Parsons Corporation (PSN) Earnings Call Transcript & Summary

All right. Thanks for joining us for the next session at Baird's Global Consumer Technology & Services Conference. I'm Andy Wittmann, together with Justin Hauke, we cover the consulting and engineering companies, construction and engineering companies and facility service companies. This next session here is with Parsons. We are really delighted to have them. And this is, I think, the third time that you've been at this conference, Carey?

That's correct.

Carey Smith is the company's CEO. And we are going to do this one as a fireside chat.

I usually like to just start off with the question of, why don't you tell us who Parsons is and what you do, and I'll launch from there with the other questions that we have for you.

Sounds great, Andy. Happy to be back at the Baird Conference. It's always a terrific forum. So Parsons, we have about 20,000 people. We're located in 23 countries around the world. We're located in all 50 states. We report in 2 segments of Federal, which will comprise about 52% of the company's revenue this year; and Critical Infrastructure, which will be about 48% of the company's revenue this year. We have 6 end markets. The first one is cyber and intelligence that represents roughly 20% of the company's revenue. One of our fastest growing area, it's very exciting. We've delivered over 20% growth in the last 2 years in the cyber market. We play predominantly in offensive. I always like to look at cyber in 3 layers. You have offensive, defensive, and infrastructure and services. We do about 75% offensive, 25% defensive, and we don't really play in infrastructure and services. The second market areas, space and missile defense. It makes up about 10% of the company's revenue. There, we're the #1 contractor for the Missile Defense Agency. So if you think about the system engineering and integration work that goes on there, that's a role that we've held for 4 decades, and it's a role that's going to be increasingly important as we look forward to the future and critical programs like Golden Dome for America. In the space area, we're involved in space domain awareness. We provide those capabilities to the Department of Defense and the intel community for a couple of decades. Then a few years ago, we were awarded the Commerce's mission to be able to provide space domain awareness for civilian customers as well as international customers. We're involved in assured position, navigation and timing. So if you lose your GPS signal, you're still able to get location information. There, we have an exclusive partnership with Globalstar, where we're providing our proprietary software defined radio capabilities. We currently demonstrated the system over in Europe, and we're looking forward to demonstrating it in the Indo-Pacific in the future. We also do space ground systems. We've done over 170 different space ground systems. Third part of our portfolio is critical infrastructure protection that represents about 17% of the company's revenue. There, we're focused on protecting 285 embassies and consulates all over the world. We're the #1 provider of electronic security systems for the Department of State. We're #1 for the Army and we're #3 for the Air Force. We also provide counter unmanned air systems. So particularly for Groups 1 to 3, making sure that we can protect embassies and consulates against threats. And we do biometrics capabilities. So if somebody has trained them properly to enter an embassy or consulate, we can tell just within minutes that they're not supposed to be there and make sure that they're rejected. The next area is transportation sector. That makes up about 26% of the company's revenue. There, we've designed and built over 10,000 miles of roads and highway across 6 continents over the world. We've been involved in over 4,500 bridge projects. We're a world leader in long-span bridges. We've done over 450 rail and transit projects, over 450 airport projects, including the recent win we just announced in Saudi Arabia 2 weeks ago. We're really proud to be the program manager for the new King Salman International Airport that will be handling 120 million passengers per year by 2030. The next area is environmental remediation that represents about 12% of the company's revenue. There, we did work in mine reclamation for some of the world's abandoned mines up in Canada, the Faro and Giant Mine. We're also involved in PFOS/PFAS emerging contaminant elimination. That's an area where we hold unique patents, specifically a capability called Hot ISCO that will destroy the PFAS molecule in situ on spot. And we think that's first technology of its kind. That market is expected to be about a $40 billion addressable market for Parsons by 2032. And then the final area is our urban development market that represents about 12% of the company's revenue. Really exciting market area that's mostly in the Middle East. We are the #1 program manager in Saudi Arabia, we're the #1 program manager in the UAE, #1 program manager in Qatar. We're pretty much involved in every major project that's going on in the region today, particularly in Saudi Arabia. But I'll say we've seen a resurgence in the UAE, too, as their population has tripled within the last 5 years. I just got back, in fact, from the Middle East trip when the President went over and the delegation 2 weeks ago and had the opportunity to go visit all 3 of those countries. That's my quick snapshot.

