Takeaways & talking points from these 2 GovCon earnings reports

Perspecta and CACI International released their latest financial results to investors this week, but the numbers are only part of the story.

Two of the government IT market’s largest companies in CACI International and Perspecta reported their latest quarterly financial results this week, while CACI also detailed how its most recent full fiscal year went.

Beyond just the numbers, both their statements and subsequent conference calls with investors also help give a glimpse at the trends driving not just the companies themselves but the overall market.

Here are some of them:

*Some* budget clouds are lifting

During their firms’ respective calls with analysts, newly-installed CACI International CEO John Mengucci and Perspecta CEO Mac Curtis welcomed the two-year budget agreement reached earlier this month that raised both defense and civilian spending caps, suspended sequestration cuts and lifted the U.S.’ debt ceiling.

Both also pointed out what must come next: Congress and the White House agreeing on what the final appropriation numbers are for Cabinet-level and other government agencies for the next fiscal year that begins Oct. 1.

They both do see agencies broadly having more clarity, even though more specifics are to be determined and have to work their way through the legislative system.

“Budgets are up nicely and our customers can proceed with the new program starts and expansions of existing programs,” Curtis told analysts in Perspecta’s first quarter call Wednesday. “Now Congress still needs to pass the 12 individual funding bills, so some of the agencies may begin the fiscal year on a continuing resolution. But all agencies should have full year budgets in the fall, which is a great outcome.”

“While 12 appropriation bills still need to be passed, the progress is very encouraging, allowing our customers to plan, program and invest with greater visibility and consistency,” Mengucci said in CACI’s fourth quarter call Thursday. “But what’s more encouraging is our customers’ spending priorities are in areas like system and infrastructure modernization, electronic warfare, cyber and space.”

For fiscal 2020, the defense spending cap rises 3.1 percent to $738 billion and civilian by 4.5 percent to $632 billion. The defense budget was finalized on time for the current fiscal 2019, while many civilian agencies were shut down earlier this year over funding disagreements among lawmakers.

Where companies are investing

Acquisitions are one way of doing that (more on those later on), but companies also have to invest in themselves in order to keep the growth going. That can include technology, people and processes -- areas frequently intertwined.

Chantilly, Virginia-based Perspecta saw revenue growth in its first fiscal year and sees that continuing in its second, partly on the back of the defense and intelligence business. Including acquired revenue, Perspecta sees $4.4 billion-$4.5 billion in sales for its current fiscal year versus the prior $4.35 billion-$4.45 billion range.

Civilian is another story, of which first quarter sales fell 4 percent to $355 million. Perspecta faces more headwinds there, partly from the loss of a NASA end-user IT services contract and winding down of some other programs.

The company is proceeding plan to reinvigorate a “part of the business” that “was somewhat underinvested (in),” Curtis said. First was the hire earlier this year of former AT&T executive Rocky Thurston as civilian group president to drive a new strategy in that business, largely inherited from DXC Technology in the merger to create Perspecta.

In the Wednesday call, Curtis named some of the agencies Perspecta has bids either awaiting award decisions or being worked on for submission: the State Department, Labor Department, Transportation Department and the Treasury

In CACI’s call Thursday, Mengucci outlined the company’s plan of how it plans to put its independent research-and-development dollars toward bids and meeting customer demands.

“We also plan to spend about $90 million of (bid and proposal) and IRAD levels that are materially higher than in past years indicative of the technology business we are pursuing,” Mengucci said.

“We're going to continue to increase our investments in signals intelligence, electronic warfare, communications and the like, and that's a very dynamic market.”

What agencies are wanting

During earnings conference calls, analysts who follow the companies also get a chance to find out from executives what their government customers are asking industry for.

In the case of Perspecta, the government has increasingly turned to them for help for something key to both industry and agencies alike: what Curtis called the “trusted workforce.”

That means everything from background investigations and continuous monitoring work related to the backlog of those seeking or holding security clearances, plus insider threat and supply chain security.

Perspecta holds a $100 million “Other Transaction Authority” agreement to modernize IT systems supporting background checks and anti-insider threat programs. The company is also one of four contractors supporting the Office of Personnel Management and National Background Investigations Bureau

The work needed is tremendous to reduce the backlog. Citing Bloomberg Government data, Curtis said almost “200,000 ongoing investigations and 50,000 to 55,000 new background investigation requests per week will be the norm.”

Like his predecessor Ken Asbury, Mengucci sees a demand both today and in the future from agencies of more technology defined by software. That is envisioned at getting capabilities in the field faster and keep them there, plus disrupting the product market with a different concept.

“Our technology is going to be set up such that the larger companies who are looking at attacking this technological market with a product, we’re looking at our device being delivered as software definable,” Mengucci said.

“That means that I can build software to put in a device. I can also take that same software, put it on a much larger scale system and be able to get back customer both mobile and fixed site coverage to what their problems are.”

Acquisitions companies are digesting

In keeping with the market’s busy merger-and-acquisition scene, Perspecta earlier this month closed a $250 million deal of its own to mark the Chantilly, Virginia-based company’s first M&A transaction since it opened for business in June 2018.

Curtis told analysts Wednesday that the acquisition of Knight Point Systems opens up new opportunities across technology areas in Perspecta’s core: cloud computing, cybersecurity, digital transformation and enterprise IT.

Knight Point also brings to Perspecta more intellectual property, plus a presence in DHS and the Defense Information Systems Agency.

“They're complementary to our culture and our offerings while accelerating our growth strategy. And they look a lot like us, which will ease the integration,” Curtis said.

Meanwhile, CACI is well past its process to integrate its almost $1 billion worth of acquisitions: LGS Innovations and Mastodon Design.

Mengucci admitted to investors that Arlington-based CACI “reached out and stretched ourselves” in integrating two companies simultaneously. But CACI seeing some heavy fruits of those deals as it turns the page on one year of growth and kicks off another on the same trajectory.

“LGS has already contributed with a triple million dollar award, $200 million-to $300-million of an updated sole source, where it competes,” Mengucci said. “That's part of the business case for that part of our acquisition. It's also proved that the business does continue to operate just as they did prior to the integration.”

One of the market’s serial acquirers, CACI is keeping to its M&A strategy focus on “technology-centric” deals, Mengucci said. That means “everything from supporting enterprise IT and business systems customer as they continually look for new creative enterprise-wide solutions,” he added.