Public Sector IT Services Benchmark

TBR

TECHNOLOGY BUSINESS RESEARCH, INC.

Publish Date: Sept. 24, 2013

Authors: Sebastian Lagana ([email protected]), Public Sector Analyst; Jacob Gordon and Harry Norton, Professional Services Practice Research Analysts

Content Editor: John Caucis,Senior Analyst/Public Sector Practice Manager

PROFESSIONAL SERVICES BUSINESS QUARTERLYSM

Public Sector IT Services BenchmarkSecond Calendar Quarter 2013

mailto:[email protected]

TBR

©2013 Technology Business Research, Inc.2 Public Sector IT Services Benchmark 2Q13 | Professional Services Business Quarterly

Key Findings & Trends

3 Executive Summary4 Scoring Summary5 Strategic Actions/Key Developments10 Market Overview11 Revenue, Growth and Margin Leaders12 Revenue Leaders13 Growth Leaders14 Margin Leaders15 Growth Trends and Drivers17 M&A Trends18 New Service Offerings19 Contract Trends20 Resource Management 21 Future Outlook

Contents

PSBQ Benchmark Metrics23 Market Strategy Metrics28 Resource Management

Strategy Metrics35 Financial Strategy Metrics44 Company Scores Over Previous

Nine Quarters52 Revenue, Growth and Margin

Leaders Tables54 Announced Contracts and Backlog

Appendix56 About TBR

TBR offers this benchmark data in an XLS format.For further information, contact your TBR account executive.

TBR


Many public sector contractors insist sequestration has yielded minimal fallout, despite key metrics indicating otherwise

Executive Summary

While many companies indicated they have not experienced any major impact from the sequester, revenue and backlog metrics indicate persistent market pressure continues to weigh on results

• Fourteen of the 20 companies in the PSBQ Public Sector IT Services Benchmark realized year-to-year revenue contractions in 2Q13. Only Boeing GS&S (3%), L-3 Communication (1.3%), General Dynamics IS&T (0.9%) and Harris (0.8%) generated growth among the public sector-focused companies while Xerox (7.1%) and Accenture (3.3%) were the only commercial-centric companies to generate public sector revenue growth.

• Average weighted revenue growth for the 20 companies covered in the benchmark was -4.2% in 2Q13, up 30 basis points from -4.5% in 2Q12, but down 80 basis points from -3.4% in 1Q13. The 2Q13 revenue contraction is also the eighth consecutive quarter of year-to-year contractions among the competitive set. Average organic growth was -4.7% in 2Q13, declining year-to-year for the eighth consecutive quarter and declining 90 basis points compared to 1Q13.

• For a second consecutive quarter, federally focused companies did not hesitate to revise guidance, with L-3 (down $50 to $150 million), Northrop Grumman IS&TS (down $100 million) and ManTech (down $200 million) all lowering expectations for the remainder of the year. Raytheon II&S represented the only guidance increase (up $100 million) among its peer group, however this followed a $300 million guidance reduction in 1Q13, netting out to a $200 million reduction from initial guidance projections at the start of the calendar year. Companies that outperformed their guidance so far this year, such as General Dynamics, generally maintained initial guidance ranges for 2013. This behavior indicates corporate expectations for sharp revenue contractions during 2H13, which would be necessary to meet initial guidance.

• 2Q13 aggregate backlog for the 13 federally focused contractors in the benchmark was down 3.7% from 1Q13, the third consecutive and sixth of past seven quarters with aggregate backlog contraction. Additionally, average backlog of $8.8 billion was the lowest figure realized since TBR began tracking backlog metrics for the current set of companies in 1Q10. This performance correlates strongly with guidance reductions over the first half and, ultimately, expectations for accelerating revenue contractions during the second half of the year.

• Based on updated guidance, continued backlog contraction and the likely prospect of a federal FY14 budget based on a continuing resolution, TBR is projecting a weighted average revenue contraction among the 20 benchmark firms of -5.9% during 3Q13, absent a major budget flush from U.S. federal agencies to close FY13. However, we believe this to be an unlikely outcome given the general tenor of the U.S. federal market over the past six months.

TBR


Firms with niche offerings or a strong focus on international and state & local markets earned leadership positions in TBR’s scoring metrics

Key ■ Represents an area where company is challenged versus peers (score is <4.50)

■ Represents an area where company is outperforming peers (score is >5.50)■ Represents an area where company is neither significantly outperforming nor underperforming peers (score is between 4.50 and 5.50)

Scoring Summary

CompanyTotal Average PSBQ Public

Sector Score (1Q13)Total Average PSBQ Public

Sector Score (2Q13)Market Strategy Score

Resource Management Strategy Score

Financial Management Strategy Score

Boeing GS&S 5.94 6.27 6.32 7.31 5.20

Accenture 6.02 5.87 5.95 5.31 6.35

IBM Global Services 5.88 5.80 5.25 6.12 6.04

Xerox 5.55 5.78 7.12 4.76 5.46

Harris 5.25 5.32 5.24 5.43 5.30

Booz Allen Hamilton 5.31 5.27 5.29 5.10 5.42

L-3 Communications 5.03 5.24 4.55 5.65 5.52

Raytheon II&S 5.30 5.19 4.57 5.99 5.02

CACI 5.39 5.14 4.52 5.79 5.12

Northrop Grumman IS&TS 5.37 5.12 4.55 5.53 5.30

Lockheed Martin IS&GS 5.38 5.11 4.39 5.82 5.11

CSC 5.31 5.10 4.77 5.32 5.22

HP 5.07 5.10 6.47 4.14 4.69

ITT Exelis 4.51 4.84 4.10 4.98 5.44

Dell 4.81 4.80 4.51 4.99 4.90

ManTech 4.76 4.66 4.37 4.72 4.89

General Dynamics IS&T 4.53 4.58 5.57 4.17 4.02

SAIC 4.94 4.53 4.09 4.82 4.67

Unisys 3.80 3.90 3.85 3.47 4.39

NCI 3.87 3.65 3.48 3.11 4.35SOURCE: TBR SCORING METHODOLOGY

2Q13 PSBQ Public Sector Scoring Summary

TBR


Leading federal IT contractors increasingly leverage healthcare IT, cloud, cyber and analytics to mitigate legacy defense business cutbacks

Strategic Actions/Key Developments

Strategic Actions/Key Developments for Government-centric IT Services Firms in 2Q13

Company Action/Event TBR Assessment TBR Analysis

General Dynamics IS&T

IS&T is ramping up its call center headcount to deliver customer service support for the Centers for Medicaid & Medicare Services.

IS&T plans to hire individuals primarily in low-cost, onshore locations to maintain profitability on the engagement. This will include 1,600 people in Sandy, Utah; 1,600 in Lynn Haven, Fla.; 1,300 in London, Ky.; 1,000 in Hattiesburg, Miss.; 120 in Coralville, Iowa; and 100 in Bogalusa, La.

Lockheed Martin IS&GS

Lockheed Martin received FedRAMP certification as an authorized secure cloud solution provider.

TBR believes the FedRAMP authorization will eventually provide sales momentum for IS&GS’ secure cloud solutions offerings due to increased credibility and the simplification of the sales process, as it is now preauthorized to sell to any of the U.S. government markets.