That's a lot there, isn't there? I was like, woah. That's a great rundown. I love how you've got that totally committed to memory. Okay. So I'm just going to start with where everybody's kind of focused. So you cut guidance and the stock went up 7%. That's the punch line. The reason you cut guidance was a one singular contract that was very large that you had. And so why don't you talk about, if you could, this is a confidential contract so you're not going to say a lot about it. But we're starting to get a handle between the guidance reduction and what the financial impact was. So can you talk about how big this contract was last year? What it's done this year? And how it affected your reduced guidance just so we can level set and understand the moving pieces and the change of your guidance first.

Yes. I'd say this was an important contract that was through Department of State. It was one that we competed for. There were actually 10 companies that originally bid on it. We were deemed the only company capable of performing the mission, so we did get the mission-directed sole source. The mission was originally going to be a 10-year program. We were in year 3 of that job this year. January 20, when the new administration came in, there was the foreign aid executive order. That paused a contract that was related to ours. It did not stop ours, but it did cause our work to run at reduced volume. So we ran about 80% volume for the first quarter. We were about 50% volume for the second quarter. Recently, there was a testimony where the Secretary of State testified and did indicate they were going to fulfill statutory obligations, but there was a little more clarity added the week after that when we received the organization chart, and it did eliminate the office. So we felt that due to the uncertainty and the ability for us to be able to estimate this contract that it was best if we reset our guidance and just took this contract out. I'd like to highlight that our performance on the contract has been rated excellent for the past 3 years, just an outstanding mission. We had outstanding performance on it. We won't also, as a company, be affected much from a personnel perspective. We were predominantly doing program management work and providing the technology capabilities. So we just will basically reassign a handful of people. Without this contract, we're really excited about our growth prospects because when you look at Parsons, we're going to be growing 17% in total and 14% organic growth. That would be 19% total growth in our Federal segment, 17% organic growth. And then if you look at our Critical Infrastructure segment, that's 15% total growth and 11% organic growth. And that's really a result of the strong tailwinds that we have in both of our segments to be able to deliver double-digit organic growth.

Yes, this contract took a lot of airtime. So this allows you to breathe free kind of in a way and just really focus on those really attractive growth rates, 17% total, 14% organic at the consolidated level. Just -- I want to be clear here, though, like the office is closed. The contract has not technically been canceled. It's just -- you're just taking it out of guidance. Do you anticipate that some of this could show up still depending on what the administration wants to do? How do you think -- how should investors think about that?

Yes. So what we've done is, after June, we've zeroed their contract. We have assumed that for June, we would be demobilizing. But it could trickle on. If anything that would come out after this time, we would disclose separately.

Okay. That will be helpful to understand what's going on then, too. Okay. All right. So where do we want to go next? Let's talk about the Federal business. That's a little bit bigger part of your business, I think it's at 52% now and growing 17% organically. In there, there's a couple of things. There's a few topics I want to get to. I want to get to DOGE. I want to get to FAA and I want to get to Golden Dome. So let's do those in reverse order here. Why don't you talk about your stripes in missile defense and how applicable they will be to Golden Dome? As I understand it, I think you've had some recent meetings with senior level officials in the administration that are helping you understand what the plan is here. So to the extent that you can share with us what the plan is, can you tell us about that plan and how Parsons factors into it?

