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Contractor Survival Tactics: Booz Allen Makes C4ISR Acquisition, Expands Into Commercial Cyber

In today’s challenging federal market, contractors of all sizes are evaluating their current strategies to achieve success over the next several years, while bracing for potential budget cuts that could significantly impact the way they do business moving forward.
At FIA, we are always keeping tabs on what’s going on in the federal market, and I recently noticed that consulting firm Booz Allen Hamilton is making some interesting moves in order to remain competitive and continue its success in today’s evolving government market.
In fiscal 2012, Booz Allen derived 98% of its revenue from services provided to more than 1,200 client organizations across the U.S. government under more than 5,800 contracts and task orders.
FIA Perspective:
Booz continues to look for “opportunistic” acquisitions. Last week, Booz Allen agreed to acquire the Defense Systems Engineering & Support (DSES) division of ARINC for $154 million. This acquisition will bring strong capabilities in advanced aviation and maritime engineering, advanced weapons modernization and sustainment, and advanced systems engineering and integration to complement Booz Allen’s existing services, which span engineering and operations, technology, analytics, and strategy and organization. DSES is well-positioned in the growing C4ISR and engineering services/prototyping segments of the defense market, and Booz sees opportunities for these capabilities in adjacent intelligence, law enforcement, homeland security, and international systems sectors.
Taking a look at its acquisition strategy, Booz said it’s seeing consolidation in the market, and is “open to evaluating potential opportunities” with a focus on companies that are a cultural fit that will bring additional client access or enhanced capabilities. It also said it would “pursue inorganic growth options ideally in the $100 to $200 million range.”
Booz continues to win significant contracts despite tightening market conditions. In terms of contracts, Booz Allen was recently one of 12 vendors who won a $7 billion Army contract for software and engineering services. In August, Booz was also one of five contractors to receive an Army award (with a $489 million ceiling) to manage chemical weapons. In addition, Booz said it won 35 healthcare contracts, totaling more than $112 million, in August and September timeframe to support a wide range of federal healthcare agencies and private organizations.
In its fiscal first quarter, Booz Allen also won a series of major awards totaling over $300 million to support the U.S. Navy Space and Naval Warfare Systems Command in areas such as cyber, intelligence systems, infrastructure protection, and C4I. Booz also added an IDIQ contract with a ceiling of $20 billion from the National Institute of Health for services and solutions with the Chief Information Office, and a $73 million contract from the Department of Energy to provide scientific, engineering, and technical support.
For fiscal 2012, Booz said it achieved an overall win rate of 55% on new contracts and task orders that it pursued, and a win rate of more than 91% on re-competed contracts and task orders for existing or related business.
Booz Allen looking for commercial opportunities in cyber security.  While cybersecurity is one of the federal market’sfew bright spots in terms of spending,Booz Allen is aiming to use its federal cyber expertise as a bridge to commercial opportunities in the field, according to a recent Washington Post article.
Currently, Booz is one of a handful of contractors looking to make the transition to the commercial sector to expand its addressable market in cyber. Other firms seeking to make this jump include KEYW Holdings Corp., ManTech International, SAIC and Computer Sciences Corp., according to the article.
As part of its foray into the commercial market, Booz Allen recently entered into a consulting and services partnership with EMC’s security division, RSA, to provide enhanced offerings and make it easier for commercial and public sector customers to use both companies’ information security expertise and specialized technologies. The partnership’s objectives include: developing joint information security service offerings; simplifying client engagements for security preparedness and incident response; and further assessing the commercialization of advanced security technologies (from Booz Allen) that play a crucial role in detecting and defeating today’s sophisticated computer attacks.
In its annual report, Booz noted that it will continue to pursue new opportunities in the commercial market by building on its cyber-related work and leveraging its core competencies, with a focus on serving industries in which there is a strong intersection between government and commercial interests, such as financial services, healthcare, and energy.  
Currently, Booz Allen’s key service offerings to commercial clients include: dynamic defense (cyber), next-generation virtual infrastructure, decision analytics, design for affordability, and smart compliance. Its commercial clients include major commercial banks and investment banks, healthcare providers, energy companies, and utilities.
Booz posts nice bottom-line growth in latest quarter. In the latest fiscal first quarter, Booz Allen’s profit jumped 21% to $61.9 million, or 43 cents per share. This compares with $51.1 million, or 37 cents per share, in last year’s comparable quarter. At the same time, the company’s revenue slipped 1% to $1.43 billion, compared with $1.45 billion in last year’s first quarter.At June 30, Booz Allen had total backlog of $10.23 billion, of which $2.58 billion was funded.
Looking ahead, Booz said it expects adjusted earnings of between $1.60 and $1.70 per share for the year, down from its earlier estimates of between $1.71 and $1.81 per share. Moving forward, Booz believes that the investments it’s making in areas such as cyber, cloud, health, engineering services, enterprise effectiveness and efficiency, commercial, and international businesses will “position the company well for future growth.”
On its first quarter earnings call, Booz highlighted that it’s “investing resources and deploying leaders to business areas that are growing, while noting that it “will continue to grow in government, commercial, and international markets, such as health, finance, and intelligence surveillance reconnaissance.”
Booz also noted that it continues to win major contract awards across all markets in its government business, despite the generally challenging conditions in that sector. The company has also been “proactive and diligent in managing its cost base which has enabled Booz to continue to deliver on bottom-line commitments.”
Our Take:
Overall, we believe that Booz Allen will continue to be aggressive in making moves to remain competitive in today’s challenging federal market, especially in the wake of expected defense budget cuts and increased competition from top-tier rivals.
We like that Booz is making opportunistic acquisitions to expand into new and adjacent markets (especially commercial cyber), while continuing to win key contracts in markets in which it already competes. Looking ahead, we believe that Booz’s growth strategy will ultimately payoff for the company and allow it to achieve success in today’s evolving markets. 

