TBR Webinar: Struggling to Navigate the Stormy Waters of Sequestration

TBR

T EC H N O LO G Y B U S I N ES S R ES EAR C H , I N C .

Navigating Headwinds and Increased Competitiveness in the Federal Marketplace Insights from TBR’s 3Q13 Public Sector IT Services Benchmark

March 5, 2014

TBR

2 TBR Quarterly Benchmark Readout | 3.5.14 | www.tbri.com | ©2014 Technology Business Research Inc.

Today’s Presenters

TBR Public Sector IT Services Benchmark Readout: Presenter Bios

Sebastian Lagana

Lead Analyst, Public Sector Practice 3 years of experience

Email: [email protected]

Twitter: @SLaganaTBR

John Caucis

Senior Analyst and Practice Manager, Public Sector and Health 12 years of experience


Twitter: @jcaucistbr

mailto:[email protected]


TBR


TBR’s Public Sector IT Services Benchmark report delivers unique insight and value through in-depth analysis in a concise, consumable format

TBR Public Sector IT Services Practice Overview

• TBR's syndicated reports provide ongoing coverage of nine “government-centric” IT services vendors (i.e., firms whose primary customers are government or noncommercial entities): Booz Allen Hamilton, CACI, General Dynamics IS&T, L-3 Communications, Lockheed Martin IS&GS, ManTech, Northrop Grumman IS&TS, Raytheon IIS and SAIC.

• TBR also follows the public sector activities of seven leading commercial-centric IT services vendors: Accenture, CGI, CSC, HP Services, IBM Global Services, Unisys and Xerox.

• The benchmark includes analysis of four government-centric firms for a total of 20 public sector IT services vendors: Boeing GS&S, Exelis, Harris and NCI.

• TBR reports are unique due to their deep, holistic analysis of leading vendor businesses.

• Financial modeling and TBR insights help customers build a better understanding of vendor business models.

• TBR designs reports and webinars that are clear, concise and responsive to client timelines and provide insight into multiple layers of an organization.

• TBR’s strategic assessment provides an impartial reality check on vendors’ performance relative to their strategic objectives and the overall market.

TBR


TBR Public Sector IT Services Benchmark Readout: Agenda and Format

Today’s Agenda

1. Key fiscal results from the 3Q13 benchmark

2. Strategic actions to adapt to the market

3. Preliminary 4Q13 data and 2014 outlook

4. Q&A

TBR


Focusing on operations to sustain margins was the mantra

for federal contractors in 2013; some also forged alliances or

acquired capabilities, and one (CACI) made a big splash in

the M&A market.

Federal budget turmoil continues to define the industry, creating growth and margin headwinds and elevating competition in the federal sector

3Q13 PSBQ Public Sector IT Services Benchmark Research Highlights

Public sector IT services vendor trends for 3Q13

SOURCE: TBR RESEARCH AND ESTIMATES; COMPANY DATA AND ESTIMATES

Preliminary data suggests 4Q13 will be another difficult

quarter for most federal contractors, capping off a grueling

2013 and fueling pessimism for 2014.

Sales continued to fall in 3Q13, and despite federal year-end

budget flush, company backlogs have contracted to the

lowest levels in recent years — a grim omen for 2014.

TBR


Aggregate average quarterly year-to-year growth rates contracted for a second consecutive quarter during 3Q13


The barriers to federal IT market growth remain: budget uncertainty, program delays and terminations, elongated business development and task order provision cycles and tightening short-cycle IT spending

SOURCE: TBR ESTIMATES AND COMPANY DATA. AVERAGES ARE BASED ON THE 20 COMPANIES IN THE PSBQ PUBLIC SECTOR IT SERVICES BENCHMARK.