Yes. So first, I'd say we're really excited about the Golden Dome opportunity. Again, we've been a Missile Defense Agency system engineer and integration contractor for 4 decades. So a very strong position there. A lot of what is going to happen on Golden Dome is actually integration because a lot of the systems are out there. They just need to be put together to be able to provide coverage across the United States for unmanned air systems, cruise missiles, hypersonic missiles, all the way up to intercontinental ballistic missiles. So we would see our role as being heavily involved in system engineering and integration. In addition to those capabilities, we do provide non-kinetic effects. So you think instead of a missile taking out a missile, we can use cyber and electronic warfare effects to be able to perform that capability. That really came through our purpose-built Federal portfolio, where, I'd say, starting in November 2016, we pretty much only had missile defense work and then we really started to buy and organically grow our capabilities in cyber and electronic warfare to be one of the elite companies within that space. So we look forward to the prospects on that.

And that was a couple of different acquisitions. It wasn't just one acquisition that was this. Like you built up a couple of different acquisitions that all helped you in this as you were reforming the company and your vision?

Absolutely. We had a vision basically that say we were going to provide full spectrum cyber operations, and we want to cover as much of the electromagnetic spectrum as we could. So even our most recent acquisition that we did, BlackSignal, helped us in both of those areas, cyber and electronic warfare.

Okay. The FAA has been getting a lot of attention as well. While this is -- you could argue this is Critical Infrastructure side of the house. It's actually -- I think you report this in the Federal side of the business because it's a federal agency. Gosh, there's talk of, what, $12 billion of spend to kind of redo air traffic control? Maybe for the benefit of the room, can you talk about what you've done for air traffic control systems historically and where your position is on that competitively? And obviously, the implications that, that has for this next round of investment that the government wants to make.

Yes, and Andy, you're correct. There's $12.5 billion that's in the reconciliation bill for FAA modernization. The goal would be to complete that modernization effort within the next 4 years. Parsons has been responsible for the FAA infrastructure. We've supported the FAA for 4 decades on our current contract, which is called technical support service contract. We've been on that contract for 24 years. We're pretty much at every FAA location. We do everything from permitting, site access, design, program management, construction management, for anything that's being basically installed, upgraded within those systems. So we are very excited about helping the FAA to achieve its vision. I will say, the FAA does have a plan that what they have needed is funding. And so it's exciting to see that money moving forward within the reconciliation bill.

What's a realistic time frame for them to get going? I mean you said they've got the plan, they just needed the funding. The funding could be coming -- everybody was saying July 4. We'll see about that. That's politics and not here that we're going to -- something here that we're going to solve. But sometimes it's just -- they've got $12.5 billion they want to spend but you're human capital limited. Is the time frame that they wanted to deploy that possible? And how can -- and does Parsons have enough people to help them get at that goal?

Yes. So I would say they have a reasonable plan, and they've kind of outlaid the various different areas. So like infrastructure, here is what needs to be done. Surveillance, here's what needs to be done. Automation, here's what needs to be done. And they've laid it out over a 4-year period. So once the funding is authorized, they're ready to go and that 4-year clock will start moving.

Okay. DOGE, I think one of the interesting questions from your last conference call was how much have you debooked because of DOGE? The answer was?

Zero.

Yes. Exactly. And then there's the kind of the addendum question to this is there's been talk about the Department of Defense making cuts of 8% per year for a few years, actually. But then there's this conflicting information that the Big Beautiful Bill was talking about $1 trillion defense budget, which would be an increase of $150 billion and not a decrease. Can you help us reconcile how both of those things can be true at the same time?

