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Salesforce.com Growing Cloud Computing/Social Media Presence Through Acquisitions

At FIA, we are always examining how various vendors are performing in the federal contracting marketplace, and keeping tabs on how these firms are executing their various strategies to achieve success going forward.
In this week’s installment, we would like to highlight Salesforce.com Inc., a provider of enterprise cloud computing and social enterprise solutions. Over the past few years, Salesforce has been making noticeable moves in the cloud computing and social media sectors via acquisitions, while attempting to solidify its market share versus top-tier rivals in these high-growth markets.
FIA Perspective:
Salesforce keeping pace with rivals Oracle and SAP in high-growth cloud and social media markets.  Since early 2011, Salesforce has been among the most active players on the M&A front, snapping up numerous small- and mid-tier firms to enhance its cloud computing and social media portfolios. 
Since the beginning of 2011, Salesforce has spent over $1.5 billion on 9 acquisitions to extend its cloud and social media capabilities, while noting that it regularly evaluates acquisitions or investment opportunities in complementary businesses, joint ventures, services and technologies, and intellectual property rights.
In its annual report, Salesforce stated that it expects to continue to make investments and acquisitions as part of its growth strategy, and plans to reinvest a “significant portion of its incremental revenue in fiscal 2013 to grow its business” and continue its leadership role in the cloud computing industry.
Overall, we believe Salesforce will continue to seek out smaller acquisitions to fuel its long-term growth strategy, and allow it to better compete with top-tier rivals like Oracle and SAP AG (who have also been making acquisitions) in the high-growth cloud computing market. At the end of the latest quarter, Salesforce had about $1.7 billion in cash, cash equivalents and marketable securities to put towards future acquisitions, so the M&A frenzy in the cloud computing sector should continue.
Below, we highlight Salesforce’s purchases since January 2011, and detail how these acquisitions will benefit the company moving forward.
  • Last week, Salesforce said it's paying almost $70 million to purchase browser collaboration business GoInstant Inc., which allows people to surf the web with each other without having to download an extra plugin or software. The GoInstant acquisition will extend Salesforce’s capability to offer fully integrated, real-time social collaboration.
  • In early June, Salesforce agreed to buy Buddy Media, a social media marketing platform, for $689 million in cash and equity. Buddy Media enables its clients to listen, engage, gain insight, publish, advertise and measure social marketing programs. Buddy Medias’ top clients include Ford, Hewlett Packard, L’Oreal and Mattel, among others. Its social media solutions help Chief Marketing Officers manage social media campaigns, which is becoming an increasingly important aspect in brand building and awareness.
  • In December 2011, Salesforce agreed to acquire Rypple, a provider of social performance management applications, for $50.6 million. This acquisition marks Salesforce’s first step into human capital management.
  • In November 2011, Salesforce.com said it was purchasing Model Metrics, an implementer of mobile applications, for $66.7 million. With Model Metrics, Salesforce will add mobile and social expertise, allowing the company to further transform customers and empower its global partner ecosystem.
  • In September 2011, Salesforce.com acquired cloud provider Assistly for $58.7 million. Assistly provides an instant customer-service help desk built for the cloud.
  • In May 2011, Salesforce.com completed the purchase of Radian6, which helps companies monitor and engage with their customers via social media. Salesforce paid $336.6 million for Radian6, a Canadian cloud application vendor that provides customers with social media monitoring, measurement and engagement solutions.
  • In February 2011, Salesforce acquired Manymoon Corp. for $13.6 million in cash. Manymoon provides productivity and collaboration tools to web apps like Gmail and Google Apps, and allows Salesforce to branch out from its traditional customer relationship management (CRM) software.
  • In January 2011 Salesforce acquired Dimdim, a provider of online meeting solutions for business collaboration, for $37.1 million. Dimdim has created critical real-time communication technologies such as presence, messaging and screen sharing.
  • In January 2011 Salesforce.com completed the acquisition of Heroku for $216.7 million. Heroku provides a cloud platform for writing Ruby-based applications, and allows Salesforce to expand its capabilities in the public cloud services market
Salesforce introduces government cloud. In the federal sector, Salesforce recently unveiled its Government Cloud to accelerate government’s transformation for the social era. The Government Cloud will include a dedicated, multi-tenant instance of Salesforce’s cloud infrastructure that will allow U.S. federal, state, and local agencies to rapidly deploy the latest social and mobile technologies in compliance with FISMA requirements. The Government Cloud will also include AppExchange for Government, a new app marketplace for the public sector where government agencies can find, try and deploy cloud apps that meet their needs.
 
According to Deltek’s Federal Cloud Computing Services Outlook, 2012-2017 report, the demand for vendor-furnished cloud computing services by the U.S. government will increase from $734 million in fiscal 2012 to $3.2 billion in fiscal 2017, representing a compound annual growth rate (CAGR) of 34%.
 