 

 

 

Contractor Survival Tactics: Raytheon Focuses on High-Growth Markets, Foreign Sales To Offset Cuts

As part of our efforts to keep tabs on the evolving federal marketplace, we are constantly evaluating how various vendors are performing, and analyzing the steps these contractors are taking to achieve success going forward.
In this week’s blog, we turn the spotlight on defense contracting giant Raytheon Corp., which has been focusing its efforts on high-growth markets like ISR and cybersecurity, while expanding its foreign military sales to offset upcoming federal budget cuts.
Based in Waltham, Mass., Raytheon is among the largest aerospace and defense firms in the U.S., with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services.
In 2011, Raytheon’s total net sales to the U.S. Government, excluding foreign military sales, were $18.4 billion, representing 74% of the company’s overall net sales. Foreign military sales (through the U.S. Government) were approximately $3 billion. Raytheon’s primary U.S. Government customer is the Department of Defense (DoD); other key federal customers include Intelligence Community agencies, the Departments of Homeland Security, Justice, State and Energy, NASA and the FAA.
FIA Perspective:
Raytheon making acquisitions in high-growth markets to expand capabilities. In 2011, Raytheon acquired California-based Applied Signal Technology Inc. (for $500 million) to broaden its capabilities in Command, Control, Communication and Intelligence (C3I). Raytheon said the acquisition is part of its strategy to “extend and enhance its Space and Airborne Systems (SAS) offerings related to certain classified and DoD markets.”  Raytheon’s C3I systems provide integrated real-time support to decision-makers on and off the battlefield, transforming raw data into actionable intelligence. Raytheon’s C3I capabilities include situational awareness, persistent surveillance, communications, mission planning, battle management command and control, intelligence and analysis, and integrated ground solutions. As part of its strategy, Raytheon said it’s “continuing to grow its market presence in C3I and expand its knowledge management and discovery capabilities.”
In 2011, Raytheon also acquired Henggeler Computer Consultants Inc. and Pikewerks Corp. to enhance its cybersecurity and information assurance capabilities at Intelligence and Information Systems (IIS). Pikewerks specializes in cybersecurity, software protection, anti-tamper, information operations, data protection and forensics, while Henggeler focuses on cybersecurity, enterprise architecture, analytics, software, and cloud-based solutions. In its annual report, Raytheon said it “continues to enhance its capabilities in the cybersecurity market as well as leverage the capabilities of the ten cyber acquisitions it has made since 2007.” Raytheon said it’s focusing on providing cyber capabilities to the Intelligence, DoD and DHS markets, as well as embedding information assurance capabilities in its products and IT infrastructure. 
In 2011, Raytheon also acquired key business assets of Ktech Corp., expanding the company's capabilities and opportunities in the non-kinetic effects markets. Located in Albuquerque, N.M., Ktech is a leader in pulsed power systems engineering. Ktech’s compact pulsed power systems, combined with its high efficiency magnetron technology, will enable increased integration of directed energy weapons on combat platforms.
While Raytheon hasn’t made any acquisitions thus far in 2012, M&A will continue to be a key component of the company’s overall growth strategy moving forward. At the end of the latest quarter, Raytheon had about $2.5 billion in cash on hand to put towards future acquisitions.
Raytheon aiming to grow international business via foreign military sales. Raytheon believes demand is growing for solutions in air and missile defense, homeland security, air traffic management, precision engagement, naval systems integration, and intelligence, surveillance and reconnaissance (ISR). In addition, as coalition forces increasingly integrate military operations worldwide, Raytheon believes that its capabilities in network-enabled operations will continue to be “a key discriminator in these markets.”
In 2011, Raytheon’s international sales, including foreign military sales through the U.S. Government, totaled $6.2 billion, compared with $5.8 billion in 2010. For 2011, the company’s international bookings checked-in at $7.7 billion, rising substantially from $4.4 billion in 2010.
On its second quarter earnings call, Raytheon Chairman and CEO Bill Swanson said he’s counting on the company’s variety of products and services as well as international business to weather future U.S. defense spending cuts. Swanson highlighted that foreign orders may contribute as much as 30% to Raytheon’s bookings for 2012, up from 25% at the end of the first quarter. He expects future orders for missile defense systems, precision missiles, command control and communications systems and air-traffic control radar from several countries in the Middle East, while noting that Turkey, Kuwait, Oman, Saudi Arabia and the United Arab Emirates could be potential customers.
Raytheon posts solid financials in 2Q. In the latest second quarter, Raytheon’s net income jumped to $471 million, or $1.41 per share, compared with $438 million, or $1.20 per share, in the prior-year period. At the same time, Raytheon’s revenue slipped 3.4% to $5.99 billion, compared with $6.2 billion in the previous year’s comparable quarter. At the end of the latest quarter, Raytheon’s total backlog was $33.9 billion, of which $23.1 billion was funded.
Looking ahead, Raytheon raised its full-year profit forecast from continuing operations to $5.15 to $5.30 a share, compared with an earlier forecast of $5 to $5.15 a share. For 2012, Raytheon maintained its sales guidance in the range of $24.5 billion to $25 billion.
Raytheon “well-positioned” for future DoD opportunities. In January 2012, the DoD issued strategic guidance on the U.S. defense priorities for the next ten years in light of the geopolitical environment and U.S. Government finances. The DoD guidance identified the primary missions of the U.S. armed forces and the capabilities expected to be critical to future success, including ISR, missile defense and cybersecurity. Although the actual impact of implementation of the strategic guidance on the DoD budget and Raytheon’s programs is uncertain at present, the company believes it’s “well positioned” to support many of these critical capabilities going forward.
In its annual report, Raytheon noted that it’s currently involved in over 15,000 contracts, with no single contract accounting for more than 5% of its total net sales for 2011. The company also believes that its “diverse portfolio of programs and capabilities is well suited to the changing defense environment.”
Our Take:
Overall, we believe Raytheon is a well-diversified defense contractor with history of strong order bookings and order backlog. The company also has a solid balance sheet, with growing cash flow and operational improvements. 
In the future, we expect Raytheon’s growth to be driven by its focus on ISR- and missile-related technologies, cybersecurity, and foreign military sales. However, with potential reductions to the U.S. defense budget on the horizon, and numerous high-cost programs at risk, it’s difficult to predict if Raytheon could see future order reductions or cancellations moving forward. 
Despite the potential risks, we like that Raytheon has a clearly-defined growth strategy, and believe that its focus and investments in key high-growth markets (such as ISR and cybersecurity) will align well with future defense priorities, which should allow the company to remain competitive and achieve success in today’s challenging federal market.

