Okay. Great. All right. Come on in. Have a seat. Some of the good seats up front still, if you need one. You're welcome to sit wherever. I'm just saying they're available if you want it. Thanks for joining us for the next session at Baird's Global Consumer Technology and Service Conference. I'm Andrew Wittmann. Together with Justin Hauke, we cover the consulting and engineering companies, construction and engineering companies, and facility service companies. This next session here is with Parsons. We are really delighted to have them. This is, I think, the third time that you've been at this conference, Carey?
That's correct.
Carey Smith is the company's CEO. We are going to do this one as a fireside chat. I usually like to just start off with the question of, why do you not tell us who Parsons is and what you do? I will launch from there with the other questions that we have for you.
Sounds great, Andrew. Happy to be back at the Baird conference. It's always a terrific forum. So Parsons, we have about 20,000 people. We're located in 23 countries around the world. We're located in all 50 states. We report in two segments: federal, which will comprise about 52% of the company's revenue this year, and critical infrastructure, which will be about 48% of the company's revenue this year. We have six end markets. The first one is cyber and intelligence that represents roughly 20% of the company's revenue. One of our fastest growing areas is very exciting. We've delivered over 20% growth in the last two years in the cyber market. We play predominantly in offensive. I always like to look at cyber in three layers. You have offensive, defensive, and infrastructure and services. We do about 75% offensive, 25% defensive, and we don't really play in infrastructure and services.
The second market area is space and missile defense. That makes up about 10% of the company's revenue. There we're the number one contractor for the Missile Defense Agency. If you think about the system engineering and integration work that goes on there, that's a role that we've held for four decades. It's a role that's going to be increasingly important as we look forward to the future and critical programs like Golden Dome for America. In the space area, we're involved in space domain awareness. We've provided those capabilities to the Department of Defense and the intel community for a couple of decades. A few years ago, we were awarded the Commerce mission to be able to provide space domain awareness for civilian customers as well as international customers. We're involved in assured position, navigation, and timing.
If you lose your GPS signal, you're still able to get location information. There we have an exclusive partnership with Globalstar, where we're providing our proprietary software-defined radio capabilities. We've currently demonstrated the system over in Europe, and we're looking forward to demonstrating it in the Indo-Pacific in the future. We also do space ground systems. We've done over 170 different space ground systems. Third part of our portfolio is critical infrastructure protection. That represents about 17% of the company's revenue. There we're focused on protecting 285 embassies and consulates all over the world. We're the number one provider of electronic security systems for the Department of State. We're number one for the Army, and we're number three for the Air Force. We also provide counter unmanned air systems, so particularly for groups one to three, making sure that we can protect embassies and consulates against threats.
We do biometrics capabilities. If somebody's trying to improperly enter an embassy or consulate, we can tell just within minutes that they're not supposed to be there and make sure that they're rejected. The next area is the transportation sector. That makes up about 26% of the company's revenue. There we've designed and built over 10,000 mi of roads and highway across six continents all over the world. We've been involved in over 4,500 bridge projects. We're a world leader in long-span bridges. We've done over 450 rail and transit projects, over 450 airport projects, including the recent one we just announced in Saudi Arabia two weeks ago. We're really proud to be the program manager for the new King Salmon International Airport that will be handling 120 million passengers per year by 2030. The next area is environmental remediation. That represents about 12% of the company's revenue.
There we do work in mine reclamation for some of the world's abandoned mines up in Canada, the Faro and Giant Mine. We're also involved in PFAS, PFAS, emerging contaminant elimination. That's an area where we hold unique patents, specifically a capability called Hotisco that will destroy the PFAS molecule in situ, on spot. We think that's first technology of its kind. That market's expected to be about a $40 billion addressable market for Parsons by 2032. The final area is our urban development market. That represents about 12% of the company's revenue. Really exciting market area that's mostly in the Middle East. We are the number one program manager in Saudi Arabia. We're the number one program manager in the United Arab Emirates, number one program manager in Qatar. We're pretty much involved in every major project that's going on in the region today, particularly in Saudi Arabia.