Overall, we believe that Salesforce will continue to be among the market leaders in the cloud computing and social enterprise sectors, while using acquisitions to fuel its growth moving forward. With the federal cloud computing and social enterprise markets just beginning to develop, we expect Salesforce to benefit from the widespread adoption of these technologies by federal agencies over the next several years.

M&A Activity Holds Steady In 2Q: Cloud Computing And Analytics Drive Transactions

Mergers and acquisitions activity in the defense and government services sector held steady in the latest second quarter, and is expected to remain robust for the remainder of the year as larger firms continue to seek out smaller companies operating in hot sectors to help offset expected federal budget cuts.
Among the contractors we track, there were 43 deals either announced or completed during the latest second quarter, off slightly from 44 deals announced in last year’s second quarter, and up significantly from the 29 transactions announced in the first quarter of this year.
M&A activity in the second quarter was driven by four deals which had valuations of over $1 billion, including SAP’s $4.3 billion purchase of cloud-based applications provider Ariba Inc., and CGI Group’s $2.6 billion acquisition of rival Logica PLC, an Anglo-Dutch firm which provides consulting, outsourcing and IT services to governments and companies across Europe.
Other significant purchases in the latest second quarter included Microsoft’s $1.2 billion acquisition of business social network Yammer, and Microsoft’s purchase of more than 925 patents and patent applications from AOL for $1.1 billion. After the purchase, Microsoft later sold 650 of those AOL patents to Facebook Inc. for $550 million.
FIA Perspective:
Smaller deals in cloud computing and analytics fuel M&A activity in 2Q. During the latest second quarter, there were several M&A transactions announced in the cloud computing and big data/analytics sectors, and we expect these trends to continue moving forward.
On the cloud front, there were six deals reported in the latest second quarter which involved companies with cloud-related solutions, on par with the six cloud computing transactions announced in the first quarter of this year.
Notable deals (besides SAP/Ariba) include Dell’s purchases of Wyse Technology and Clerity Solutions Inc. earlier in the quarter, and Oracle Corp.’s purchase of Virtue, which operates a cloud-based social marketing and engagement platform, for $300 million. In another cloud-related transaction, Teradata agreed to acquire eCircle, which provides e-mail marketing and social media software in the cloud. This acquisition is expected to significantly enhance Teradata’s multi-channel marketing capabilities.
Overall, top-tier IT firms looking to expand their market share in the cloud computing sector is expected to continue moving forward, as the market is slated to see high-growth over the next several years. According to Deltek’s Federal Cloud Computing Services Outlook, 2012-2017 report, the demand for vendor-furnished cloud computing services by the U.S. government will increase from $734 million in fiscal 2012 to $3.2 billion in fiscal 2017, representing a compound annual growth rate (CAGR) of 34%. Given this expected growth, we expect top-tier IT firms to continue their foray into the cloud market, targeting smaller companies providing unique or distinctive solutions.
Elsewhere, M&A activity in the big data/analytics market was also strong in the latest second quarter, continuing its momentum from earlier in the year.
Always on the hunt for acquisitions in hot sectors, IBM seemed to have its eye on the analytics makret in the latest second quarter, making three acquisitions, including Varicent Software Inc., Vivisimo, and Tealeaf Technology Inc. IBM said it believes the analytics market presents a significant growth opportunity for the company with attractive profit margins.
Other notable deals in the analytics market in the latest second quarter included VMWare’s purchase of big data startup Cetas Software, Cisco’s acquisition of data analytics firm Truviso Inc., and CACI International’s buyout of Delta Solutions and Technologies Inc., which provides financial management and business analytics services to the federal government.
Overall, M&A activity in the big data/analytics market has been on the upswing over the past quarter or so, and we expect this trend to continue as top-tier IT firms continue to seek out small- and mid-tier firms providing unique or niche technologies within this hot sector.
Top-tier IT and contracting firms continue to lead the pack in M&A transactions. In the latest second quarter, technology titans such as IBM, Dell and Oracle continued to invest heavily in smaller companies in hot growth segments. IBM, Dell and Citrix Systems all made three purchases in the latest second quarter, while Oracle and Google each made two acquisitions.
Among the contracting heavyweights, Boeing acquired ISR provider Immedius, which provides software applications and services for managing and sharing information and learning content. Elsewhere, Northrop Grumman purchased M5 Network Security, an Australian provider of cybersecurity and secure mobile communications products and services, while General Dynamics picked up IPWireless Inc., which provides wireless broadband network equipment and solutions.

 

 

KeyW, LogRhythm and Palo Alto Networks Could Be Cyber M&A Targets

With the cybersecurity market is getting a lot of attention at the federal level these days and rapidly evolving, smaller firms decoding the next cyber threat are at the forefront of exciting changes taking place throughout the industry. At FIA, we are always analyzing the federal cybersecurity sector, and I personally have an interest in what’s going on in the mergers and acquisitions (M&A) market surrounding this high-growth market.
 