Northrop Grumman IS&TS

Northrop Grumman was included as a participant in the Department of Homeland Security’s Enhanced Cybersecurity Services program.

Northrop Grumman continues to pursue low-cost R&D methods as it expands its cybersecurity portfolio. Gaining access to classified network intrusion information will further enhance the security of its clients’ and its own information networks.

Raytheon II&SRaytheon acquired Visual Analytics Inc., a provider of analytics services related to fraud and security.

Visual Analytics’ experience delivering solutions to domestic and international public sector agencies, as well as enterprise-level commercial businesses, will enhance existing solution delivery and expand opportunities in adjacent commercial and international markets.

Key: Positive short-term impact expected on bottom line/top line Negative short-term impact expected on bottom line/top line Too soon to tell

TBR


Companies are realigning operations to intensify focus on core competencies and related business development effortsStrategic Actions/Key Developments for Government-centric IT Services Firms in 2Q13


SAICSAIC divested noncore businesses from the National Security Solutions (NSS) segment.

SAIC deemed the business, which was related to technology used to detect concealed explosives or weapons, outside the scope of NSS’ core competencies. We expect additional divestiture of noncore assets and operations will continue up to and through the split coming at the end of 3Q13.

L-3 Communications

L-3 rebranded its Aircraft Modernization & Maintenance (AM&M) segment as Platform & Logistics Services (P&LS).

The repositioning reflects the firm’s heightened focus on ground-based maintenance and logistics service provision. We believe P&LS’ expanded presence in logistics presents L-3 with an opportunity to grow revenues once OCO funding reductions subside, as the space is far less saturated than more common growth areas, such as cyber or healthcare IT.

ManTech

ManTech, via its HBGary subsidiary, released new iterations of its Responder Pro and Active Defense cyber solutions.

The Responder Pro and Active Defense suites are designed to detect malware in physical memory and virtual desktop environments. We believe the products have application for public sector as well as commercial markets — particularly Active Defense, as cloud adoption and desktop virtualization increase in both segments.



TBR


Partnerships are increasingly attractive to companies seeking low-cost methods of expanding capabilities and geographical penetrationStrategic Actions/Key Developments for Government-centric IT Services Firms in 2Q13


CACI

CACI announced, in collaboration with Netherlands-based semantic business solution provider Be Informed, the development of a Software as a Service-based customizable application platform.

The expansion of CACI’s business systems solution aligns with the firm’s recent acquisition activity in the area and increasing shift in client mix toward federal civilian agencies. The addition of a semantic-engineered, customizable application model allows for the most cost- and time-effective development and deployment of application derivations, eliminating the need for customized application development each time a given agency’s requirements change.

Booz Allen Hamilton

BAH announced a partnership with Turkey-based HAVELSAN to provide technical and professional services to public sector and commercial clients.

The partnership with HAVELSAN strongly supports BAH’s focus on expanding its operations in Gulf Cooperation Council, U.S. friendly Middle Eastern nations and delivery of Foreign Military Sales (FMS) through NATO-led programs. We anticipate the partnership will initially focus on services such as cyber, critical infrastructure, border security and training.



TBR


Expanding cloud capabilities offer commercial-centric firms an avenue to expand respective portfolios for public and commercial clientsStrategic Actions/Key Developments for Commercial IT Services Firms in the Public Sector in 2Q13


IBM Global Services

IBM acquired SoftLayer Technologies for $2 billion to expand its public cloud capabilities.

As a result of the acquisition, IBM created IBM Cloud Services, a dedicated cloud unit expected to meld SoftLayer’s portfolio with IBM’s SmartCloud solutions. We believe this will boost the firm’s cloud capabilities in the commercial and public sectors, enhancing IBM’s position against cloud providers such as Amazon and Rackspace.

HP

HP laid off 150 public sector-focused employees following the finalization of a North Carolina Health and Human Services contract.

HP is in the process of laying off approximately 29,000 employees before the end of its FY14 in October 2014. We expect public sector-focused employees to be more likely targets for layoffs despite recent federal deal wins.

CSCCSC partnered with AT&T, expanding their respective cloud infrastructure and service capabilities.

We believe many systems integrators and IT service providers will seek to partner with infrastructure and data hosting providers as a cost-effective way of expanding portfolio reach and competing with public sector cloud providers such as Amazon Web Services (AWS).

AccentureAccenture launched an Oracle Engineered Systems Center of Excellence during 2Q13.

Enhanced Oracle system design, client collaboration and service delivery capabilities will drive increased traction among Federal Civilian Agencies that are seeking to build improved business systems capabilities.



TBR


New service announcements utilizing analytics will generate growth opportunities in the healthcare and transportation verticals Strategic Actions/Key Developments for Commercial IT Services Firms in the Public Sector in 2Q13


Dell

Dell announced an alliance with Apixio that is designed to cultivate connected healthcare-focused information management and analytics capabilities.

With Dell leveraging Apixio’s big data analytics and machine learning capabilities, TBR expects the partnership to expand Dell’s portfolio of high-margin offerings for the healthcare sector. We expect Dell to continue favoring alliances over acquisitions as the company proceeds with its corporate privatization.

XeroxXerox introduced Merge, a centralized, analytics-based parking system for local governments.

Xerox’s ability to leverage its clients’ own data to generate revenue through demand-based rate adjustments and parking enforcement will allow it to capture demand from municipalities seeking to maximize the value of its parking systems. The improved efficiency will enhance the company’s value proposition during the bidding process, particularly to municipalities working under considerable budgetary constraints.

Unisys

In 2Q13 Unisys released its Stealth Solution for AWS, which provides added security for AWS customers moving data to the cloud.

Unisys is positioning to capitalize on the growing demand for cloud security as clients increasingly shift mission-critical data and processes to the cloud. Given AWS’ increasing penetration of the public sector cloud market, Unisys’ ability to piggyback off its partner provides the firm with a new avenue for revenue generation.



TBR


Contrary to vendor claims, sales declines suggest the sequester impeded growth in 2Q13; projected contraction for 3Q13 supports this assertion

• Aggregate average quarterly year-to-year growth rates contracted sharply during 2Q13, down 80 basis points from the previous quarter, tracking below average trailing 12-month growth over the same period. The revenue contraction drivers that have impeded market growth in the federal space since 2011 remain in place: federal budget constraints, long-term budget contractions, program delays and terminations, elongated business development and task order provision cycles, and tightening IT spending in key U.S. and western European markets.

• IT contractors with a primary focus on the federal space continued to either sustain or reduce guidance for the remainder of CY13, with the majority of companies positioned for mid- to high-single-digit losses through the end of the year. Even firms that fared comparatively well, such as General Dynamics IS&T (0.3% and 0.9% revenue growth year-to-year in 1Q13 and 2Q13, respectively), maintained guidance for full-year revenue contractions, which demands revenue contractions in the high-single to low double-digits through the end of the year if they are to meet expectations.

