By Sebastian Lagana, Analyst
IS&T’s diverse client base helped offset legacy defense program reductions in 2014 and positioned the company for improvement in 2015
General Dynamics Information Systems & Technology (IS&T) surpassed quarterly expectations during 4Q14, with an 8.3% year-to-year revenue contraction exceeding its revenue performance outlook, as IS&T received a steady flow of IT support-oriented work, though not enough to offset volume contractions on legacy communications programs. Despite this shift in sales mix, IS&T was also able to leverage corporate initiatives to trim its cost structure, resulting in the group’s strongest operating margin performance in two years.
IS&T’s ability to penetrate addressable international and civilian markets and willingness to take on work that many competitors eschew, such as contact center engagements, will also benefit the company in 2015, when IS&T expects to trim its revenue contraction rate to the midsingle digits. Additionally, scale from business segment consolidation will augment corporate profitability initiatives, driving operating margin expectations above the 9% threshold.
IS&T’s healthcare IT business is positioned to capture increasingly lucrative, higher-value engagements
Over the past 12 months, healthcare opportunities have been key to offsetting legacy defense-based demand contractions, particularly in engagements centered on mobile communications systems, largely delivered from the consolidated C4 Systems group. Despite this, many of the captured engagements have been resource-heavy, lower-value call center engagements in support of the Centers for Medicaid and Medicare Services (CMS). While effective in buoying the top line, IS&T retains the requisite capabilities to play further up the value chain, an area of focus as the company moves into 2015.
The first, and by far largest, opportunity is the U.S. federal government’s Defense Healthcare Management System Modernization (DHMSM) program, an $11 billion RFP for which four teams of leading federal IT contractors teamed up and submitted bids by the end of October. IS&T, via its GDIT unit, is teaming with PwC, DSS Inc. and MedSphere in hopes of winning the award, expected to be issued in July 2015.
A second, smaller area is related to IS&T’s provision of an analytics-driven payment platform for Arkansas, a solution that has been acknowledged by the CMS as an implementation model for state-level payment transformation programs. Given IS&T’s relatively limited state & local footprint and the increasing utilization of analytics-driven solutions by healthcare organizations, we believe it represents a solid case study for use in engaging with states seeking to improve the efficiency of their internal payment platforms.
We feel programs such as these better align with IS&T’s desired level of engagement with healthcare clients, which IS&T has struggled to achieve over the past 24 months. By moving up the healthcare value chain, IS&T will offset persistent revenue pressure and increasingly contribute to corporate profitability goals.
Providing secure networks to joint military operations increases international visibility for IS&T’s cyber portfolio
Much like many of its peers, General Dynamics enjoys a solid reputation in international defense product markets, albeit largely centered on the company’s Land Systems divisions. The IT and professional services business, however, continues to trail in international market penetration and, where services-based deal wins occur, many center on C4ISR-related platform maintenance, modernization and upgrade (MM&U) and related integration work.
Recently, however, traction has been observed in core IS&T businesses such as the use of IS&T’s Trusted Network Environment for secure communications provided to U.S. Central Command and NATO/coalition military partners. With defense-related cyber generally dominated by companies such as Raytheon, we believe the utilization of IS&T’s secure network capabilities may generate new demand from U.S. allies using the system in joint operations with U.S. forces operating overseas.
Please feel free to use this content with TBR and analyst attributions. Contact Sebastian Lagana at (603) 929-1166 or sebastian.lagana@tbri.com for additional commentary.