Overall, M&A activity in the defense and government services sector been somewhat lackluster this year, although deals in the cyber arena have kept pace despite the general slowdown. Within the cyber sector, we have seen six acquisitions (within our coverage universe) which we would classify as cyber-related, and we expect these deals to continue to as larger firms look to inorganic means of driving revenue growth in today’s challenging markets. 
 
Considered a high-growth sector, cybersecurity will continue to be at the forefront of M&A activity over the next several years, and is a market many top-tier commercial and government IT firms will continue to look at for extending their growth in the future.
 
With that in mind, we believe there is still a long-list of smaller niche security firms which could be on deck as possible takeover targets. These firms include players with unique capabilities or specialties within the cyber market, such as KeyW Corp., LogRhythm, and Palo Alto Networks – we highlight each below.
 
While some of these cyber specialists have more commercial than government security business, we continue to believe that government is at the forefront of cyber adoption, driven primarily by the intelligence agencies. All of the above-mentioned firms could be attractive targets for larger IT companies looking to gain market share or enhance their footprint in security. Interested suitors could include tech titans such as IBM, Oracle, EMC and Hewlett-Packard, plus other top-tier firms like Dell, Cisco and Juniper Networks.
 
While government IT pure-plays like SAIC and CACI, or even the defense primes, could also have an interest in these smaller firms, we see them primarily focusing on customers in the intelligence agencies, and hence their acquisitions will most-likely focus on niche technology providers (like KeyW and other firms in the Ft. Meade area) for that cutting-edge client base.
 
With spending on information security expected to grow at almost double-digit rates over the next several years, and being somewhat immune to future spending and budget cuts, we expect government-wide, as well as agency-specific, cybersecurity initiatives to continue to present numerous opportunities for federal contractors for the foreseeable future, making smaller firms working on the next cyber threat a hot commodity in the government IT market.
 
Below we highlight the above-mentioned security firms and the larger IT companies which may find these smaller high-growth businesses attractive:
 
1. KeyW is a smaller niche firm which provides agile cyber superiority, cybersecurity and geospatial intelligence solutions primarily for U.S. government, intelligence, and defense customers. Over the past few years, KeyW has primarily grown through acquisitions, snapping up 13 businesses since its inception, while expanding its list of clients and capabilities into new and adjacent markets. 
 
In the latest first quarter, KeyW saw its revenues jump 34% to $55.8 million, while noting that its “pipeline of new opportunities looks very promising in terms of new proposal activity, growth in existing programs, and opportunistic acquisitions." KeyW CEO Leonard Moodispaw also said the firm is progressing on its 'horizontal path' effort into the commercial markets, while disclosing that the company’s “investment in internal R&D have opened doors to significant new business potential.”
 
Overall, KeyW’s core cyber capabilities and relations with the intelligence community make it an attractive takeover target for a larger IT firm or defense contractor looking to gain market share or expand its addressable market in the area of cyber intelligence (which has high barriers to entry and is difficult to penetrate). Potential suitors could include Northrop Grumman, Boeing, Lockheed Martin, SAIC or CACI, along with tech-giants such as IBM, Dell or EMC. 
 
2. LogRhythm provides solutions in log management and SIEM 2.0, while delivering visibility, insight and situational awareness needed for cyber threat defense, detection and response, compliance automation and assurance, and operational intelligence and optimization.
 
LogRhythm analyzes and manages network, host, file and user activity data in a highly scalable, integrated solution. Its unique log management and SIEM 2.0 solution detects the previously undetectable, and delivers powerful forensics, while providing actionable intelligence. LogRhythm provides its solutions and operational intelligence to Global 2000 organizations, government agencies and mid-sized businesses worldwide. 
 
Within the federal space, LogRhythm recently announced that its SIEM 2.0 platform has received a Certificate of Networthiness from the U.S. Army. As a result, Department of Defense (DoD) organizations that use the Army Enterprise Infrastructure (AEI) can now deploy LogRhythm to meet their security and compliance needs. LogRhythm is one of only two SIEM vendors – and the only independent provider - with CoN accreditation.
 
Within the SIEM space, all of the major niche providers have been acquired over the past several years, with the exception of LogRhythm. Acquisitions include Hewlett-Packard purchasing ArcSight, IBM buying Q1, and TIBCO purchasing LogLogic, among others. This places LogRhythm at the top-of-the-list among smaller providers in the SIEM market, and current LogRhythm partners such as Oracle, Cisco, and Dell could all have an interest in acquiring the company.
 
