Parsons Corporation (PSN) Earnings Call Transcript & Summary

My name is Sheila Kahyaoglu with the Jefferies Aerospace, Defense and Airlines Equity Research team in case you're on the webcast and don't recognize me. We have 31 minutes left in our buyer side chat due to the elevators, but great news. We have the Parsons management team here. And if you haven't heard Carey speak yet, she's the Chairman, President and CEO of Parsons, and she's extra speedy. So we won't have a problem within these 31 minutes; and Matt Ofilos, who's the CFO.

So with that, Carey, Matt, maybe you could just -- for folks who aren't familiar with the story, Parsons has gone through a lot, has had some great wins. How do we think about Parsons going forward from here?

Yes. So first, thanks for having us here today. I'll start off with a very brief overview of Parsons. We are organized for about 50% Federal Solutions, 50% within Critical Infrastructure. We have 21,000 people that work in 25 countries around the world, all 50 states. I'd like to talk about the company in terms of 6 end markets, all of which are growing between 4% to 11% compound annual growth rate. Starting off with transportation. Transportation represents about 29% of the company's revenue. And there, we're involved in roads and highways, bridges, both those areas are very important as you look at the next 5-year surface transportation bill because they are the 2 areas that are mostly going to get emphasized. We also do an advanced traffic management system, we're the most globally deployed in the world. And we just had an exciting first deployment within the Middle East and the city freon. And then we're involved in areas like ports and airports. We've done over 450 airport projects, including the new King Salmon in National Airport and 450 rail and transit projects. Second area is cybersecurity, also an area that's very exciting, an area that should be the fast-growing end market at a rate between 9% to 11%. That represents about 20% of Parsons' revenue. There, we do about 60% offensive cyber, about 40% defense of cyber. When the recent wind Sheila that we just had in the defensive cyber area would be the Joint Cyber Hunt hit. That's a $750 million program over 5 years, it's product based, so it's margin accretive, and we're excited about that. The other area within cyber that's getting increasing attention as critical infrastructure protection. So whether you look at what's happened recently in the U.S. where there's been a tax on the water supply within 12 states. And we recently participated as a founding member of the Project Watershed kickoff within the state of Texas, where we're going to try and help the water companies be able to basically harden our infrastructure through cybersecurity capabilities. That's going to be important. Whether you look at what's going on in the conflict today in the Middle East, where a lot of the shots are being taken at water companies, utility companies and data centers, that's another area that we can help support. So that's kind of the cyber market. Third market area is space. It's about 15% of the company's revenue. Within space and missile defense, we're the #1 contractor for the Missile Defense HC for system engineering and integration. That's important as we look at the Golden Dome for America program because the missile defense and designated as the lead for the system engineering. Also in space, we've done over 170 space ground systems. We're involved in space situational awareness, both for Department award, the intelligence community as well as the Department of Commerce, which supports civilian and international missions. And we have an assured position, navigation and timing solution exclusive partnership with Globalstar, now at Amazon, which allows you to get location information in case your GPS is jam because we're using a different frequency constellation. The next area would be 14% of the company's revenue would be water and environment. We do a lot in area of water, so we're involved in water, wastewater treatment plants. We're involved in desalination. We're involved in water conveyance. We also do mine reclamation projects, 2 of the largest abandon mines up in Canada, Faro and Giant mine, all fall within that. Next are would be [indiscernible]Ariba development, 14% of the company's revenue. That's what we do in the Middle East. We've been in the Middle East for 7 decades. We are the #1 program manager within Saudi Arabia within Qatar and within the UAE. We're on every single Saudia project. So we're the program manager that is doing the new King Salmon International Airport, we're the program manager for King Salman and Park, 5x size Central Park. Program Manager for Cadia, the world's largest entertainment city. We're also redesigning the roads and highways around Riyadh, going to be critically important to get that right for the upcoming Expo and World Cup, and we deployed our advanced traffic management system. Then the final area about 7% of the company's revenue is critical infrastructure protection. When the recent wins we had in that area was $392 million classified win that we announced in the fourth quarter, that leveraged our biometric solutions capability. We do biometrics for over 50 different customers, state local Department of War and intelligence community. There, we also, within critical infrastructure protection port 285 embassies and consulates throughout the world, providing counter unmanned air systems in addition to biometrics capability. So a quick snapshot and 1 additional comment I would make on recent awards. This year, in the first half, we have been awarded 9 contracts greater than $100 million. That compares with 7 a year ago. and 5 years before that. So we're on a trajectory where we've won quite a bit of big awards. And within the 9%, 5% new new business, 3 are follow-ons and 1 was [indiscernible].