I'll say we've seen a resurgence in the UAE too, as their population has tripled within the last five years. I just got back, in fact, from the Middle East trip when the President went over in the delegation two weeks ago and had the opportunity to go visit all three of those countries.
Yeah.
That's my quick snapshot.
That's a lot there, isn't there? Everybody's like, "Whoa." That's a great rundown. I love how you've got that totally committed to memory. Okay. I'm just going to start with where everybody's kind of focused. You cut guidance, and the stock went up 7%. That's the punchline. The reason you cut guidance was a one singular contract that was very large that you had. Why don't you talk about, if you could, this is a confidential contract, so you're not going to say a lot about it, but we're starting to get a handle between the guidance reduction and what the financial impact was. Can you talk about how big this contract was last year, what it's done this year, and how it affected your reduced guidance, just so we can level set and understand the moving pieces and the change of your guidance first?
Yes. I'd say this was an important contract. It was through the Department of State. It was one that we competed for. There were actually 10 companies that originally bid on it. We were deemed the only company capable of performing the mission, so we did get the mission directed sole source. The mission was originally going to be a 10-year program. We were in year three of that job this year. January 20th, when the new administration came in, there was the Foreign Aid Executive Order. That paused a contract that was related to ours. It did not stop ours, but it did cause our work to run at a reduced volume. We ran about 80% volume for the first quarter. We were about 50% volume for the second quarter.
Recently, there was a testimony where the Secretary of State testified and did indicate they were going to fulfill statutory obligations, but there was a little more clarity added the week after that when we received the organization chart, and it did eliminate the office. We felt that due to the uncertainty and the ability for us to be able to estimate this contract, that it was best if we reset our guidance and just took this contract out. I'd like to highlight that our performance on the contract has been rated excellent for the past three years, just an outstanding mission, and we had outstanding performance on it. We will not also, as a company, be affected much from a personnel perspective. We were predominantly doing program management work and providing the technology capabilities, so we just will basically reassign a handful of people.
Without this contract, we're really excited about our growth prospects because when you look at Parsons, we're going to be growing 17% in total and 14% organic growth. That would be 19% total growth in our federal segment, 17% organic growth. If you look at our critical infrastructure segment, that's 15% total growth and 11% organic growth. That's really a result of the strong tailwinds that we have in both of our segments to be able to deliver double-digit organic growth.
Yeah. This contract took up a lot of airtime. This allows you to breathe free kind of in a way and just really focus on those really attractive growth rates: 17% total, 14% organic at the consolidated level. I just want to be clear here, though. The office is closed. The contract has not technically been canceled. You're just taking it out of guidance. Do you anticipate that some of this could show up still, depending on what the administration wants to do? How do you think, how should investors think about that?
Yeah. So what we've done is after June, we've zeroed the contract. We have assumed that for June, we would be demobilizing, but it could trickle on. If anything that would come out after this time, we would disclose separately.
Okay. That'll be helpful to understand what's going on then too. Okay. All right. So where do I want to go next? Let's talk about the federal business. That's a little bit bigger part of your business. I think it's at 52% now and growing 17% organically. In there, there's a couple of things. There's a few topics that I want to get to. I want to get to DOGE. I want to get to FAA, and I want to get to Golden Dome. Let's do those in reverse order here. Why don't you talk about your stripes in missile defense and how applicable they will be to Golden Dome. As I understand it, I think you've had some recent meetings with senior-level officials in the administration that are helping you understand what the plan is here.
To the extent that you can share with us what the plan is, can you tell us about that plan and how Parsons factors into it?
