Parsons Corporation (PSN) Earnings Call Transcript & Summary

So good afternoon. I am Louie DiPalma. I cover aerospace and defense and smart city technologies on William Blair's Equity Research team. This is the first day of the 45th Annual William Blair Growth Stock Conference. We're pleased to be hosting a 30-minute mostly presentation with the Parsons management team. And joining me today are Chair and CEO, Carey Smith; and Head of Investor Relations, Dave Spille in the front row. Following the presentation, there will be a breakout session in the Jenny A room. Carey, thank you for joining us, and I'm required to inform the audience that a complete list of disclosures and potential conflicts of interest are available on the William Blair website. In addition, as many of you on the webcast and the audience are aware, last night, Parsons released breaking news that seems to be causing the stock price to trade up 5% today. And investors are definitely interested to hear your perspective on the breaking news and the latest developments associated with the company. So Carey, please take it away.

Thank you very much, Louie. Happy to be back at this conference. It's always so special and glad that we did our breaking news at this conference. So let me start off with the breaking news. So last night, we did update our guidance for the full year. We've had a contract that's with the Department of State that has been a little bit uncertain throughout the year. In January, there was -- January 20, there was an executive order that paused some foreign aid contracts. While our contract was not affected, there was a related contract that was paused that basically has caused our contract to run at a reduced volume. So through the first quarter, we were about 80% of volume and then through the second quarter, about 50% of volume. Last week, on May 29, Marco Rubio issued a new organization chart. The organization eliminated the program office that does hold our contract, indicating that the functions would be moved to a different program office. But we felt this was prudent in the right time due to the uncertainty to remove this contract so that you won't see any financials reflected after June. We've zeroed it out for the year. So as I talk through the rest of the presentation, I'm quite excited to look forward and talk about things that we can control and most importantly, the exciting growth that we see in the company. So removing that contract, we're looking at 17% total growth and 14% organic growth, excluding that one contract. And that is 19% total growth on the Federal side, 17% organic growth within Federal, 15% on the Critical Infrastructure side and 11% organic growth within Critical Infrastructure. So obviously, very strong tailwinds across all of our markets. I would say that, coupled with our 68% win rate that we had year-to-date through Q1 has really enabled us to win some significant jobs. And we're looking at the double-digit growth in both of our segments for the year. We still have -- we have $9 billion in backlog, within there 69% is funded, which is a very high number. And then we have $12 billion of what we call awarded not booked. So those are jobs that have been awarded to Parsons as a single company contractor, and we have not yet reflected in our bookings or backlog. So you can kind of take and add those 2 numbers together. On the bottom line, we're expanding our margins by 30 basis points this year. That's on top of a 50 basis points expansion last year. We see the most significant margin opportunity within our Critical Infrastructure segment. Q1 was basically what I would call a clean quarter where we didn't have any one ups or one downs, and our Critical Infrastructure business was at 10.3% for the quarter. So I want to reiterate our growth strategy. First and foremost is to invest in software and integrated solutions to move up the value chain to be able to prime bid and win larger contracts. For the last 4 quarters, we've had over a $50 billion pipeline. Within there, we have about 19 opportunities that are greater than $500 million and 121 opportunities greater than $100 million. I do want to point out this pipeline does not reflect some of the items in the reconciliation bill, which I'll address on the next chart because we're waiting to make sure that funding gets passed and assess the timing. We -- our goal has been to create a very exquisite federal company that outpaces near-peer threats. We had the luxury when I joined the company back in November 2016 of putting together a federal business from scratch. So that means we really like all parts of our portfolio. We put it together to basically have end-to-end cyber capabilities, space capabilities, electronic warfare, to be able to fight information warfare