Market Overview

TBR


Outperformers’ Key Characteristics• Boeing GS&S, L-3 Communications, General Dynamics IS&T and Harris were the only government-centric companies to post

positive, albeit modest, growth in 2Q13. The companies posted year-to-year expansion of 3%, 1.3%, 0.9% and 0.8% respectively, fueled by lower-margin, healthcare IT-based call center engagements, network communications work, and task order activity on maintenance and upgrade contracts.

• Healthcare IT system design and implementation, particularly at the state and local level, remains a key driver of revenue growth and above-average margins for Accenture and Xerox, with the latter capturing strong demand for transportation-related and document outsourcing solutions.

Laggards’ Key CharacteristicsLaggards such as Unisys and NCI remain in their market-trailing positions in margins and revenue growth during 2Q13, as the firms’ limited portfolio and scale continue to increase the degree of difficulty in adjusting to higher-demand services. SAIC’s year-to-year revenue contraction was also significant, as the firm suffered due to the loss of revenues associated with the $4.6 billion DISA contract taken over by Lockheed Martin and the ramp down of its Joint Logistics Integration contract with the U.S. Army.

Growth and margin leaders rely on differentiated and specialized service provision to outperform their peer group

Revenue, Growth and Margin Leaders

Outperformers

Laggards

TBR


Revenue leaders seize opportunities in cybersecurity, healthcare and modernization engagements to generate salesPublic Sector IT/Professional Services Revenue Leaders 2Q13 (In $ Millions)

Leaders Revenue Key Strategies Drivers and ChangesPrevious Quarter Rank


$2,550Reorganize U.K. leadership team to revive flagging international operations and diversify revenue mix away from U.S. markets.

General Dynamics U.K. captured two key deals during the quarter, one as a supplier for the U.K.’s G-Cloud iii program and another to develop a quality control system for the National Health Service.

No. 3

HP $2,489Pursue state and local healthcare deals, in the U.S. and foreign markets, related to cloud and infrastructure support services.

HP won three Medicare/Medicaid deals driven by the upcoming Affordable Care Act and ICD-10 regulation compliance as well as a deal with the government of Catalonia in Spain.

No. 2

SAIC $2,474

Leverage cyber and healthcare services to win deals and rebound from year-to-year revenue contraction of 12.5%, the largest decline among benchmark vendors.

SAIC won several cyber-related deals, such as capturing one of 17 prime contractor positions on the $6 billion DHS Continuous Monitoring as a Service contract.

No. 1


$2,411Augment core systems integration and logistics work with traditionally underserviced state-level healthcare engagements.

IS&TS grew healthcare revenue, leveraging its Avance Web-based insurance eligibility and enrollment solution to support Tennessee and Wyoming as they strive to meet new requirements under the Affordable Care Act.

No. 4

Boeing GS&S $2,248

Target opportunities related to Maintenance, Modification and Upgrade (MM&U) programs.

In 2Q13, lower revenue in Integrated Logistics was offset by task orders on MM&U programs, including the C-17 Globemaster III Integrated Sustainment program.

No. 6

Revenue Leaders

TBR


A strong portfolio of healthcare services, particularly for state & local clients, is a common thread among growth leaders

Public Sector IT/Professional Services Year-to-Year TTM Growth Leaders 2Q13

Leaders YTY TTM Growth Key Strategies Drivers and Changes

Previous Quarter Rank

Xerox 6.2%Leverage portfolio of transportation and healthcare IT services to drive growth, largely from the state & local government sector.

Xerox is leveraging engagements providing managed services, such as virtualization, for the Mississippi Department of Human Services in 4Q12 and New Jersey FamilyCare in 1Q13 to capture revenues.

No. 2

Accenture 5.5%Capture demand, particularly in the U.S., for C&SI engagements related to federally driven healthcare requirement compliance.

Accenture’s revenue was driven by state-level signings in the U.S. and India for solutions such as eligibility systems.

No. 1

SAIC -0.8%

Prepare for the upcoming corporate split, which will result in the spin out of SAIC’s current Health & Engineering segment, the company’s primary growth engine.

SAIC remains adversely affected by significant contract losses, such as the $4.6 billion DISA GIGN contract loss to Lockheed Martin in 2012.

No. 3

Harris -1.1%Counter the loss of the Navy Marine Corps Intranet (NCMI) contract, which was won by HP in 2H12 and is currently under protest.

Harris’ steady revenues from the NCMI IT infrastructure contract were a key driver of the company’s revenue growth in the IT Services segment over the past year.

No. 12

Booz Allen Hamilton -1.6%

Continue to leverage healthcare, cybersecurity and intelligence work to generate revenues while simultaneously expanding its Middle East footprint.

The acquisitions of SDI and ARINC’s DSES division, both completed in the past 12 months, helped buoy the company’s revenues despite continued pressure from the U.S. public sector, which accounts for 98% of corporate revenues.

No. 5

Growth Leaders

TBR


Margin leaders utilize scale and end-to-end service provision to maintain profitability

2Q13 Total Operating Margin for Public Sector Leaders

Leaders Operating Margin Key Strategies Drivers and Changes

Previous Quarter Rank

Boeing GS&S 11.8%

Leverage proprietary platforms and related existing inventory to deliver integrated logistics, modernization and upgrade support at low cost.

Boeing’s operating margin of 11.8% represents a decrease of 10 basis points from the year-ago quarter; however, strong contract performance and tight control of sales-related expenses position the company ahead of its peer group.

No. 4

Accenture 11.7%

Leverage consulting capabilities and modular platform-based solutions to deliver high-value, replicable, yet still customizable options to state and local government clients.

Accenture’s ability to engage clients from consulting and design through implementation, particularly at the state & local level, is a key driver of its consistently strong margins.

No. 1

CSC 11.5%Divest noncore business units to shift portfolio mix toward higher-value services.

CSC scaled down its portfolio from more than 2,000 offerings to 312 during FY2013, enabling the firm to focus on its technology solutions portfolio that covers cloud, big data, analytics and cybersecurity.

No. 6

Margin Leaders

Among other government-centric IT services vendors, ITT Exelis led in operating margin (10.2%), followed by Booz Allen Hamilton (9.7%), Lockheed Martin IS&GS (9.2%), Northrop Grumman IS&TS (8.7%), Raytheon II&S (8.3%), General Dynamics IS&T (7.8%), CACI (7.4%), L-3 Communications (7.3%), ManTech (6.4%), Harris (4.2%), NCI (4%) and SAIC (3%).

