Market Share: Third quarter earnings solid, opportunities abound

Most public federal IT service companies have reported third quarter earnings, and results have been better-than-expected earnings per share with mixed performance on revenue.Contract award activity also was mixed. Except in the case of CACI International Inc., I have not seen a jump in award activity despite the government fiscal year just having ended.Several companies reported that government clients have pushed back expected contract award dates, but I have not heard of any material cancellations. The fiscal 2006 budget delays and Hurricane Katrina have caused some distractions, but the pipeline of potential bid opportunities for federal IT companies remains strong.MTC Technologies Inc. reported third quarter 2005 results in line with its guidance, with EPS up 17 percent year-over-year. The company gave an unusually wide earnings guidance range for the fourth quarter that included the consensus EPS estimate. Internal revenue growth, which excludes acquisitions, was 21 percent, an above-average pace as the company continues to benefit primarily from its Air Force sustainment and modernization contracts.In a somewhat surprising situation, MTC continues to see lower than expected funding for its Army reconstitution and reset contract, primarily for the 1st Armor Division, a contract for which I would have expected to see good funding, given equipment use in the Middle East.SI International Inc. reported revenue and EPS in its guidance range; EPS was up 18 percent year-over-year. The company gave fourth quarter 2005 EPS guidance above the consensus estimate and revenue below the estimate, citing fewer-than-expected pass-throughs on its contracts.SI had light new contract wins in the third quarter but indicated that its bid pipeline continued to grow. It has announced more than $70 million in new awards so far in the fourth quarter.Anteon International Corp. had strong results, with both revenue and EPS ahead of guidance and analyst estimates. Anteon's EPS grew a strong 22 percent year-over-year, while internal revenue growth was an above-average 16 percent. Anteon gave fourth quarter 2005 EPS guidance ahead of consensus analyst expectations, and revenue guidance within analyst expectations.CACI reported quarterly EPS at the high end of its guidance, up 12 percent year-over-year, and revenue closer to the low end of its guidance range, with 9 percent organic revenue growth. The company lowered its revenue outlook slightly ($25 million on a $1.8 billion revenue target) after its Army interrogation service contract ended unexpectedly. That contract cutoff sent CACI's shares down a surprising 13.7 percent that day, despite the company's win of a record $800 million in awards during the quarter and an EPS outlook in line with analyst estimates.Over the next few months, investors will focus on completion of fiscal 2006 spending bills and how the fiscal 2007 budget request is shaping up. As with the Program Budget Decision 753 memo that created a stir last December, we likely will hear about proposed defense program cuts, which investors will study carefully. Despite the budgets in motion, opportunities for federal IT companies should stay strong over the next few quarters.