first quarter EPS of 17 cents, a penny above the consensus estimate, on revenue of $49.2 million, up 1 percent. Dynamic Research's federal business grew 11 percent in the quarter; however, total revenue growth was hurt by a decline in its commercial and state and local businesses. ManTech International Inc. reported first quarter EPS of 20 cents, 3 cents above the consensus estimate, on revenue of $108.1 million (3 percent year-over-year growth). Titan Corp. reported pro forma EPS increased 33 percent to 12 cents per share, above the 10 cents consensus, on revenue of $340.5 million, up 42 percent. PEC Solutions reported EPS of 14 cent, in line with the consensus estimate, on revenue of $38.2 million, up an impressive 74 percent year-over-year (40 percent organically). The outlook each company gave for its firm's federal business was similar: good visibility on future revenue, strong business pipeline and an anticipation of increased contract opportunities related to higher defense and homeland security spending. Investors questioned companies about reports that there has been a decline in new request for proposals from agencies, despite growing budgets. Although some companies cited delays in the fiscal 2002 appropriations bills and changing priorities that have delayed some initiatives, all said business under existing contracts has increased, as evidenced by the accelerating internal revenue growth rates in the quarter. Federal Sources Inc. recently held its annual Federal IT Outlook conference, calling the current market "hot." However, new entrants to the federal market will have a tough time benefiting from the current budget cycle, because most work is going to existing contracts. Also, most large contracts coming up this year are recompetes of existing contracts, where a history with the government customer will give incumbents an advantage. Most of the new budget money is focused on enhancing existing programs and priorities versus new budget line items.Another frequent message was that the government seems to be favoring continued growth in outsourcing and performance-based contracting, both of which would be positive to industry. Overall, the outlook and trends for the federal IT market seem quite positive.