TBR


Trailing 12-month revenue growth remained flat sequentially in 2Q13, but will contract further in 3Q13 as federal budget pressure intensifies

LEGEND

Green Above Public Sector Average

White Below Public Sector Average

Growth Trends and Drivers

COMPANY

2Q13 PUBLIC SECTOR REVENUE

(In $ Millions)1Q13 PUBLIC REVENUE

GROWTH TTM YTY2Q13 PUBLIC REVENUE

GROWTH TTM YTY

CHANGE IN 2Q13 FROM 1Q13

(Basis Points)General Dynamics IS&T 2,550$ -7.6% -4.9% 270HP 2,489$ -2.1% -3.6% (150)SAIC 2,474$ 4.6% -0.8% (540)Northrop Grumman IS&TS 2,411$ -6.3% -6.9% (60)Boeing GS&S 2,248$ -0.9% -2.5% (160)Lockheed Martin IS&GS 2,101$ -4.9% -5.7% (80)IBM Global Services 2,022$ -3.1% -5.0% (190)Raytheon II&S 1,570$ -2.2% -2.5% (30)Xerox 1,469$ 6.1% 6.2% 10Booz Allen Hamilton 1,428$ -1.7% -1.6% 10ITT Exelis 1,251$ -10.6% -11.2% (60)L-3 Communications 1,215$ -12.2% -2.2% 1,000CSC 1,053$ -8.7% -6.0% 270CACI 913$ -1.9% -2.5% (60)Harris 884$ -6.1% -1.1% 500Dell 812$ -6.1% -6.0% 10Accenture 738$ 6.7% 5.5% (120)ManTech 605$ -10.3% -7.8% 250Unisys 303$ -13.3% -12.2% 110NCI 83$ -28.8% -19.3% 950Average 1,431$ -3.8% -3.8% 0SOURCE: TBR AND COMP ANY DATA

TTM = Trailing 12 months. Growth is compared between 3Q12-2Q13 and 3Q11-2lQ12 periods.

Public Sector TTM Growth YTY(2Q13 vs. 1Q13)

TBR


Despite inorganic contributions, few companies realized revenue growth, a trend that will persist in 3Q13

LEGEND



Growth Trends and Drivers

COMPANY

2Q13 PUBLIC SECTOR REVENUE

(In $ Millions)2Q13 YEAR-TO-YEAR

TOTAL GROWTH2Q13 YEAR-TO-YEAR ORGANIC GROWTH

General Dynamics IS&T 2,550$ 0.9% 0.2%HP 2,489$ -5.0% -5.0%SAIC 2,474$ -12.5% -14.1%Northrop Grumman IS&TS 2,411$ -8.6% -8.6%Boeing GS&S 2,248$ 3.0% 3.0%Lockheed Martin IS&GS 2,101$ -7.2% -7.2%IBM Global Services 2,022$ -8.0% -8.0%Raytheon II&S 1,570$ -1.7% -1.7%Xerox 1,469$ 7.1% 7.1%Booz Allen Hamilton 1,428$ -0.3% -2.3%ITT Exelis 1,251$ -9.3% -9.3%L-3 Communications 1,215$ 1.3% 1.3%CSC 1,053$ -11.0% -11.0%CACI 913$ -3.8% -6.8%Harris 884$ 0.8% 0.8%Dell 812$ -3.5% -7.0%Accenture 738$ 3.3% 3.3%ManTech 605$ -5.3% -5.3%Unisys 303$ -7.1% -7.1%NCI 83$ -9.0% -9.0%Average 1,431$ -4.2% -4.7%

SOURCE: TBR AND COMP ANY DATA

2Q13 Public Sector Total Growth vs. Organic Growth

TBR


Public sector companies will remain apprehensive about acquisitions in 3Q13, as financial flexibility remains a higher priority

Public Sector Related Acquisitions Completed in 2Q13 by IT/Professional Services Vendors

Acquirer Acquired Firm Service Focus Headcount, Revenue, Purchase Price


Amor GroupIT Services — the U.K.-based Amor Group provides IT solutions for the public, energy and transportation verticals. It offers a range of vertical-focused managed services, consulting and software development.

Headcount: 500Rev. Contribution: $105 million (est.)Purchase Price: Undisclosed

Accenture Federal Services

ASM ResearchIT Services — ASM provides the Department of Defense and Veterans Affairs with a range of healthcare and human capital-focused ITO, cloud and analytics services.


Raytheon Visual Analytics

Analytics — provides a range of analytics and big data products for the intelligence, law enforcement and commercial segments; the company’s core product is its Visualinks software that shows data graphically to enable users to spot patterns and trends

Headcount: 30Rev. Contribution: $15 million (est.)Purchase Price: $14 million

IBM TrusteerCybersecurity — provides a range of security software for enterprises with a primary focus on financial systems; its solutions include endpoint protection, fraud detection, mobile security and malware prevention


Public sector firms remained cautious in pursuing acquisitions during 2Q13 for many of the same reasons that persisted over the past 12 months: the ongoing uncertainty in public sector spending, a lack of corporate appetite for introducing additional risk associated with M&A and difficulty in valuating future revenue contributions from prospective targets. We believe public sector firms will continue to focus on alliances, IP development and corporate restructuring to better align portfolios with the current market environment. Should firms choose to seek M&A opportunities, we expect cybersecurity, mobility, analytics, and healthcare IT to remain high priorities.

M&A Trends

TBR


Public sector companies are expanding their cybersecurity offerings to enhance their end-to-end cyber solutions capabilitiesNew Service Offerings Announced in 2Q13 by Professional Services Vendors Serving the Public SectorFirm Service/Solution Description TBR Assessment

ManTech

Responder Pro 2.1

This update to the Responder Pro suite leverages analytics capabilities to detect malware and other viruses embedded in physical memory on Windows computers, allowing incident responders to safeguard computing infrastructures.

Increased awareness of the need for security solutions, especially within cloud and virtualized environments, will drive adoption of ManTech’s product-based solution set by both public sector and commercial clients. Additional product-centered cybersecurity solutions also provide ManTech with the opportunity to grow profitability in a high-value segment.

Active Defense 1.3

The new iteration of Active Defense 1.3 is designed to provide similar memory malware and virus detection as Responder Pro, but in virtualized desktop environments where runtime memory analysis is more applicable.


GD Nexus

IS&T introduced the GDNexus platform, a collaborative cybersecurity service broker solution managed by General Dynamics aimed at reducing acquisition risk for buyers, accelerating delivery and connecting public sector and commercial buyers with integrated solutions from vendors.

The GDNexus solution enables IS&T to collaborate with innovative companies and locate potential alliance partners for the delivery of cybersecurity solutions to its federal clients. The expansion of the company’s product-based cybersecurity portfolio also positions IS&T to more easily penetrate the commercial cybersecurity market.

Fidelis XPS Vector

IS&T’s Fidelis unit released a product-based cybersecurity solution that provides intrusion detection and prevention from inbound malware.

Xerox Merge

Xerox released a central management solution for municipal parking operations that integrates hardware and software to provide real-time information about coin collections, meter maintenance, enforcement and occupancy to enhance municipal parking revenues.

The Merge offering positions Xerox Services to become a leading provider of end-to-end parking solutions and will allow Xerox to remain a leading provider of transportation services to public sector clients.

New Service Offerings

TBR


Public sector deal activity is pressured by budgetary constraints, although demand for IT modernization and healthcare remains

Key Deals in 2Q13 by Professional Services Vendors Serving the Public Sector

Firm Contract/Description Duration Price

SAIC

SAIC won a single award ID/IQ contract from NASA to provide a range of scientific, health, engineering, operational and technical support services to the agency's Johnson Space Center Human Health and Performance directorate and the Human Exploration and Operations Mission Directorate Human Research Program.

10 years $1.8 BillionTPV*


Lockheed won a contract from the U.S. Air Force to run the Network Command Center, which supports the National Capital Region. Lockheed will provide several services, including desktop support, enterprise applications, planning, project and engineering services, and National Military Command Center support.

