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.
Capgemini’s Q1 press release back in May started with the headline, “stabilisation confirmed”. Today, it has upped the ante with its H1 press release headlining with “confirmed recovery”. That’s despite a 3.8% decline in revenues to Eur4.2b compared to H109 (and a 6.1% decline on a like-for-like basis – constant Group structure and exchange rates). Indeed, Outsourcing revenues were down 6.3%, Technology Services revenues were down in line with Group revenue, Local Professional Services revenues were down by 4.1% and Consultancy Services were down 9.3%. As H109 including significant restructuring costs, operating profits were up 19.8% to Eur200m.
There were a whole raft of US software company quarterly results last night. Basically, Citrix, (revenues up 17%), Concur (up 20%), and Taleo (up 14%) all beat Wall Street consensus estimates on revenue and profits. While BMC (up 2%) and Symantec (flat) were below. The first three are all, in a sense, Cloud companies (one Virtualisation, the others SaaS). The other two aren’t – though they are moving that way. There’s a message here.
Software AG, Germany’s second-largest software company and a top 25 software supplier to the UK market – particularly significant in the public sector market here – has released its Q2 results. Thanks to last year’s acquisition of IDS Scheer (which has almost closed: it’s a very long process) revenues for the half year were up 51%, to €518m. Without IDS, growth would have been a rather more modest 4% (5% in Q2). Due to the much-larger services portion following the IDS integration (now 40% compared to 25% a year ago) EBIT margin fell from 24% to 20% but rebounded to 22% in Q2. That’s pretty good for a mixed software/services business, and eps was up 20%, to 2.29. It seems the integration is going well.
Declining revenues and deeper losses in its BPO business marred an otherwise impressive growth quarter for HCL, the last in its FY. HCL recorded a stunning 9.1% qoq revenue growth at constant currency (ccy), comfortably above its larger peers. This brought FY revenues to $2.49b, up 28%, including the effect of its acquisitions of Axon and Liberata Financial Services. As with peers, growth in Europe, at 4.2% qoq (ccy) lagged other regions, leaving Europe representing just under 25% of HCL’s group revenues, almost 4 points down yoy. Q4 Margins wer 90bps down qoq to 15.3%, 270bps lower yoy. IT services attrition rose nearly 2 points to 15.7% (LTM). There’s much stuff to pour through and I will bring you more later.
It looks like Patni rather missed guidance for Q2 (to 30th June), as revenues came in at just $168m, shy of the $171-172m management were hoping for. Operating margins also fell, down 220bps qoq to 18.8%, though nearly 4 points higher than in Q209. Europe still proved troublesome, with revenues (as reported) down 13% yoy and qoq to $20m, now just 12% of the total. Attrition (LTM excluding BPO) jumped to 21.5%.
Despite a 5% revenue increase in its BPO Medical business in H1, Atos Origin UK was unable to keep ahead of last year, reporting a 3.6% organic revenue decline to €442m. In fact, it seems the business reversal accelerated slightly in Q2, given that the Q1 revenue decline was 2.4% (see 
After a pretty miserable first quarter, business picked up for Unisys in Q2, albeit once again led by product sales. Services revenues grew by 5% qoq to $911m, though still 7% down yoy. Product sales raced ahead, up 14% qoq to $145m, 56% higher yoy (excluding divestments). As we have said many times before, Unisys seems to operate in a parallel universe!
I will leave it to my learned colleague, Philip Carnelley, to flesh out the detail of Misys’ FY results after this morning’s briefing, so I will just brush over the highlights. First, Misys is now at zero net debt (yeah, I know that’s not the same as ‘debt free’ but that makes a better headline). Second, as previously announced, when the Allscripts divestment goes through (see 
Derivatives trading & exchange software vendor Patsystems has released its interim results showing 6% growth, largely organic, to £10m for the half year. Adjusted pre-tax profit rose 37% to £1m, though reported operating profit halved as H109 hedging gains (nearly £1m) turned into losses (£291k).
HR SaaS provider SuccessFactors has released its Q2 results showing 27% growth – organically – to $47m. Growth will probably accelerate next quarter as it recently closed two acquisitions – a social software company CubeTree, and Inform, an analytics/workforce planning software company (
It was a pretty woeful quarter for telecom-focused Indian SI, Tech Mahindra. Profits fell 20% yoy in Q1 (to 30th June), slashing operating margins to 18.5% (Q1 09: 25.5%). Revenues declined by 3% qoq as reported, to $251m. Tech Mahindra chairman Anand Mahindra reported “prolonged decision making cycles at key customers,” adding, “We believe this to be temporary...”. Number one ‘key customer’ (and shareholder) is of course BT. Judging by BT's woes, I wouldn’t be betting a huge amount of dosh on precisely how ‘temporary’ Tech Mahindra's setback will be.
Many commentators – including ourselves – have noted that Microsoft’s stranglehold on IT is being loosened as the rise of mobile and cloud computing changes the landscape and makes network-dependence the key, not platform-dependence. Apple, Google, and others are all making inroads.
After what can only be described as rather muted results in Europe from archrivals TCS and Infosys, Wipro marched ahead in Q1 (to 30th June), with 3.4% qoq growth at constant currency (ccy). In contrast, Infosys went backwards in Europe by just under 1% (see 