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NCI warns revenue will be down in 2012

Reston-based information technology services contractor NCI is warning investors that it expects revenue to drop dramatically in 2012 as it tries to adapt to changes in federal procurement.

The company said in a call with investors earlier this month that it is facing a roughly $220 million decline in sales, which has already meant layoffs.

Brian J. Clark, who took over as president of NCI at the start of the year, attributed about $90 million of the decline to the end of a Pentagon base realignment program, another $67 million to contracts that are ending or that NCI has lost and $62 million to contracts that have been reduced in size.

The forecast suggests some contractors may feel the pain of reduced government spending and a more competitive field sooner than anticipated. Contractors have warned that they expect sales to drop, but NCI officials said they are already hitting choppy waters.

Clark told investors NCI anticipates revenue of $340 million to $360 million in 2012, a significant drop-off from its $581 million in 2010 and $469 million in 2009 and closer to the $391 million the company posted in 2008.

“Clearly something hasn’t been done right there,” said George A. Price Jr., senior equity research analyst for information technology services at BB&T Capital Markets. “They’re either not targeting the right kinds of contracts or they’re not adjusting to the changing realities of the marketplace.”

BB&T and its affiliates have relationships with a number of contractors, including NCI.

Clark ticked off NCI’s problems for investors. When vying for spots on existing contracts now up for award, companies generally are offering lower bids than those that were once good enough to win a deal. Also, the losing bidders are filing more protests, adding delays, he said.

At the same time, he said the government is offering more small-business-focused awards and reducing the size of some contracts.

Clark also blamed NCI’s worsening win rate, which Charles K. Narang, NCI’s chairman and chief executive, attributed to the government’s increased focus on selecting a bidder with a lower price as long as the proposal meets technical requirements.

“Lately, we have been providing outstanding proposals in both technical as well as management approach, but we have lost those proposals mainly because of pricing structure — which means 25 percent, 20 percent below what we normally would have bid on those programs,” Narang said.

As a result of its shrinking sales, NCI is taking steps to lower its costs, including consolidating, terminating and renegotiating leases at five facilities and reducing its workforce by about 60 employees and consultants, or about 2 percent of its head count. The company said the moves would save more than $5 million in annual costs.

In the call with investors, Clark rejected questions about whether the company had cut enough, arguing NCI “took things right up to the breaking point.”

Marco F. de Vito, NCI’s chief operating officer, said the company did not want to destroy its ability to recover, explaining that NCI needed to ensure “that we had the engine that we needed to grow our way out of this problem.”

William Loomis, managing director at Stifel Nicolaus, which has a business relationship with NCI, said the contracting industry’s lengthy bid cycles mean that even if NCI can turn around its win rate, it could take a year or two to see improved financial results.

“I do think you’ll see what we’re seeing at NCI become more evident at the other companies ... but probably not quite to the extent that we’re seeing it at NCI,” Loomis said.

Clark, who served as NCI’s chief financial officer for several months before becoming president this month, said in an interview that he is focused on securing new work for the company.

“My mantra has been, if I look at something, well, how have we done it in the past? ... OK, then let’s change it,” he said. “I’m changing almost everything.”

NCI is slated to announce its fiscal 2011 earnings and its full 2012 guidance Feb. 15.



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