3. Palo Alto Networks is a next-generation security provider with a platform that allows enterprises, service providers, and government entities to secure their networks and safely enable the increasingly complex and rapidly growing number of applications running on their networks.
 
The core of Palo Alto’s platform is its Next-Generation Firewall, which delivers application, user, and content visibility and control integrated within the firewall through its proprietary hardware and software architecture. The company’s platform offers a number of compelling benefits for its end-customers, including the ability to identify, control, and safely enable applications while inspecting all content for all threats in real time.
 
As of April 30, Palo Alto had more than 7,750 end-customers in more than 100 countries, compared with 1,800 at July 31, 2010.
 
For the nine month period ended April 30, 2012, Palo Alto’s revenues skyrocketed 129% to $179.5 million, compared with revenues of $78.4 million in last year’s comparable period. At the same time, the company generated net income of $5.3 million, swinging from a net loss of $6.5 million in last year’s nine month period.
 
Currently, Palo Alto is in the process of going public via an initial offering of its common stock. Despite its aspirations of going public, Palo Alto could still make for an attractive takeover target with its significant top-line growth and growing list of end-customers.  Palo Also would most-likely draw interest from the usual list of top-tier IT firms who have been making cyber acquisitions over the past several years – these include IBM, HP, Dell, Cisco and Intel, among others.

 

 

 

Sourcefire Outperforming In Cyber Market; Could Serve As Model For Smaller Contractors To Follow

At FIA, we believe Sourcefire Inc., a cybersecurity provider with a comprehensive portfolio of solutions, will continue to increase its federal business while expanding its capabilities in the growing cyber market. The information security market continues to be one of the most attractive growth segments within the federal IT space, and is expected to grow from $9.2 billion in 2011 to $14 billion in 2016, representing a CAGR of 8.8%, according to Deltek’s Federal Information Security Market, 2011-2016 report.
 
In 2011, Sourcefire generated approximately $34.8 million (21%) of its total revenue from the U.S. government, including the Department of Defense and various intelligence agencies. This compares with $32.7 million in revenues from the U.S. government in 2010, and $30 million in revenues in 2009. 
 
FIA Perspective:
 
Sourcefire seeing dramatic top-line growth with diversified portfolio. In the latest first quarter, Sourcefire’s revenue shot up 50% to $46.3 million, compared with $30.8 million in last year’s first quarter, reflecting 60% growth in revenue from the company’s federal government sector. In addition, Sourcefire saw its commercial business revenue rise 28% to $20.8 million, while international revenues skyrocketed 87% to $15.7 million.   
 
Sourcefire said its federal government business generated $9.8 million of revenue in the latest quarter, up 60% over the year ago quarter. The company noted that earlier funding of federal agencies versus what the firm experienced last year seemed to stabilize the procurement process, and as a result, Sourcefire saw greater deal flow over last year’s comparable quarter.
 
Looking ahead, Sourcefire believes it can grow its business by 25% on the top line in 2012, reflecting a growing awareness and demand for cyber security solutions like its Next-Generation IPS, the expanding size of the firm’s total addressable market, and a more stabilized federal spending environment through at least the remainder of the current federal fiscal year. Sourcefire noted that it now expects its federal business to show a 500 basis point to 600 basis point improvement for 2012. 
 
Sourcefire could serve as model for smaller contractors looking to branch out. With Sourcefire sporting a nicely-diversified list of capabilities and solutions across the commercial, government and international markets, the firm’s success could serve as a blueprint for other small contractors in the federal cyber sector to emulate moving forward. In the latest quarter, Sourcefire’s commercial business accounted for 44.9% of the company’s overall revenues, while international and government business checked in at 33.9% and 21.2%, respectively. In addition, Sourcefire also has a nice blend of product and service revenues, which stood at 59% and 41% of total revenues, respectively.
 
Over the past few years, Sourcefire has continued to develop new security products and services, while adopting an “Agile Security” vision in order to evolve with today’s rapidly changing market. In 2011, Sourcefire launched two innovative solutions into two adjacent markets - next generation firewalls and advanced malware protection. This effort is expected to increase Sourcefire’s addressable market from $1.7 billion to more than $10 billion over the next four years, the company noted.
 
Sourcefire also continues to grow its international presence, while expanding its relationships with partners, resellers, distributors, and government integrators. In 2011, Sourcefire launched its first North American distribution partnerships with recognized channel leaders, Synnex and Computerlinks, and is now making investments in these partners with the objective of increasing its percentage of channel-influenced revenue. The company also continues to add members to its distribution network. At the end of 2011, Sourcefire had agreements with 576 third parties for the distribution of its products, compared with 339 at the end of 2010.
 
Overall, we believe Sourcefire’s strategy to broaden in reach while expanding its current capabilities could be a nice model for smaller federal contractor’s to emulate moving forward. With shrinking budgets government-wide and increasing competition from larger players, smaller contractors may need to look outside-the-box, and seek cyber opportunities in commercial and international markets to continue their growth over the next few years. 
 
