Newsfilter article unlocker

All right. Good morning, everyone, and thank you for joining us for this fireside chat with the leadership team at ICF International. We're pleased to have them here at our Industrials Conference, and thanks to you all for joining. We are going to cover a number of topics today about ICF, both background on the business, trends, and what we're seeing in the market today and looking forward. So before I go too far into questions, I'm going to pass it over to John and David to quickly introduce themselves and then we'll dive in so okay great I'm John Watson I'm chairman and CEO of ICF I've been at ICF for 39 years so I've seen every corner of the business and really pleased to be here appreciate the invitation from Jeffries Dave Birkin senior vice president I run our technology modernization and digitalization experience business and been at ICF 21 years as LinkedIn was so kind to remind me like no great so ICF a really interesting business an integrated business with a lot of different business lines across federal state and local energy digital modernization transformation maybe it'd be helpful just to start high level and John I'll probably start with you to give a little bit of the ICF story what makes you unique and different well sure so as you said I mean we're a professional services and technology services firm about two billion in revenue 9,000 employees we've been traded for coming up on our 20th anniversary on the Nasdaq next week and so I think in terms of of ICF and our differentiation first since the founding of the company in 1969 we've always been known for the deep domain expertise so the subject matter experts in the firm in the verticals we operate they allow us to provide first-rate advisory consulting services of strategy program design a policy and economic analysis research so that's been a strong differentiator for many many years in the last 20 years what we've done with our clients is also in addition to providing those advisory services we've developed a set of cross-cutting capabilities to help our clients implement the advice and that gets at technology services complex program management change management and so we do both of those for clients and one of the things we can do given we do both the advisory and implementation is connect that white space between them for clients which I think allows us to do those types of activities very efficiently we also have a very multi multidisciplinary staff we're really known for for the breadth of capability and our ability to bring together these interdisciplinary teams to solve very complex problems, very collaborative. The other thing about us is we work across multiple markets. We work on the commercial side and we work on a government side and were able to bring commercial and government perspectives to those clients which they they really value. And so I think those are you know the key differentiators. I would also say in this environment we deliver measurable outcomes for our clients. So So our contracts now are increasingly either fixed-priced or outcome-based, both for commercial clients and government clients. And we deliver on that, and that's how we get paid and make our fees. And I think that we've really leaned in hard on that. Yeah, great. And you mentioned the federal business, which obviously had disruptions over the changing administration in the last couple of years. But that's a lot in the rearview mirror, and you've emphasized some of the changes and how those made you stronger over the last sort of 18 months. Can you elaborate on that? Well, sure. So, you know, I think about 40% of our business today is in the government sector. We did see a lot of disruption and change in 2005, 2025 from that. I think the way we managed that is because of our diverse portfolio, the other 60% is in commercial, state, and local, and international. We shifted a lot OF the staff capabilities out of the federal market, given this disruption into the commercial and state and local and international markets, which grew quite nicely over the last several years. So part of it was just repointing that staff into markets where we saw growth and opportunity. That's the beauty of having a diversified portfolio. We're a little different from many of our peer companies in that we are diversified across both commercial and government, and that helped us a lot. With that, the other shift we had to make is how you go about winning commercial business and state and local business. It's different procurement, it's different velocity, it is different speed than the federal government business. With that we had the pivot and speed up and adjust our internal processes to win that business. I think we did a very good job of that. And then we really leveraged AI to help us improve cost efficiency and improve innovation within the company. So I think those are three areas where we really did a nice job in terms of pivoting the business in the last year. That's great. And then, Dave, maybe I'll jump off that last point on AI and technology modernization. Maybe if you would give us a quick overview of the business that you lead within ICF, because I think it's going to weave its way into many of our next questions. Sure, absolutely. So our modernization business makes up about half of our federal business, a little more than half of the federal business. it is a lot of what it sounds like and sometimes it's not very exciting but it is modernizing what we would consider core government systems so things that are required statutorily by law so you think of this like grant systems payment systems fraud waste and abuse Medicaid and Medicare payment systems you know we've recently just completed a project on modernizing a commercial driver licensing program so these are systems that are required by law by Congress that's why they came through