Yeah. First, I'd say we're really excited about the Golden Dome opportunity. Again, we've been the Missile Defense Agency system engineering integration contractor for four decades, so a very strong position there. A lot of what is going to happen on Golden Dome is actually integration because a lot of the systems are out there. They just need to be put together to be able to provide coverage across the United States for unmanned air systems, cruise missiles, hypersonic missiles, all the way up to intercontinental ballistic missiles. We would see our role as being heavily involved in system engineering and integration. In addition to those capabilities, we do provide non-kinetic effects. You think instead of a missile taking out a missile, we can use cyber and electronic warfare effects to be able to perform that capability.
That really came through our purpose-built federal portfolio where, I'd say starting in November 2016, we pretty much only had missile defense work. Then we really started to buy and organically grow our capabilities in cyber and electronic warfare to be one of the elite companies within that space. We look forward to the prospects on that.
That was a couple of different acquisitions. It was not just one acquisition that was this. You built up a couple of different acquisitions that all helped you in this as you were reforming the company and your vision.
Absolutely. We had a vision basically that said we were going to provide full-spectrum cyber operations, and we wanted to cover as much of the electromagnetic spectrum as we could. So even our most recent acquisition that we did, Black Signal, helped us in both of those areas, cyber and electronic warfare.
Yeah. Okay. The FAA has been getting a lot of attention as well. While this is, you could argue this is critical infrastructure side of the house, it's actually, I think you report this in the federal side of the business because it's a federal agency. Gosh, there's talk of what, $12 billion was spent to kind of redo air traffic control. Maybe for the benefit of the room, can you talk about what you've done for air traffic control systems historically and where your position is on that competitively and obviously the implications that it has for this next round of investment that the government wants to make?
Yes. In a year, correct, there's $12.5 billion that's in the reconciliation bill for FAA modernization. The goal would be to complete that modernization effort within the next four years. Parsons has been responsible for the FAA infrastructure. We've supported the FAA for four decades. On our current contract, which is called Technical Support Services contract, we've been on that contract for 24 years. We're pretty much at every FAA location. We do everything from permitting, site access, design, program management, construction management for anything that's being basically installed, upgraded within those systems. We are very excited about helping the FAA to achieve its vision. I will say the FAA does have a plan that what they have needed is funding, and it is exciting to see that money moving forward within the reconciliation bill.
What's a realistic timeframe for them to get going? I mean, you said they've got the plan. They just needed the funding. The funding could be coming. Everybody was saying July 4th. We'll see about that. That's politics and not here that we're going to solve. Sometimes it's just they've got $12.5 billion they want to spend, but you're human capital limited. Is the timeframe that they wanted to deploy that possible? Does Parsons have enough people to help them get at that goal?
Yeah. I would say they have a reasonable plan, and they've kind of outlaid the various different areas. Like infrastructure, here's what needs to be done. Surveillance, here's what needs to be done. Automation, here's what needs to be done. They've laid it out over a four-year period. Once the funding is authorized, they're ready to go, and that four-year clock will start moving.
Okay. DOGE, I think one of the interesting questions from your last conference call was, how much have you debooked because of DOGE? The answer was.
Zero.
Yeah. Exactly. There is the kind of the addendum question to this. There has been talk about the Department of Defense making cuts of 8% per year for a few years, actually. There is this conflicting information that the big, beautiful bill is talking about $1 trillion defense budget, which would be an increase of $150 billion and not a decrease. Can you help us reconcile how both of those things can be true at the same time?
Sure. Let me start with DOGE. DOGE had several objectives, and they were really looking at consulting firms. First, DOGE and GSA looked at the top 10 consulting firms. Then they went to the next nine consulting firms. Because Parsons is not a consulting firm, that's why we really have not seen any impact. There was also a memo last week that Secretary Hegseth issued, which was about insourcing areas such as enterprise IT consulting work and advisory and administrative work. Again, that's not what Parsons does. We're a solutions provider. We're focused on getting mission capabilities to the warfighter. Regarding the FY26 budget, there's a goal to realign from non-priorities to areas of priorities. To basically, starting with the five-year defense plan in FY26, take out 8% or $50 billion per year and align it to a set of 17 priorities, which Secretary Hegseth has outlined.
