This week several of the major defence contractors have announced H1 results: Raytheon, Lockheed Martin and BAE Systems. Due to the nature of their businesses, it is nigh on impossible to determine the performance of these companies' IT services business in the UK – that will require us to catch up with the management teams in the UK (which you can be assured we will be doing!).
All three companies increased worldwide sales with single digit percentage growth – BAE Systems by 9% (or 7% on a like-for-like basis), Lockheed Martin by 3% and Raytheon by just under 3% (if you take out the impact of the termination of eBorders – more on that below).
Of course, total sales include products and services far removed from our IT services world (involving fighting equipment such as tanks, submarines and aircraft and their subsystems). Looking at the divisions most relevant to IT services, there appears to have been a mixed performance. Within BAE Systems, Programmes & Support (the bit that now includes Detica), saw sales increase 27%; within Lockheed Martin, the Information Systems & Global Services (IS&GS) division saw sales increase by 3%; but within Raytheon, the Intelligence & Information Systems (IIS) division saw sales decline by about 4.8% (even ignoring the impact of the eBorders termination).
Double-digit percentage growth for BAE Systems Programmes & Support division was driven by the company’s substantial involvement in ‘cyber & security services’ in government and ‘readiness and sustainment’ activities in defence (i.e. through-life support of systems). All the defence contractors are, as Lockheed Martin so neatly puts it, “refining” their portfolios of services and capabilities. The results appear to indicate that BAE is succeeding in pursuing business in areas of the market adjacent to its traditional defence equipment focus both in the US and UK. When we visited the Farnborough Air Show last week, both Lockheed Martin and Raytheon were also working hard to market their cyber security skills. Not surprising considering the words from Baroness Neville-Jones, Chairman of the British Joint Intelligence Committee, when she launched Cyber Security Challenge UK on Monday. She stated that Britain has “a talented, but small pool of highly skilled public and private sector cyber-security individuals... but... we don’t have enough... future online security professionals have to be encouraged and nurtured”.
Now, back to eBorders... both BAE Systems and Raytheon have been impacted by the Home Office’s decision to terminate Raytheon’s contract (as Detica was a subcontractor to Raytheon on the deal). The impact on Detica is unclear. However, under US GAAP, Raytheon has had to recognise in Q210 the potential financial impact of the termination notice. As a result, net sales have been dragged down by $316m in the period and income from continuing operations have been dragged down by $395m. In addition the company's ‘backlog’ and ‘funded backlog’ has been brought down by $556m. Raytheon states that it “will pursue vigorously the collection of unbilled receivables and damages and defend itself against the claims for losses and previous payments”... watch this space! It will be interesting to see if any other suppliers are willing to take on this project (perhaps one of the subcontractors in the prime role?). We suspect, though, considering some of the seemingly insurmountable legal barriers faced thus far, that the eBorders programme requirements will need to be reviewed and reshaped.
As always, it’s hard to dissect BT’s financial results to get to grips with its IT services performance. At the Group level in Q1 (to 30th June 2010), revenues declined 4% to £5,006m and adjusted EBITDA increased by 6% to £1,399m (reported EBITDA was up 5%). The single digit percentage decline in revenues was common across all parts of the business.
Today, TechMarketView has published its latest report, “What needs to change in UK Government?”, based on an in-depth survey of 19 key ICT industry suppliers, including 8 of the top 20 UK SITS suppliers.
Following my HotViews article – 
Shouldn’t the acquisition be chosen to suit the strategy rather than the strategy be altered to suit the acquisition? IDOX, the supplier of software and services to the local government market, has announced the acquisition of Computershare Electoral Management Services Limited (CEMS) – which trades as Strand Business Systems - for a total consideration of £4.4m. Strand is to be renamed Strand Electoral Management Services Limited.