TBR


Aggregate backlog grew 3Q13 due to the seasonal increase in award activity coinciding with the end of the federal fiscal year in September


Aggregate backlog reported by the 13 government-centric contractors was $106.8 billion in 3Q13, up 1.4% sequentially from $105.3 billion in 2Q13 but down 8.7% from $117.1 billion in the year-ago quarter (3Q12)

TBR


The volume of year-end budget flush fell sharply, causing a precipitous decline in the pace of sequential backlog growth in 3Q13 from 3Q12


The aggregate backlog for the 13 government-centric firms in the benchmark study has declined nearly 9%, or more than $10 billion since 3Q12; the seasonal sequential rise was modest compared to 2012 and prior years

TBR


The federal IT environment favors specialization and operational proficiency, but vendors may not realize the rewards in the near term











for federal contractors in 2013; some also forged alliances

or acquired capabilities, and one (CACI) made a big splash

in the M&A market.

TBR


Contractors sustained sharp focus on cost in 3Q13, but continued top-line contraction in 2013 has neutralized the impact on margin performance


Est.

TBR


Margin-leading federal contractors commonly restructured business units and companywide to preserve margins

Top federally focused operating margin performers in 3Q13


• LOB and portfolio restructuring

• Push to higher-value solutions

• Revamping of pricing models


• Strong contract performance

• Shifting sales mix; more classified and intelligence work

• Operational restructuring offsetting higher R&D investments

• 2013 restructuring paying off; favorable contract adjustments

• Facilities consolidation; 1+ million square-foot reduction

• Expanding use of shared services

14.9% in 3Q13

11.9% in 3Q13

13.9% in 3Q13*

• Corporatewide and sector restructuring and workforce rebalancing

• Cost containment and reduced discretionary spending

• Increasing automation in solution delivery *ESTIMATED GLOBAL PUBLIC SECTOR MARGIN

11.7% in 3Q13

Other vendor operating margins in 3Q13: Boeing GS&S (11.4%), Booz Allen Hamilton (9.8%), Northrop Grumman IS&TS (9.8%), Lockheed Martin IS&GS (9.1%), Raytheon II&S (9%), L-3 Communications (8.5%), General Dynamics IS&T (8.4%), CACI (7.1%), ManTech (5.6%), NCI (4.4%) and SAIC (3.7%)

CSC

IBM

Harris

Exelis

TBR


BAH effectively managed billable headcount costs and aggressively

reduced its fixed cost structure through 2012 and 2013.

Vendor spotlight — Booz Allen Hamilton margin performance


BAH is increasingly reinvesting profit into its operations. • Organic portfolio investment: predictive intelligence, cloud, engineering

services, rapid prototyping and cyber

• M&A: ARINC’s DSES division and SDI Corp. in late 2012

• Increase volume and breadth of thought leadership

• Expand in overseas markets: Middle East/GCC, Africa, APAC

BAH successfully elevated its operating margins from the mid-5%

range after its late-2010 IPO to almost 10% in 3Q13, despite the

turbulent market environment.


TBR Position

A steadily increasing flow of profit dollars enables Booz

Allen Hamilton (BAH) to ramp up organic and inorganic

investments in its portfolio and geographic footprint. Booz Allen Hamilton

TBR


Federal contractors continue to expand alliance ecosystems to augment capabilities and extend geographic reach

Key alliances and partnerships for public sector IT services vendors in 3Q13



FireEye, Red Hat and Splunk: Expands Cyber Security Alliance

network to 20 partners, adding machine-based security

platforms, open-source solutions and big data indexing

No Magic and Be Informed: Enhance CACI’s cloud and

integration capabilities in integrated modeling, simulation

and analysis and business process platforms

Havelsan: Will enable BAH to drive deeper into new markets

in MEA, jointly delivering cyber, simulation and training, e-

government and border security solutions

HP: Access to HP’s R&D and support resources; integrates HP

ArcSight security, information and event management (SIEM)

technology to enhance the flexibility of CSC’s security tools

Booz Allen

Hamilton

CACI

CSC

Lockheed

Martin IS&GS

TBR


CACI’s largest acquisition ever was an anomaly in 3Q13, a quarter during which the pace of M&A activity was light