Great. Lots to digest there. Can we talk about the Federal Solutions business. Bookings were stellar in the quarter, and they accelerated significantly at 45% in the first half, I'm sorry, for a book-to-bill 1 million -- what are some of the demand signals you're seeing? What's benefiting from the defense budget versus what you're seeing from recompetes and new business opportunities?

Yes. So to your point, Sheila, we had a 1.4 book-to-bill for federal in the first quarter, 1.3% in the second quarter. So federal bookings have been very strong. And then after the quarter ended, it was also announced on the federal procurement data system that we were awarded a $665 million counter UAS job with the army that's going to be over a 7-year period of performance. So I would say where we're seeing acceleration is in a lot of our classified programs such as the Navy's Intelligence carry-on program, that was a new start, $184 million over 5 years. We also won some other transaction agreements. Two of those were worth $400 million. Those are over 3 years. And OTAs, I'd say, is an area that we're really excited about because we currently have about 94 OTAs between what's in our pipeline and what's been awarded. 37 of the OTAs have been awarded. So we're seeing this now be kind of billions of dollars type of representative for our market. And then the Joint Cyber Hunt Kit, I'll hit on, again, that's a great example of where we applied artificial intelligence. So we had the first deployed Agentic AI use for a cyber threat hunt kit. And I think it was a key enabler to us winning. The neat thing about that contract being another transaction agreement, originally 101 company submitted white papers. It was down selected to 3 companies for a prototype and then we were ultimately selected as the winner for that contract. That was done in a period of like 9 to 12 months, so something that traditionally would have taken a long time, and that's the benefit of what's happening in acquisition reform. So now we're going to be delivering 74 kits each year for the first 3 years. And then the last 2 years, that contract is going to be opened up for international customers and other military services.

Lots to digest. How do we think about that $11 billion pipeline as well? You've mentioned it. It's been pretty constant actually over the last 3 years. How do we think about it expanding things moving into backlog and into revenues?

Yes. So our backlog is about $9.3 billion, 71% of which is funded, which is very strong compared to any of our peers. We also have an $11 million awarded not booked. So you can think of that that is work that has come to persons as a single prime contractor. Half of the $11 billion represents option years on follow-on contracts and the other half of the $11 billion represents potential ceiling value. So that would be like an OTA where we have to drive work to that. That number will tend to fluctuate based on when we do bookings. So a good example -- last quarter, we booked $593 million for our FAA contracts. So that was for the 3-year option year. So that comes out of the $11 billion and gets reflected into bookings. And then we also booked $514 million for our missile defense agency contract last quarter over 2 years. That was the follow-on option year for that. And we'll be replenishing it with some of the new awards that I mentioned like the $665 million counter UAS award.

Can we talk about Federal Solutions as well, just the organic growth ex the confidential program, which has been a lot in the news. You've had growth organic growth, low to mid-single digits outside of that. Can you maybe help us understand what drives FS growth from here going forward? I know Joint Cyber Hunt is one of the maybe 1 point of growth, but you have lots of strong growth drivers from here.