10 years $320 Million TPV


Northrop’s IS division was awarded a task order under the Solutions for Information Technology Enterprise contract by the Defense Intelligence Agency to support the full software development life cycle of DIA’s IT systems.


HP Services

HP Enterprise Services was awarded a deal by the Indiana Department of Administration to construct and implement Indiana’s new Medicaid Management Information System (MMIS). HP will deploy its Medical Assistance Provider Incentive Repository application and will provide additional services and support.

6.5 years $220 Million TPV

ManTech

ManTech won a single-award blanket purchase agreement under a GSA Schedule contract from the Customs and Border Protection Agency (CBP) to provide training services for information technology systems, wireless and voice communications equipment, and enforcement technology to all CBP personnel as well as other federal, state and local law enforcement agencies.


* TPV = Total potential value for all awardees

Contract Trends

TBR


The need for security clearances and highly specialized engineering and cybertalent drives high productivity metrics for government-led companies

• Government-centric companies continue to lead in resource productivity metrics, with Boeing GS&S far outpacing its competitive set, followed by Raytheon II&S, L-3 Communications and Lockheed Martin IS&GS. Government-focused vendors traditionally lead their commercial counterparts in employee productivity metrics due to the higher value and more sensitive nature of the services provided, particularly in federal defense, intelligence and classified agencies. This value is largely established due to the high level of security clearances required for a large cross-section of these companies’ employees.

• Companies engaging federal defense, intelligence and classified agencies are able to bill clients at higher rates than in the federal civilian or commercial markets as a result of the highly specialized skills and top-level security clearances required to bid and perform work on particular projects. Some federal contractors, such as Raytheon, Lockheed Martin and Northrop Grumman augment larger-scale engagements with smaller, extremely high-margin niche R&D work for agencies such as DARPA (Defense Advanced Research Projects Agency) and IARPA (Intelligence Advanced Research Projects Agency).

• Among the commercial players, companies with strong end-to-end consulting, design and implementation capabilities or easily replicable services delivered via modular platforms, such as CSC, IBM and Accenture, are able to bill at a higher rate than more technically oriented competitors. Firms that are able to replicate commercial capabilities in the public space, such as with healthcare IT, are able to drive down cost of sales due to the portability of solutions related to EHR or analytics, particularly to clients in the state & local segment.

Resource Management

TBR


Regardless of a potential federal budget flush, the majority of public sector players are poised for further revenue contraction in 3Q13

• The FY14 federal IT budget request totals approximately $82 billion, an increase of 1.8% from the projected FY13 figure of $80.6 billion (under continuing resolution) and up 2.1% from the FY12 budget of $80.3 billion. These figures considered, the federal IT budget has grown by a CAGR of 0.8% since FY2009, down from a CAGR of 7.1% between FY01 and FY09, indicative of long-term spending constraints, regardless of sequestration impact.

• Of note in the FY14 budget request is a slight resurgence in defense spending, which is essentially flat from 2012 levels (up $10 million) and up roughly 2% from 2013. Federal civilian agencies will continue to reap the majority of the budget expansion, with FY14 aggregate spending projected to be up 4.1% over 2012 and 1.5% over FY13.

• The following federal agencies are realizing the largest budget adjustments between 2013 and 2014: Department of Veterans Affairs (19.1%, $623 million), Department of Homeland Security (7%, $398 million), Department of State (4.3%, $59 million), Social Security Administration (-6.3%, -$101 million), General Services Administration (-11.5%, -$63 million) and the Department of Urban Development (-36.2%, -$167 million).

Future Outlook

TBR


Key Findings & Trends

3 Executive Summary4 Scoring Summary5 Strategic Actions/Key Developments10 Market Overview11 Revenue, Growth and Margin Leaders12 Revenue Leaders13 Growth Leaders14 Margin Leaders15 Growth Trends and Drivers17 M&A Trends18 New Service Offerings19 Contract Trends20 Resource Management 21 Future Outlook

Contents

PSBQ Benchmark Metrics23 Market Strategy Metrics28 Resource Management

Strategy Metrics35 Financial Strategy Metrics44 Company Scores Over Previous

Nine Quarters52 Revenue, Growth and Margin

Leaders Tables54 Contracts and Backlog

Appendix56 About TBR

TBR


Market Strategy Metrics

Note: Revenue represented in the above table reflects either reported total public sector services revenue or TBR estimates of total public sector services revenue.

PSBQ Benchmark Metrics

RANKING TBR SCORE COMPANYTOP 3 COMPANIES

1 7.70 General Dynamics IS&T2 7.55 HP3 7.52 SAIC4 7.36 Northrop Grumman IS&TS5 6.95 Boeing GS&S6 6.59 Lockheed Martin IS&GS7 6.39 IBM Global Services8 5.27 Raytheon II&S9 5.02 Xerox

10 4.92 Booz Allen Hamilton11 4.48 ITT Exelis12 4.39 L-3 Communications13 3.99 CSC14 3.64 CACI15 3.57 Harris16 3.39 Dell17 3.21 Accenture18 2.87 ManTech19 2.12 Unisys20 1.58 NCI

TBR

TBR



Note: Revenue growth represented in the above tables is based on either reported total public sector revenue growth or TBR estimates of public sector revenue.



1 7.41 Xerox2 6.57 Accenture3 6.51 Boeing GS&S4 6.12 L-3 Communications5 6.03 General Dynamics IS&T6 6.02 Harris7 5.76 Booz Allen Hamilton8 5.46 Raytheon II&S9 5.06 Dell

10 4.99 CACI11 4.72 HP12 4.66 ManTech13 4.27 Unisys14 4.24 Lockheed Martin IS&GS15 4.05 IBM Global Services16 3.91 Northrop Grumman IS&TS17 3.83 NCI18 3.77 ITT Exelis19 3.39 CSC20 3.06 SAIC

TBR

TBR

TBR



Note: Organic revenue growth represented in the above tables is estimated by TBR based on total public sector growth net or our assessment of the revenue impact of acquisitions made by the companies over the last four quarters.



1 7.51 Xerox2 6.69 Accenture3 6.63 Boeing GS&S4 6.26 L-3 Communications5 6.16 Harris6 6.01 General Dynamics IS&T7 5.62 Raytheon II&S8 5.48 Booz Allen Hamilton9 4.89 HP

10 4.84 ManTech11 4.51 CACI12 4.46 Dell13 4.46 Unisys14 4.43 Lockheed Martin IS&GS15 4.24 IBM Global Services16 4.12 Northrop Grumman IS&TS17 4.04 NCI18 3.98 ITT Exelis19 3.61 CSC20 2.94 SAIC

TBR

TBR



Note: Backlog/revenue ratio is estimated for commercial-centric companies in the above graphic and based on total services backlog.



