by Joseph Walent, Analyst
Anticipating a decline in its more traditional defense-oriented streams, General Dynamics IS&T bolstered its revenue by an estimated $200 million in 4Q11 with the completion of its acquisition of Vangent. General Dynamics IS&T continued to adjust to the realities of uncertainty in government spending cycles; however, the unit was not unscathed, realizing a 0.5% year-to year contraction in revenue in 4Q11 (revenue would have been down 7.3% without the estimated contribution of Vangent).
While revenue growth took a step back, General Dynamics IS&T’s ongoing restructuring and headcount rationalizations helped to deliver improved operating income, yielding operating margin of 10.8% for the period; however, ongoing operational improvements will not be enough to sustain margin performance, as operating margin is expected to drop below 10% in 2012 due to lower equipment orders, prolonged decision cycles and delayed funding.
IS&T’s ongoing shift of resources and focus to the higher demand areas of government IT spending, particularly ISR, cybersecurity and healthcare IT, proved instrumental in ensuring a less dire outlook for 2012. Total backlog for IS&T including estimated revenue on ID/IQ contracts was nearly $32 billion.
Leveraged expansion of Health IT service capabilities
General Dynamics quickly integrated Vangent in 4Q11, expanding its performance in healthcare services globally with new service agreements with Departments of Health in both the United Kingdom and the United States. Crucial to each engagement are health data analytical services. The engagement in the U.K. involves the development of the Calculating Quality Reporting Service (CQRS) assessment of quality outcomes in support of the U.K National Health Service quality reward system.
The movement in the U.S. toward implementing Accountable Care Organizations (ACO) and shifting the reimbursement policies to accentuate positive outcomes over number of procedures performed provides additional opportunities for engagements similar to the CQRS.
Launch of cloud-oriented offerings aimed at public sector clients
General Dynamics released a cloud-based email offering in 4Q11, Email as a Service (EaaS). IS&T’s EaaS services provide federal agencies with flexible service at a lower cost of ownership while maintaining compliance with federal cybersecurity standards and will compete with similar offerings from commercially based providers, such as Google.
TBR believes General Dynamics IS&T will increase development of cloud-based services in 2012, which will be key continued revenue growth in the face of reduced defense spending expansion predicted for the next five years.
Actively promote cybersecurity capabilities for both public and commercial clients
General Dynamics announced soon after the close of 2011 the opening of its Cyber and Intelligence Solutions center in Annapolis Junction, MD. This facility effectively consolidates the breadth of the company’s cyber capabilities and provides prospective clients with technical demonstrations.
As the imperatives to secure defense, communication, energy and data networks mount, General Dynamics and its Government IT service peers are focusing on supplanting revenues lost from discontinued programs and slower overall IT spending by federal agencies with cybersecurity as an exception. TBE anticipates General Dynamics will be actively hunting for cybersecurity acquisitions, especially in the network monitoring field.
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