Key acquisitions by public sector IT services vendors in 3Q13



ServiceMesh: Enterprise cloud management solution

(Agility Platform) automating the orchestration of

applications across multiple cloud environments

Six3 Systems: Broad range of C4ISR, intelligence and

cybersecurity solutions; will add 1,600 employees and $275

million to $325 million in sales in FY14

Qantas Defence Services: Logistics, sustainment and

modernization services in Australia and southeast APAC

CPAS Systems: Toronto-based provider of pension

administration software, including defined benefit, defined

contribution and hybrid retirement plans

Northrop

Grumman IS&TS

CACI

CSC

Xerox

TBR


Vendor Spotlight — CACI and Six3 Systems M&A



Six3 Systems will augment CACI’s operating margin (historically

between 7% and 8%). If Six3 maintains an operating margin near

analyst estimates of 14%, it would significantly boost CACI’s long-term

profitability.

The Six3 acquisition was aggressive with limited short-term potential,

given lingering uncertainty in the DOD and intel markets.

• Customer mix: 70% to 75% intelligence; 20% to 25% DOD; <5% civilian

• Contract mix: 50% fixed-price

• Service mix: 80% C5ISR; 20% cyber-related

Six3 is CACI’s largest-ever acquisition at $820 million, a multiplier of

roughly 1.75 on estimated 2013 sales of $470 million; CACI guided for

inorganic revenue to rise $275M to $325M in FY14 (ending June 30).

TBR Position

Six3 is a short-term risk as the DOD and intel space offers

limited near-term upside; Six3 is CACI’s vista of the future,

subject to the long-term endurance of the C5ISR market. CACI & Six3 Systems

TBR


Early 4Q13 data indicates federal contractors continued to struggle as 2013 closed; cynicism pervades the consensus outlook for 2014











for federal contractors in 2013; some also forged alliances or

acquired capabilities, and one (CACI) made a big splash in

the M&A market.

TBR


The convergence of lower funding levels, sequestration and the 16-day government shutdown impacted preliminary 4Q13 top-line growth results


The government shutdown was moderately disruptive for most

contractors, impeding the pace of contract awards and creating

resource management and business development challenges.

SOURCE: TBR ESTIMATES AND COMPANY DATA. AVERAGES ARE BASED ON THE 20 COMPANIES IN THE PSBQ PUBLIC SECTOR IT SERVICES BENCHMARK.

TBR


The government shutdown extended receivables collection cycles for federally focused contractors in 4Q13


Aside from sales growth, the shutdown also had a tangible impact

on company receivables and days sales outstanding ledger line

items and metrics.

TBR


However, most contractors remain apprehensive about long-

term budget uncertainty and anticipate the market

environment will remain challenging through 2014.

The shutdown exacerbated difficult federal IT market conditions, though December’s budget deal gave a (minor) boost to vendor confidence


Contractors expect the budget agreement will provide a

stable budget for the next two years, giving the industry

some much desired clarity.

Vendors welcomed the temporary sequestration relief and

near-term planning horizon the budget deal established.

TBR


Limited growth opportunities in the federal market in 2014 will force vendors to look to foreign markets and commercializing select offerings


Contractors will continue to target markets outside of their

core U.S. federal sector, focusing on public sector

opportunities in the Middle East, Asia Pacific and Europe.

The FY14 federal IT budget request shows a modest increase

of 1.8% over FY13, largely driven by demand for mobility, big

data and cloud solutions that boost operational efficiencies.

Vendors will continue to repurpose offerings in cybersecurity,

communications and analytics for applications in

nongovernment/DOD sectors (health, public safety, energy).

TBR


Vendors expect 2014 to essentially be a repeat of 2013, though there are signs of reaching the low-water mark in the first half of the year



Note: Two-tone bars are TBR estimates, as these companies have yet to release 4Q13 earnings as of Feb. 12, 2014.

