Kanata-based Calian Technologies weathered the recession better than many companies, but the technology service provider may finally be showing signs of strain as it contends with a surging Canadian dollar and incursions from the political realm in the form of looming changes to Canada’s military role in Afghanistan.
Prime Minister Stephen Harper’s announcement last month regarding the end to Canada’s combat mission in Afghanistan in 2011 has cast a shadow over the company’s dealings with its largest client: the Department of National Defence (DND).
Government cost-cutting initiatives as well as overseas deployment reductions in the military will inevitably have an impact on the company.
A high-tech company founded by former Ottawa mayor Larry O’Brien, Calian’s operations are two-fold. The business and technology services division (BTS) provides staffing and outsourcing services in areas like engineering and health care to clients in industry and government.
The secondary branch of the company is the Saskatoon-based systems engineering division (SED), which provides contract manufacturing services and engineering services to space agencies, telecommunications companies and satellite manufacturers and operators.
Calian’s Q4 results indicated a three per cent drop in revenues over last year with net profit of $3.2 million and year-end results continued the downward trend with the company reporting revenues of $215.7 million for 2010— a drop of five per cent from last year. That produced a decline in net profit to $13.6 million from $16.5 million last year.
COST-CUTTING CAN BITE
Looking ahead to 2011, and echoing the company’s conservative tone, analysts at Desjardins Securities decreased their estimates for Calian’s earnings per share by 14 cents, down to $1.77.
“Government cost-cutting initiatives as well as overseas deployment reductions in the military will inevitably have an impact on the company,” said Desjardins analyst Benoit Poirier in a recent report.
Poirier added that government cost-cutting measures could eventually benefit Calian if those measures included the use of contract outsourcing and staffing services.
“We continue to be pleased with the company’s strong financial metrics.”
Calian CEO Ray Basler says that the company expects growth in the business and technology services division, but revenues in the systems engineering division will likely remain flat.
“We have come through a pretty decent year within 2010 and we’ve obviously got some obstacles, but at the same time we’ve got some opportunities in the future,” says Basler. “Really, the message is: steady as she goes.”
BATTLEFIELD BOTTOM LINE
Going forward Calian faces uncertainty in dealing with its largest client: the Department of National Defence (DND). While Canada’s military transitions into a non-combat role in Afghanistan and reduces its overseas deployments, the impact will almost certainly be felt at Calian.
Calian currently provides simulation and training services to the military but Basler says the need for training could actually be heightened as the drawdown of troops proceeds.
The healthcare services contract [provides] health care practitioners to DND…they need those services [regardless of] where the army is in the world.
“We could end up doing more training than we have in the past or conversely, if the military decides to bring some of that training in-house, it might be less,” says Basler. “It could cut both ways.”
But Basler adds that Calian’s long-term contracts with the DND provide an element of security going forward. Currently, Calian’s contracted backlog with DND and others amount to $924 million with terms extending to fiscal 2018.
“Obviously we go through both short term and long term planning with DND, and we’ll use those avenues to gain insight into what they expect to do [next],” says Basler.
CFO Jacqueline Gauthier adds that Calian is only half way through its largest contract with DND: a ten-year health services agreement worth approximately $55 million per year.
“The healthcare services contract [provides] health care practitioners to DND…they need those services [regardless of] where the army is in the world,” says Gauthier.
CURRENCY VOLATILITY
Q4 revenues for SED, Calian’s second largest operation, dropped 4 per cent over the same period last year. And with approximately 80 per cent of SED revenues in foreign currencies, Basler suggests that the high Canadian dollar is cause for continual concern.
While the company uses derivative instruments to secure the profitability of existing contracts, Basler notes that a fluctuating dollar can make spending decisions difficult:
We’re a pretty defensive stock in that we’ve got a lot of long term contracts and a steady base of work.
“Obviously, the stronger the dollar is, the more uncompetitive or pricey we appear to be, says Basler. “We have been living with it for the past couple of years.”
Looking forward, Basler notes that a stronger Canadian dollar could undercut the company’s competitiveness when bidding on international projects denominated in foreign currencies.
“There’s no doubt about it, [the high dollar] has been more difficult for companies,” says Ottawa Centre for Research and Innovation CEO Claude Haw.
“It does mean that we just have to be more competitive globally,” adds Haw.
TWO-FOLD APPROACH
A house divided may not stand, but sometimes a company divided is better off.
Part of Calian’s success can be chalked up to the company’s dual nature: part telecom service provider and part staffing and outsourcing firm; servicing both private sector clients and government. Calian’s unique positioning has allowed it to weather an economic downturn and will assist the company in coping with a volatile Canadian dollar.
When the economy faltered in 2008, Calian was buoyed by reliable contracts with the government. Now that the Canadian dollar is surging, Calian can rely on domestic clients—including Research in Motion— to shield it from some of the volatility felt by Canadian companies dealing principally in foreign currencies.
“We’re a pretty defensive stock in that we’ve got a lot of long term contracts and a steady base of work,” says Basler.
“We’re carrying on a strong steady business and even though 2011 doesn’t have huge jumps… it is steady and predictable, and we fully expect to deliver.”