Sure. So let me start with DOGE. DOGE had several objectives, and they were really looking at consulting firms. So first, DOGE and GSA looked at the top 10 consulting firms, then they went to the next 9 consulting firms. Because Parsons is not a consulting firm, that's why we really have not seen any impact. There was also a memo last week that Secretary Hegseth issued, which was about in-sourcing areas such as enterprise IT consulting work and advisory and administrative work. Again, that's not what Parsons does. We're a solutions provider. We're focused on getting mission capabilities to the warfighter. Regarding the FY '26 budget, there's a goal to realign from nonpriorities to areas of priorities. So basically, starting with the 5-year defense plan in FY '26, take out 8% or $50 billion per year and align it to a set of 17 priorities, which Secretary Hegseth has outlined. Parsons is aligned at 10 of those priority areas. So it's things like I already talked about, such as cyber, munitions, modernization, Indo-Pacific region, cyber command, space command, nuclear deterrence, et cetera. So again, I'd say we're quite excited about the budget realignment into those priority areas, and I think our purpose-built Federal portfolio is ready to help solve some of those problems. Couple of other areas we didn't talk about that are in the budget, I'd say munitions, modernization was put in by the house at $21 billion. The Senate Republicans came back with $23 billion. Parsons is currently at Holston and Radford. And so we're upgrading those facilities. We just received an award last week for the ammonia and nitrate tank farm that's going to be added to Holston. So that's an area that we're excited about. Another one would be border security. There's $61.5 billion in the budget for border security. We've performed border security all over the world for the past 2 decades. Also, we've done work on the Mexico-U.S. border. So it's another area that we believe that we're going to tap into. Nuclear deterrents, it's about $13 billion that's in the reconciliation budget. That would be for the Sentinel ground-based infrastructure. So Parsons has been an engineer or architect of record on Atlas, Titan and Minuteman. So we look forward to getting involved in Sentinel.

And that's all missile defense stuff based?

Missile defense, yes, ground-based infrastructure. And then I'd say the final area, $11 billion for the Indo-Pacific region, where we're currently positioned on Guam, Quad, and we have hundreds of people in Hawaii.

Yes. So basically, the takeaway I hear from that is the areas that are getting cut, you don't do, and you're aligned to the stuff that is getting the redirection of those funds. That's before we even talked about the increase in the budget from $850 billion to $1 trillion.

Yes, we're excited about the Federal budget alignment.

And is there -- does it make sense to ask the question about where the extra $150 billion goes because most of what I heard from you there was probably just the $50 billion per year that's getting realigned. Is it different buckets? Or is it all the same?

Yes. So the reconciliation budget, which is going through which Parsons would like to have signed by July 4, that has the additional funds that will be spent. Originally, a reconciliation could be over a 10-year period. They hope to have that money expended over a 4-year period. And then the FY '26 is basically a reallocation, 8% per year over the 5-year defense plan.

Got it. Okay. While we're talking about Federal, I guess maybe we'll wrap up on this part of the conversation by asking about your kind of goal strategically through M&A from here that you already talked about how you purpose built this when you came in, you brought your experience in the Federal government service. You looked at what you had, what you should have, and we've articulated some of that. What still don't you have maybe is the question from here. Where would you like to go next to really kind of keep rounding out your portfolio of services?

So when we do M&A, we look at companies going -- growing greater than 10% top line, companies that have greater than 10% EBITDA margin. On the Federal side, we're going to continue to double down the areas I described. So how do we do end-to-end cyber, how do we do end-to-end electronic warfare, and basically positioned to be a leader in information operations. On the Critical Infrastructure side, we're also looking at M&A. In fact, our most recent deal that we closed, we're quite excited about was BCC Engineering in Florida, which enhanced our transportation engineering capabilities. We will look at specific states. So the states that we identify as Tier 1 are California, Florida, Texas, New York, New Jersey and Georgia. Those are the states that are going to receive the most funds that come through the formula funds. And so we're kind of doubling down. It's not enough, for example, just to be in Florida. We happen to be in Jacksonville and had a big presence, but we really needed a presence in Miami. So we'll look there. We'll also look at digital transformation capabilities on the Critical Infrastructure side. I think Parsons is the pioneer leading digital transformation of infrastructure. How do you apply artificial intelligence to the problem. How do you apply cybersecurity to protect our utilities, our water companies, our transportation systems. We're fortunate that we can vertically integrate because we have the domain knowledge on the infrastructure side, but we have cyber technology on the Federal side of the house.