 

 

M&A Activity Dips In 3Q: Deals In Cloud Computing And Cyber Lead Transactions

Mergers and acquisitions activity in the defense and government services sector continued to move along in the latest third quarter, and is expected to remain robust for the remainder of the year as larger contractors continue to seek out smaller firms operating in hot sectors like cloud computing and cybersecurity to help offset expected federal budget cuts.
Among the contractors we track, there were 40 deals announced during the latest third quarter, off slightly from 43 deals announced in the second quarter, and 47 deals in last year’s third quarter.
M&A activity in the third quarter was driven by five transactions which had valuations of over $1 billion, including Dell’s acquisition of IT management software maker Quest Software for $2.4 billion, and Chicago Bridge & Iron Co.’s purchase of AEC firm Shaw Group Inc. for roughly $3 billion.
Other significant purchases in the third quarter included VMWare’s buyout of software-defined networking firm Nicira for $1.26 billion, and IBM’s purchase of HR management software provider Kenexa Inc. for $1.3 billion. Also in the latest quarter, private equity firm Thoma Bravo acquired enterprise software firm Deltek Inc. for $1.1 billion.
FIA Perspective:
Smaller deals in federal growth markets drive M&A activity. During the latest third quarter, there were several M&A transactions announced in the cloud computing and cybersecurity markets, and we expect these trends to continue going forward. M&A activity in the cloud sector was very strong in the latest third quarter, continuing its momentum from earlier in the year. 
In one of the larger deals announced in the cloud market (besides IBM/Kenexa above), VMWare agreed to acquire DynamicOps, a Burlington, Mass.-based cloud computing startup that was spun out of banking giant Credit Suisse’s IT department, for between $100 and $150 million. DynamicOps is a leader in the emerging market for cloud automation solutions.
Cisco also continued its foray into the cloud in the latest third quarter, acquiring Virtuata to help secure virtual machine data in multi-tenant data centers. Virtuata helps to isolate each virtual machine from others in the same virtualized data center or cloud environment, and will allow Cisco to address security concerns among enterprises and service providers.
Other notable deals in the cloud sector included Rackspace’s purchase of e-mail application integrator Mailgun, and Citrix’s acquisition of Beetil, which provides cloud-based service desk technology. In addition, Lenovo agreed to buyout Stoneware, which makes cloud products used in the education and government sectors, for an undisclosed amount.
Overall, top-tier IT companies enhancing their presence in the cloud computing space should come as no surprise; the cloud market is slated to be one of the most attractive growth markets for IT firms 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 FY2012 to $3.2 billion in FY2017, representing at a CAGR of 34%.
For the remainder of the year, we expect top-tier IT firms to continue their expansion into the cloud market, targeting smaller firms providing unique or distinctive solutions to enhance their overall market share, while allowing them to compete for future opportunities.
On the cybersecurity front, there were five deals announced in the latest third quarter which involved firms providing cyber solutions or products, up significantly from the number of cyber-related deals announced in the second quarter. 
Notable deals included Apple’s acquisition of AuthenTec for $356 million, and General Dynamics’ purchase of Fidelis Security Systems for an undisclosed sum. AuthenTec designs security products for mobile devices such as fingerprint sensors, while Fidelis provides cyber tools that provide real-time network visibility, analysis and control.
Earlier this month, KEYW Holdings Corp. also made two significant cyber purchases, acquiring Poole & Associates for $126 million and Sensage for $34.5 million. Poole will expand KEYW’s software engineering presence in the Intelligence Community (IC), while Sensage will allow KEYW to expand its addressable market into securing critical infrastructure. Both of these acquisitions should significantly enhance KEYW’s top-line growth moving forward.
We believe that M&A activity in the cyber arena will continue to be robust for the remainder of the year, as larger IT firms look to extend their addressable markets while recognizing the vast number of smaller firms with unique cyber-related capabilities. 
Elsewhere, there were several notable acquisitions in other markets which were previously hot sectors (health IT, geospatial and wireless). In July, SAIC acquired health IT consulting firm maxIT Healthcare for $493 million, while DigitalGlobe acquired rival satellite imagery firm GeoEye for $900 million. AT&T also made a significant purchase in the latest third quarter, snapping up mobile service provider Nextwave Wireless for $600 million.
Our Take:
Looking ahead, we expect M&A activity in the defense and government services sector to continue to be strong for the remainder of the year, as federal contractors look to acquisitions in new and adjacent markets to make up for lost revenues resulting from expected future budget cuts. 

 

Contractor Survival Tactics: General Dynamics Making Acquisitions To Offset Tightening Budgets