the cuts in in 25 and so you know that business we've we've built it out over the last six seven years it's growing quite nicely with the introduction of AI and now working in the AI fabric layer and the data layer because we have been working in modernizing these core systems bringing them into the cloud infrastructure we are now being turned to by our clients to build out both the cloud and the data side and then that AI fabric on top so that's a quick overview you know and John just referenced the use of AI you know we basically integrated into everything we do whether it's how we approach our work how we deliver for our clients how we measure our outcomes perfect and so that diversified portfolio that you have John do you have an optimal view on what or a view on what optimal mix should be or or do you manage the business to find that what as As I said, I think we do have a diversified portfolio. We've always had that as a company since our founding. Today we're about 60% non-federal, 40% federal. We're seeing a disproportionate amount of the growth opportunities in our non-Federal business, commercial energy, disaster recovery in state and local. And so we'll follow the market, I would expect for the next three to five years. Following the market will perhaps take us to 70% non-federal and 30% federal. That doesn't mean we won't grow in federal, we will, but we'll grow more quickly outside of federal. So we'll follow the market and our investments will follow the markets. Right now I would say, there's no optical mix. We're gonna follow the mark and that's the beauty of having a diversified portfolio. Yeah, that's right. Let's sit on the commercial energy market, which is one of those growth areas that you've seen over the last couple of years certainly will continue to grow going forward how how do you think about sort of the trends in that business among sort of utility modernization and technology being in so we have three growth areas right now in the business that we're focused on um commercial energy the IT modernization business in federal and and disaster recovery which is primarily a state and local I would say the the end commercial energy is about 30% of our total business it's the first among equals in terms of growth markets we're seeing tremendous opportunity there once in a generation increase in electricity demand the amount of investments that's going to be required to meet that with generation and transmission related assets the rise of electric vehicles there's just a whole set of things that are just you know causing unprecedented demand we have a significant business at scale there we have marquee clients we're seeing tremendous opportunity I think in the long run we should be growing double-digit in that portion of the business and so we feel very good about that Dave mentioned the IT modernization business it's about 20% of our total business you know I just would say there the federal government is in the third or fourth you know third or fourth inning of modernizing their backbone systems they still are using cobalt and Fortran there's a lot of work to do there it's been priorities of two or three administrations now the Trump administration actually supports IT modernization they just want to push hard on AI and we're good with that because we're pushing hard on an AI they wanted outcome based fixed price that's how we do all of our work and so I think we're highly aligned there and the last thing I just mentioned is disaster recovery we're a market leader in implementing disaster recovery programs for state and local governments it tends to be more of a there's an optionality there it really depends on when there's significant disasters typically hurricanes. I think the data shows that if you take a long-term trend, the frequency and severity of these types of events is increasing. And when they occur, these are contacts that can really move the needle. There's been three or four times in the history of ICF where we've won these contracts and they've added, you know, two, three, four hundred million dollars of revenue a year for some period. And so those are the three growth drivers. As I say, energy is certainly the first among them. Yeah, maybe a note on the disaster piece, right? Because As you say, over decades, it's been episodic, but it's a recurring, non-recurring, if you will, that seems to be more prevalent, or at least the risk is more prevalent. Yeah, I think that the trend is clear that the frequency and severity of disasters, whether it's hurricanes, wildfires, floods, they're increasing. They'll continue to increase, and it is episodic when those large events happen. I will say the government in the last decade has also been spending more to prepare for these events, to make assets more resilient, to mitigate the impact in advance. And so that's helped flatten it out a bit. So we have a very good business right now. It's just the real optionality is down the road when these storms occur. Right. Yep. And, Dave, so your business is federal-focused, but that technology push is throughout the organization. How do you think about bringing that technology modernization into the non-federal pieces of the business? Yeah, I mean, so as John said, you know, we do pay very close attention to the market trends. And so while the business was built as a federal-first business, if I think about it that way, we've, in the last two years, made huge strides into state and local, working in regulated markets like utilities. The big thing that we look for is kind of a replication of what we consider our special sauce on the IT side. So the way I like to think about this is, in theory, almost anyone could modernize an IT system. The question is what it has to do and whether or not it's got a mission component piece that's going to interact with, whether it be citizenry or customers, in a way