HAMPTON, N.H. (April 2, 2012) — According to Technology Business Research Inc., budget turmoil and defense cuts continued to impact the public sector IT services space in 4Q11. Overall budget ambiguity, prolonged decision cycles and delays in funding combined to take a toll on IT services vendors serving the U.S. federal government. As a result, most firms suffered top-line contraction or low-single-digit growth in 4Q11; many also realized lower annual sales.
Average revenue growth for the 20 firms in the PSBQ Public Sector IT Services Benchmark was -3.1% in 4Q11, falling from 0.3% in 3Q11 and decelerating for the fifth consecutive quarter. Average organic growth decelerated for the fourth straight quarter despite a slight uptick in M&A activity in 4Q11, falling to -5.8% from -1.9% in 3Q11 and 0.7% in 2Q11.
Average sequential growth in backlog for the 20 firms in the PSBQ Public Sector IT Services Benchmark also fell in 4Q11, dropping to -4.6% from 4.2% in 3Q11. According to John Caucis, senior analyst and Public Sector practice manager, “TBR believes the sharp decline in sequential backlog growth in 4Q11 clearly illustrates that budget turmoil and defense cuts continue to dominate the public sector IT services landscape. Looking ahead to 2012, the recent triggering of the sequestration process and the upcoming presidential and congressional elections are expected to further complicate the federal budget process. As a result, a ‘perfect storm of uncertainty’ is set to descend on the federal IT spending space in the upcoming year, which may linger into 2013.”
Several vendors have guided for top-line contraction in 2012, though some expect to grow despite the market environment. Many of the largest IT contractors have guided for top-line contraction in 2012, implying a second straight year of falling sales: Raytheon IT Services’ revenue is projected to be flat to down 5% in 2012; L-3 Communications projects its 2012 top line will fall between 4% to 5% from 2011 (including the impact of the Engility spin-off); Northrop IS&TS’ 2012 revenue is expected to fall 3% to 6% from 2011; and Lockheed Martin expects IS&GS’ 2012 revenue to fall between 6% and 8% from 2011. General Dynamics has guided for flat sales growth in 2012 for its IS&T unit. TBR believes these firms have been the most acutely impacted by the reductions in defense spending and the drawdown of operations in Iraq and Afghanistan.
SAIC appears to be an exception among the large-cap firms, projecting top-line growth between 1% and 6% in 2012. Several smaller contractors also expect sales growth in 2012. Booz Allen Hamilton expects growth in its FY13 (beginning calendar 2Q12) to be in the low- to mid-single digits. ManTech expects 9% to 10% growth in 2012, and CACI expects 8% to 13% growth in revenue in 2012.
TBR believes the firms expected to realize growth in 2012 will continue to be active on the M&A front despite also being affected by lower defense spending and the drawdown of operations in the Iraq and Afghanistan theaters, as these firms have been the most aggressive in realigning their portfolios to federal spending priorities C4ISR, counterterrorism, intelligence, cybersecurity and IT modernization.
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Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, networking equipment, wireless, portal and professional services vendors. Serving a global clientele, TBR provides timely and accurate market research and business intelligence in a format that is uniquely tailored to clients’ needs. TBR analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis.
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