2013 closed on a low note, setting the stage for a difficult 2014 in federal IT

TBR

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

2013 closed on a low note, setting the stage for a difficult 2014 in federal IT Insights from TBR’s 4Q13 Public Sector IT Services Benchmark

May 7, 2014

TBR

2 TBR Quarterly Benchmark Readout | 4.21.14 | 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 Three 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 ten 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, Leidos, 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 three government-centric firms for a total of 20 public sector IT services vendors: Boeing GS&S, Exelis and Harris.

• 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 that 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 4Q13 benchmark

2. Strategic actions to adapt to the market

3. 2014 outlook

4. Q&A

TBR


2013 ended much like the way it began for federal IT contractors, with all facing pervasive budget turmoil and uncertainty

4Q13 PSBQ Public Sector IT Services Benchmark Research Highlights

Public sector IT services vendor trends for 4Q13

SOURCE: TBR RESEARCH AND ESTIMATES; COMPANY DATA AND ESTIMATES

SOURCE: HTTP://ALLFACEBOOK.COM/FILES/2014/01/FOURTHQUARTERKEY650.JPG

SOURCE: HTTP://GOO.GL/6XPUZP

SOURCE: HTTPS://ENCRYPTED-TBN0.GSTATIC.COM/IMAGES?Q=TBN:AND9GCSFO42RIT3-XRTABS-CL1NKQNF5MDZ0KGRAGBO1RNSF7KPO6QNA

There was no fourth quarter comeback for government IT

contractors in 2013; budget outlays continued to lag behind

appropriations as agencies delayed procurements and held

off spending, despite the kickoff of a new federal fiscal year.

Difficult market conditions from 2013 will continue, driving

revenue contractions for many public sector IT services

contractors in 2014.

Vendors pushed hard in 2013 to improve cost structures,

enhance operations and maximize contract execution to

drive margin performance; strategic actions, alliances and

M&A also focused on advancing up the value chain.

TBR


The budget agreement injected stability into the market but failed to keep growth rates from contracting for a third straight quarter in 4Q13


Budget constraints, a trickle of task orders from many large-scale ID/IQ contracts, program delays and terminations and award protests on new and rebid work continue to impede contractors’ revenue growth

TBR


Backlog contracted for most federal contractors in 4Q13, consistent with seasonal patterns but to a magnitude not observed in recent memory


Aggregate backlog reported by the 13 government-centric contractors was $112.7 billion in 4Q13, down 3% from $116.2 billion in 3Q13; 10 of 13 benchmark firms saw sequential backlog contraction in 4Q13

TBR


The volume of year-end budget flush fell sharply as federal FY13 closed and backlogs slid further as FY14 began, heralding a grim 2014 for most firms


The aggregate backlog for the 13 government-centric firms in the 4Q13 benchmark study declined nearly 10%, or almost $12 billion, since the previous year (4Q12)

TBR


Growth leaders have limited exposure to the defense market; margin leaders leverage multipoint solutions and delivery automation


Outperforming vendors in growth and margin performance are investing in international markets, high-growth verticals and cost-takeout technology while minimizing contract risk to best their peers

Outperformers

Laggards

TBR


Reductions in federal IT spending will fall mostly on the DOD in federal FY14 and FY15, but civilian agency IT spending will be more stable







off spending, despite the kickoff of a new federal fiscal year. SOURCE: HTTP://ALLFACEBOOK.COM/FILES/2014/01/FOURTHQUARTERKEY650.JPG










TBR


The federal IT market environment has compelled firms to focus on margin preservation in lieu of top-line growth since 2012, but the effort stalled in 2013 and only a marketwide recovery will help avert further erosion

Contractors focused on cost controls through 2013, but systemic top-line contraction nullified the impact on margins


SOURCE: HTTP://3.BP.BLOGSPOT.COM/-6XAPYN0E32E/TKF00D3ZNGI/AAAAAAAAAFS/VFVCANCYAF4/S1600/CEILING.PNG

TBR


Margin-leading federal contractors enhanced program performance and operational efficiency while advancing their portfolios up the value chain