Over the past few weeks, we have been highlighting how various vendors are dealing with today’s challenging federal market, and outlining some of the steps these contractor’s are taking to achieve success going forward.
In this edition, we would like to turn the spotlight on defense giant General Dynamics Corp., which has been among the most active participants in the M&A arena since early May, acquiring five companies to expand its list of capabilities and addressable markets.
FIA Perspective:
General Dynamics expanding capabilities in several growing markets via recent acquisition spree. Below we highlight the recent acquisitions GD has made, and detail how these purchases may help the company going forward.
  • In early May, GD acquired IPWireless Inc. for an undisclosed sum. Based in San Francisco, IPWireless provides 3G and 4G LTE wireless broadband network equipment and solutions for first-responder and military customers. The acquisition will allow GD to expand its commercial networking solutions to better serve the needs of its customers, including municipalities who are moving to broadband public safety networks such as the FirstNet nationwide interoperable broadband network.
  • In late June, General Dynamics bought Earl Industries ship repair and coatings division to enhance its ability to compete for Naval contracting opportunities. The ship repair and coatings division of Earl Industries is a prime contractor for nuclear aircraft carrier programs, and provides maintenance and repairs for other Naval ships. Financial terms for the transaction weren’t disclosed.
  • In mid-August, GD said it would acquire Fidelis Security Systems, a provider of network security tools that provide real-time network visibility, analysis and control. Based in Waltham, Mass., Fidelis' solutions help customers stop advanced threats and prevent data breaches by providing visibility into the complex layers of a network, exposing malicious content in real-time. This acquisition will allow GD to expand its capabilities in the growing cybersecurity market, with a particular focus on incident response and situational awareness. Earlier this year, GD opened its Cyber Intelligence and Solutions Center located in Annapolis Junction, which houses experts working on cyber threat detection and mitigation solutions.
  • In late August, General Dynamics acquired the defense operations of Gayston Corp., which supplies precision metal components used in several munitions programs. Gayston's defense unit makes rocket motor tubes for the U.S. Army's Hydra-70 air-to-ground rocket program. It also provides liners and cartridges for 40mm ammunition rounds and components for 60-120mm mortar rounds, among other things.
  • Earlier this month, GD also acquired virtualization security software start-up Open Kernel Labs Inc. for an undisclosed amount. OK Labs provides virtualization software for securing wireless communications in the corporate and government sector. In addition, Open Labs creates apps and content for mobile devices and in-vehicle 'infotainment' systems. This acquisition will expand GD’s capabilities as a provider of secure mobile devices for public safety, civilian, military and commercial customers.
In 2011, General Dynamics spent $1.6 billion on six acquisitions, compared with three purchases in 2010 for $233 million.
Our Take:
Overall, we believe that General Dynamics will continue to be aggressive in making moves to remain competitive, while expanding its capabilities in growing markets such as cybersecurity and wireless.  
Over the next few years, companies which will succeed in this challenging environment will need to be flexible and make strategic adjustments where needed. We believe General Dynamics is taking these necessary steps, and that the company’s M&A strategy will expand its addressable markets and list of customers moving forward, while enhancing its ability to pursue future opportunities in growing markets.
At the end of last quarter, GD had about $2.54 billion in cash and cash equivalents in its war chest to put towards future acquisitions.

 

Contractor Survival Tactics: KEYW Continues To Make Acquisitions, Expands Into Commercial Market

In today’s challenging federal market, contractors of all sizes are evaluating their current strategies to achieve success over the next several years, while bracing for potential budget cuts that could significantly impact the way they do business moving forward.
At FIA, we are always watching the federal marketplace, and I personally have an interest in what’s going on in the mergers and acquisitions (M&A) arena surrounding cybersecurity, a market which is rapidly evolving and always seems to be in the news.
FIA Perspective:
KEYW makes two key acquisitions, which should significantly enhance revenues moving forward. Last week, KEYW said it planned to acquire software maker Poole & Associates Inc. for $126 million in an effort to boost its ability to win more work within the intelligence community.Based in Annapolis Junction, Md., Poole offers a broad range of high-end technical capabilities including systems and software engineering, program management support, and technical training.
For 2012, Poole is expected to generate about $60 million in total revenue, which should significantly enhance KEYW’s projected top-line growth. Poole is also expected to generate about $90 million in revenue for 2013, and had a total backlog of around $225 million at the end of the latest quarter.
In terms of contracts, Poole was recently awarded a five-year $150 million prime contract to provide systems engineering and program management support to an intelligence customer. Looking ahead, KEYW CEO Leonard Moodispaw said the acquisition will expand KEYW's footprint with one of its most important customers, while adding several prime contract vehicles that have significant growth potential with a key customer.
On Thursday (9/13), KEYW also announced that it’s purchasing Sensage Inc., a provider of advanced Security Information and Event Management (SIEM) and event data warehousing software solutions, for $34.5 million. In addition to providing KEYW an expanded commercial market opportunity, this acquisition strategically supports Project G, KEYW’s new cyber awareness and response platform geared towards critical infrastructure.
KEYW expanding its footprint into commercial and adjacent markets. In addition to acquisitions, KEYW has several new initiatives on the horizon in order to expand its addressable markets. KEYW recently said it continues to make strides on its “horizontal path” effort (Project G), which will target security for critical infrastructure. The company noted that Project G includes a national-security derived cyber-defense solution for critical infrastructure, and said the Sensage acquisition will be a key component of a new generation of cyber awareness products and services that KEYW is preparing for commercial launch in early 2013.
Elsewhere, KEYW has also invested (via its Flight Landata acquisition) in building an unclassified geospatial data system that is based on its knowledge of the classified version of a similar capability. This system will provide users in the first responder and national guard communities’ access to intelligence community (IC) quality data on devices, while expanding the company’s footprint beyond cybersecurity. In addition, KEYW said that it’s also pursuing opportunities in cloud computing, mobile device applications, classified and unclassified training programs, and synthetic aperture radar, which should all expand KEYW’s capabilities moving forward.
In the latest second quarter, KEYW saw its revenues jump 25% to $56.2 million, while noting that it’s “continuing to invest in key R&D initiatives, including Project G.” Previously, KEYW said that its “pipeline of new opportunities looks very promising in terms of new proposal activity, growth in existing programs, and opportunistic acquisitions."
Our Take:
Overall, we believe that KEYW will continue to be aggressive in making moves to remain competitive in the ultra-intense cyber market, especially in the wake of proposed defense budget cuts and increased competition from top-tier rivals.
With the cyber market being targeted as one of the few areas slated for growth over the next several years, numerous contractors are currently looking to invest in cybersecurity as an inorganic means of driving revenue growth, which should further fuel competition for cyber-related opportunities, acquisitions and market share in the near-term.
By continuing its aggressive M&A strategy and expanding into new and adjacent markets (and beyond the intelligence community), we believe KEYW is taking the necessary steps to remain competitive and carve out a niche in today’s evolving cyber market, which should ultimately payoff for the company and allow it to achieve success going forward. 

