Government services executives struck an optimistic tone in their second-quarter earnings calls as implications of a favorable federal budget came into focus. As they anticipate higher levels of defense spending, they see opportunities for IT modernization, cyber and space contracts.
Combined with the recent influx of infrastructure awards relating to last year’s legislation, executives highlighted a favorable operating environment despite persistent labor market challenges.
Four themes emerged from the calls, transcripts of which were provided by Bloomberg:
Great (budget) expectations
The House and Senate indicated that sizable increases in defense spending are approaching in the fiscal year 2023 federal budget over what President Biden originally proposed.
KBR’s chief executive, Stuart J.B. Bradie, highlighted the $45 billion and $37 billion proposed increases to defense spending in the Senate and House bills, respectively, during his company’s earnings call.
CACI International’s chief executive, John Mengucci, said that the newly apportioned funds may be directed toward defense, intelligence and homeland security through solutions relating specifically to digital, enterprise IT, C4ISR, cyber and space.
Most executives have followed suit, aligning and re-aligning the service offerings of their company’s portfolios to address these areas.
Meeting threats with modernization
Cyberattacks are only increasing, in both complexity and volume. In turn, government agencies are continuing to improve their IT capabilities and infrastructure as modernization is increasingly recognized as a critical component of national security.
Booz Allen Hamilton is expanding its position on cyber missions, its chief executive, Horacio Rozanski, said as agencies seek to outpace the evolving threats.
Cybersecurity continues to be an area of focus for many government agencies, particularly the Department of Defense. Telos cited a partnership with IBM to address the efficiency of cyber risk management.
This captures the common tone among industry executives who are increasingly focusing on solving cyber-related problems for their clients.
Infrastructure inbound
Executives are finally seeing awards from last year’s infrastructure legislation enter the pipeline.
Parsons’ chief executive, Carey A. Smith, characterized the current state as just the beginning of a prolonged increase in spending.
Mengucci noted that infrastructure upgrades will occur in both the physical and digital arenas, which encompass a broad range of opportunities related to the legislation.
Contractors expressed relief and optimism as the awards under the infrastructure law come to fruition for large industry players.
Government services businesses are also looking forward to long-term opportunities related to protecting the country’s critical infrastructure in addition to simply building it.
Retention ramifications
Labor, though, continues to be an issue, as companies across the industry see an uptick in attrition. As a result, corporate retention efforts have increased to keep skilled and cleared talent from entering the govcon transfer portal.
Roger Krone, chief executive of Leidos, reminded listeners that highly skilled positions like software engineers and developers will continue to be in demand by both tech and non-tech companies.
He added that even though voluntary attrition seems to have peaked, Leidos remains focused on keeping engaged with its workforce to attract and retain talent.
ICF International’s chief executive, John Wasson, added his concerns, noting that there is strong demand for talent in an already tight labor market, which is consistent with trends over the past several quarters.
Industry players continue to invest in retention efforts given increased demand for skilled and cleared workers paired with a tight labor market across the nation.
The takeaway
Industry executives agree that contract awards and pipeline-building opportunities will remain healthy beyond the second quarter with the prospect of greater spending in the 2023 federal budget. In turn, companies have positioned themselves to fulfill the needs of a rapidly evolving landscape in which IT modernization, cybersecurity and infrastructure upgrades remain a priority.
Amid the flurry of activity, the industry remains focused on retaining talent as new opportunities become meaningless if a business doesn’t have the people to do the work.
