What we can learn from next week's earnings calls
Come early next week, most of the publicly-traded government contractors will begin to report their latest quarterly financial results and conduct conference calls with investors to discuss not just those numbers, but also general conditions of the companies and the market at-large.
Here are some common themes I expect to come up, particularly when analysts get to ask the questions on those calls and try to get executives off the script.
Budget: Just exactly what is up?
Government agencies are funded through Nov. 21 under the continuing resolution signed by President Trump on Sept. 27 that averted another shutdown ... for now. One could argue that industry has gotten used to these stopgap measures that freeze spending levels at the previous fiscal year. Another CR beyond Nov. 21 is possible for many reasons.
The specter of impeachment proceedings is one factor, only for the sake of taking the temperature off negotiations involving congressional lawmakers and the White House. Recall also that many civilian agencies closed their doors during the January shutdown given the disagreements over spending affected them more than defense and intelligence agencies, most which remained fully funded.
Expect companies to say largely what they have said before about budget uncertainty impacting their business (i.e. not too much), but what is said about the procurement cycles and how agencies are working through it could reveal some insights.
Mergers and acquisitions done, with one to come
L3Harris Technologies began its journey in late June after the megamerger to create it closed. The new company has checked off creating a new board of directors and overall structure including management from its to-do list. Expect some updates on the integration and possibly the ongoing portfolio review when L3Harris reports on Oct. 30.
Meanwhile, it goes without saying that GovCon’s IT and services side continues to be active in deals of all shapes and sizes. They can be the big ones like Science Applications International Corp.’s buy of Engility, CACI International’s twin acquisitions of LGS Innnovations and Mastodon Design, Jacobs Engineering Group's purchase of KeyW Corp., or Perspecta’s first deal as a public company. We should include transactions closed by the likes of ManTech International and Parsons Corp. in that group as well.
Expect the normal routine of updates on integration and opportunities that lie ahead as a result of those deals, plus what the pipeline of more potential deals looks like. I am hoping to hear at least one question about the competition for deals from private equity firms, given how two of them will pay $2.4 billion to buy AECOM's government services business originally slated to go public.
Raytheon and United Technologies Corp. can at least plan for the integration of both companies after they close their merger even as they wait out a review by federal antitrust regulators that nearly all observers expect to stretch into early summer. Both sets of shareholders have approved the deal.
We do know the future Raytheon Technologies’ overall business structure and some names of the executives who will lead that company. Raytheon and UTC report this coming Tuesday and Thursday, when their leaders will likely (again) explain the rationale of their deal. It is also possible they will be asked if any divestitures could happen to clear the antitrust hurdle.
Recompetes: Risk and reward
Government IT and services companies typically have to defend anywhere between 15 and 20 percent of their revenue each year, although that number can fluctuate and be concentrated to varying degrees. For example, SAIC is only fighting to keep 13 percent of sales during its current fiscal year and believes it can focus more attention on pursuing new business as the company integrates Engility.
Then there is Perspecta, which is defending its role on the Navy’s $3 billion-plus Next Generation Enterprise Network contract that is 15-20 percent of total sales. Perspecta lost a $2.9 billion NASA end-user IT services contract to Leidos, but has seen success on the bookings front since it opened for business last year to mitigate some risk from that loss and a potential NGEN defeat.
NGEN was broken up into a pair of separate contracts for this recompete and the $1.4 billion hardware portion was awarded earlier this month to HP’s federal subsidiary. Perspecta is fighting to keep the services contract away from rivals General Dynamics IT and Leidos. An award is expected in the first quarter of next year.
A second major technology contract Wall Street has its eye on is the $6.5 billion Defense Information Agency “GSM-O” contract held by Leidos to run DISA’s global information grid for communications and data. Analysts see the competitive field there as just like NGEN-R services: Leidos versus GDIT and Perspecta. DISA should award the contract before the year ends, and Leidos will likely be asked about it.
NGEN-R’s services portion and GSM-O are the two major competitions many investors are eyeing as test cases for the notion of scale, which has driven much of the dealmaking. This includes Leidos' deal for the former Lockheed Martin IT services business, GDIT and the acquisition of CSRA last year, and the three-way combination that created Perspecta.
Cloud dollars and other new money for the taking
Yes, there is that one called “JEDI” that the Defense Department should award sometime this year to acquire a commercial cloud infrastructure from either Amazon Web Services or Microsoft.
During the summer round of earnings calls, we did start to see government IT companies and specifically Leidos tout their chops in helping agencies move their data and other assets into cloud environment. We could start to see that again during this round as a JEDI award gets closer, given the significance of the U.S. military going to the commercial cloud.
That other large DOD commercial cloud contract focused on email, calendar and other back-office collaboration functions is starting over. The General Services Administration has pulled back its award of the $7.6 billion Defense Office Enterprise Solutions contract to GDIT and will take new bids from both GDIT and Perspecta, which protested the award.
Specific IT contracts rarely come up in General Dynamics’ earnings calls but there is a chance DEOS could come up given its size and scope, plus how that contract positions the winner for future defense cloud work. Be certain Perspecta will get a question about it.
If these calls were open to media (they are not unfortunately), then I would be asking these companies how they are looking to get a slice of this overall government cloud pie. There are a lot of opportunities for services wrapped around the infrastructure.