By Sebastian Lagana, Senior Analyst
IS&TS is well-positioned to succeed as the segments split into new business units based on improved portfolio synergy
Northrop Grumman Information Systems and Technical Services (IS&TS) reported consolidated revenue contraction of 10.4% during 4Q15, driven primarily by weakness in the IS segment related to volume declines under ongoing programs. Despite this, tight delivery cost management supported profitability expansion in the quarter, helping assuage the sting of difficult top-line results through operating profit growth, fueled by a 10.4% operating margin.
Moving into 2016, the two units will cease to function as stand-alone businesses, with services-oriented components from IS combining with TS to create a new business unit, Technology Services. The remaining product component from IS now resides in the new Mission Systems segment with the legacy Electronic Systems group. The restructuring aims to benefit from portfolio synergies, improving wallet share capture and driving further cost reductions.
Northrop’s investment in Cync provides access to niche capabilities to broaden its cyber portfolio
In November Northrop Grumman and the University of Maryland, Baltimore County’s R&D community, bwtech@UMBC, announced Ayasdi as the sixth startup to graduate from their collaborative Cync cyber incubator program. Ayasdi fills a niche in the cybersecurity market as a provider of machine intelligence software leveraging advanced analytics to improve users’ cyber situational awareness. Northrop’s role in Cync provides the opportunity to assess participants and solutions that address specific problems related to cybersecurity, a go-to-market underpinning for IS&TS. Past graduates specialize in other niche areas such as database security, mobile device security and open-source programming software, providing Northrop access to a range of potential small business partners to fill cyber portfolio gaps.
Northrop’s less capital-intensive strategy to round out its cyber capabilities is similar to General Dynamics, which in 4Q15 invested in Virginia-based cyber startup accelerator Mach37. Both companies differ in this way from peer Raytheon, which has invested heavily in cyber-related acquisitions over the past five years to build a robust cyber portfolio. While emphasizing partnerships with academia and startups facilitates returning value to shareholders through alternative means of capital deployment such as share repurchases and dividend payments, it also presents risk, as investments could go to waste if startups fold, get acquired by a competitor or otherwise fail to benefit Northrop in the long term.
Efforts to build up a presence in Australia generate momentum via contract wins in the region
Northrop’s efforts to grow in Australia paid off in 4Q15, when its Australian subsidiary won a contract extension from the Royal Australian Air Force to continue providing logistics support for F/A-18 Hornet target designation systems and a Department of Defence cyber systems integration contract. Northrop’s greater access to defense programs in the country results from investments such as the 2013 acquisition of logistics specialist Qantas Defence Services and participation in Team Defence Australia, which provides access to Australia-based suppliers. Fostering relationships with local vendors will remain key to Northrop’s Australia strategy, evidenced by the creation of a supply chain manager role based out of Canberra and the inclusion of Perth-based iWebGate into the Cync cyber accelerator program.
Despite its success in the Australian logistics market, a changing competitive landscape could introduce new challenges and opportunities for Northrop in the region. The sale of Lockheed’s IT operations in Australia could create greater competition in the logistics market against a vendor like Leidos, which recently captured a large-scale logistics deal in the U.K. As a launching pad for Northrop’s broader APAC expansion, growth in Australia remains critical to offsetting continued softness in core U.S. markets.
Please feel free to use this content with TBR and analyst attributions. Contact Sebastian Lagana at +1 603.929.1166 or via email at sebastian.lagana@tbri.com for additional analysis.