Top federally focused operating margin performers in 4Q13


• Restructuring of contracts and operations in NPS

• Divestitures of less-profitable operations

• Strong growth in lucrative cybersecurity and cloud solutions


• Strong program execution

• Shifting sales mix; more classified and intelligence work

• 2013 restructuring efforts offsetting higher R&D and sales outlays

• Internal programs to cut costs and enhance contract margins

• Traction in shared services, digital, cloud, mobility and analytics

• Management consulting-led federal engagements

11.7% in 4Q13

11.9% in 4Q13

13.9% in 4Q13

• Continued rollout of “market-based affordability” initiative

• “Partnering for Success” supply-chain efficiency program

• Growth in higher-margin maintenance and training programs

11.7% in 4Q13

Other vendor margins in 4Q13: Exelis (11.5%), IBM Federal (10.3%), Northrop Grumman IS&TS (9.5%), Lockheed Martin IS&GS (9%), CGI (8.9%), Xerox (8.6%), Unisys (8.3%), Raytheon II&S (8.3%), L-3 (8.3%), Booz Allen Hamilton (7.6%), CACI (7.4%), General Dynamics IS&T (7.3%), Leidos (6.3%), SAIC (6%), HP (4.4%) and ManTech (-17.3%)

CSC

Boeing GS&S

Harris

Accenture

TBR


Companies are acquiring niche firms to augment cybersecurity and analytics portfolios for addressable nondefense public sector markets

Key acquisitions by public sector IT services vendors in 4Q13



Industrial Defender: Enhances IS&GS’ energy and chemical

offerings; verticals increasingly demanding cybersecurity

solutions in the face of growing cyber threats

Data Tactics Corp.: Expands L-3’s analytics portfolio and its

addressable markets in cybersecurity, public safety and law

enforcement; adds 200 staff and approximately $50 million in

2014 revenue

Allied Technology Group: A $45 million acquisition

enhances engineering and information management

solutions in ManTech’s Mission Solutions and Services Group

and provides ManTech a position on large-scale DHS IDIQ

contract vehicles.

ManTech

L-3

Communications

Lockheed Martin

IS&GS

TBR


Alliance activity in 4Q13 focused on portfolio enhancements in cloud, mobility and virtualization as well as gaining access to new markets

Key alliances and partnerships for public sector IT services vendors in 4Q13



Hitachi Data Systems Federal: SAIC and HDS Federal will

collaborate to develop Desktop as a Service for federal clients.

CA Technologies and Cirque Energy: Enhances IS&TS’ cloud-

based security and cost-saving energy solutions with broad

applicability across current clients

Colt Canada and Samtel Avionics: Both alliances will advance

IS&T’s efforts to expand outside the U.S. and enhance IS&T’s

networking, mobility and communications capabilities.

HCL: The co-created CSC/HCL app modernization network will

accelerate client migration to cloud-enabled platforms, though

the initial vertical focus will be in the banking sector.

General

Dynamics

IS&T Northrop

Grumman

IS&TS

CSC

SAIC

TBR


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




SOURCE: HTTP://ALLFACEBOOK.COM/FILES/2014/01/FOURTHQUARTERKEY650.JPG





off spending, despite the kickoff of a new federal fiscal year.









TBR


The 16-day government shutdown had minimal impact on vendors’ 4Q13 top-line growth results, though receivables collection was affected


The government shutdown was moderately disruptive for most contractors, impeding the pace of contract awards and creating resource management and business development challenges.

SOURCE: HTTP://BIT.LY/1HWRHDC

TBR


2014 will be another year of limited growth opportunities in the federal IT space, though the budget agreement is helping drive optimism for 2015


Expected growth in global IT spending (2% to 3% in TBR

estimates) in 2014 is not expected to spill over to the federal

sector; the FY14 federal IT budget request shows a modest

increase of 1.8% over FY13.

Vendors are encouraged by the 2014 appropriation acts for the

increased stability and predictability they injected into the

planning process, though fully incorporating these measures

into programs will take some time.

SOURCE: HTTP://BIT.LY/1MDUBNA

SOURCE: HTTP://BIT.LY/1MDCORB

Contractors expect 2014 to be a transition year, perhaps the

trough in the beleaguered federal IT market, ahead of

improving conditions in 2015. SOURCE: HTTP://WWW.MARKETLEADER.COM/BLOG/WP-CONTENT/UPLOADS/2013/12/FOTOLIA_57684648_XS-300X200.JPG

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


Questions?

Public Sector IT Services Practice Research Outlook: Questions

TBR


John Caucis

Senior Analyst and 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

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TBR 4Q13 Syndicated Research Topics | Confidential and Proprietary

TBR

©2014 Technology Business Research Inc.

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 • HCL Technologies • HP Services • IBM Global Services • Infosys • T-Systems • Tata Consultancy Services • Unisys • Wipro IT Services • Xerox Services

• Booz Allen Hamilton* • CACI International* • General Dynamics IS&T* • L-3 Communications* • Leidos* • Lockheed Martin IS&GS* • ManTech* • Northrop Grumman IS&TS* • Raytheon Intelligence, Information &

Services* • SAIC*

• 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

21

*Semiannual publication

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