Parsons has aligned to 10 of those priority areas. It is things like I already talked about, such as cyber, munitions modernization, Indo-Pacific region, cyber command, space command, nuclear deterrence, et cetera. Again, I'd say we're quite excited about the budget realignment into those priority areas, and I think our purpose-built federal portfolio is ready to help solve some of those problems. A couple of areas we did not talk about that are in the budget, I'd say munitions modernization was put in by the House at $21 billion. The Senate Republicans came back with $23 billion. Parsons is currently at Holston and Bradford, and we are upgrading those facilities. We just received an award last week for the ammonium nitrate tank farm that is going to be added to Holston. That is an area that we're excited about. Another one would be border security.
There's $61.5 billion in the budget for border security. We've performed border security all over the world for the past two decades. Also, we've done work on the Mexico-US border. That's another area that we believe that we're going to tap into. Nuclear deterrence, it's about $13 billion that's in the reconciliation budget. That would be for the Sentinel ground-based infrastructure. Parsons has been engineer, architect, and record on Atlas, Titan, and Minuteman. We look forward to getting involved in Sentinel as well.
That's all missile defense stuff, basically.
Missile defense, yes, ground-based infrastructure. I'd say the final area, $11 billion for the Indo-Pacific region, where we're currently positioned on Guam, Kwaj, and we have hundreds of people in Hawaii.
Yeah. So basically, the takeaway I hear from that is the areas that are getting cut, you don't do, and you're aligned to the stuff that is getting the redirection of those funds. That's before we even talk about the increase in the budget from $850 billion to $1 trillion.
Yes. We're excited about the federal budget alignment.
Does it make sense to ask the question about where the extra $150 billion goes? Because most of what I heard from you there was probably just the $50 billion per year that's getting realigned. Is it different buckets, or is it all the same?
Yeah. So the reconciliation budget, which is going through, which the President would like to have signed by July 4th, that has the additional funds that will be spent. Originally, reconciliation could be over a 10-year period. They hope to have that money expended over a four-year period. The FY26 is basically a reallocation, 8% per year over the five-year defense plan.
Got it. Okay. While we're talking about federal, I guess maybe we'll wrap up on this part of the conversation by asking about your kind of goals strategically through M&A from here. You already talked about how you purpose-built this when you came in. You brought your experience in the federal government service. You looked at what you had, what you should have, and we've articulated some of that. What still don't you have maybe is the question from here. Where would you like to go next to really kind of keep rounding out your portfolio of services?
Yeah. When we do M&A, we look at companies growing greater than 10% top line, companies that have greater than 10% EBITDA margin. On the federal side, we're going to continue to double down on the areas I described. How do we do end-to-end cyber? How do we do end-to-end electronic warfare? Basically positioned to be a leader in information operations. On the critical infrastructure side, we're also looking in M&A. In fact, our most recent deal that we closed, we're quite excited about, was BCC Engineering in Florida, which enhanced our transportation engineering capabilities. We will look at specific states. The states that we identify as Tier one are California, Florida, Texas, New York, New Jersey, and Georgia. Those are the states that are going to receive the most funds that come through the formula funds. We're kind of doubling down.
It's not enough, for example, just to be in Florida. We happen to be in Jacksonville and had a big presence, but we really need a presence in Miami. We'll look there. We'll also look at digital transformation capabilities on the critical infrastructure side. I think Parsons is the pioneer leading digital transformation of infrastructure. How do you apply artificial intelligence to the problem? How do you apply cybersecurity to protect our utilities, our water companies, our transportation systems? We're fortunate that we can vertically integrate because we have domain knowledge on the infrastructure side, but we have cyber technology on the federal side of the house.