Yes, I'd say just -- I know Carey hit on this, but 1.4 book-to-bill in Q1, 1.3 in Q2 within federal. We're seeing favorable trends in Q3 as well. So everybody remember last year was pretty weak on the book-to-bills across the entire entire group. So it's nice to see federal recovering on that side. And so to your point, low to single-digit growth this year on an organic basis, but we see favorable trends going into next year. We've said mid-single digit or better at the corporate level, and we think that will be split between the 2 segments. So really strong kickoff for the Federal group on the back of JCHK, A lot of the new awards that Carey mentioned in the first half of this year that are truly no new work to us. So those should be ramping in the second half of this year and into next.

And then I would also add, we're seeing on contract growth in areas like our muscle defense same-state contract, which will ramp up as part of Golden Dome, our FAA work, which we expect to be about a 40% year-over-year increase. And then our contract that protects U.S. air forces in Europe, which is airbase AirDefense.

Got it. within your space and national security portfolio, Carey, do you mind reminding me how much -- how big of the portfolio it is. And you recently won a $245 million Naval Research Laboratory, IDIQ. How do you think about that when strengthening your position there?

Yes. So again, federal represents about half of Parsons' revenue. And then our defense and intel business is about 70% of federal. So that's how large our national security portfolio would be. Within the space area, we were re-awarded the National Research Lab. It's a contract that supports space ground systems. Some of the work we're doing is going to help get disaggregated space architecture. So if you think about we're going to transition from a lot of large satellite vehicles, small satellite vehicles, Parsons is developing a software suite that's called the Neptune Software suite that basically is the ground system portion of that. So national security, whether it's cyber, space, missile defense, signals intelligence represents a significant part of our portfolio and one, by the way, that was purpose-built to outpace near-peer threats. We put this together intentionally through M&A. We've done 17 acquisitions since 2017, 12 of them have been the federal business, 10 of those have been within the national security space.

Can you talk about just maybe on the Chesapeake transaction, how that helped you win the Joint Cyber Hunt kit? And maybe products, we talked about products in June, how big of the portfolio represents and how you think about that part of the portfolio growing?

Yes. So I'll hit the first part, and I'll have out here upon the products. So from an M&A perspective, I want to highlight several of our acquisitions because I think that's been critical to our success story. If you look at Exator when we bought Exator, that ended up landing an over $2 billion confidential contract for us. And then recently, our $392 million win that leveraged our biometrics capability in the fourth quarter that was a takeaway from a Tier 1 prime. If you look at Chesapeake Technology International, the one that you just asked about, Sheila, I would say that we've won both of the other transaction agreements worth $400 million, and we just acquired Chesapeake technology a year ago. If you look at our ceiling tech acquisition, that was what landed the $750 million joint cyber hunt kit contract. If you look at Black Horse a couple of years ago, that landed a $1.2 billion GSA Fed SIM contract. Black signal got us into the special access program. So we're doing a lot more classified space and cyber work than previously. And then if I turn to a couple of the ones that are on the critical structure side of the house, I would say IP Keys as an enabler. IPS has a tool set that's called Cyberscape that's in use with over 400 electric and utility companies. And when you now look at the need to protect those companies against cyber vulnerabilities and make sure that you have them defended. This is an AI ML-enabled tool set, again, that's rapidly deployed throughout the industry. And then TRS group, I'd hit on TRS Group provides thermal remediation. So if you're looking at PFS PFAS emerging contaminants, that's a market that represents $40 billion addressable for Parsons, TRS group has really helped us increase our sales in the PFOS/PFAS area. You want to hit on the product, Matt?

Yes. So in 2026, products will represent about $350 million at the corporate level. About $300 million of that is on the federal side. So think about 10% of the federal business being products-oriented. And so a lot of these products were kind of making the transition to full production. And so with CHK is a critical win for us, we do see north of 20%, probably 20% to 30% worth of growth next year at accretive margins. So really a great part of the story on margin expansion within Federal over the next couple of years.