 

Contractor Survival Tactics: SAIC Splits Company In Two; Investing In Health IT Via Acquisitions

In today’s evolving federal marketplace, contractors of all sizes are evaluating their current strategies to achieve success going forward, while bracing for potential budget cuts that could significantly impact the way they do business over the next several years.
Over the past few months, one company which has been making noticeable moves is federal contracting giant SAIC, which recently announced plans to split into two separate companies, while also boosting its presence in the health IT sector with the acquisition of maxIT Healthcare. In addition to the split, SAIC also recently said it would divest its operational test and evaluation unit, which generates roughly $75 million in annual revenue.
FIA Perspective:
SAIC seeks to unlock long-term value/growth potential via business spin-off.  Last week, SAIC said it plans to spin-off its government services business, separating it from the unit that provides IT for the national security, health and engineering markets. Under the proposed plan, the government services unit is expected to generate about $4 billion in revenue for fiscal 2013, while the national security business will book around $7 billion in revenue.
SAIC said the move is intended to reduce potential operational conflicts of interest (OCI), especially for the government services unit, while allowing the two companies to be "more differentiated and more competitive in their own space." It will also provide SAIC more business opportunities – the company noted that it has already identified over 150 new opportunities within the Department of Defense alone worth around $25 billion. SAIC said it expects the spin-off to occur in the latter half of next fiscal year.
Over the past few years, a number of larger contractors in the defense and government services market have looked at spin-offs as a way to maximize value, while allowing the separate businesses to more narrowly focus on the markets they service. Recent examples include L-3 Communication’s spinoff of Engility, which encompassed the majority of L-3’s government services business, and ITT Corp.’s spin-off of its ITT Exelis and Xylem Inc. businesses.
Northrop Grumman has also been divesting units over the past several years. In 2009, the company sold its TASC advisory services unit to an investor group led by General Atlantic LLC and Kohlberg Kravis Roberts & Co. for $1.65 billion. In 2011, Northrop also spun-off its Huntington Ingalls shipbuilding business to shareholders after failing to find a suitable buyer.
SAIC expanding in Health IT sector via acquisitions. In July, SAIC agreed to acquire healthcare IT consulting firm maxIT Healthcare for $473 million. The acquisition expands SAIC’s capabilities in providing EHR implementation and integration services to its large base of federal healthcare customers, as they move toward the use of commercial-off-the-shelf (COTS) EHR applications.
maxIT, which is the largest private independent healthcare IT consulting firm in North America, provides a wide range of health IT services and solutions primarily to commercial hospital groups and other medical delivery organizations. These include IT strategy and planning, electronic health record (EHR) implementation and optimization, and management consulting across a broad range of activities such as accountable care transformation.
Last year, SAIC also acquired Vitalize Consulting Solutions (VCS), a provider of clinical, business and IT services for healthcare enterprises, for an undisclosed sum. Combined, these two acquisitions will allow SAIC to compete for new opportunities in the growing health IT market, an area where the company previously had little experience.
Besides acquisitions, SAIC has also been making divestitures to become more streamlined and efficient, including recent plans to sell its operational test and evaluation business (mentioned above). In April 2011, SAIC also sold certain assets that provided IT services to international oil and gas companies. These assets, which were sold to Wipro Ltd. for an undisclosed sum, included SAIC's U.S. oil and gas IT services business along with units SAIC Ltd., of the U.K.; Science Applications International, Europe S.A.R.L., of France; SAIC India Private Ltd., of India; and its Middle East operation, SAIC Gulf LLC.
At the time, SAIC said the sale of the oil and gas assets would enable the company to better focus on its strategic growth areas, including market segments in the energy sector, such as smart grid, renewable energy implementation, and energy efficiency, where it has successfully built its business through organic growth and acquisitions.
Previous spinoffs could set the stage for further divestitures within the government sector. Looking to the future, the SAIC, L-3 and ITT spin-offs could serve as a model for other large and mid-sized conglomerates looking to reorganize themselves by breaking-off units to survive in today’s challenging federal marketplace.
It’s also worth noting that investors prefer to invest in publicly-traded companies that are “pure plays,” or single-industry enterprises, which could further drive the trend towards spinning-off or divesting various units going forward. Companies which could potentially spin-off units in the future include mid-tier defense contractors like Textron and Kratos Defense & Security Solutions, and tech giants such as Hewlett-Packard or VMWare.
Our Take:
Overall, we believe that SAIC will continue to be aggressive in making moves to remain competitive while streamlining operations, especially in the wake of proposed defense budget cuts and a challenging federal marketplace which is constantly evolving. We believe SAIC sees the writing on the wall with regard to the slowdown in the federal IT sector, and will be making investments in areas that are slated for growth over the next several years.
Moving forward, companies which will succeed in this challenging landscape will need to be flexible and make strategic adjustments where needed, and we believe SAIC is taking the right steps to remain competitive in these uncertain times.

 

 