I feel like even just technology is a great enhancement to, I'm going to switch over to critical infrastructure now. We're to talk about the design business, the consulting, engineering, design business. Technology is great, and it's going to make your team more efficient. But I kind of feel like even just your base employee utilization rates have been a pretty important story over the last few years. Can you talk about how the growth rates that have been underpinning your critical infrastructure business have driven utilization, how that's changed over the last couple of years, and if you expect that to continue to improve?
Yes. I'd say we have very strong utilization rates. We tend to run between 80% and 90%. One thing that we do that's unique is we move, we have the ability to work from anywhere. So you can be working up in Canada in a program in the Middle East. You can work in North America on a program up in Canada. So it's kind of engineer design from anywhere. We're fortunate in the critical infrastructure side, particularly in the North America market, that in the last 24 months, we've won five, six of our biggest projects in our company's history. So really moving up the value chain. And we're ranked by Engineering News-Record now in three categories as top three companies and punching above our weight class.
Within the Middle East, I mentioned number one program management consultant in all three of the major countries, Saudi Arabia, United Arab Emirates, and Qatar. We get excited about the US infrastructure bill, $1.2 trillion in the Infrastructure Investment and Jobs Act. That will not peak till 2028, and it has got about a six-year to eight-year tail after that. We will have the next surface transportation bill that hopefully will be passed by November of 2026. You look at the Middle East spend. In Saudi Arabia alone, we are anticipating $1.3 trillion of spend from the Public Investment Fund on infrastructure. A lot of global trends right now in infrastructure upgrades.
Yeah. There's a lot to unpack there. I want to maybe go back before I go forward on some of those. One of the things you didn't say that some of the other publicly listed firms say, they've got low-cost engineering centers. Parsons has elected not to do that and instead to work share like you described around domestic for better engineering centers. Why?
For us, it's been very effective because you can easily move work. You don't have to move people. You don't have to reestablish a new center. You can keep the same trained people that you've had. For Parsons, particularly in this critical infrastructure sector, people have been with the company for decades and have a lot of expertise that we want to retain.
Got it.
We set up basically practice areas. We have like a bridge practice area. We have a roads and highway practice area. These are really deep domain experts.
Yeah. These are teams that, again, they've got people all over the place that are part of the bridge team or the part of the whatever team. They work when we spent our day with your team in infrastructure. They worked really closely. It seemed like they knew each other all personally in some ways, which is pretty impressive. Yeah. There's one other thing I wanted to ask about that. It's escaping me now. Okay. Maybe I'll just move on. Does tariff or macro uncertainty become a factor in your customers making decisions to move forward with projects?
I would say the only area that probably tariff will affect the industry would be potentially lower spend due to tariffs. Generally, because of the type of work we perform, which is design and program management, we're not personally impacted.
You're not personally impacted, but because maybe more dollars have to go to the materials, the volume of design work will have to shrink because each individual project costs a little bit more, is what you're saying.
Yes.
Is there any tangible signs that that's happening yet?
I have not seen it. Obviously, with critical infrastructure, we've had 18 consecutive quarters greater than when I booked a bill. We've been running pretty well for a long time.
The question that I had before just came back to me, and so I'll ask it. You said that you won five of the company's six largest infrastructure projects of all time here in the last year or two. I have to think that if your teams are assigned on big continuous projects like that, it's above average margin. Is that a fair assumption? Just because there's just less frictional time for mobilizing teams and demobilizing teams. They just go to work every day knowing what they have to do for a long period of time. Is that right?
I would say that's a factor. I would also say right now, demand's greater than supply.
Are you able to price for that? It seems like when you're working for public sector customers, my experience is that most of the companies maybe tend to be a little bit more like a price taker. Is that changing with the demand being greater than supply today?
I think we're getting good margins within the infrastructure business. I would say, though, we don't compete on a margin basis or a cost basis. We win or lose on technology. That's true, by the way, in both of our segments. That's one reason I'm proud of the fact we're kind of focused on being an advanced solutions integrator that differentiates with technology.