I feel like even just technology is a great enhancement to -- I'm going to switch over to Critical Infrastructure now. Let's talk about the design business, the consulting engineering design business. Technology is great, and it's going to make your team more efficient. But I kind of feel like even just your base employee utilization rates have been a pretty important story over the last few years. Can you talk about how the growth rates that have been underpinning your Critical Infrastructure business have driven utilization? How that's changed over the last couple of years? And if you expect that to continue to improve?

Yes. So I'd say we have very strong utilization rates. We tend to run between 80% and 90%. One thing that we do that's unique is we move -- we have the ability to work from anywhere. So you can be working up in Canada on a program in the Middle East. You can work in North America on a program up in Canada. So it's kind of engineered design from anywhere. We're fortunate in the Critical Infrastructure side, particularly in the North America market, that in the last 24 months we've won 5 to 6 of our biggest projects in our company's history. So really moving up the value chain. And we're ranked by Engineering News-Record now in 3 categories, as top 3 companies and punching above our weight class. Within the Middle East, I mentioned #1 program management. Consultant in all 3 of the major countries, Saudi Arabia, UAE and Qatar. We get excited about the U.S. infrastructure bill, $1.2 trillion in the Infrastructure Investment and Jobs Act. That won't peak until 2028, and it's got about 6 to 8 year tail after that. We'll have the next surface transportation bill that hopefully will be passed by November 2026. Then when you look at the Middle East spend. In Saudi Arabia alone, we're anticipating $1.3 trillion of spend from the public investment fund on infrastructure. So a lot of global trends right now in infrastructure upgrades.

Yes. There's a lot to unpack there. I want to maybe go back before I go forward on some of those. One of the things you didn't say that some of the other publicly listed firms say, they've got low-cost engineering centers. Parsons has elected not to do that and instead, to work share like you described around domestic for better engineering centers. Why?

For us, it's been very effective because you can easily move work, you don't have to move people, you don't have to reestablish a new center. You can keep the same trained people that you've had. And for Parsons, particularly in this critical infrastructure sector, people have been with the company for decades and have a lot of expertise that we want to retain.

Got it.

We set up basically practice areas. So we have like a bridge practice area. We have our roads and highway practice area. And these are really deep domain experts.

Yes. And these are teams that, again, they've got people all over the place that are part of the bridge. They were part of the whatever team. And they worked -- when we spent our day with your team in infrastructure, they worked really closely. It seemed like they knew each other all like personally in some ways, which is pretty impressive. Yes. So there's one other thing I wanted to ask about that, it's escaping me now. Okay. Maybe I'll just move on. Does tariff or macro uncertainty become a factor in your customers making decisions to move forward with projects?

I would say the only area that tariff will affect the industry would be potentially lower spend due to tariffs. Generally, because of the type of work we perform, which is design and program management, we're not personally impacted.

You're not personally impacted. But because maybe more dollars have to go to the materials, they just -- the volume of design work will have to shrink because each individual project costs a little bit more, is what you are saying. Is there any tangible signs that, that's happening yet?

I have not seen it. And obviously, with Critical Infrastructure, we've had 18 consecutive quarters greater than 1.0 book-to-bill. So we've been running pretty well for a long time.

The question that I had before just came back to me. And so I'll ask it. When you -- you said that you won 5 of the company's 6 largest infrastructure projects of all time here in the last like year or 2. I have to think that if your teams are assigned on big continuous projects like that, it's above average margin. Is that a fair assumption? Because there's just less frictional time for mobilizing teams and demobilizing teams. They just go to work every day knowing what they have to do for a long period of time. Is that right?

I would say that's a factor. And I would also say right now, demand is greater than supply.

And do you have a price for that? It seems like when you're working for public sector customers, my experience is that most of the companies are -- maybe tend to be a little bit more like a price taker. But is that changing with the demand being greater than supply today?

So I think we're getting good margins within the infrastructure business. I would say though, we don't compete on a margin basis or a cost basis. We win or lose on technology. And that's true, by the way, in both of our segments. And that's one reason I'm proud of the fact we're kind of focused on being an advanced solutions integrator that differentiates with technology.