TBR


Public Sector Research Current Topics 2014 Report Key Themes

• Vendor Reports: o Northrop Grumman IS&TS o Lockheed Martin IS&GS o General Dynamics IS&T o Raytheon IT Services o SAIC o L-3 Communications* o ManTech* o CACI** o Booz Allen Hamilton** o Public sector practices of:

IBM Global Services HP Services CSC Accenture Dell Services Unisys Xerox Services

• Vendor Benchmark • Benchmark Webinar

How does vendor fiscal performance reflect the overall federal IT services market landscape?

What strategic actions are vendors taking to adjust to market conditions or better position themselves against the competition?

How are public sector IT services vendors leveraging partnerships? Are they forming new alliances? How are they leveraging M&As?

How are vendors managing human capital in the environment?

Where are vendors capitalizing on new adjacent market opportunities? What new markets — domestic, international or commercial — are public sector IT services vendors eyeing to generate revenue?

High-growth Segments

Strategic Actions

Alliances and Acquisitions

Resource Management

Growth and Margin

Performance

TBR’s Public Sector practice will continue tracking the activities of the leading federal IT services contractors and their commercial counterparts

Public Sector IT Services Practice Research Outlook: 3Q13 Research Highlights

*SEMIANNUAL: REPORTS PUBLISH IN CALENDAR 2Q/4Q. ** SEMIANNUAL: REPORTS PUBLISH IN CALENDAR 1Q/3Q.

TBR


Questions?

Public Sector IT Services Practice Research Outlook: Questions

TBR


John Caucis

Senior Analyst & Practice Manager, Public Sector and Health


Twitter: @jcaucistbr

Telephone: 603.758.1836

Professional Services Business Quarterly Research Highlights and Outlook: Contact Information

Sebastian Lagana

Lead Analyst, Public Sector Practice


Twitter: @slaganatbr

Telephone: 603.758.1857

James McIlroy

Vice President of Sales Email: [email protected]

Telephone: 603.929.1166

Twitter: @TBRinc SlideShare: www.slideshare.net/TBR_Market_Insight YouTube: www.youtube.com/user/TBRIChannel




https://twitter.com/TBRinc

http://www.slideshare.net/TBR_Market_Insight

http://www.youtube.com/user/TBRIChannel

TBR


PSP Syndicated Research Coverage IT Services Vendors Public Sector Vendors Benchmarks

(Benchmark XLS data also available)

• Accenture • Atos • Capgemini • CGI* • Cisco Services • Cognizant • CSC • Dell Services • Fujitsu • Genpact* • HCL Technologies • HP Services • IBM Global Services • Infosys • KPN Corporate Market* • Tata Consultancy Services • T-Systems • Unisys • Wipro IT Services • Xerox Services

• Booz Allen Hamilton* • CACI International* • General Dynamics IS&T* • L3 Communications* • Lockheed Martin IS&GS* • ManTech* • Northrop Grumman IS&TS* • Raytheon Intelligence, Information &

Services*

• Global Delivery Market Landscape • Healthcare IT Services Vendor

Benchmark • IT Services Vendor Benchmark • Management Consulting

Benchmark • Public Sector IT Services Vendor

Benchmark • Software Alliance Benchmark

Healthcare IT Services Vendors

• Accenture HITS* • CSC HITS* • Dell HITS* • HP HITS* • IBM HITS*

Management Consulting Vendors

• Bain & Company* • Booz & Company* • Boston Consulting Group* • Deloitte Consulting* • McKinsey & Co.*

TBR Professional Services Practice Syndicated Coverage

*Semiannual publication

TBR

T EC H N O LO G Y B U S I N ES S R ES EAR C H , I N C .

About TBR Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in formats that are tailored to clients’ needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis. TBR has been empowering corporate decision makers since 1996. To learn how our analysts can address your unique business needs, please visit our website or contact us today.

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