that that interaction is just absolutely critical, that the system has to work the first time and every time, no matter who's accessing it and how it's being deployed. So we look for those type of similarities. We've actually gotten a great foothold in several states where we're taking what we've done at the federal level and bringing that expertise down to the state level. We partner with our utility colleagues in the energy market, and those types of sort of offshoots have been great. We're early in this, I'll call it a pivot or adjustment, but the returns so far are great. We've seen, you know, double-digit growth in both those spaces. Great. And maybe I'll touch on international really quick as well as part of that pivot. It seems like that piece of your business is growing nicely in the latest quarter. No, absolutely. It's about 7% of our business is in international, primarily working for the European Commission and the U.K. government on the types of issues we work here in North America on from energy to environment to public health to human services. is we have won a couple of very large contracts in the last six to 12 months, both in the European Commission and in the UK. So that business is growing north of 20% this year. I expect it will grow north of the 20% next year and the trends are very positive there. And so it's the smallest part of our business, but it's also very highly rapidly growing and the work we do, I mean these are global issues we're working on and so we're seeing global opportunities. Yeah, yeah. So we touched briefly on technology that you're bringing. The government customer is also changing the way they buy technology, right? Buying more software as opposed to systems integration. How do you think about sort of shifting the ICF business to take advantage of those trends? Yeah, so those are actually things we're quite excited about. So we, unlike a lot of our peers, we're not locked into any particular platform or SaaS provider or type of cloud provider. We maintain a pretty large partner ecosystem, so often we're brought in to solve some type of challenge or issue that has arisen, and so we're going to kind of leverage across what an agency's portfolio has, they've already bought certain licenses, they need to use these types of seats, or think of it as sort of an optimization across the entire tech stack of how to get them to the best possible outcome. So from that perspective, the way in which those buying behaviors have changed have kind of actually lend to our strengths right because we're not in a reset we're not a reseller we're trying to push certain certain aspects in that in that regard the other thing that is the big switch impact from that change is that John was alluding to this idea of outcomes is when you shift to that type of buying behavior you're not paying for labor you're not paying four hours you're seeing these time and material contracts they're fixed price contracts 80% of my business is outcome fixed price contracts. So we're already built for that business model. We're built to essentially get in, build out the system, implement it, and move on to the next thing. And that's what the government is buying right now. Yeah, which is probably a good transition to Fathom, right? Which is your way of doing that just more rapidly. Yeah. So FathOM is a suite of services we launched last August. Best way to think about it, I'm sure our marketing team will not be happy, but our The simplest way to think about it is a suite of AI agents that can operate in pretty much any environment in any type of technology stack. So, again, staying with that theme of being agnostic to the technology, it is something we can deploy inside government-secured environments. It's something we kann host ourselves and access back and forth. But it allows us to essentially start at the 40-yard line every time. So we've got a set of preset agents that are ready to be customized that we can employ. It allows us to not only help clients sort of speed along their AI journey, but most importantly, it allows us do rapid prototypes. So we don't talk to clients without something they can touch, feel, play with, see if it's along the lines of what they're looking for to solve their problem. We have an internal standard of we can produce any prototype to answer a customer's question within 24 to 48 hours, as we like to joke, weekends included, right? So many times we'll go and see a client on Wednesday, have a working prototype for them by Friday, and that allows us to have a much more tangible conversation than just, sure, we've done this before. Here's past performance. Here's our quals. Yeah. Yeah. And I just would emphasize that rapid prototyping is a major shift in how we sell and how we engage with clients in terms of getting new work and then scaling that new work. It used to be the clients would write a detailed scope of work, and you'd write a proposal, and six months later you might win it. Now with AI, if you can go in, understand their problem, and demonstrate value in 24 or 48 hours, and you have the contract vehicles that allow them to reach you, you can really accelerate and really win business in a much more agile and quick way, which this administration, they're AI-led, and so we've really, I think, done a nice job of aligning ourselves with that future and are seeing the fruits of that. The other thing I would just say is, I get asked the question a lot, oh, well, is AI going to undermine the business? Is it going to, are your fees going to reduce? Are your projects going to be half of what they used to be? And I will say that, first of all, AI is improving efficiency, and we can do the work more quickly. What used to take, you know, we could probably 25% or 30% more quickly, So we are seeing the average project size come down. The fees are not coming down. If you deliver the value, you