By Sebastian Lagana, Analyst
Despite outperforming projections in 1Q14, General Dynamics IS&T upheld 2014 guidance; however we expect IS&T to exceed expectations
General Dynamics IS&T’s 1Q14 vastly overachieved corporate revenue expectations, with a year-to-year revenue contraction of 6.8% significantly exceeding 2014 revenue growth guidance of -20%. The company’s GD IT sub-unit remains IS&T’s top performing segment, driven largely by its healthcare business, while stability injected into IS&T’s ISR business was enough to help offset significant downsizing within the company’s communications-related business.
Although IS&T greatly exceeded revenue expectations during the quarter, the company declined to update guidance for the remainder of the year, indicative of the “lumpy” nature of its healthcare business and the related overall impact on its IT sub-unit. Despite this, we are increasing our expectations for IS&T for full year 2014 by 250 basis points to a 17.5% year-to-year contraction. We also anticipate General Dynamics to adjust its guidance at the half-year mark, as full-year appropriations gain more clarity.
General Dynamics is leveraging existing, platform-based relationships to wedge its way into international services engagements
General Dynamics, like many of its competitors, has long been a player in international defense product markets, primarily through the company’s Land Systems division. Delivered via Land Systems’ Spain-, Germany-, Austria- and Switzerland-based subsidiaries, the company has well established relationships with countries for the provision of vehicles, combat systems and munitions. Similarly to peers such as Raytheon and Lockheed Martin, however, the company had limited penetration of related IT and professional services business. As core U.S. markets have come under increasing pressure, however, General Dynamics has increased its focus on cross-selling, or independently selling, its capabilities in IT, systems integration, C4 systems and maintenance, modernization and upgrades (MM&U) work.
IS&T is increasingly penetrating the international services-focused defense market, particularly in Europe, due largely in part to the restructuring actions it took in 2Q13 to reposition its international unit for growth. IS&T’s contract wins from the Portuguese Navy to upgrade sonar systems through the implementation of the ECLIPSE adjunct processor, as well as an engagement with Germany to upgrade P-3C Orion planes with improved mission and acoustic systems, mirror efforts by competitors such as Lockheed Martin IS&GS, Northrop Grumman IS&TS and L-3 Communications to increase their penetration of international defense markets through MM&U engagements.
General Dynamics is positioning itself to be a leading provider of brokerage solutions within the public sector
General Dynamics released two new brokerage solutions for government customers in 1Q14, including its online GDNexus ISR portal, which connects ISR clients with companies developing ISR-related analytics, video processing and visualization solutions, as well as its Edge Innovation Network Knowledge Management Solution for the DHS, which connects government clients needing public safety solutions with a network of qualified vendors.
TBR believes General Dynamics is positioning itself to be a leading provider of brokered solutions to U.S. government clients, leveraging the company’s vast procurement and supplier networks to capture a share of highly specialized technology while mitigating related portfolio development costs. As buying behavior increasingly shifts towards finding the best value proposition, regardless of the company providing it, a brokerage model creates an ideal buying platform for agencies looking to reduce costs while maintaining quality by encouraging competition between small companies eager to win deals from government clients. We anticipate IS&T will provide smaller companies with assistance in delivering offerings on a larger scale in order to meet the needs of major federal agencies, in turn capturing a small slice of revenue with minimal associated business development and portfolio expansion investment.
Please feel free to use this content with TBR and analyst attributions. Contact Sebastian Lagana at 603.758.1857 or sebastian.lagana@tbri.com for additional commentary.