CACI Performing Admirably In Today’s Evolving Federal Market

At FIA, we are always checking the pulse of the federal contracting marketplace, and keeping track of how various vendors are executing on their strategies to achieve success going forward.
Last week, we listened in on CACI International Inc.’s earnings call to investors, and came away impressed with some of the numbers disclosed on the call, and outlook for the company moving forward. Below we highlight some of the details CACI provided on the call.
FIA Perspective:
CACI posts solid financials in FY2012 despite challenging market conditions. For fiscal 2012, CACI’s revenues rose 5.5% to $3.77 billion, compared with $3.57 billion in fiscal 2011. At the same time, the company saw its net income climb over 16% to $167.6 million, up from $144.2 million a year ago.
For fiscal 2013, CACI said it expects revenues to be between $3.8 billion and $4 billion and net income to be between $160 million and $167 million.
On its earnings call, CACI noted that it has “a large and established client base providing a steady stream of new opportunities.” Because the company offers a broad range of capabilities and services, CACI said it maintains a large addressable market, and is “executing on roughly 2,200 ongoing contracts or task orders.”
CACI also said its “new business win rate and high re-compete win rate allow it to continuously refresh its current program and add new business across its platform.” This large addressable market provides CACI room to maneuver as it sees opportunities, while the diversity of its clients and contracts minimizes the risk associated with any individual program, the company said.
CACI seems to be clicking on all cylinders in evolving federal market. Looking ahead, CACI said it has “examined its addressable market of approximately $235 billion and identified 10 market segments that are high-priority missions for its clients, including Intelligence, Cyber, Business Systems and Healthcare.  
In fiscal 2012, CACI noted that it had its “best year yet for funding orders,” totaling more than $3.9 billion, which is up 8.8% over fiscal 2011. Its fiscal 2012 awards also reached record levels and totaled $4.5 billion, up 40.8% from fiscal 2011. The company’s fourth quarter awards, like those throughout the year, represent strong growth in CACI’s Cyber, Business Systems, Healthcare and Intelligence markets and continued volume in its C4ISR, Enterprise IT and integrated security solutions markets, the company said.
As its recent contract awards and funding orders illustrate, CACI continues to “see attractive opportunities for growth in its markets and believes it’s well positioned to capture those opportunities.” CACI closed the year with a total backlog of $7.2 billion, a 5.9% increase over last year. In addition, its funded backlog grew 7.2% over last year as well.
As CACI looks to fiscal 2013, its opportunity pipeline “remains very strong.” Specifically, at the end of the fourth quarter, CACI had more than $9 billion in supported proposals under evaluation with various agencies, and it expects to submit another $11.7 billion of proposals over the next 6 months. Over half of this pipeline is for stand-alone contracts and task orders, which will fuel the company’s revenue growth, CACI noted.
M&A remains a key part of CACI’s long-term growth strategy. Layered on top of CACI’s organic growth focus is its strategic mergers and acquisitions (M&A) program. Over the past 20 years, CACI highlighted that it has completed more than 57 acquisitions, which has extended the company’s client base, solutions and addressable markets.
CACI noted that its recent acquisition of APG and Delta Solutions are examples of how it uses M&A to support its long-term growth objectives. APG boosts CACI’s capabilities in the Oracle E-Business Suite, while Delta expands its SAP and Momentum System capabilities. Both acquisitions provide CACI core capabilities that enable the growth of its Business Systems market segment, while supporting its government transformation activities.
In the future, CACI said it expects to continue to use strategic M&A in a “disciplined way” to complement its organic growth, ensuring it will remain aligned with the company’s clients' highest priorities, while creating “sustainable, long-term organic growth.”
Analyst's Take
Overall, we believe CACI has done an admirable job in identifying areas that are slated for growth, including Intelligence, Cyber, Business Systems and Healthcare. Going forward, it will be interesting to see if CACI can continue to outperform in the federal marketplace, while remaining agile and executing in today’s challenging and evolving market.

SRA Holding Its Own In Today’s Challenging Federal Marketplace

At FIA, we are always checking out how various vendors are performing in the federal contracting marketplace, and keeping track of how these firms are executing on their various strategies to achieve success going forward.
In this week’s installment, we would like to highlight SRA International Inc., which provides technology and strategic consulting services and solutions primarily to U.S. government clients (accounted for 98% of SRA’s total revenues for the quarter ended March 31, 2012).
Based in Fairfax, VA., SRA provides services, systems, and solutions that enable mission performance, improve efficiency of operations, and/or reduce operating costs. Currently, the company has a balanced portfolio of clients and is organized into four business groups: Civil, Defense, Health, and Intelligence, Homeland Security and Special Operations.
FIA Perspective:
SRA has a nice blend of contracts, which includes several top-tier programs. SRA’s contract portfolio encompasses a nice mix of IDIQs, GWACs, and IQCs, which gives the company a solid overall balance in today’s competitive market. SRA’s top contracts include spots on the GSA’s $50 billion Alliant program, DHS’s $45 billion EAGLE program, GSA’s $25 billion MILLENNIA program, and the Army’s $23 billion R2 program, among others.
In addition, SRA was also recently named as an awardee on the National Institutes of Health’s (NIH) $20 billion CIO-SP3 contract vehicle, a follow-on to the CIO-SP2 contract. This 10-year, multiple-award IDIQ contract supports the Federal Enterprise Architecture, the Department of Defense Enterprise Architecture, and the Federal Health Architecture. Under the predecessor contract (CIO-SP2), SRA performed admirably, winning about 14% of the work, or $404 million in revenues from 2001 to 2012.
In April, SRA also was awarded a spot on the VA’s $12 billion T4 program, which is expected to run for 5 years. Thus far, SRA has won 8 task orders under the new program, recording about $12.5 million in total revenues.
In mid-June, the U.S. Transportation Command (USTRANSCOM) also awarded SRA its Defense Personal Property System (DPS) contract, which carries a total value of $17.6 million if all options are exercised.  Under the contract, SRA will manage two major DPS software releases, in addition to providing training and learning management, engineering services, configuration management and operations maintenance support.
Elsewhere, SRA also received (in May) the sole award for the U.S. FBI’s operational response and investigative online network (ORION) program. The award includes one base year plus seven options for one year each, and carries a value of $19 million if all options are exercised. ORION is the FBI’s next generation crisis information management system.
SRA’s top federal customers currently include the Defense Department, Air Force, Marine Corps, Defense Logistics Agency, Agriculture Department, Food and Drug Administration, Federal Aviation Administration, and Homeland Security Department, among others. 
Going private will allow the SRA to cut costs, while the company aims to improve efficiencies. In July 2011, Providence Equity Partners completed the acquisition of SRA for $1.88 billion. Since the acquisition, SRA has brought in a new CEO in Bill Ballhaus and has divested several businesses so it can focus on the core IT services business. Looking ahead, SRA should benefit from being a private company, as the company will no longer be required to make SEC-related disclosures, which should allow the company to cut costs while it looks for further operating efficiencies.
To maintain a competitive cost position in this challenging market environment, SRA said it continually looks to improve the efficiency of its internal operations. As part this effort, SRA has initiated a reduction in its indirect labor force during the fourth quarter of fiscal 2012. This will result in indirect cost savings for SRA, some of which will be reinvested in the company’s corporate growth initiatives moving forward.
SRA posts solid top line results, while bottom line struggles. From July 31, 2011 through March 31, 2012, SRA reported a net loss of $21.5 million on revenues of $1.15 billion, according to the company latest quarterly report. During that same time frame, SRA said its organic growth rate slipped 3.4%.
In the report, SRA noted that it received approximately $227.1 million and $1.11 billion of total contract awards during the three and nine months ended March 31, 2012, respectively. At the end of March, SRA also had a total backlog of $3.86 billion, of which $877 million was funded. SRA said it expects to recognize approximately 26% of the above backlog as revenue within the next twelve months.
Looking ahead, SRA’s growth strategy includes investing in existing services while expanding its offerings and customer base worldwide through strategic mergers and acquisitions.
While SRA expects the federal government to make continued investments in areas such as cyber security, operating efficiency, intelligence, surveillance and reconnaissance, and to continue supporting the intelligence community as well as special forces capabilities, the company maintains its belief that the constrained government spending environment will result in “modest market growth for the foreseeable future requiring an increase in market share to achieve more robust growth.”
Our Take:
Overall, we like that SRA is looking to broaden its client base and expand its offerings, while taking steps to improve its operating efficiency. Looking ahead, we believe SRA may face difficulties in competing with larger, more well-established contractors in today’s evolving federal market.
Within the federal market, we expect mid-tier contractors like SRA to face increasing challenges in winning new contracts due to tightening budgets and intense competition from top-tier rivals. While SRA has had success winning numerous large contracts in the past, and is doing a decent job of winning task orders under these major contract vehicles, we believe the company will have to step-up its game to increase market share in today’s intensely competitive federal market, and to achieve greater success going forward. 