against a potential near-peer threat. And we've done a great job, I'm going to say, moving up that value chain and winning larger jobs. We also want to be the digital transformation pioneer within Critical Infrastructure. That means we're a company that can apply our cyber capabilities, artificial intelligence capabilities, digital twins and technology capabilities because we have technical capabilities on the federal side of our house that we can leverage on the critical infrastructure side of our house, whereas other critical infrastructure companies do not have that technology component. We want to leverage our unique portfolio in areas like critical infrastructure protection. So how do you protect water companies, utility companies, transportation against cyber threats. Once again, we can vertically integrate. We understand the domain of how those areas work, but we also have the cyber capabilities to be able to protect against those threats. And then finally, we want to be the preferred acquirer of assets. I believe we've done a great job since 2017, we've bought 14 companies. We buy companies that are growing at greater than 10% on the top line, greater than 10% EBITDA margin and have technology differentiation. We generally acquire companies on a preemptive basis. These are companies we've worked with. They understand our mission, understand our culture, and we have alignment in those areas. And afterwards, we pride ourselves on being able to retain what made those companies successful, whether it was a process, but most importantly, the people, the leadership and the founders of those companies. This is probably the chart I'm most excited about and what I'm going to present today, which is our alignment to administration and global priorities. Starting over on the left with Federal Aviation Modernization. That's within the reconciliation budget for $12.5 billion. Parsons has been the Federal Aviation Administration Infrastructure contractor for 4 decades. We've held the technical support services contract for 24 years. We're currently in year 2 of 10 on that contract. It's a $1.8 billion ceiling, and we have $1.2 billion remaining. So we really look forward to helping the FAA modernize its systems as we go out over the next 3 to 4 years. The next item is Global Dome for America, and we have several capabilities to bring to bear. For the Missile Defense Agency, Parsons, again, has supported the Missile Defense Agency for 4 decades as a system engineering and integration contractor. So we've been involved in working with MDA to define a layered architecture that can provide a Golden Dome capability for America. How do you defend against unmanned air systems, cruise missiles, hypersonics, intercontinental ballistic missile threats. We believe the engineering and the integration is going to play a very important role in Golden Dome for America. We have a $2.24 billion contract that we're currently in year 3 of that contract. So we have scope remaining there as well. In addition to what we do for the system engineering and integration component, the capabilities that we've put together in cyber and electronic warfare enable us to provide nonkinetic effects and we believe we're an industry leader in that. So instead of a kinetic to kinetic missile, you're basically holding a missile through nonkinetic means. Sentinel ground infrastructure. Parsons has been the engineer of record on all prior intercontinental ballistic missile ground infrastructure programs, Atlas, the Titan, the Minute man. We were originally selected by Northrop Grumman, the prime contractor, but there were some terms under the fixed price that we could not sign up to. So we look forward to the opportunity to get reinvolved in the Sentinel program and leverage our capabilities in designing launch facilities and command centers. I'll point out that Sentinel has $13 billion within the reconciliation bill. Next item is munitions modernization. There's $21 billion within the reconciliation, both for munitions modernization. We're happy to be involved in 2 of the major army munition ammunition plants across America, both Holston and Radford. Just last week, Department of Defense announced that we won a $170 million project to develop a new ammonia nitrate facility tank farm that will be placed at Holston. So that's an important initiative there. Border security, there's $61.5 billion in the reconciliation budget. Parsons has done border security for over 2 decades. A lot of our work has supported the Defense Threat Reduction Agency in countries such as Georgia, Armenia, Lebanon and others. We've also done work closer here to home on the Mexican-U.S. border, mostly involved in video surveillance activities as well as building towers. So border security is an opportunity.