And just to highlight a couple of more of the product offerings that we have. So I mentioned biometrics earlier. We sell that to over 50 different customers. Our command and control core system, which is currently being used in the ongoing conflict in the Middle East. That has been selected as they are tasking program of record for the forest that's another product that we sell internationally. We have assured position, navigation and timing, which we've successfully demonstrated in the U.K. crane conflict that we believe will also be beneficial to the Indo Paycom region. And we have a product called the Trex system, which is basically a threat emulator that's also been deployed in conflict. And then we also have an antenna as a ground service solution that we develop the infrastructure for that customers can combine as a service. And then not to leave out critical infrastructure side of the house, our intelligent network program, again, one of the most globally deployed applications for how do you manage traffic both around congestions or traffic accidents. So broad portfolio that we're putting increased emphasis on.

And how do you think about the $350 million growing Joint Cyber Hunt Kit will help? Is that going to grow double digits? How do we think about the growth versus the rest of Parsons?

Yes. Going into next year, we expect 20% to 30% growth within products for 2027. Corporate, we're talking mid-single digit or better revenue. So it's both accretive on the margin side and faster growth.

Just to touch on the FAA business. There's been a lot of contention behind your FAA franchise, but you have 40 years of experience with the agency. How do we think about the FAA build-out from here your large existing contract, which I think represents $250 million of revenue and how you continue -- you expect to continue to build on that?

Yes. So the FAA contract is second largest in our portfolio. We've been doing a great job of increasing the growth on the FAA. We expect about a 40% year-over-year revenue increase on the FAA program. FAA is a critical customer of Parsons. We've supported the over 5 decades. We have been on the technical sport service contract for 24 years. That's a contract that is valued at over $2 billion. And we're involved importantly in all work streams of the FAA. So whether that's doing automation work or surveillance work or communications work or facilities work, we're involved in all aspects of that. We were recently selected to do some of the radar demobilization work as an example, which is a critical component for the air traffic control modernization. We're involved in the voice communication switch implementation. We're working as subcontractor to Rohde & Schwarz and also starting to support Frequentis on the deployment of those. That was another critical part of their traffic control modernization. So what we're seeing is not just improvement on our current FAA technical sport service contract, but we're also getting new contract work as a result of that funding.

How do we think about AI, it's becoming -- it's a hot topic. It was really for the services group, but it's also morphed into becoming a beneficiary and a tower the Parsons team. How do we think about how you're using AI capabilities within your business and how it's benefiting Parsons?

Yes. We've been involved in artificial intelligence for over 2 decades of this company. We started off we developed an early version of what I call a chatGPT like solution, which would basically sort through up open source...

Would you answer all of them, by the way, Carey at the same time?

Which would basically sort through open source intelligence information for the intelligence community. And then if you fast forward today, because we're a mission solutions company, we are using AI as an enabler to help us win more business and also expand margins. Because if we can come up with a better solution, leveraging AI, that's good for our business. several examples, I talked about Joint Cyber Hunt kit and the deployment of the first Agentic AI for that application. We're using artificial intelligence for object detection and our counter unmanned air system suite. On the critical infrastructure side of the house, we use it for our intelligent network work. We also use it in the energy area for areas like distributed energy resource management. So if you're adding renewable energy loads, can determine what that does to your loading but also to the bills that you're paying for your customer. And then internally, we use it, Matt, is it for cash forecasting. We use it to see if we're going to win or lose a program. It's got great accuracy. I think that's been key to helping us sustain over 60% competitive win rates as we go forward. So it really allows you to increase your knowledge at speed if you're applying that as a critical enabler. We're a partner with all the frontier model companies. We use different models on different use cases, but the key for customers is how you apply AI to get to the best use case. In the case of our federal business, get solutions out there operationally relevant to the warfighter faster. In the case of our critical infrastructure business, it's how do I better design and predict infrastructure. So we're designing now for a 100-year life cycle and to a 30-year life cycle, and we can use it to predict things like bridge failures, for example.