1 9.25 HP2 9.01 CSC3 8.59 Xerox4 6.49 Accenture5 6.12 IBM Global Services6 5.33 Harris7 5.24 ManTech8 5.11 Booz Allen Hamilton9 4.84 Dell

10 4.64 CACI11 4.51 ITT Exelis12 4.36 NCI13 4.27 Boeing GS&S14 3.91 Unisys15 3.61 SAIC16 2.57 L-3 Communications17 2.37 Northrop Grumman IS&TS18 2.31 General Dynamics IS&T19 2.17 Raytheon II&S20 1.99 Lockheed Martin IS&GS

TBR

TBR


Market Strategy MetricsPSBQ Benchmark Metrics


1 8.79 Boeing GS&S2 7.04 Accenture3 6.84 IBM Global Services4 6.76 Northrop Grumman IS&TS5 6.46 HP6 6.30 General Dynamics IS&T7 6.10 Xerox8 5.74 Lockheed Martin IS&GS9 5.03 Dell

10 4.99 CACI11 4.75 Booz Allen Hamilton12 4.74 Unisys13 3.84 Harris14 3.69 SAIC15 3.45 ITT Exelis16 3.30 Raytheon II&S17 3.27 ManTech18 2.96 NCI19 2.89 CSC20 0.13 L-3 Communications

TBR

TBR


Note: Margins represented in the above tables reflect either reported total services margins or TBR estimates of total services margins.


Resource Management Strategy Metrics

Public sector-centric vendors tend to realize lower gross margins than commercial-centric companies (see following slide).


1 8.64 IBM Global Services2 8.62 CACI3 8.08 Harris4 6.83 Xerox5 6.47 Accenture6 6.33 Dell7 5.83 Booz Allen Hamilton8 5.70 Boeing GS&S9 5.64 L-3 Communications

10 5.55 ITT Exelis11 4.98 CSC12 4.41 General Dynamics IS&T13 4.36 HP14 4.28 Lockheed Martin IS&GS15 3.94 Northrop Grumman IS&TS16 3.85 Raytheon II&S17 2.97 Unisys18 2.67 ManTech19 2.56 NCI20 1.61 SAIC

TBR

TBR


Vendors focused primarily on the public sector tend to realize lower gross margins than their commercially oriented counterparts, as business acquisition, bid and proposal, and various engagement costs (such as contract-centered R&D) are bucketed within cost of sales under federal guidelines. Some government-centric vendors, such as Harris, drive higher gross margins by maintaining a product component within service lines. Often, these firms realize higher opex levels as a result of their elevated internal R&D expenses or preferred cost allocation structure, such as CACI’s preference to realize subcontractor costs as an operating expense rather than cost of sales (see slide 31).



TBR



Note: Operating expenses represented in the above tables reflect either reported total services operating expenses or TBR estimates of total services operating expenses.


Public sector-centric vendors tend to have lower opex as a percentage of sales than commercial-centric companies (see following slide).


1 6.53 SAIC2 6.17 ManTech3 5.96 Northrop Grumman IS&TS4 5.94 Raytheon II&S5 5.91 CSC6 5.88 Lockheed Martin IS&GS7 5.87 NCI8 5.71 IBM Global Services9 5.65 Boeing GS&S

10 5.61 General Dynamics IS&T11 5.46 ITT Exelis12 5.32 Unisys13 5.28 Accenture14 5.27 Booz Allen Hamilton15 5.26 Dell16 5.08 HP17 5.00 L-3 Communications18 4.48 Xerox19 3.72 CACI20 3.48 Harris

TBR

TBR



Government-centric IT services vendors tend to realize lower operating expenses as a percentage of revenues as traditional operating activities, such as R&D, are often expensed to a given government contract; however, there are some exceptions.

During the quarter, Harris’ operating expenses increased sequentially by nearly $100 million to $300.7 million. The increase was due to a $127 million expense associated with restructuring, debt asset impairment and debt repayment costs. Commercial providers tend to realize greater operating expenses than many of their government-centric counterparts given the higher level of R&D costs related to product development, and increased bid and proposal costs related to smaller state and local deals.


TBR



Note: Revenue per employee represented in the above tables reflects either reported total services revenue per services employee or TBR estimates of total services revenue per services employee.



1 10.00 Boeing GS&S2 7.62 Raytheon II&S3 6.71 L-3 Communications4 6.59 Lockheed Martin IS&GS5 5.99 SAIC6 5.76 Northrop Grumman IS&TS7 5.68 ManTech8 5.41 ITT Exelis9 5.15 CACI

10 5.12 General Dynamics IS&T11 4.97 Booz Allen Hamilton12 4.91 CSC13 4.67 Harris14 3.82 Accenture15 3.81 IBM Global Services16 3.35 Dell17 2.95 Xerox18 2.91 HP19 2.58 NCI20 1.61 Unisys

TBR

TBR



Note: Operating income per employee represented in the above tables reflects either reported total services operating income per services employee or TBR estimates of total services operating income per services employee.



1 9.19 Boeing GS&S2 6.61 IBM Global Services3 6.24 Raytheon II&S4 6.16 Lockheed Martin IS&GS5 6.10 CSC6 5.99 L-3 Communications7 5.89 Northrop Grumman IS&TS8 3.19 ITT Exelis9 5.60 Harris

10 5.52 Accenture11 5.37 Dell12 5.29 Booz Allen Hamilton13 5.14 CACI14 4.97 ManTech15 4.93 Xerox16 4.74 SAIC17 4.27 HP18 3.68 Unisys19 0.00 General Dynamics IS&T20 0.00 NCI

TBR

TBR



Note: Turnover rate represented in the above tables reflects either reported total services employees turnover rate or TBR estimates of total services employees turnover rate.



1 7.88 Raytheon II&S2 7.83 Northrop Grumman IS&TS3 7.73 Lockheed Martin IS&GS4 7.63 General Dynamics IS&T5 7.11 CACI6 6.76 SAIC7 6.16 NCI8 5.39 Accenture9 5.28 ITT Exelis

10 4.88 Boeing GS&S11 4.88 Harris12 4.42 IBM Global Services13 3.96 Unisys14 3.61 Xerox15 3.61 L-3 Communications16 3.51 HP17 3.30 CSC18 3.20 Dell19 3.10 ManTech20 1.67 Booz Allen Hamilton

TBR

TBR


Financial Strategy Metrics

Note: Margins represented in the above tables reflect either reported total services margins or TBR estimates of total services margins.



1 5.97 Boeing GS&S2 5.94 Accenture3 5.92 CSC4 5.86 Dell5 5.75 IBM Global Services6 5.72 ITT Exelis7 5.66 Booz Allen Hamilton8 5.59 Lockheed Martin IS&GS9 5.58 Xerox

10 5.51 Northrop Grumman IS&TS11 5.46 Raytheon II&S12 5.37 General Dynamics IS&T13 5.32 CACI14 5.30 L-3 Communications15 5.17 ManTech16 5.14 HP17 4.85 Harris18 4.82 NCI19 4.73 Unisys20 4.68 SAIC

TBR

TBR



Note: Current ratio represented in the above tables reflects either reported total company current ratio or TBR estimates of total company current ratio.



