Back-Office Firm For Federal Government Holds Passport To Profit

The U.S. State Department said on its Web site that the time it takes to process a passport has increased due to high volume.

The Western Hemisphere Travel Initiative is one reason for the increase. It states that U.S. citizens now need a passport to travel to Canada, Mexico, Bermuda or the Caribbean.

Congress passed the initiative in the Intelligence Reform and Terrorism Prevention Act of 2004 in order to strengthen border security.

There are 13 regional passport agencies in the U.S. But the government only handles the adjudication part of the process.

The rest of the process is outsourced to government information technology contractor Stanley SXE. It processes the applications, prints the booklets and mails out the passports.

Passport Business

Analyst Michael Lewis of BB&T Capital Markets said Stanley is the only company that handles the government's passport business. He said it made up 17% of the company's total revenue last year, which hit $409.4 million.

BB&T Capital Markets does investment banking for Stanley.

Stanley should sustain a growth rate in the mid-teens for its passport business, Lewis said. The State Department expects to churn out about 18 million passports this year, up 50% from last year.

"There should be significant passport activity over the next few years with the State Department expecting to issue roughly 30 million passports in 2009," Lewis said. "This could end up being a $100 million business for the firm over the next few years."

But the passport business is just one aspect of Stanley's services.

Chief Executive Philip Nolan said Stanley provides a broad set of sering, enterprivices, including systems engineerse integration, logistics and business outsourcing to the federal government.

The IT firm went public last October, selling 6.3 million shares at 13. Its IPO raised $81.9 million.

Stanley also helps the federal government deal with internal personnel issues as well as upgrades to its IT infrastructure and processes. The company also will assist the U.S. in adapting to an ever-changing geopolitical landscape.

Today, the U.S. faces asymmetrical threats in lieu of the national threats it encountered in the past. Because of this, there is an urgent need to update the government's IT infrastructure, analyst Brian Gesuale of Raymond James & Associates said.

"It was easier to build a lot of missiles and point 20hem at an enemy, such as the former Soviet Union," he said.

"But now it's about information advantages in trying to find that needle in a haystack and disrupt the enemy, whether it's in a formal conflict such as in Iraq or Afghanistan or even just trying to thwart terrorism at the local level."

Bullets, rockets and missiles were the clear weapons of choice during the Cold War. But in today's conflicts there is a transition to information as the weapon of choice, Gesuale said.

About 65% of Stanley's revenue last year came from the Department of Defense. The rest of the firm's sales come from federal civil agencies.

Stanley raised its first-quarter revenue 44% to $133.5 million, beating views. Its profit surged 53% to 23 cents a share. Analysts expected 21 cents.

"The drivers are certainly our passport business as well as our systems integration work and our logistics IT services for the military," Nolan said.

"What we're advertising to the investing public is that we think we can continue to grow the company at 10% to 15% organically over the next couple of years."

Since 2001, the market for providing IT services to the federal government has remained robust, Gesuale said. It is a highly fragmented sector that sees about $175 billion of government spending a year, he said.

The top 10 firms by size have about 40% of the market, while the next 90 firms may have about 30%, Gesuale said. Stanley's $409 million in fiscal year 2007, which ended in March, puts it in the second ranking.

Spending priorities can shift with changes during midterm elections or in the upcoming 2008 elections. Nolan said the company expects to see some shift in priorities back to more what he calls back-office IT systems or things that provide more of a supporting role.

However, Gesuale said those changes should not affect Stanley too much.

"Stanley's balanced mix of customers split between the Department of Defense and civil government make it the diversified way to play the federal technology spending," he said.

Stanley has announced more than $400 million in contract wins since April. Chief among those was its win on the initial task order for the Army Field Installation Readiness Support Team program, which is valued at up to $267 million.

"We think it's going to be a vehicle that's going to see a lot of opportunities come through it and a lot of those opportunities in support of the reset effort," Nolan said.

The reset effort is the process by which the military has to take the equipment that they've been using in Iraq and Afghanistan and bring it out of the country to reset it back to war-fighting capabilities. The equipment ranges from field radios to large track vehicles, such as Humvees or tanks.

"It's a huge effort because it affects a wide range of equipment," Nolan said. "Stanley provides the IT underpinning that tracks the maintenance status, inventory and accountability of this equipment worldwide."

Intercom System

Stanley's other large project is installing Tactical Operations Center Intercom System on the Mine Resistant Ambush Protected vehicles. Nolan said this was a good contributor in the first quarter and should remain one for the rest of the year.

Stanley's backlog reached $986 million in the first quarter, up 18% from a year ago. The heavier backlog has prompted the firm to raise its fiscal year 2008 earnings outlook.

The firm expects full-year profit of 90 to 95 cents a share on revenue of $525 million to $540 million. Analysts are expecting 96 cents.

"The growth prospects in the space are good, but it is one of those things that the prospects are good if you're in the right areas for taking advantage of them," Nolan said.

"And we feel our exceptional revenue visibility and track record of execution give us confidence that we will meet our increased guidance targets."