Also helping smaller contractors is a renewed emphasis on supporting and expanding the role of small businesses in government contracting, as Deltek discloses in its recent Small Business Federal Contracting: Trends and Drivers? report. The report discusses how federal agencies are participating in interagency groups to focus on communicating best practices and proven strategies for increasing small business utilization across multiple agencies, and how small business can achieve success going forward. 
 
Cybersecurity is getting attention at the highest levels, as contractors jockey for market share.  According to Deltek’s Federal Information Security Market, 2011-2016 report, cyber attacks are up 650% since 2006, as attackers continue to go after targets to disrupt government operations and U.S. critical infrastructure. However, while agencies continue to make incremental progress toward securing systems and data, environmental complexity, technical challenges, and workforce shortages have inhibited the federal government’s pace in implementing a comprehensive and cohesive national cybersecurity strategy.
 
While the strategic direction for cybersecurity seems to be hazy at the moment, the Obama Administration has clearly sated that cybersecurity a top-priority. As a result, almost every major IT firm is jockeying to contend for current and upcoming cyber-related opportunities, and we expect these opportunities to multiply over the next several years.
 
Sourcefire could be seen as an attractive takeover target. Since Sourcefire is a proven supplier with numerous government customers, it could be an attractive takeover target for a top-tier IT firm looking to expand its cybersecurity footprint.  IT contractors typically use strategic acquisitions to gain a foothold in growing markets, while broadening their offerings, and supporting organic growth.  
 
Overall, mergers and acquisitions activity in the cyber arena has continued to be robust this year, and we expect this trend to continue throughout 2012. Notable deals in the cyber arena include Dell’s purchase of SonicWall, and ManTech’s acquisition of HBGary.  Juniper Solutions has also been active on the cybersecurity front, acquiring Mykonos Software, while Salient Solutions has purchased ATS Corp. to enhance its cyber-related capabilities. We believe that M&A activity in the cyber arena will continue to be strong for the remainder of the year, as larger contractors look to expand their expertise in this growing sector while recognizing the vast number of smaller firms already working on the next cyber threat.
 
Our Take:
 
We think that Sourcefire has done a great job over the years in building its comprehensive portfolio of security solutions, while expanding into new and adjacent markets. We also like that Sourcefire has a well-diversified cyber portfolio split among the commercial, international and government markets, and close to an even split between its product and service revenues. Despite a tightening budget environment and competition from larger and better-funded rivals, we believe Sourcefire has what it takes to be successful in the ultra-competitive cyber market, and will continue to gain market share within this high-growth industry over the next several years. 

 

 

Kratos Defense & Security: A Mid-Tier ISR Firm Making Big Acquisitions In Hot Markets