Yeah. This obviously brings me to the next question, is that your first quarter, your March quarter, which is usually actually seasonally in the design business, not the strongest quarter of the year, you had 10.1% margins, which is above the margins that you're guiding for the year. Was there anything unusual about that 10.1% that we should know about that suggests that the year would be less than that?
Yeah. So we've always said we would get the business to double-digit margin. I would say Q1 was what I would call a clean quarter. There were no one-time upticks and no one-time downticks. We've been moving away from what we called legacy programs, which were the company used to get involved in areas like construction joint ventures. It was a business we started exiting in 2018. As we exit that business, you're going to naturally see our margins progress. Last year, we had 50 basis points margin expansion. This year, we will have 30 basis points margin expansion. Really, you could look at that as 60 basis points coming from the critical infrastructure segment.
Got it. I want to spend the last amount of time that we have here talking about the Middle East, probably not, frankly, not enough time to talk about the Middle East. This business has been going very rapidly. Why do not you quantify that for us? Really, the question that I want to get to, now that this business is approaching almost half of your infrastructure segment, I think it is 40%.
It's about a third, yeah.
A third. Okay. A third of the business. The revenue compares are presumably getting tougher. Maybe they're not. Against that, can this book to bill continue to be above one in the Middle East over the next 12 months based on what we're seeing today?
Yeah. We are projecting it to be above one. We're projecting double-digit growth within the Middle East. All three countries within the Middle East, we expect double-digit growth. Saudi and Qatar over 10%, and then the UAE over 30%. What's been happening there, if I just take the UAE for a minute, the UAE's population from the year 2000 went from 3.3 million. Five years later, you're at 9.7 million. When you triple your population, you now have to add transportation, infrastructure, additional water capabilities, utilities, etc. We're very involved in helping with that and also doing a lot of build-out in Abu Dhabi, for example. What we've seen in Saudi Arabia is a similar population trajectory. It's gone from 24 million people in 2000 up to 33 million people in 2025.
More importantly, they're going to be on the world stage in 2029 for the Asian Games, 2030 for the Expo, 2034 for the World Cup. What's really important for Saudi Arabia is making sure they have the traffic flow, the traffic management, particularly around Riyadh, going very smoothly for those efforts. We're involved in modernizing the roads. We're also doing the traffic management program. We also just opened probably the most beautiful metro, at least I've ever been on, which is the Riyadh Metro, and had the opportunity to ride that before the opening ceremony, just a pristine metro. We're doing the world's largest entertainment city, Qiddiya. We're the program manager for King's Salmon Park, five times the size of Central Park. We're involved in Al Sidal, which is a resort location that's going to be on the left. We got a contract to convert palaces to hotels.
We're in the tourism and entertainment industry. I think all this to say it is amazing when you go over there, I think, in terms of transportation, infrastructure. It's some of the best in the world. It gets done the fastest in the world. It's the most modern. It's being done with the most recent technology. We like that fact. We can actually bring a lot of that capability even back to North America.
The confidence behind having a greater than one book to bill in these businesses, does that come from the fact that you're on these programs and the full scope hasn't been released? Does that mean you've just got visibility that the future scope increases are coming on these existing programs? Or do you need other projects to be, I don't know, unveiled, for lack of a better term, that would contribute to the backlog?
Yeah. I'd say it's a combination of both. When you look at the U.S. not peaking until 2028, we don't expect the Middle East region to peak until about the 2030 or 2032 timeframe. We are still indeed on the ramp up. Every day, we're continuing to win new projects, like we just announced during the Middle East trip, the win of the King Salman International Airport. Just making sure we continue to win, but also continue to perform on the projects we're currently on.
Great. I'm going to leave it there. We're out of time. Please join me in thanking Carey for the presentation.
Thanks, Andrew