Is your biometrics applicable there too?

Yes, our biometrics would apply definitely in that area, and I would say in others as well, Louie. And then I'm going to talk critical infrastructure, and then I'll come back to the areas for both. So on the critical infrastructure side of the house within the U.S., we're aligned to the administration priorities in terms of hard infrastructure. Our company does roads and highways, designed over 10,000 miles roads and highways across 6 continents. We have been involved in over 450 rail and transit projects, over 450 airport projects. So that's a good alignment to the administration, and we've designed and built over 4,500 bridges. We're rated by engineering news record in top 3 of 3 categories. In the Middle East, we're involved in transportation activities. Middle East has significant spend. U.S., we've got the $1.2 trillion infrastructure bill. We don't expect to peak until 2028 time frame. It's going to last 6 to 8 years after that. Saudi Arabia alone has $1.3 trillion of spend on infrastructure between now and 2030. We're the #1 program manager in Saudi Arabia, UAE and Qatar. Middle East Urban development, we're helping design and build some of the newest, I must say, most complex facilities in the world today, mostly taking place in Saudi Arabia. King Salman Park, 5x the size of New York City Central Park. Qiddiya, the world's largest entertainment center. We just announced during my recent Middle East visit that coincided with Donald Trump's visit 2 wins, the air side and the land side on King Salman, so think about getting an airport signed and built prior to 2030, that's going to host 120 million passengers per year, twice the size of the JFK. Middle East, Defense and Security, there's close alignment to help get a partnership between the countries in the Middle East, this wide space for Parsons. We're going to leverage our very strong position that we have in the Middle East, plus our federal capabilities. Then finally, advanced manufacturing. We're involved in helping develop and build semiconductor facilities as well as some data centers from a design and program management perspective. Moving to the center part, this is where the synergies of the portfolio come to play. Cybersecurity increasingly important for the administration. Parsons does about 75% offensive 25% defensive. Critical infrastructure protection, how do you protect your utilities, your water companies, your transportation from threats. PFOS, PFAS, an area we see a $40 billion addressable market, not peaking until the 2032 time frame. We're proud of the fact that we just got approval in the U.S. for our [indiscernible] technology patent. So it's going to be the first technology of its kind that destroys the PFAS molecule on site. That patent was approved about a year ago in Canada. Rebuild. How do we help California rebuild from the wildfires? Israel, Gaza, Syria and Ukraine. Syria presents a unique opportunity because the Middle Eastern countries are going to be involved in helping to fund that, and we're obviously in a very strong position within the Middle East. Events Management, Parsons has been above in nearly every world event like Olympics, Expos, World Cups since 2016 in the Atlanta Olympics. Two most recent, we did the traffic management for the World Cup in Doha, Qatar, and we were the Head of Construction for the world -- or for the Expo in Dubai. So we hope to help out here U.S., Mexico, Canada as we look forward to the World Cup as well as to the Olympics in LA. Then finally, INDOPACOM, an area that's got $11 billion in the reconciliation bill. We've been in the INDOPACOM region for 3 decades, providing critical infrastructure. We're there today on Guam. We're on [indiscernible] doing housing and airfield projects. We also have hundreds of people working on cyber and electronic warfare areas within INDOPACOM. So as I mentioned, you're looking at $150 billion reconciliation bill. We're excited about the alignment to Parsons. A lot of times those bills are spent over a decade. They're indicating this may be spent over a shorter period like 4 years and be front-end loaded. So we see some pretty good alignment. This is our end market portfolio, where all 6 of the markets, as you can see, are growing between 4% to 10% compound annual growth over the next 3 years. The 2 most important that I would highlight here are transportation that represents 26% of Parsons' revenue and cyber and intelligence, which represents 20% of Parsons' revenue. So as you can see, 46% of our revenue has the strongest CAGRs.. Our investment thesis remains the same since we hosted our last Investor Day several years ago. Most importantly, we have an experienced management team that delivers on commitments. Again, very excited to be moving forward with 14% organic growth this year across our portfolio double digits within both segments. We have a people-first culture and a mission focus that attracts destination employees. We pride ourselves on having the lowest retention this year that we've had since 2020 and doing a great job on hiring. For example, in the Middle East, we need to hire 200 to 250 people a month just meet the demand for work that we've already been awarded. And we pride ourselves on keeping people that we've acquired through acquisitions and not just keeping these folks but promoting the really good leaders in the significant roles. As I just showed you, all 6 markets are growing. They're all enduring, they're all profitable. I talked about our national security portfolio that's positioned to outpace near-peer threats. Unprecedented global infrastructure spending, $1.2 trillion, 40% of that spend still hasn't been -- only 40% has been allocated. So you're looking at a peak in the 2028 time frame, 6- to 8-year tail. In parallel, you've got a new 5-year surface transportation reauthorization bill starting up by November 2026. So we're going to see a layering effect here in the U.S., and I already mentioned the Middle East, which we don't expect to be until 2030 to 2032. And then we have a favorable financial outlook, proven effective capital deployment strategy. We've been deploying capital on M&A and also on share repurchases. On share repurchases, we're authorized up to $250 million. Last year, we repurchased $25 million. This year, in the first quarter, we did repurchase $25 million already. M&A, we expect to complete 2 to 4 deals this year. We've already acquired 1 company TRS group that helps us with thermal remediation and also beefs up our capability on PFOS, PFAS, helping both our federal and credit infrastructure segment. So just to wrap up, we couldn't be more excited about the position of the company, excited about the double-digit growth, excited about the tailwinds that we see in both sectors and also the fact that we can look out over a long period of time.

Great. Thanks, Carey. One question that I have following up on the introductory remarks. Beyond the confidential contract, you lowered guidance at the midpoint by $85 million for the RemainCo business. And are you seeing any impact from DOGE, the GSA review or the broader Department of Defense scrutiny on consultants. In other words, are you a consulting firm?

We're not a consulting firm.

Are you seeing any consulting firm type weakness or what is taking place with everything that's been happening in the government tech world?

Yes. So we lowered an additional $85 million really for precautionary reasons on the macro environment. Just in case we see some delays on the federal side. We're a company that prides ourselves on beating our guidance and we want to make sure that we achieve it. Relative to DOGE and GSA, we are not a consulting firm. We do not do enterprise IT work and should not be kind of thrown into that bucket. Pete Hegseth issued a memo a week ago where he talked about in-sourcing IT work, consulting work as well as advisory and administrative services. We do not perform that work. That's why our portfolio has not been impacted.