 

 

VMware Making Moves To Win Market Share In Virtualization/Cloud Markets

The cloud computing and virtualization markets seem to be hot topics in the technology sector days, which places small- and mid-tier firms providing these technologies at the forefront of exciting changes taking place within the marketplace. Within the federal group at Deltek, we are always keeping tabs on these hot sectors, and I personally have an interest in what’s going on in the Mergers and Acquisitions (M&A) arena surrounding these hot markets.
Within these sectors, one company which has been making noticeable moves over the past few months is virtualization software juggernaut VMware, which has been among the most active participants in the M&A market, snapping up small- and mid-tier players to add “breadth and depth” to its product lines.
Last week, VMware agreed to acquire software-defined networking form Nicira for $1.26 billion, as it continues its efforts to virtualize all aspects of the data center. Nicira, which is VMware’s largest acquisition to date in terms of price, provides software that creates an abstraction layer between servers and networking gear, allowing organizations to decouple the network topology from the equipment, creating virtualized pools of networking capability. The deal is expected to close by the end of the year.
FIA Perspective:
VMware continues to make acquisitions in virtualization and cloud markets. Over the past several years, acquisitions have been an integral part of VMware’s growth strategy, and the company has been focusing on smaller firms which can be easily integrated into its existing product portfolio, thereby expanding its product lines in the areas of virtualization and cloud management.
Besides the Nicira purchase, VMware has been making other recent moves in the M&A arena, and we highlight each of these acquisitions below:
  • Last month, VMware acquired cloud computing provider DynamicOps Inc. for an undisclosed sum. Burlington, Mass.-based DynamicOps develops solutions that help in running virtual workloads (hypervisor) across diverse cloud platforms. Hypervisor software (also known as virtual machine manager) allows several operating systems to share a single hardware host.
  • In May 2012, VMware also acquired Wanova Inc., a cloud-based desktop virtualization solutions provider, for an undisclosed amount. The Wanova technology makes thick or thin Windows devices manageable in a very flexible and centralized way, and complements VMware’s View product line and emerging horizon portfolio of multi-device end-user solutions.
  • In late April, VMware purchased Cetas, a big data startup that provides analytics atop the Hadoop platform, for an undisclosed amount. This acquisition is expected to strengthen VMware’s Cloud Applications Platform moving forward.
In 2011, VMware completed 7 acquisitions to expand its portfolio in the areas of virtualization and cloud computing, including Digital Fuel, Neo Accel, Packet Motion, Shavlik, SlideRocket, Socialcast and WaveMaker. It also acquired certain assets from EMC's Mozy cloud-based data storage and data services.
Overall, we believe VMware will continue to look to acquisitions to drive its long-term growth strategy, and allow it to better compete with top-tier rivals (like Microsoft and Citrix Systems) in the high-growth virtualization and cloud computing markets. At the end of the latest quarter, VMware had about $5.35 billion in cash and cash equivalents in its arsenal to put towards further acquisitions.
VMware posts solid results in 2Q. In the latest second quarter, VMware saw its revenues rise 22% to $1.12 billion compared with last year’s second quarter. At the same time, the company said its per-share profit minus items rose 24% to 68 cents from 55 cents in the year-earlier quarter. On its earnings call, VMware noted that its “deal pipeline remains very strong,” and that it “expects to have a solid second half of 2012.”
Looking ahead, VMware anticipates revenue in the range of $4.54 billion to $4.64 billion for fiscal 2012, an increase of 20.5% to 23% from fiscal 2011, primarily driven by strong license revenue growth. It also expects operating margins in the range of 30.25% to 31.25% for 2012, the company said.
Management shuffle should benefit both VMware and EMC.  A few weeks ago, VMware and its majority owner, storage giant EMC Corp. (which owns 80% of VMware), announced a management reshuffle that will give the CEO position at VMware to Pat Gelsinger, an EMC executive. He will be replacing Paul Maritz, a former Microsoft executive, who will be taking the Chief Strategist position at EMC. Gelsinger plans to take over the reins at VMware in September.
With the executive swap, Maritz may be in line to become the new vice-chairman at EMC, and looking towards replacing current EMC Chief Executive Joe Tucci at some point in the not-so-distant future. Tucci, who had recently planned to retire in 2012 (but has now backed off), is 65 years old, and probably relatively close to the end of his tenure as CEO.
Overall, this will likely be a smart and smooth transition for both companies, with the executive swap potentially enhancing both VMware's and EMC’s CEO positions moving forward. The executive moves are also likely to allow VMware and EMC to better-align their product portfolios, while boosting the potential for new software-based, higher-margin revenue streams at EMC.
Around the time the executive change was announced, it was also rumored that VMware and EMC may be planning to spin-off some of their cloud assets into a separate company, according to a report by GigaOm. The article noted that the new company would include VMware’s Cloud Foundry platform-as-a-service division and EMC’s Greenplum business, as well as an EMC/VMware joint venture in the infrastructure-as-a-service segment called Project Rubicon. GigaOm noted that the spin-off would be put together to build a cloud computing services firm that could complete with top rivals Google, Microsoft and Amazon.com.
Conclusion:
Any way you slice it, VMware is positioning itself to be a top-tier performer in the virtualization and cloud computing markets. With the recent management changes, acquisitions, and potential spin-off of its cloud assets, the company is making noticeable moves to establish a market leading position in these high-growth sectors, while enhancing its product portfolio to pursue growth within the virtualization and cloud markets over the next several years. 