Yes. This obviously brings me to the next question is that your first quarter, your March quarter, which is usually actually seasonally, in the design business, not the strongest quarter of the year. You had 10.1% margins, which is above the margins that you're guiding for, for the year. So was there anything unusual about that 10.1% that we should know about that suggests that the year would be less than that?

Yes. So we've always said we would get the business to double-digit margin. I would say Q1 was what I would call a clean quarter. So there were no onetime upticks and no onetime downticks. We've been moving away from what we call legacy programs, which were -- the company used to get involved in areas like construction joint ventures. It was a business we started exiting in 2018. So as we exit that business, you're going to naturally see our margins progress. Last year, we had 50 basis points margin expansion. This year, we will have 30 basis points margin expansion. And really, you can look at that as 60 basis points coming from the Critical Infrastructure segment.

Got it. I want to spend the last amount of time that we have here talking about the Middle East, probably not, frankly, not enough time to talk about the Middle East. This business has been growing very rapidly. Why don't you quantify for that -- quantify that for us? But really, the question I want to get to, now that this business is approaching almost half of your infrastructure segment, I think it's 40%?

It's 1/3.

1/3, okay. 1/3 of the business. The revenue compares are presumably getting tougher, maybe they're not. But against that, can this book-to-bill continue to be above 1 in the Middle East over the next 12 months like what we are seeing today?

Yes, we are projecting it to be above 1. We're projecting double-digit growth within the Middle East. All 3 countries within the Middle East, we expect double-digit growth. Saudi and Qatar, over 10%. And then the UAE, over 30%. What's been happening there, if I just take the UAE for a minute, the UAE's population from the year 2000 went from 3.3 million. Five years later, you're at 9.7 million. So when you triple your population, you now have to add transportation, infrastructure, additional water capabilities, utilities, et cetera. So we're very involved in helping with that. And also doing a lot of build-out in Abu Dhabi, for example. What we've seen in Saudi Arabia is a similar population trajectory. It's gone from 24 million people in 2,000, up to 33 million people into 2025. More importantly, they're going to be on the world stage in 2029 for the Asian Games 2034, the Expo 2034 for the World Cup. So what's really important for Saudi Arabia is making sure they have the traffic flow, the traffic management, particularly around Riyadh is going very smoothly for those efforts. So we're involved in modernizing the roads. We're also doing the traffic management program. We also just opened probably the most beautiful metro at least I've ever been on, which is the Riyadh Metro, and had the opportunity to ride that before the opening ceremony, just a pristine metro. We're doing the world's largest entertainment city, Qiddiya. We're the program manager for King Salman Park, 5 times the size of Central Park. We're in Mountain Al Soudah, which is a resort location that's going to be on the left. We got a contract to convert palaces to hotels. We're in the tourism and entertainment industry. And I think all this to say, it is amazing when you go over there, I think, in terms of transportation infrastructure. It's some of the best in the world. It gets done the fastest in the world. It's the most modern. It's being done with the most recent technology. We like that fact. We can actually bring a lot of that capability even back to North America.

So the confidence behind having a greater than 1 book-to-bill in these businesses, does that come from the fact that you're on these programs and the full scope hasn't been released? And so you've just got visibility that like the future scope increases are coming on these existing programs? Or do you need other projects to be, I don't know, unveiled, for lack of a better term, that would contribute to the backlog?

Yes. I'd say it's a combination of both. When you look at the U.S. not peak until 2028, we don't expect the Middle East region to peak until about the 2030 or 2032 time frame. So we are still indeed on the ramp-up. But every day, we're continuing to win new projects like we just announced during the Middle East trip, the win of the King Salman International Airport. So just making sure we continue to win, but also continue to perform on the projects we're currently on.

Great. I'm going to leave it there. We're out of time. Please join me in thanking Carey for the presentation.

Thanks, Andy.