With the Intelligence, Surveillance and Reconnaissance (ISR) and cybersecurity markets poised to receive federal funding increases over the next several years, the small- and mid-tier providers of these unique technologies are at the forefront of exciting changes taking place within the evolving federal landscape.
With this in mind, FIA is always monitoring these changes, and I personally have an interest in what’s going on in the Mergers and Acquisitions (M&A) market surrounding these hot sectors.
Within these markets, one company which has been making noticeable moves over the past year is Kratos Defense & Security Solutions Inc., a mid-tier defense contractor which has been acquiring other mid-tiers to expand its addressable markets in the areas of ISR and cybersecurity. Over the past year, Kratos has been among the most active mid-tier acquirers in the federal M&A market, snapping up small-and mid-tier players in hot markets to expand its list of offerings.
Based in San Diego, Kratos is a specialized national security technology firm providing mission critical products, services and solutions for U.S. national security priorities. Its core capabilities include sophisticated engineering, manufacturing, system integration and test and evaluation offerings for national security platforms and programs. The company’s principal products and services are related to the growing C5ISR market.
FIA Perspective:
Kratos targets ISR and cyber firms in year-long shopping spree. Over the past year or so, Kratos has made five acquisitions in an effort to expand its portfolio, with a particular emphasis on firms providing ISR and cyber capabilities. Overall, M&A activity in the ISR and cyber markets has been active this year, and we expect this trend to continue as top-tier defense contractors continue to seek out small- and mid-tier firms providing unique or niche technologies within these hot sectors.
Below, we highlight Kratos’ purchases over the past year, and detail how these acquisitions will boost the firm’s capabilities moving forward:
  • Earlier this month, Kratos said it would acquire drone maker Composite Engineering Inc. for $155 million. California-based CEI makes aerial target drone systems and composite structures primarily for U.S. defense agencies. In 2011, CEI booked revenue of $94 million, and the firm has a backlog of about $160 million, with a qualified bid pipeline of over $1 billion.
  • In December 2011, Kratos also acquired selected assets of a critical infrastructure security and public safety system integration business for $20 million. The critical infrastructure business designs, engineers, manages and maintains specialty security systems at some of the most strategic and critical infrastructure locations in the U.S.
  • In November 2011, Kratos purchased SecureInfo Corp., which offers strategic advisory, operational cybersecurity and cybersecurity risk management services, for $20.3 million cash. SecureInfo is a leader in the rapidly evolving fields of cloud security, continuous monitoring and cybersecurity training. Customers include the Department of Defense, the Department of Homeland Security and large commercial customers.
  • In July 2011, Kratos acquired Integral Systems Inc. in a transaction valued at $241 million. Integral specializes in developing, managing and operating secure communications networks, both satellite and terrestrial, as well as systems and services to detect, characterize and geolocate sources of radio frequency interference. Integral’s customers include U.S. and foreign commercial, government, military and intelligence organizations.
  • In March 2011, Kratos also purchased Herley Industries Inc. for $272.5 million. Herley’s products represent key components in national security efforts, as they are employed in mission-critical electronic warfare, electronic attack, electronic warfare threat and radar simulation, command and control network, and cyber warfare/cybersecurity applications.
Overall, we believe Kratos sees the significant potential in the ISR and cyber markets, and is enhancing its portfolio to win market share within these high-growth segments. We believe the above acquisitions exhibit Kratos’ strong push into these markets, and will allow the firm to better compete with larger and more-established contractors going forward.
Kratos reports solid top-line results in 1Q. In the latest first quarter, Kratos saw it revenues jump 75% to $215 million, compared with $122.8 million in last year’s comparable quarter, reflecting the recent acquisitions of SecureInfo, Integral and Herley (which had combined revenues of $100.5 million).
At the same time, Kratos posted a net loss of $3 million, or 9 cents per share, compared with a loss of $3.5 million, or 17 cents per share, in the 2011 first quarter. At the end of the latest quarter, Kratos' had a total backlog of $1.1 billion, and a qualified bid and proposal pipeline of around $4 billion. Sales to the U.S. government accounted for 77% of the company’s total revenue in the latest quarter.
Looking ahead, Kratos believes that spending on modernization and maintenance of defense, intelligence and homeland security assets will continue to be a national priority. It also noted that its business is “aligned with mission critical national security priorities, particularly in the areas of Unmanned Aerial Vehicles (UAVs), cybersecurity, ballistic missile defense, space programs and science and technology efforts,” where the proposed defense budget for fiscal 2013 has actually allocated increased funding.
Overall, we like that Kratos is being aggressive with its M&A strategy to broaden its client base and expand its offerings, but think the company may face difficulties in competing with larger, more well-established defense contractors. Within the federal market, we expect mid-tier contractors to face increasing challenges in winning new business, as more RFPs are calling for past performance metrics as prime contractors. This places mid-tiers conducting most of their work as subcontractors in a precarious bidding position versus their top-tier rivals, and will make it difficult for them to contend for prime opportunities versus these larger companies moving forward.    

 

Cleveland considering radio system partnership

The city of Cleveland and the Ohio Southwest Regional Communications Network (SWRCN) are considering a radio communications partnership. Cleveland had budgeted more than $30 million for the build out of a new radio system that was awarded to Motorola earlier this year, and as part of this costly endeavor, the city may merge systems with the SWRCN at no cost.

 

The SWRCN, which operates on a Motorola system as well, consists of Middleburg Heights, Berea, Brook Park, Parma Heights, Strongsville, North Royalton, Olmstead Falls and Olmstead Township. The reason for the proposed merger is to increase interoperability through 13 different licensed frequencies that Cleveland uses, improve connectivity, and allow for better coverage among the major systems in Northeast Ohio. The merger is up for vote at the start of 2012.

 

In the past, Cleveland has addressed limitations in its ability to communicate across agencies. Within Cuyahoga County, there are more than 40 types of radio systems along with a diverse set of frequencies used by all public safety agencies. The integration between the city and the SWRCN would alleviate many of the problems associated with radio coverage across the county.

 

Analyst’s Take

 

Integration of communications systems has become more of a norm in order to ensure coverage in the event of a natural disaster or major emergency, especially when systems experience incompatibilities with neighboring jurisdictions. Since both Cleveland and the SWRCN operate on a Motorola system, if an upgrade is pursued or a contract renewed, it will likely be done regionally under the same system to control costs.

 

As more cities and counties consider regionalizing their public safety systems, it may create additional opportunities for vendor solutions and services, like the need for a systems integrator. Vendors should stay atop upgrades within smaller counties and municipalities as well as research regional and state systems for possible mergers.