 

Oracle Uses Cloud Computing/Social Media Acquisitions To Build Oracle Cloud

Business software titan Oracle Corp. has been on acquisition spree over the past six months, snapping up several small- and mid-tier firms to expand its capabilities in both the cloud computing and social media markets, two areas poised to see significant-growth over the next several years.
Below, we highlight some of Oracle’s recent purchases, and breakdown how these purchases can benefit the company moving forward.
  • Last week, Oracle acquired San Francisco-based Involver for an undisclosed sum. Involver provides social market language and a social media development platform that enables developers to create highly-customized marketing applications for social media sites and web campaigns. Involver will provide Oracle with a powerful toolset for helping brands create custom applications as they adjust to evolving changes in marketing brought on by social sites like Facebook, Twitter, and YouTube.
  • In early June, Oracle announced that it was purchasing Collective Intellect, a social media analysis firm, for an undisclosed sum. With this acquisition, Oracle is aiming to enhance its ability to analyze social media for customers. Collective Intellect’s cloud-based software claims to be able to scan Twitter messages and blog posts to determine a user’s intent and interests.
  • In May, Oracle announced its plans to acquire social marketing platform Virtue for $300 million. Over the past few years, Vitrue has grown to become one of the most popular solutions for big companies trying to win Facebook fans and push out marketing messages to the news feed. Beyond Facebook, Vitrue helps marketers manage their presences on Twitter, YouTube, Pinterest, and Instagram, among other platforms.
  • In April, Oracle completed the acquisition of Taleo Corp., a provider of cloud-based talent management solutions, for $2 billion. Taleo gives Oracle tools that help firms manage human resources, recruit employees and set compensation.
  • In late March, Oracle bought ClearTrial, a cloud-based company in the business of biopharmaceutical and medical trials. This acquisition will become a key part of Oracle’s closed-loop clinical trial management offering, with features guiding the client from planning to payments.
  • In January, Oracle completed the acquisition of RightNow Technologies Inc. for $1.5 billion. RightNow provides cloud-based customer services, including solutions to help companies handle customer interactions across a multitude of channels, including call and contact centers, the Web and social networks.
Looking ahead, Oracle believes that an active acquisition program is “an important element of its corporate strategy,” as it strengthens its competitive position, enhances the products and services that it offers, and expands its customer base. Over the past few years, Oracle noted that it has invested billions of dollars to acquire a number of companies, products and services, and technologies that have enhanced its existing offerings and extended its addressable markets.
Moving forward, Oracle intends to continue to make acquisitions to advance its corporate strategy, and had about $30.7 billion in its war chest at the end of the latest quarter to pursue further acquisitions.
With Oracle making several acquisitions within the cloud computing sector over the last few years, let’s check-out what the company’s cloud strategy encompasses moing forward. Currently, Oracle’s cloud strategy offers customers a broad portfolio of enterprise-grade software and hardware products and services that are secure, scalable and reliable, while enabling interoperability and portability.
Overall, Oracle offers customers a “pragmatic roadmap” to adopt the cloud computing environment that best fits a specific customer’s needs, whether that is a “private” cloud or a “public” cloud. Private clouds are basically exclusive to a single organization, whereas “public” clouds are used by multiple organizations on a shared basis and hosted and managed by a third-party service provider.
As part of its cloud strategy, Oracle introduced its “Oracle Cloud” offering in early June, which includes the company’s cloud software subscription offerings such as Oracle Fusion Human Capital Management Cloud Service, Oracle Fusion Customer Relationship Management Cloud Service, Oracle RightNow Customer Experience and Oracle Taleo Talent Management Cloud Service, among others. All of these offerings provide Oracle customers with software application functionality within a cloud-based IT environment that the company manages and offers via a subscription-based model. Oracle Cloud also includes software platforms within a cloud-based IT environment that it manages and offers to customers via a subscription-based model, including Oracle Database Cloud Service and Oracle Java Cloud Service.
Within the federal market, spending on vendor-furnished cloud computing services is expected to grow from $734 million in fiscal 2012 to $3.2 billion in fiscal 2017 at a compound annual growth rate (CAGR) of 34%, according to a Deltek report. On a global basis the numbers are even greater - the global cloud computing market expected to grow from $40.7 billion in 2011 to more than $241 billion in 2020, according to Forrester Research.
Looking ahead, we expect that Oracle’s Cloud offering will substantially increase the company’s ability to gain market share in this high-growth growth market over the next several years. Currently, Oracle only takes in about $1 billion in revenue from its cloud computing solutions, so the company should be able to exponentially grow its cloud-related revenues (on both the federal and global levels) moving forward.
While potential growth in cloud market looks rosy, we also wanted to note that Oracle will face stiff competition from top-tier rivals (Microsoft, IBM, Hewlett-Packard, SAP AG and Salesforce.com) in competing for cloud computing market share over the next few years. In addition, we also believe Oracle may see some integration hurdles related to its numerous cloud acquisitions over the past year, and the weaving together of these various cloud capabilities to develop a streamlined cloud computing offering in the near-term.

 

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