Northrop Grumman IS&TS remains extremely focused on maintaining profitability in a federal contracting environment hostile to revenue growth

By  Sebastian Lagana, Analyst

IS&TS’ revenue suffers from volume declines on legacy programs related to in-theater support, readiness and training programs; however, profitability remains strong

Northrop Grumman Information Systems and Technical Services (IS&TS) performed in lockstep with the majority of its federal IT and professional services peers during 3Q14 earnings season, with the discomfort of another quarter of aggregate revenue contractions somewhat blunted by strong profitability. IS&TS was down an aggregate 5.6% year-to-year, with both IS (-6.7%) and TS (-3.1%) feeling the impact of overseas contingency operation (OCO) funding, volume reductions on legacy programs and persistently tepid spending on new short-cycle IT and professional services.

Despite these revenue declines, IS&TS’ aggregate operating margin of 9.8% continues to set the standard among its competitive set, a testament to the company’s laser focus on operations management and efficient service delivery, as well as Northrop’s strategic imperative to walk away from deals that don’t fit its desired margin profile in lieu of pursuing revenue at all cost. Adherence to this strategy will position IS&TS as a federally focused margin leader through year-end. Continue reading

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Xerox is transforming its services operation by adopting a new organizational structure and investing in sales and low-cost offshore headcount

By Jacob Gordon, Research Analyst

Xerox is shifting its services mix to higher-margin BPO offerings while investing in its service delivery operations to achieve its 10% margin target

Although Xerox continues to face Medicaid implementation issues and slower contract award cycles due to the increased frequency of recompetes, the company was able to increase revenue 0.5% year-to-year due to growing demand for technology-enabled BPO solutions. Xerox continued to adjust its portfolio mix to emphasize its higher-margin BPO offerings while reducing exposure to lower-margin ITO contracts through a more selective bidding process. The company is not shrinking its ITO business; instead it is seeking to bundle ITO more frequently with BPO to enhance its value proposition. New president Bob Zapfel, who came from IBM Services, aims to bring services margin into the 10% to 12% range by transforming the services organization. He is implementing best practices across its units to enhance service delivery processes, investing in sales resources and training, expanding low-cost offshore headcount to lower costs, and bringing on new leaders to implement the aforementioned initiatives. TBR believes Zapfel’s services initiatives combined with Xerox’s emphasis on improving its services mix positions the company to grow margins 60 basis points sequentially in 4Q14. Continue reading

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Wipro’s open source capabilities and industrial process optimization are competitive differentiators in the connected systems space

By Jennifer Hamel, Analyst

Wipro reaped the benefits of its 2013 sales team investments with eight major deal wins that restored double-digit growth in 3Q14

Building upon its consulting portfolio with emerging technologies and industry-oriented nuances in mind has driven continued acceleration in Wipro IT Services’ year-to-year growth throughout 2014 as the company entered back into double-digit growth. We expect growth to hover near 10% over the next couple of quarters as continued growth in the healthcare space offset declining discretionary spend in the energy and natural resources space as oil and gas prices have notably declined in recent weeks. Wipro’s low-cost delivery base provides the company significant pricing power in comparison to MNCs such as HP and IBM with large onshore delivery teams across service lines and solutions. Wipro’s new open source consulting practice builds its portfolio in key growth segments to help the company better rival such competitors in the cloud professional services and managed private cloud markets.

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General Dynamics IS&T is consolidating business units in support of improved profitability and further portfolio synergy

By Sebastian Lagana, Analyst

Successful implementation of profitability expansion initiatives helps ease the burden of persistent revenue contractions in IS&T

General Dynamics IS&T offered mixed results during 3Q14, with expected revenue contractions somewhat offset by significant improvements in operating profitability. IS&T’s 12.9% year-to-year revenue contraction was driven by continued pressure on core U.S. defense clients, which the group has not been able to offset by diversifying revenue through international and commercial opportunities to the same degree as peers such as Lockheed Martin or Raytheon. Continue reading

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EMC posts strong 3Q14 revenue growth, but must evolve the federated structure for future success

By  Krista Macomber, Analyst

EMC’s federated businesses return strong financial performance, but alternative business models will be considered for future growth

EMC reported record third-quarter revenue in 3Q14, rising 8.9% year-to-year to $6 billion on the back of growth across its federated businesses, EMC Information Infrastructure (EMC II), VMware and Pivotal. Broad-based top-line growth indicates EMC is reaping benefits as a result of its focus on leveraging federated brands to ensure business and R&D focus and agility, as traditional data center portfolio innovation, go-to-market and profit strategies are being rapidly upended by cloud, commoditization and other market disruptors. Although EMC continues to demonstrate, from a financial perspective, successful execution across its businesses in enabling customer migration to third-generation cloud-, mobile- and big-data-focused IT infrastructures, the federation’s 3Q14 earnings are a strong reminder that successful execution in core second-generation (client/server) markets remains strategic to near-term profits, investment leverage and customer relationships. Continue reading

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VMware ramps up investments in SDDC, hybrid cloud and an application fabric to win more expansive deals

By Krista Macomber, Analyst

Helping customers bridge on-premises and cloud infrastructures, and IT and business silos, garnered 17% revenue growth for VMware in 3Q14

VMware continued to accelerate top-line performance in 3Q14, growing revenue 17.5% year-to-year to $1.5 billion as its corporate hybrid cloud, software-defined data center (SDDC) and end-user computing (EUC) growth initiatives continue to gain momentum. However, gross margin fell by 180 basis points year-to-year to 84% during the quarter, contributing to an operating margin decline of 630 basis points to 16% in 3Q14. The decline in operating margin can further be attributed to increased revenue contributions from the lower-margin end-user computing business, as well as from investments in acquisitions, internal innovation in new portfolio areas, and go-to-market transformation. Stabilizing the bottom line through more rapid portfolio innovation while accelerating its transition to a strategic advisor for customers is critical to long-term success for VMware, as the company continues on its journey of enabling seamless and secure “device through data center” management. Notably, adapting to longer and more complex sales cycles as VMware drives toward multipronged engagements with customers and earning a richer enterprise license agreement (ELA) revenue mix will help VMware continue to climb the value chain with customers. As the server hypervisor market grows increasingly commoditized, fueled by competition from vendors including Microsoft, Citrix and Red Hat, and as the pace of cloud migration accelerates, VMware does not have time to waste in its corporate transformation. Continue reading

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Verizon will lead all operators in postpaid subscribers in 3Q14, driven by 1.1M tablet additions

By Eric Costa, Analyst

Verizon continued to see success with its More Everything plans, XLTE deployments and FiOS business

Verizon’s 3Q14 strategy revolved around XLTE, FiOS and More Everything adoption. Overall revenue grew 4.3% year-to-year in 3Q14, as a decline in wireline revenue partially offset growth in the wireless segment. Verizon will continue to report one of the fastest-growing wireless segments in revenue, backed by its market-leading postpaid segment. The FiOS business, which continued to gain TV and Internet net additions, will continue to drive wireline growth.

Verizon is expected to outpace AT&T and T-Mobile for the lead in postpaid subscribers in 3Q14 due to its high More Everything plan adoption rate. Verizon will continue to lead AT&T in margins, revenue growth and postpaid subscribers in 3Q14, and will use this momentum to grow its LTE subscriber base heading into 2015. Verizon’s More Everything plans and market-leading LTE coverage will continue to draw in new connections including tablets, smartphones and LTE devices in 4Q14.

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