can maintain the fees. But with the projects coming down, there is a 10- or 15-year backlog. There is a huge backlog of systems that need to be modernized. And so if we can work through that backlog more quickly, the government will just give us the next assignment. And so I used to think it would take 10 or 20 years to work through this backlog. So maybe we'll do it in 7 to 15. But the fact that the projects are not as large doesn't mean there's not a lot of work to do. And so I'm generally, I think we're generally very bullish that, you know, if I looked out over the next 10 years, there's going to be plenty of work here to do, and it's not like the IT modernization business, at least given how we're positioned, is going to just dwindle or disappear, you now, in the short run. And I will say, it's interesting, our clients, the federal government clients we work for, and we work for the energy industry which is a pretty risk averse industry and so they're also not leaning in in as hard as other other entities um you know other commercial entities and so um and so i'm so that's a long winded way to say i'm quite confident of the growth opportunities and certainly in the federal arena over the next five to ten years yeah yep and so in that competitive landscape where you're bringing quick solutions rapid prototyping solutions how do you you think about that competitive set there's larger systems integrators there's sometimes the government itself there's pure IT services firms what really differentiates you yeah in that competitive so I think the way we tend to think about it is we kind of have three core competitors in this space so your traditional your si is your big large firms who've been doing this since the early 2000s with them it's what you just talked about that speed it's the We take a lot of contracts away from those SIs by going in and saying, we understand this is how it's being done right now. Let us show you a way that's 30% faster and cheaper. It's not just a pitch. We can show you exactly how we'll attack that system. Being able to do it on a fixed price basis is something that is a huge differentiation against that peer group. That's just how we're built and how we build those teams. On a pure technology firm, they may have us outclassed on the exact element of that IT system, but what they typically lack is the mission expertise of what that system has to do. So if it's a Medicare system, how are we going to ensure we're going to prevent fraud before payment goes out, as well as being able to claw back if we find fraud in the system during other tests? If it's grant system, are we able to track funds from disbursement all the way through? So that mission aspect, and John talked about being first and foremost a domain company, that's how we deploy. So we don't do any technology project with just technologists. Almost every one of our deployments has two or three subject matter experts or technical experts in either the agency or the domain field we're operating in to give that aspect so that we're not pulling, particularly right now, on government resources where they've been severely impacted by this administration. And then that third aspect of the more rapid deployment, think of sort of our large language competitors who are moving into the space with them it is an aspect of collaboration but also competition that for them they want to own and control all that data that does not work very well in the federal market and so offering that buffer being able to partner with them to provide you know closed-loop systems in ways in which we can protect government data but also allow the benefits for those systems that's that's the narrow line we walk there okay maybe I'll shift gears a little bit here because we spent a lot of time focused on growth, which is exciting, I think, across multiple end markets. But maybe on the execution side, you've had a long track record of growing EBITDA margins. Maybe give us a sense for where you are and where you're headed in that. Well, as you said, we've been guided for the last decade for 10 to 20 BIPs of margin improvement per year. We measure that as adjusted EBITda to revenue. So if you look over that 10-year period, I Think the average for that period is 14 bps a year so I think we've pretty consistently done that and that occurs based on several factors one is the mix of business and by that I mean you know what portions of the business are growing and how profitable are they and so certainly our commercial energy business is our most profitable business it's growing most rapidly so that's helping with the margins Dave's business IT modernization is primarily fixed price outcome based so for our government business his portion is at the high end of the margin arena and then disaster recovery work tends to be fixed price and so the key growth areas are I think the higher margin businesses that's helping us as we scale we shouldn't have to add as much corporate costs as we scale the revenues and so there's benefit there and then we are obviously looking at ways to use AI internally in the company we've made great progress actually on in the marketing and proposal front and in some of the finance areas. And so I think we're quite confident we can deliver 10 to 20 BIPs. We could have probably actually go higher, but we also wanna be reinvesting some of those savings into the business. And so net-net, I think, we're quiet confident we can continue to expand the margins. Yep, good. And on capital allocation, M&A's been a part of your story. You've also repurchased shares and generated a good amount of cash. How do you think about capital allocation from here? I think for us it's a balanced approach. I mean, I think we pride ourselves on being a growth company. I mentioned we're coming up on our 20th anniversary as a public company. If you run a CAGR on ICF on