Great. And along those lines in terms of how the FAA modernization seems to be a pretty huge opportunity given what's taking place in Newark airport, but -- and dozens and dozens of incidents across the United States over the past decade or so. What is the scope of services that you are capable of providing the FAA and what do you provide the FAA today?

Yes. So we're at pretty much every FAA location coast-to-coast across the U.S. And we're involved in engineering, we do design, we do construction management, we do program management. So if you think about the implementation of any project, a project could be I'm going to upgrade a radar system or I'm going to put in a new display system. or I'm going to put in a new ADSB auto direction system. So we would be involved in how you implement those at all the facilities. We do quite a bit of tower work as well. But I divide it kind of into pillars, you have an infrastructure pillar. You have an automation pillar, you have a surveillance pillar, you have a technology pillar and the nice thing is Parsons place across all 4 of those pillars, which is important as we move forward to the modernization program.

Great. And how do you think this FAA modernization is going to play out in terms of timing? Like first, does the reconciliation bill need to get passed and then the contracts need to be written up in terms of new contracts? Or can the government take your existing $1.8 billion contract and just build from there and also use other vendors?

Yes. So they can use our contract today. It's available. Again, we're in year 2 of 10. We have $1.2 billion ceiling remaining on that. And there are some efforts that are already moving forward on the modernization. A good example is the voice communication switches. The FAA has outlined a plan, and it's over basically a 3- to 4-year period for how they would roll out the modernization programs. There does need to be budget certainty for that to happen.

Great. And another question related to the U.S. aging infrastructure. Did you indicate that over the next 3 years, there could be like multiple infrastructure bills like contributing simultaneously?

That's correct. So you would basically have infrastructure investment Jobs act passed in November 2021, and it's a 5-year bill, so that runs until 2026, but the money can be spent years after that, and that's why we're indicating you won't see a peak until 2028 and you'll still have a 6- to 8-year tail. In parallel, they're already starting work on the next surface transportation bill. And so they hope to pass that by November 2026. So you could indeed see a layering effect and I also should point out -- sorry, Louie I should also point out the importance of state and local funding because what we see is about 60% of the funding right now is coming from state and local. So it's not just federal funding that we're relying upon to enhance our infrastructure, but also the importance of state and local.

Great. So it seems from your observations and your dealings with the administration that they are supportive of a successor infrastructure bill.

Definitely, yes. If you look at ASC is the organization that typically evaluates U.S. infrastructure. Before the infrastructure Investment and Jobs Act, they rated our infrastructure D-, we're now at a level C. I think everybody here that drives on the roads every day across those bridges would agree, we still have a ways to go. So I think it's going to be an important bipartisan focus for years to come.

Well, for members of the audience, Sterling Infrastructure's CEO, Joe Cutillo said the exact same thing in terms of the successor infrastructure bill in terms of September or October, November 2026. So multiple independent sources, which seems positive, even though you both are very aligned. And so it's in your favor for that to happen. But hopefully, it does happen for the sake of U.S. infrastructure. Another topic that's very pertinent related to the data center theme, that you talked about designing data centers, but what is taking place with the Department of Defense in terms of AI in that I think you guys recently gave a presentation about Project Lynchpin with the Army, but can you discuss the different initiatives you guys are doing with AI that makes you more differentiated than a consulting firm?

Yes.

Once again, that's -- the theme is that the administration does not like consulting firms. So giving you the opportunity to discuss, you are not a consulting firm.

We are not a consulting firm. On artificial intelligence, we've been doing artificial intelligence for the past 2 decades. We actually started off -- our first application was how do you find a counter-improvised explosive device within video analytics. And then we developed what I would call an early version of an open source intelligence tool to help the intelligence communities sort through data so you can get to actionable intelligence. So if you fast forward today, we're applying AI in almost every program that we deliver for our customer, whether it's offensive cyber capabilities that we're using it for, whether it's on counter unmanned air systems, how you identify, detect, track and deter UAS vehicle. On the infrastructure side, we also apply it to our contracts. A good example is advanced traffic management. We use artificial intelligence to determine predict if you have an incident, how you reroute or if there's congestion, how you reroute traffic. We use it for energy, if you're adding renewable energy resources, what does that do to your demand loading? Also what does that do to your bills that you're going to be paying to your customer. And then we also have internal use cases. A couple of years ago, I asked each of my leaders to come up with your best internal use case, and you need to deliver 3 to 4 every single year because I wind the ownership from the top down. So for example, our CFO, he developed an AI application to forecast cash, may be 1 of the reasons we've been able to actually predict cash. We developed a tool in our business development team for are we going to win or lose jobs, it is 92% accuracy. Some pretty neat applications of AI internally as well.

