Analysts: CWT, Concur Each To Win Parts Of A Delayed And Downsized ETS2 Contract

The U.S. General Services Administration in April will award its e-Gov Travel Service 2.0 contract in parts to Concur and CWTSatoTravel/Northrop Grumman, according to BMO Capital Markets analysts Karl Keirstead and Shateel Alam. The equity analysts on Sunday published research based on conversations with government sources.

"The GSA has indicated that it will award the ETS2 deal to either one or two bidders," the analysts wrote. "According to our sources, the likelihood that Concur will win the entire ETS2 contract is approximately zero. The combined Carlson Wagonlit and Northrop Grumman team now has roughly 75 percent of the existing contract and hence a strong incumbent advantage. While our sources admitted that the current Carlson Wagonlit solution is perceived as being too complex, they also argued that Carlson Wagonlit has a 'decent' reputation with no chorus of voices looking to boot out the incumbent vendor. Carlson Wagonlit and Northrop Grumman have a long history serving the federal government and have invested considerable resources in building the complex interfaces to the back-end systems."

The current 10-year ETS contract is due to expire next year, although Alam and Keirstead reported that "GSA is negotiating a two-year extension to the recommended migration deadline to November 2015 from November 2013." The new ETS2 travel management contract initially was described as a 15-year deal worth approximately $1.5 billion, but the analysts "heard that the annual ETS2 contract revenues could end up closer to $75 million rather than $100 million" due to pending cuts in federal travel.

According to the BMO analysts' sources, GSA will award "hunting licenses" to the two contractors and enable them to "compete for subsequent task orders to be awarded by each of the federal agencies. It will be up to each federal agency to choose between Carlson Wagonlit and Concur and to decide when to migrate to the new systems." They estimated that Concur would secure about one-third of the business.

"This outcome implies an incremental $25 million per year in revenues to Concur once the deal reaches steady-state and just modest ETS2 revenues before 2015," BMO's analysts wrote. "While a contract award will be a net positive, we believe that this outcome falls short of what Concur and many investors are expecting." In their view, Concur's stock price had been lifted by rumors about the award.

Concur has said it is targeting $100 million in annual revenues from the public sector. A trimmed-down ETS2 outcome "would make it challenging for Concur to reach its target," the analysts wrote. "In the interim, Concur must incur up-front investments, and margins on the ETS2 deal could be low or even negative until volumes ramp. All things considered, the potential for an ETS2 contract award is a net positive for Concur and would provide a vehicle to reach much greater scale in a heretofore under-penetrated vertical. However, we believe that the ultimate revenue boost from the ETS2 deal could prove to be lower than many analysts think and may prove to be modest until perhaps 2015."

A GSA official recently declined to comment on expected timing for the selection, saying the most recent deadline she had heard was March 2012.

A Concur spokesman declined to comment on the BMO report in light of the release of Concur's quarterly earnings, scheduled for Feb. 1. A CWT official said CWTSatoTravel's leadership also declined to comment.