General Dynamics not sweating protests, award delays

General Dynamics often touts the fact that the IT services segment operates at a different pace and cadence than its other defense businesses, namely the higher velocity of opportunities against a larger field of competitors.

The General Dynamics IT business hence has to deal with significantly more protests than the rest and often regarding big-ticket awards. In an earnings call with investors Wednesday morning, CEO Phebe Novakovic estimated GDIT has close to $1 billion in contract awards delayed by protests.

Not included in that figure is a potential $7.6 billion Defense Department cloud email migration award GDIT won that was pulled back earlier this month for a redo after rival bidder Perspecta protested.

But GDIT’s wait on rulings for those protests comes alongside delays on awards from government agencies. Novakovic also told analysts on GD’s third quarter earnings call that of the $65 billion in awards the IT services shop is awaiting decisions on, half of those “slipped to the right.”

GDIT has "seen a slowing in the execution of the contract awards, and we suspect that will resolve through the course of next year," Novakovic added. “Our rate of growth will be… in no small measure driven by the increased rate in award volume. Nothing is systemic here, it's really a question of timing.”

There are two significant contracts GDIT and its competitors are all waiting on, as are investors to gauge the success of consolidation moves in recent years.  The deals include GDIT’s buy of CSRA and Perspecta’s creation, both last year, all preceded by Leidos’ merger with Lockheed Martin’s IT services business three years ago.

Those contracts are the $3.5 billion Navy Next Generation Enterprise Network services contract held by Perspecta and anticipated for award in the first quarter of next year, and a $6.5 billion Defense Information Systems Agency contract held by Leidos to run DISA’s global information grid that could get awarded by the end of this year.

Analysts view the competitive field for both of those contracts as GDIT, Perspecta and Leidos whether they be an incumbent or seeking to take away market share.

GDIT and Perspecta will also evidently submit new proposals for the rebid of the Defense Enterprise Office Solutions contract to migrate DOD’s email, calendar and back office collaboration systems into an Office 365-based environment.

GDIT certainly has others it is waiting on given the $65 billion figure Novakovic mentioned. But based on her general description, the fact that federal agencies are operating on a continuing resolution through Nov. 21 also cannot be discounted as a factor in those delays.

Agencies are working against the same level of spending as last fiscal year and will often say that CRs delay new starts, which would imply new awards getting held up. That is a dynamic government contractors have largely gotten used to this decade with one stopgap funding measure passed after another.

GovCon companies also have gotten used to protests of large awards. But as Novakovic pointed out there, “protests historically resolve to the benefit of the winners.”

The GDIT business does have runway for growth with the contracts it is already performing on. GDIT’s book-to-bill ratio on a trailing 12-month basis is 1.1, a sign of growth to show the division has added contracts to the backlog faster than drawdowns to book revenue.

Also on that 12-month basis, Novakovic said GDIT has recorded a win rate of between 70 and 75 percent.

“We are winning more than our fair share, but we have seen a protraction,” Novakovic said.

Investors use the trailing 12-month methodology as a way to adjust for seasonal-based activity at a company.