Great. And I guess following up on your very-high-profile Middle East visit in which Parsons you were mentioned in the same vein as Boeing and you were on the world stage and I think 3 different White House press releases. How should we think of the trajectory of this Middle East infrastructure spending boom in terms of like what inning are we in here? I know that's a question you get a lot, it's not a very creative question. But considering you were just in this very-high-profile position. And you gto to speak to all of these dignitaries and hear all of the most recent news flow what can you share with the audience?

Yes. So our Middle East business will deliver double digits this year. That's on top of double digits last year and 33% growth a year before. What you're seeing, I'll start with the UAE. So the UAE in 2020 had a population of about 3.3 million people. Today, the population is 9.7 million people. So when you're increasing the population, you have to have additional transportation infrastructure. And those are the areas that we're involved in as well as tourism and entertainment. Parsons did a lot of the work in to buy originally and when to buy, we started several decades ago. And now you look forward to today, there's a lot of build-out going on in Abu Dhabi. And then in the future, you can see areas like in the North LA and getting built out. Saudi Arabia has experienced similar growth. Saudi Arabia went from 24 million people to 33 million people from 2020 to 2025. They've their sights set on Saudi Vision 2030, which is how do you diversify the country away from its dependency on oil. So they identified 13 sectors. Two of those sectors we're heavily involved in, again, transportation, tourism and entertainment. Infrastructure alone for Saudi Arabia, they're going to spend $1.3 trillion by 2030 under the public investment fund, it's really exciting to go over there because we're involved in pretty much every major project. We just opened the Riyadh metro a really beautiful metro project that we did. We're going to be doing King Salman International Airport, about $250 million, $275 million for Parsons, an airport with 120 million passengers per year. We're doing Qiddiya, the world's largest entertainment city. We're involved in Riyadh ring roads, how do you improve the traffic flow for these upcoming world events. We were awarded a sole-source traffic management contract around Riyadh, which is critically important. Syria Gates, which the restoration of Saudi's history. So you can just see how all these projects are going on. I'd say similar, I expect in Saudi is what we saw in UAE. You build out the Riyadh area first, then you'll get up to areas like [indiscernible] on the Red Sea areas in the South like our [indiscernible] project will become tourism centers. Really exciting place to be.

And how many different projects would you estimate that you're doing across the area?

I would estimate hundreds of projects across the area.

Yes. that -- and do these projects, do they -- like have they been like ending? And has that number just been growing such that maybe it was 100 projects 2 years ago, and then it's increasing to 130 and it's like the scope is widening of everything that they are doing.

Yes, I'd say the biggest growth we're going to see in this year off a smaller base is actually UAE, which we expect to achieve about 30% growth, again, double digit in Qatar, double digit in Saudi Arabia. UAE is really because of the influx of people and how much building and development that they're going to be doing. Saudi is just going to continue to evolve because they're going to be on the world stage between 2029 and 2034. They want to become a tourism economy. So we're going to see that over the next few years.

Projects, are they like mostly transportation focused? And is there also security? Like what would you -- if you could bucket the different segments of these hundreds of projects across the Middle East.

Yes. So today, I would say we're involved in transportation. We're involved in tourism and entertainment. We're involved in mixed-use development housing. We also do water, wastewater and sewage. They obviously had the flood that occurred and so how do you improve the water system. I'd say going forward, the biggest white space market that we see is defense and security because leveraging our position and we have there and bringing over some of our important capabilities that they need, such as integrated missile defense, border security capabilities, counter unmanned system capabilities, those are things that we can provide.

Yes, that's actually a great topic considering that for most of your like federal government type solutions, it's for the U.S. federal government. So is their legitimate prospect for you to export some of your more like cybersecurity type solutions and the other solutions that you provide too.

Just a few examples. So within the Middle East, we are currently doing -- we have a Middle East contract with the Army Corp. We were just awarded the recompete where we're responsible for installing systems like that and Patriot Missile systems all over the Middle East. We also just got export approval for a system that is called our ZEUS RADBO system. It's 3-kilowatt directed energy laser system, originally developed to take out improvised explosives, but it can also be used for deep mining capabilities. So we have approval to sell that within Ukraine and we see that as an important step. But definitely, we always look at applications internationally.

Fantastic. I believe that is all the time we have for this main session, but we are going to resume the conversation in a different room, the Jenny A room upstairs. So thank you so much, Carey, and thank you, Dave.

Thank you.