Where does Northrop see its services future after reorg?
By
Ross Wilkers
Northrop Grumman's realignment mostly will affect its technology services segment just as that business shows signs of growth after a significant pivot.
Northrop Grumman is in the midst of reshuffling its segments with the technology services shop set to be the most impacted: just as what it calls “TS” appears to be turning the corner toward growth.
During Northrop’s third quarter earnings call with investors Thursday, CEO Kathy Warden peeled more of the onion back on how the company is shifting different business units around through the realignment announced in September.
The company is shifting a bulk of technology services into what will become a new defense systems segment in the structure to take effect Jan. 1, 2020.
Warden told analysts that defense systems will also include “select capabilities” from Northrop’s mission systems segment. Also under the defense systems umbrella will be global sustainment modernization, tactical missiles, munitions, integrated air and missile defense programs.
Notably absent from that description is enterprise IT, although Northrop’s September announcement of the realignment does list “critical technology services” as part of the future defense systems look.
The technology services segment under the microscope here posted 3-percent revenue growth to $1.07 billion in the third quarter over the prior year period. Investors will have to wait until January for a more detailed outlook, but Warden said she sees "this to be a growing segment of our business in 2020."
Northrop is holding to its low-$4 billion revenue forecast for TS this year but Warden also touted a classified win in the “hundreds of millions of dollars” range for the segment in the third quarter: one she said indicates that business’ ability to win more secretive work in the national security services domain.
What was not said in the call with analysts does not necessarily mean Northrop is eyeing a long-term exit from that line of work, given the large IT contracts it already has in tow and efforts the company has made to create synergies between technology services and the rest of the corporation.
One analyst asked Warden about whether the realignment signals more portfolio reshaping by Northrop.
“As we did shine a light on the whole of the portfolio, there wasn’t anything that didn’t fit within the structure that we created” Warden said. “But of course, I continue to look at that on a regular basis, and as we execute the strategies that we’ve defined in this new realignment, we’ll continue to assess that question.”
Even with the revenue declines for technology services, Northrop has held the margins steady there and higher compared to what similar businesses at other large defense companies have recorded.
The realignment does tie directly to how Northrop sees its future almost one year since the acquisition of Orbital ATK closed. As Warden also pointed out to analysts, Northrop wants to move on capturing more revenue synergies through the combination with much of the integration activities in the rear view mirror.
“It seizes the opportunity that we knew we had in space to bring the portfolio together in the new space sector,” Warden added in reference to the realignment of business segments.
Mission systems is the other segment of Northrop that could be considered IT-heavy given that business’ focus on open architecture, cybersecurity and software-defined systems. That segment will remain “largely intact” once the realignment goes into effect, Warden said.