Through the start of 2021, the government services ecosystem buzzed with excitement around the Biden administration’s budget request and proposed infrastructure package. Contractors expect federal spending to flow toward initiatives such as IT modernization, supply chain risk management, cybersecurity and ESG (environmental, social and corporate governance) issues.
Top executives in the government services space highlighted opportunities and strategic initiatives in their Q1 earnings calls, according to Bloomberg. Specifically, the companies represented were ManTech International Corp. (MANT); Booz Allen Hamilton (BAH); Leidos Holdings (LDOS); ICF International (ICFI); Parsons Corp. (PSN); PAE (PAE); Vectrus (VEC); CACI International Inc. (CACI); Jacobs Engineering Group, Inc. (J); and Telos Corp. (TLS). Across the calls, five key themes came into focus.
1. Infrastructure: Building on a foundation of opportunity
Government services businesses are preparing for a meaningful uptick in federal spending under the Biden administration and view infrastructure as an additional layer of upside. Regardless of negotiations in Washington, an infrastructure bill falling anywhere within the proposed spending range from both sides of the aisle would provide great opportunity. A looser definition of infrastructure would result in more funding for federal contractors that provide strategic solutions above and beyond core infrastructure needs that are most often addressed at the state and local levels.
A looser definition of infrastructure would result in more funding for federal contractors that provide strategic solutions above and beyond core infrastructure needs that are most often addressed at the state and local levels.
ICF CEO John Wasson proposed thinking about the infrastructure bill as having “very significant upside in 2022 and beyond” if it plays out positively.
Carey Smith, incoming CEO of Parsons Corp., expects an infrastructure bill toward the end of Q3 (September) and expects it will take about six months for the money to get obligated and contractors to see the expected uptick.
Federal contractors didn’t consider the infrastructure bill explicitly in their projected growth and earnings guidance but noted it as an opportunity for additional opportunity and upside in the future.
2. Modernization continues
The federal government requires a full spectrum of digital enterprise solutions to modernize operations, become more efficient, and compete with the rapidly changing threat environment. This has been a growing area in recent history and will continue to be going forward. Removal of troops in the Middle East could allow for reallocation of funds toward such efforts.
Kevin Phillips, CEO of ManTech, said: “Our view is reinforced by a few secular trends, namely the fact that national security threats are not abating and that there is a persistent need for technology modernization for both IT and physical platforms, with an increasing convergence of the two. That said, the associated market opportunities are still bound by budget realities.”
He went on to say: “We view the drawdown of our military presence in Afghanistan as a potential opportunity for the DoD (Department of Defense) to repurpose funds towards technology that will advance modernization and bring new capabilities to meet near peer national security threats.”
Charles Peiffer, CEO of PAE, also mentioned the drawdown of troops in Afghanistan and said the DoD “may likely prioritize the geographic shift towards the Asia Pacific region and a focus on modernization efforts.”
Vectrus CEO Charles Prow senses more emphasis on upgrading government “infrastructures, installations, and supply chains” and more “innovative and instrumented ways of doing business” than he has seen in his 20-year career, he said.
Wasson, of ICF, referenced the $1 billion of new funding for the Technology Modernization Fund under the recent stimulus package that will propel modernization efforts at federal agencies.
Finally, Charles Pragada, chief operating officer at Jacobs Engineering, summarized the federal modernization opportunity well: “In order for government agencies to run effectively and transform how they accomplish their missions, they require a full spectrum of digital enterprise solutions, including engineering and operations, digital services such as cloud services, dev tech ops, cyber and data analytics,” he said. “Contract obligations for digital modernization services have grown significantly over the past five years with strong continued growth expected as government agencies upgrade their data networks.”
3. Recent events underscore the necessity of supply chain risk management
Recent supply chain cyberattacks (SolarWinds and Colonial Pipeline) underscore the federal government’s exposure to cyber criminals and the potential for crippling effects on national security and Americans’ daily lives. Supply chain risk management is a clear and stated focus of the Biden administration, providing contractors great opportunity to assist with compliance and automation related to risk monitoring and mitigation.
Supply chain risk management is a clear and stated focus of the Biden administration, providing contractors great opportunity to assist with compliance and automation related to risk monitoring and mitigation.
Telos Corp. discussed at length its Xacta suite of solutions, given its capabilities around supply chain risk management, cyber hygiene and automating the compliance process. Chief Security Officer Richard Tracy referenced the recent executive order that “expands supply chain risk management to include critical software that is used not just within the government but used within commercial and critical infrastructure.”
Telos executives highlighted the fallout of recent supply chain cyberattacks as evidence for tools and processes needed to thwart future breaches and enhance national security efforts. With limited bandwidth and a rapidly expanding regulatory landscape, Telos executives discussed the presence of audit fatigue and the need to automate the compliance process.
4. If you haven’t already, let’s double down on cybersecurity
Cybersecurity is front of mind for defense and civilian agencies alike. Cyber hygiene and related data analytics are key areas of investment in a world where nation-state threats are waging war via technology, not tanks.
John Mengucci of CACI said that if he were to “double down” on anything in the mission tech area, it would be “anything related to cyber and data analytics.”
When Horacio Rozanski, CEO of Booz Allen Hamilton, was asked about a cyber contract delay, he said he believed there was an “unexpected slowdown in funding towards the end of the year” due to “the transition of the administration, people still coming in and priorities being realigned.” However, he expects fully funding those areas and prioritizing them.
Roger Krone of Leidos also referred to cyber as a “good place to be” as it relates to the federal government’s budget and the impending infrastructure bill.
5. ESG is full of opportunity—internally and externally
Contractors are incorporating environmental, social and corporate governance initiatives into company values and mission statements, executive compensation targets and annual reporting. While important to executives and employees, ESG is also providing great growth opportunities for contractors with the expertise to assist the government in achieving its ESG-related goals—particularly those around climate change and clean energy.
While important to executives and employees, ESG is also providing great growth opportunities for contractors with the expertise to assist the government in achieving its ESG-related goals—particularly those around climate change and clean energy.
ICF executives are particularly enthusiastic around the Biden administration’s climate agenda and ESG initiatives, touting the company’s expertise in “renewable energy and transmission issues, energy efficiency, climate science, decarbonization infrastructure, resilience and climate adaptations.” Wasson, the CEO, went on to say that the administration’s climate focus creates significant long-term growth opportunity for the company’s commercial and government businesses.
From an internal governance perspective, Parsons Corp. linked a portion of annual executive compensation to its six core values with specific targets for reducing greenhouse gas emissions and enhancing workforce diversity.
Company executives in the sector remain agile, anticipating future government spending trends in both the defense and civilian arenas. We expect Q2 earnings calls to center on the impending infrastructure package, federal budget process and when the related uptick from both will hit contractor balance sheets.