What Vencore's IPO filing tells us about the market
If you want to know why doing business is hard in the federal market, just dive into a Securities & Exchange Commission filing for just about any public company.
Annual reports (form 10-K) generally have a section about risk factors. Its darkest presentation might be the S-1 filing, when companies register with the SEC that they intend to go public.
We don’t have many of those in the federal sector, so the recent IPO filing by Vencore gives us an opportunity to look at some of the risk factors in the market that companies are facing.
Vencore includes several pages of budget, economic and competitive factors among others. You read it and you think to yourself, why would I invest or even want to be in federal market?
It is a good question, and Vencore’s S-1 answers it: a $120 billion addressable market and the company’s growth, or at least improving profit margins. They have a plethora of opportunities in segments of the market that are reasonably expected to grow in the coming years.
But then I return to those risk factors. Some of the risk factors are very short term such as the debt ceiling, which Congress will need to address before the end of the year. If they don’t, the government will be challenged to fund its operations and that negatively impacts the ability to pay contractors such as Vencore.
Other risk factors though point to systemic challenges in the market that aren’t going away anytime soon and aren’t easy to solve.
For example, companies face the impact of the budget process and the government’s repeated inability to fully fund operations for the next fiscal year by the end of the current fiscal year. This means operating under a continuing resolution, often for substantial amounts of time. This means that new initiatives are slow to start or are cancelled, which has an adverse effect on revenue and new revenue streams.
Vencore also cites government compliance as another risk factor. Compliance requirements can add costs to operations. Companies also face risks if they fall out of compliance. A sampling of compliance requirements includes Federal Acquisition Regulations, the False Claims Act and False Statements Act, Truth in Negotiations Act, and Procurement Integrity Act.
There also are accounting rules, employment laws and regulations, national security rules and executive orders. There is also the fact that contractors can't discuss classified work publicly, which can make the underlying business more difficult for investors to gauge.
As I look at the risk factors in the Vencore S-1 filing, I have to remind myself that filings often paint the worst case picture of the market. The document is for investors who are deciding whether or not to buy stock. You can’t just entice them with all the good stuff you have going on. You need to tell them the bad or at least the potential bad.
But the S-1 also is a clear-eyed view of the market, warts and all. And it makes clear there are plenty of warts.
The risk factors Vencore lists aren’t surprises to anyone, but to see them all accumulated and compiled is a powerful thing.
So here’s an idea for another use of S-1s. Take them to Capitol Hill. Make representatives and senators read them. Make sure they get in front of the regulators.
Tell lawmakers that this is what we tell our investors. This is what the market looks like to the outside world.
Do you want to attract the best and the brightest? Then help us paint a better picture.
More specifically about Vencore, it makes me realize that CEO Mac Curtis and the gang feel pretty confident about their prospects.
Whether they go forward as a public company or whether the S-1 filing entices another buyer, Vencore is jumping feet first into its next chapter.
Posted by Nick Wakeman on Jun 27, 2017 at 1:08 PM