 

Calling All Vendors: California Designated Entity Releases RFIPC

Cal eConnect, Inc., the California designated entity overseeing health information exchange (HIE) implementation, released a request for information and public comment (RFIPC) on September 9, 2010. Cal eConnect's vision is to "build a solid foundation of HIE that provides safe and secure patient and provider access to personal and population health information, and dramatically improves the health and wellbeing, safety, efficiency and quality of care for all Californians."

The private, nonprofit corporation, through a cooperative agreement between the California Health and Human Services Agency (CHHS) and the Office of the National Coordinator (ONC), will use the $38.8 million Health Information Technology for Economic and Clinical Health (HITECH) award funding to develop and support HIE policies and services in the state of California.

The main purpose of the RFIPC, per Cal eConnect, is to gain feedback on the overall approach and technical requirements in the core HIE services used to achieve meaningful use. California released its strategic and operational planning documents in March 2010 and completed its technical implementation in June. These core services include:

  • Messaging framework
  • Authorization framework
  • Entity registry
  • Service registry

Responses and comments to the RFIPC are due by 5 p.m. PDT on September 30, 2010. Cal eConnect plans to release results from the RFIPC by October 29, 2010. GovWin is currently tracking the California HIE initiative here.

GovWin's Take:

States were expected to submit their operational/strategic planning documents to ONC by August 31, 2010. Approval of state plans is a prerequisite for states to receive federal funding and submit requests for proposals (RFPs) for an HIE. As a result, numerous states have submitted plans to ONC, which GovWin is tracking here. In addition, GovWin is currently analyzing the plans of each state and will be releasing a report at the end of the month. Stay tuned for more info!

GovWin Pulse: Health Care and Human Services August Review

August brought a flurry of activity to the health care market (what's new, right?). States that sent off their Health Information Exchange (HIE) Strategic and Operational Plans to the Office of the National Coordinator (ONC) include Wisconsin (Statewide Health IT Network), Virginia (CHIMES), Connecticut (HITE-CT), and Arkansas (AR SHARE). The Louisiana Health Care Quality Forum started its procurement process by issuing a request for information (RFI) for the Louisiana Health Information Exchange (LaHIE) on August 6, 2010. On the other end of the spectrum, the Utah Health Information Network (UHIN) became the first organization to be accredited through the Electronic Healthcare Network Accreditation Commission's (EHNAC) recently developed Health Information Exchange Accreditation Program (HIEAP).

Grant money flowed freely out of the United States Department of Health and Human Services (DHHS), including $159.1 million to support health care workforce training; $1 million to each state to develop health insurance exchanges; and $32 million to increase access to health care for Americans living in rural areas. ONC named the Certification Commission for Health Information Technology (CCHIT) and Drummond Group Inc as the first technology review bodies authorized to test and certify electronic health record (EHR) systems for compliance with DHHS standards and certification criteria. This means that EHR vendors can now begin to have their products certified to support meaningful use. In other vendor news, Ingenix continued its purchasing run, acquiring Axoltl on August 16, 2010.

Medicaid projects were also hot this month, including Indiana's Department of Administration releasing an RFI for a data migration strategy. The Indiana Family and Social Services Administration plans to issue a few request for proposals (RFP) for the replacement of its Medicaid management information system with a new MMIS, including full operation of the system. On August 17, 2010, Alabama released an RFP for independent verification and validation (IV&V) and quality assurance (QA) services in support of its MMIS recipient subsystem replacement project. South Carolina's Department of Health and Human Services released an RFI for a replacement MMIS that includes provider management services, health care management services, testing management services, and IV&V services. Last but not least, the California Health and Human Services Agency released an RFP for CA-MMIS design, development, and implementation project management services on August 18, 2010.

Other projects released in the health care and social services market include:

  • The Indiana Department of Administration, in conjunction with the Family and Social Services Administration, released an RFI for eligibility determination system planning services on August 2, 2010. The RFI requests responses from vendors capable of performing planning services for the design, development, implementation, and eventual procurement of a system integrator to replace the Indiana Client Eligibility System (ICES), the state's current eligibility determination system for Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP), Medicaid, and the Children's Health Insurance Program (CHIP).
  • The Iowa Department of Administrative Services, on behalf of the Department of Public Health and Department of Agriculture and Land Stewardship, released an RFP for a planning and quality assurance contractor for electronic benefit transfer (EBT) for the Iowa WIC Program on August 9, 2010. GovWin is tracking the EBT system here.
  • The Wisconsin Department of Corrections (DOC) released an RFI for an electronic health record (EHR) on August 23, 2010.
  • The Missouri Office of Administration, Division of Purchasing and Materials Management (DPMM), on behalf of the Department of Social Services, Family Support Division, released an RFP for EBT Services for the SNAP program on August 20, 2010.
  • The New York Department of Health, Vital Record Division, re-released an RFP on August 16, 2010, for an electronic death registration system (EDRS.