1 10.00 ManTech2 8.26 L-3 Communications3 7.01 CSC4 6.70 Raytheon II&S5 6.67 SAIC6 6.66 Northrop Grumman IS&TS7 6.00 NCI8 5.78 Accenture9 5.66 Booz Allen Hamilton

10 5.14 Harris11 4.91 ITT Exelis12 4.62 Unisys13 4.32 General Dynamics IS&T14 3.62 Boeing GS&S15 3.59 Xerox16 2.64 Dell17 2.58 Lockheed Martin IS&GS18 2.54 IBM Global Services19 1.90 HP20 1.08 CACI

TBR

TBR



Note: Debt-to-asset ratio represented in the above table reflects either reported total company debt-to-asset ratio or TBR estimates of total company debt-to-asset ratio.



1 7.12 ManTech2 6.36 CACI3 6.11 SAIC4 6.07 Xerox5 6.04 L-3 Communications6 5.78 Accenture7 5.77 Northrop Grumman IS&TS8 5.73 General Dynamics IS&T9 5.69 Raytheon II&S

10 5.65 Harris11 5.50 CSC12 5.31 ITT Exelis13 5.28 HP14 5.27 Dell15 4.92 IBM Global Services16 4.64 Booz Allen Hamilton17 4.61 Boeing GS&S18 4.32 Lockheed Martin IS&GS19 1.28 Unisys20 0.00 NCI

TBR

TBR



Note: Return on assets ratio represented in the above tables reflects either reported total company return on assets ratio or TBR estimates of total company return on assets ratio.



1 8.38 Accenture2 7.07 IBM Global Services3 6.02 CSC4 5.73 Northrop Grumman IS&TS5 5.72 Lockheed Martin IS&GS6 5.71 Raytheon II&S7 5.67 Booz Allen Hamilton8 5.65 SAIC9 5.42 CACI

10 5.34 ITT Exelis11 5.28 L-3 Communications12 5.13 Boeing GS&S13 5.12 ManTech14 4.95 Xerox15 4.71 Dell16 4.65 Unisys17 4.37 NCI18 3.87 General Dynamics IS&T19 3.53 Harris20 3.42 HP

TBR

TBR



Note: Return on equity ratio represented in the above tables reflects either reported total company return on assets ratio or TBR estimates of total company return on equity ratio.



1 10.00 Lockheed Martin IS&GS2 7.28 IBM Global Services3 6.45 Booz Allen Hamilton4 6.44 Accenture5 6.43 Boeing GS&S6 5.25 CSC7 5.01 ITT Exelis8 4.83 Raytheon II&S9 4.78 SAIC

10 4.72 Northrop Grumman IS&TS11 4.48 L-3 Communications12 4.45 CACI13 4.43 Dell14 4.32 Xerox15 4.22 ManTech16 4.01 NCI17 3.81 General Dynamics IS&T18 3.74 Unisys19 3.61 Harris20 3.37 HP

TBR

TBR



Note: Operating cash flow to net income ratio represented in the above tables reflects average reported cash from operations over average corporate net income for the trailing 12 months.



1 6.69 CACI2 6.65 Unisys3 6.49 Dell4 6.41 Lockheed Martin IS&GS5 5.98 Xerox6 5.91 Boeing GS&S7 5.74 Booz Allen Hamilton8 5.61 ITT Exelis9 5.48 L-3 Communications

10 5.38 ManTech11 5.37 Accenture12 5.28 Raytheon II&S13 5.20 IBM Global Services14 5.19 CSC15 5.19 Northrop Grumman IS&TS16 4.73 SAIC17 4.38 NCI18 0.90 HP19 0.66 Harris20 0.00 General Dynamics IS&T

TBR

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Note: Operating cash flow margin represented in the above tables reflects average reported cash from operations over average corporate revenue for the trailing 12 months.


SOU

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1 10.00 Harris2 7.70 IBM Global Services3 7.50 HP4 6.81 Accenture5 6.21 Xerox6 5.67 Boeing GS&S7 5.22 ITT Exelis8 4.95 L-3 Communications9 4.63 Northrop Grumman IS&TS

10 4.43 General Dynamics IS&T11 4.40 Booz Allen Hamilton12 4.38 CSC13 4.31 Dell14 3.95 CACI15 3.81 Lockheed Martin IS&GS16 3.71 Unisys17 3.51 NCI18 3.15 SAIC19 2.46 Raytheon II&S20 2.43 ManTech

TBR

TBR



Note: Operating cash flow coverage ratio represented in the above tables reflects average reported cash from operations over average current liabilities for the trailing 12 months.



1 7.32 Harris2 6.72 Accenture3 5.84 L-3 Communications4 5.76 Booz Allen Hamilton5 5.74 CACI6 5.70 Xerox7 5.38 ITT Exelis8 5.27 Raytheon II&S9 5.26 IBM Global Services

10 5.14 NCI11 5.12 HP12 4.77 Northrop Grumman IS&TS13 4.72 SAIC14 4.41 ManTech15 4.19 CSC16 3.91 Dell17 3.36 Lockheed Martin IS&GS18 3.20 Unisys19 3.15 General Dynamics IS&T20 3.14 Boeing GS&S

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Note: Net margin represented in the above tables reflects reported corporate net margin.


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1 6.85 IBM Global Services2 6.53 Accenture3 5.94 General Dynamics IS&T4 5.92 Raytheon II&S5 5.87 Northrop Grumman IS&TS6 5.83 Lockheed Martin IS&GS7 5.59 ITT Exelis8 5.50 L-3 Communications9 5.37 HP

10 5.35 Boeing GS&S11 5.34 Booz Allen Hamilton12 5.31 CSC13 5.20 CACI14 5.08 ManTech15 4.96 Unisys16 4.82 NCI17 4.73 SAIC18 4.68 Dell19 4.65 Xerox20 3.62 Harris

TBR

TBR


Company Scores Over Previous Nine Quarters (Government-centric Firms)PSBQ Benchmark Metrics

Key ■ Represents an area where company is challenged versus peers (score is <4.50)■ Represents an area where company is outperforming peers (score is >5.50)■ Represents an area where company is neither significantly outperforming nor underperforming peers (score is between 4.50 and 5.50)

TBR


Company Scores Over Previous Nine Quarters (Government-centric Firms)PSBQ Benchmark Metrics


TBR




Company Scores Over Previous Nine Quarters (Government-centric Firms)

TBR





TBR





TBR



Key ■ Represents an area where company is challenged versus peers (score is <4.50)■ Represents an area where company is outperforming its peers (score is >5.50)■ Represents an area where company is neither significantly outperforming nor underperforming its peers (score is between 4.50 and 5.50)

Company Scores Over Previous Nine Quarters (Commercial-centric Firms)

2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13

Total Average PSBQ Public Sector Score 6.00 6.34 6.29 6.06 6.40 6.19 6.33 5.88 5.80

Market Strategy 5.55 5.61 5.57 5.27 5.90 5.47 6.20 5.37 5.25

Resource Management Strategy 6.16 6.06 5.93 6.09 5.95 6.15 6.05 6.02 6.12

Financial Management Strategy 6.30 7.35 7.36 6.83 7.35 6.94 6.72 6.25 6.04

SOURCE: COMPANY DATA & TBR SCORING METHODOLOGY

2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13


Market Strategy 6.29 6.50 6.63 6.82 6.95 6.58 6.65 6.63 6.47




2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13


Market Strategy 4.78 5.62 5.87 5.78 6.17 5.62 5.94 6.35 5.95




Accenture

HP

IBM Global Services

Calendar Quarter

Calendar Quarter

Calendar Quarter

TBR





TBR





TBR


Public Sector IT Services Revenue and Growth LeadersRevenue, Growth and Margin Leaders

