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Most Integrators Met Targets Last Quarter

Bill Loomis








By Bill Loomis




Fourth-quarter earnings season is almost over, and it has been relatively good in light of the chaotic effect that Y2K spending and lockdowns have had on IT budgets over the past few quarters.

Most of the federal integrators have reported on-target results despite agency lockdowns. Among the commercial integrators, those that have done Y2K remediation work and are transitioning to non-Y2K work have had a tough time. It is difficult replacing a large amount of revenue in a quarter or two, but then to add more revenue on top of that to satisfy investors growth expectations, and do that in the face of the industrywide Y2K lockdown, has proven nearly impossible.

Those commercial integrators focused purely on e-business solutions saw no slowdown in business in the fourth quarter of 1999, and usually have well-exceeded investors' growth expectations.

Among federal integrators, CACI International Inc. reported strong December quarter earnings from continuing operations of 38 cents per share vs. 33 cents a year ago and the analysts' estimate of 33 cents. CACI's year-earlier results have been restated to remove CACI's COMNET software business, which was sold to Compuware for $40 million in the quarter, creating a $1.83 per share gain on the sale.

CACI's revenue rose 19 percent to $121 million and operating profit margin was 6.7 percent, better than the numbers of most federal integrators. Quarterly results were depressed somewhat by a Y2K-induced slowdown in its commercial business. CACI is upbeat on its outlook, pointing to its $1 billion backlog.

BTG Inc. reported earnings of 13 cents per share vs. a loss of 3 cents a year ago, in line with expectations. Total revenue declined 29 percent to $59.3 million, mainly due to a 74 percent decline in product sales that resulted from BTG's divestiture of its reselling business to Government Technology Services Inc. a year ago. BTG's service revenue was up 19 percent to $48.3 million and operating profit margin was 4.5 percent vs. 3.3 percent a year ago. Its contract backlog was $500 million and its bid and proposal backlog was $784 million, about the same as the September quarter.

GRC International Inc. reported earnings of 17 cents per share from operations in the quarter (13 cents including charges) vs. 11 cents normalized a year ago. GRC revenue was $50.7 million, up 30 percent, and the operating profit margin was 7.5 percent, much improved over the losses of a few years and among the industry's highest.

GRC's much-improved financial position caught the eye of its suitor, AT&T Corp., which acquired the integrator for $15 per share, or 120 percent of trailing revenue and 100 percent of our fiscal 2000 revenue estimate, one of the highest acquisition valuations seen in the federal IT industry over the past several years.

Advanced Communication Systems reported 17 cents per-share earnings vs. 15 cents, in line with analysts' expectations. However, annual revenue was well below estimates, declining 2 percent to $46.3 million. Analysts had estimated $53 million or higher. ACS managed to meet analysts' estimate by sharply improving its operating profit margin to 7.9 percent from 6.2 percent a year ago. ACS' merger with Titan should be completed by month's end.

Electronic Data Systems Corp. announced good fourth-quarter results, with earnings per share, adjusted for charges, of 61 cents vs. 53 cents a year ago and 2 cents above analysts' expectations. EDS' revenue was $4.9 billion, up 11 percent, and its operating margin was 9.7 percent.

Computer Sciences Corp. also reported strong results, 66 cents per share compared with 55 cents a year ago on $2.4 billion in revenue, up 15 percent. CSC's results also included Nichols Research, which it acquired last year. However, CSC's federal revenue was up only 7 percent to $544 million, 23 percent of total revenue.

Results have been coming in at or ahead of expectations among federal IT companies, though revenue and earnings growth continues to lag their commercial counterparts. In an environment in which investors want higher growth rates, companies are scrambling to make acquisitions to make up the shortfall. GRC's acquisition leaves only a handful of publicly traded federal integrators. I expect the consolidation to continue.


Bill Loomis is managing director of the Technology Research Group at Legg Mason Wood Walker Inc. Baltimore. He can be reached at wrloomis@leggmason.com. Legg Mason makes a market in ACS, BTG, CACI and GTSI. Within the last three years, Legg Mason has managed or co-managed an underwriting of ACS. This information is based on sources believed to be reliable but is not guaranteed as to completeness or accuracy and is not intended to be an offer to buy or sell any security.

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