Notable awards include:

  • The Kentucky Cabinet for Health and Family Services awarded the State Medicaid Health IT Plan contract to Fox Systems LLC on August 9, 2010, for $476,978.
  • The state of Nebraska awarded the Development of the State Medicaid HIT Plan/Medicaid Regulation Analysis/Medicaid Systems Replacement Planning and Procurement contract to Public Consulting Group for $1,458,450. The contract will run from September 14, 2010, to December 13, 2011.
  • The Delaware Department of Health and Social Services awarded its WIC EBT planning contract to Chaddsford Planning Associates in the amount of $103,750. The tentative start date is September 1, 2010.
  • The Maryland Institute for Emergency Medical Service Systems (MIEMSS) awarded ImageTrend the Statewide Electronic Care Report and EMS Data Collection System contract in the amount of $668,000.
  • The Colorado Department of Public Health and Environment awarded the WIC EBT Planning Services contract to Imadgen LLC in the amount of $219,128.

August was also a busy month for GovWin analysts attending events. Make sure to keep an eye out for recaps of the MMIS Conference and ISM Conference in the coming weeks.

CGI Federal Gains Defense and Professional Services Benefits from Stanley Acquisition

Today, CGI Group announced its planned acquisition of Stanley, Inc. for $1.1 billion. With this acquisition, CGI's joins the Billion Dollar Club of federal contractors.

Looking at the federal procurement data for both companies, it seems like a nice fit. CGI Federal gains some very nice benefits from this acquisition:

Larger Federal Footprint According to the Federal Procurement Data System (FPDS) for FY2009, CGI Group's total prime contract obligations were approximately $196 million ($171M in Information Technology), compared to $648 million ($405 in Information Technology) for Stanley. Add together all of their respective work at both the prime and sub level, and CGI's federal footprint rises to over $1 billion.

Expanded Offerings CGI's professional services revenue stream of $22 million will become deeper with Stanley's $213M in FY09 prime obligations. As a result, CGI Federal expands its professional services footprint (primarily in engineering services) substantially. It is also gaining a strong IT and Business Process Outsourcing (BPO) portfolio from Stanley.

Defense Presence This acquisition also widens the door into the Department of Defense, which CGI missed out on during its acquisition of AMS in 2004 when AMS' defense business went to CACI. Seventy-two percent of Stanley's FY09 prime contract obligations were with Defense agencies (Army, Navy, OSD, and Air Force - in that order).

Expanded Civilian Presence CGI and Stanley also share a number of civilian customers (DHS, State, HHS, Justice, Interior and Commerce, just to name a few), and with its expanded offerings, CGI now has the opportunity to expand its reach into its current customer base as well.

This announcement marks the latest in a series of acquisitions over the past 9 months (Dell/Perot, Xerox/ACS, AT&T/Verisign). I think that the message is loud and clear: organic growth in difficult in this market; acquisitions or stealing market share are the strategies for staying in the game.

Michigan Consolidation and Streamlining: DMB and DIT to Merge

In a recent press release, Michigan Governor Jennifer Granholm announced that the Department of Management and Budget (DMB) will merge with the Department of Information Technology (DIT), thus eliminating five state agencies and approximately 200 boards and commissions. Kenneth Theis, the current Director of DIT will oversee the consolidated departments while current DMB Director Lisa Webb Sharpe will step down from her position to accept a position at Lansing Community College as Senior Vice President of Finance and Administration.

This consolidation is a result of Gov. Granholm's pledge to reduce the number of state departments from twenty to eight in order to streamline government processes and realize cost savings. This effort comes in conjunction with Gov. Granholm's request to Lt. Gov. John Cherry, Jr. in the 2009 State of the State address to lead an initiative to provide higher quality state government services at a lower cost to taxpayers than are currently available. Given how technology enables both government employees and citizens to do better business, and technology's increasing role in streamlining government, the plan to house the two departments under one roof is very logical.

What this means for vendors: One of the primary goals of the consolidation is streamlining government. Procurement is a prime example of this. Procurement and information technology will now be in the same department so vendors can anticipate a more efficient procurement process. Procurement officials and project managers will likely have a closer working relationship; there will be an increased level of interaction and communication on a variety of initiatives. Vendors should be prepared to work with the newly structured government – a single entity in which all players are on the same page and have access to the same information, rather than separate agencies passing information back and forth and following different procedures and protocols.

As always, given the government's budget cuts and revenue problems, vendors should continue their efforts to offer the most comprehensive solution at the lowest price, but now attention must also be focused on adjusting to the new consolidated structure. Many states already house information technology departments with management and budget-type agencies, and it is possible that other states will follow in Michigan's footsteps and make similar transitions in order to achieve the same efficiencies. It is in vendors' best interests to study Michigan's actions and develop new strategies for addressing this shift.

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