Pure-play and services firms stick to knitting

The Washington TechnologyTop 100 list of federal governmentservices companies contains familiarnames, reflecting a wide range ofcompany size, type and businessconcentration.The list, published May 14,includes companies that are publicand privately held, foreign anddomestic, product-oriented and service-oriented, as well as commercialmarket-focused and federal contracting-oriented.The list reinforces some interestingtrends and shows the degree to whichtheir businesses depend on the sale ofinformation technology services.The aerospace-defense prime contractorscontinue to expand theirgovernment services segments.Publicly traded companies dominatethe list in terms of revenue dollarscaptured. The most active acquirersduring the past three years are all onthis list, including both public andprivately held businesses.Most industry executives andinvestors will gain fresh insight fromthis list because it reflects many of theindustry trends at work.The dominance of the major primecontractors is readily apparent.These lead system integrators ?Lockheed Martin Corp., Boeing Co.,Northrop Grumman Corp., GeneralDynamics Corp. and Raytheon Co. ?hold five of the top seven positionson the list. Together, these five companiesgenerated more than $35 billionin services revenue, about 37percent of the total for all 100 companies.These five companies producednearly $175 billion in total2006 revenue. So although their federalIT businesses are large relativeto other contractors, IT services segmentsrepresent only 20 percent oftheir total revenue.Nine of the top 20 are diversifiedcompanies, deriving the majority oftheir revenue from nonfederal customers? including Fluor Corp.,EDS Corp., Computer SciencesCorp., Dell Inc., IBM Corp. andVerizon Communications Inc.Together, these public companiesdelivered nearly $20 billion of serviceswork to federal customers,about 21 percent of aggregate Top100 revenues. For these nine, however,federal services represent lessthan 6 percent of their $350 billionin total 2006 sales. Together, themajor prime contractors along withthe large diversified companies, atotal of 14 companies, realized about$55 billion in 2006 federal servicesrevenue. Although their revenue,collectively, was nearly 60 percent ofthe Top 100 total, it was only 11 percentof their aggregate corporaterevenue. The financial performanceand market valuations of these companiesare largely driven by nonfederalproducts and services.The 10 pure-play federal companieson the list include Science ApplicationsInternational Corp., CACIInternational Inc., ManTechInternational Corp., SRA InternationalInc. and SI International Inc. Theirqualifying 2006 revenues of about $8billion were one-half of their total revenues.For them, revenues and profitsderived from federal services are significantcontributors to their operatingperformance and market valuations.Six Top 100 companies with foreignownership elements made the list,such as BAE Systems Inc., QinetiQGroup plc, Serco Inc. and ThalesGroup. Their aggregate 2006 Top 100revenues were $2.7 billion, less than2 percent of their total revenues.Total federal services revenues in2006 were about $95 billion. The fivelarge, domestic prime contractorscaptured 37 percent of this market.Public pure-play and private governmentservices contractors capturedabout 21 percent. The remaining 41diversified public companies accountedfor about 39 percent of the market.The $95 billion of 2006 federalservices revenue is less than 8 percentof total 2006 revenues for theTop 100 companies. For many of thepublic companies, the federal marketis a small component of their overallbusiness. However, for the publicpure-play companies and privategovernment services companies, federalwork is a core competency and acritical element in their organicgrowth plan and acquisition strategygoing forward.