LEGEND



COMPANY2Q13 PUBLIC SECTOR

REVENUE (IN $ MILLIONS)2Q13 TTM REVENUE

GROWTH YTY2Q13 QUARTERLY

REVENUE GROWTH YTYGeneral Dynamics IS&T $2,550 -4.9% 0.9%HP $2,489 -3.6% -5.0%SAIC $2,474 -0.8% -12.5%Northrop Grumman IS&TS $2,411 -6.9% -8.6%Boeing GS&S $2,248 -2.5% 3.0%Lockheed Martin IS&GS $2,101 -5.7% -7.2%IBM Global Services $2,022 -5.0% -8.0%Raytheon II&S $1,570 -2.5% -1.7%Xerox $1,469 6.2% 7.1%Booz Allen Hamilton $1,428 -1.6% -0.3%ITT Exelis $1,251 -11.2% -9.3%L-3 Communications $1,215 -2.2% 1.3%CSC $1,053 -6.0% -11.0%CACI $913 -2.5% -3.8%Harris $884 -1.1% 0.8%Dell $812 -6.0% -3.5%Accenture $738 5.5% 3.3%ManTech $605 -7.8% -5.3%Unisys $303 -12.2% -7.1%NCI $83 -19.3% -9.0%SOURCE: TBR AND COMP ANY DATA

TTM = Trailing 12 months. Growth is compared between 3Q12-2Q13 and 3Q11-2Q12 periods.

2Q13 Public Sector Revenue & Growth

TBR


LEGEND



Revenue, Growth and Margin Leaders

Public Sector IT Services Margin Leaders

COMPANY 2Q13 GROSS MARGIN 2Q13 OPERATING MARGIN 2Q13 NET MARGIN (CORP.)Boeing GS&S 22.6% 11.8% 5.0%Accenture 24.9% 11.7% 11.3%CSC 20.4% 11.5% 4.8%Dell 24.5% 11.1% 1.4%IBM Global Services 31.4% 10.3% 12.9%ITT Exelis 22.1% 10.2% 6.2%Booz Allen Hamilton 23.0% 9.7% 4.9%Lockheed Martin IS&GS 18.4% 9.2% 7.5%Xerox 26.0% 9.2% 1.3%Northrop Grumman IS&TS 17.4% 8.7% 7.8%Raytheon II&S 17.1% 8.3% 8.0%General Dynamics IS&T 18.8% 7.8% 8.1%CACI 31.3% 7.4% 4.2%L-3 Communications 22.4% 7.3% 5.8%ManTech 13.6% 6.4% 3.6%HP 18.6% 6.2% 5.1%Harris 29.7% 4.2% -4.2%NCI 13.2% 4.0% 2.2%Unisys 14.4% 3.4% 2.9%SAIC 10.4% 3.0% 1.7%SOURCE: TBR AND COMP ANY DATA

GROSS MARGIN ESTIMATED FOR DELL, GENERAL DYNAMICS, HP , IGS, ITT Exelis, L-3, LOCKHEED MARTIN, NORTHROP GRUMMAN AND RAYTHEON.

OP ERATING MARGIN ESTIMATED FOR DELL, HP , IGS.

2Q13Margin Performance

TBR


Public Sector Contracts and Deals (2Q13)Announced Contracts

• In 2Q13 aggregate deal value for contracts publically disclosed by the 20 firms in the benchmark rose by roughly $2.14 billion, resulting in a total contract value of $8.29 billion. We believe the uptick was in part due to agencies flushing budget before the end of the federal fiscal year.

• Government-centric contractors Lockheed Martin IS&GS, Raytheon IT Services, Northrop Grumman IS&TS and SAIC remained the top contributors at $1.54 billion, $1.1 billion, $904 million and $748 million, respectively. The aforementioned vendors accounted for more than half of reported IT services awards from the federal government in 2Q13 (51.8%).

• CSC led all commercial-centric IT service vendors during the quarter, with $679 million in reported deals, followed by HP Services at $303 million, IBM Global Services at $217 million and Accenture at $192 million.

Lockheed Martin IS&GS, 18.6%

SAIC, 13.3%

Raytheon IT Services, 10.9%

Northrop Grumman, 9.0%

CSC , 8.2%Booz Allen Hamilton, 6.7%

HP Services, 6.6%

L-3 Communications, 5.5%

CACI, 3.6%

General Dynamics, 3.6%

Other, 13.9%

2Q13 DEALS: VENDOR SHARE

SOURCE: FEDERAL PROCUREMENT DATA SYSTEM & TBR ANALYSIS

TBR

Estimated total contract value for all IT-relatedor professional services (e.g., consulting) deals with the federal government disclosed in the

Federal Procurement Data System for the companies in the PSBQ Public Sector Benchmark

was $8,294 million in 2Q13.

TBR


Backlog contracted for the third consecutive quarter, brought on by declining OCO funding and prolonged business development cycles

Backlog

The aggregate backlog reported by the 13 government-centric contractors detailed in the graph above was $114.7 billion in 2Q13, down 3.7% sequentially from $119.1 billion, marking the third consecutive quarter backlog declined within TBR’s Public Sector IT Services Benchmark. Of the 13 contractors included above, ITT Exelis lead all vendors, with growth at 3.3%, followed by L-3 Communications at 3% in 2Q13. TBR believes contractors’ inability to restock with new deals at the same pace that awards are exiting backlog indicates accelerating year-to-year revenue declines through 2013.

$16.5 $15.4

$11.8 $10.5 $11.1

$9.7 $9.1

$7.8 $7.2 $7.4

$5.8 $6.1

$0.6

$15.9 $14.9

$11.3 $10.8

$9.9 $9.8 $9.4

$7.4 $6.9 $6.8

$5.8 $5.3

$0.6

-3.7% -3.6% -4.7%3.0%

-10.6%0.9% 3.3%

-5.1% -4.2%

-8.3%-1.3% -13.1%

0.2%

-50.0%

-35.0%

-20.0%

-5.0%

10.0%

25.0%

40.0%

55.0%

70.0%

$-

$5

$10

$15

$20

Sequ

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TOTAL BACKLOG & SEQUENTIAL BACKLOG GROWTH (2Q13 vs. 1Q13)

1Q13 Backlog 2Q13 Backlog Sequential Growth

TBR

SOURCE: TBR ESTIMATES AND COMPANY DATA. GRAPHIC ONLY INCLUDES GOVERNMENT-CENTRIC IT VENDORS. HARRIS, CACI, MANTECH, ITT & NCI ONLY REPORT BACKLOG 0N AN ANNUAL BASIS, THEREFORE TBR ESTIMATES BACKLOG BASED ON COMPANY GUIDANCE OR STATEMENTS MADE ABOUT CONTRACT TRENDS.

TBR

TECHNOLOGY BUSINESS RESEARCH, INC.

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