revenues for those 20 years, I think it's 13 or 14% revenue growth with more leverage on the earnings side. About half of it's been organic, half of its been inorganic. And so we certainly look to invest for the organic growth and the inorganic growth. We've done, I think, 35 acquisitions in the 15 years, 20 years we've been public. So that's an area of focus, but we also have been buying back stock. We've had back 435,000 shares the last couple of quarters, which is a record for us. And I think we'll continue to look at that too, particularly, we think I-SAFE is a compelling investment, So we've been buying back. And so it's a balance. I think on the M&A front, we're primarily focused in the three growth drivers we talked about. I think with commercial energy being the most likely place that we would do something on the m&a side. And more of a tuck-in, I think, than a large transformational deal in this market. But it's about balance on the capital allocation. We're trying to be balanced, but be very smart about it. Yeah, and what are some of those internal organic investments that you're making to position for? I mean, in our business, it's about people and it's about technology. I mean people, we need to have the skills and capabilities and honestly, we compete based on the quality of the gray matter between our people for two years. So we invest a lot there. We're investing a lot on the energy, the technology fronts, and then we're investing CapEx and developing new technology tools and models and data and analytics capabilities and so primarily I would say people in technology or the organic investments for sure great I have a couple more questions but I certainly welcome questions from the audience as well does anyone have questions they want to contribute while you think about it I'll ask one more thinking about the federal government it's obviously been a dynamic 24 months in the federal government landscape what's your outlook for the next 24 months? In the federal environment, I mean I would say that uh I think for the next 24 months um well we've generally guided for our federal business for the next several years from 2027 on we think we can deliver low to mid single digit growth in our federal business we think in the non-federal piece we can deliver high single-digit to low double-digits growth. So Net-Net, the company from 27 on, should be delivering mid to high single digit organic growth. Obviously, if we do acquisitions, that could take us higher. My view on the federal businesses, I think the cuts and the shift in programmatic focus and all the change, that all played out in 2025. I think we haven't seen any contract cancellations or significant shifts in our federal business since that all ended in June of 2025. So I think, we think we're on a road to growth, low to mid-single-digit growth. The work we have now is all statutorily required, so it's based on laws passed by Congress. Congress has been funding these programs for the last year. The latest budgets, we'll fund them for next year. So that's, I think how we're thinking about the federal business. Obviously now with 60% of our business on federal, and as I said, if you take a five-year view, perhaps going to 70%, you know, that's where we think we'll see the higher growth and really focus from an investment standpoint. Excellent. Please. Maybe you can just talk about kind of returning to that double-digit growth kegger you experienced over 20 years, because we've been quite a bit below that over the last three to four years, and I understand some of his government, but you understand the playing field now. How do we get back, and is that a goal of the company, to get back to double-digit top line, mid to high teens bottom line? Thanks. Yeah, I think that's the long-term goal for the company. I would say in the period 20 to 2024, WE GENERALLY ACHIEVED MID TO HIGH SINGLE DIGIT ORGANIC GROWTH, AND THEN WE WOULD LEVERAGE THE BALANCE SHEET, AND THAT WOULD GET US INTO THE LOW DOUBLE-DIGIT ORGANIC GROUGHT. IF YOU IMPROVE YOUR PROFITABILITY 10 TO 20 BIP'S A YEAR, THAT'S GOING TO GET YOU LEVERAGED TOWARDS MID-TEENS EARNINGS GROWth. I think that is the intent and that is strategy. I think we obviously had a transition here in 25, 26. I think, we're executing and I think we're on a run rate that will get us back to that from to the mid to high single in 27 and then 28, 29, I think the intent is to get to high single digit organic growth. And then with the balance sheet, we could get to the double digit. And so, I mean, that is the long-term plan. And I do think the growth opportunities in energy and in IT modernization and in disaster recovery certainly provide a compelling and I think clear path to get there. But absolutely, that's what we're striving to get to. Maybe a closing question for each of you. staying on that longer-term theme, right? If we look out three to five years, how do you think about defining success both for your technology modernization business, what does it look like, and then John, you for the enterprise. I can take tech first. Okay. So I think for us, the goal is actually really clear. We wanna be exactly in the AI infrastructure and data weave that exists inside federal agencies. So that means building out that cloud infrastructure, structuring that data for computational power of AI, and continuing to advise our clients on where humans need to be in the loop, and then where, to be honest, things can be automated or can be running in parallel with audit-proof trails and so on and so forth. So that balancing act of how fast can we go and how reliably and safe can we move, that is our core business, and that is where we're seeing tremendous growth in our space. And to be honestly, it's the thing that transfers the best from the federal environment, down to state and local, and even into our commercial clients. Because if we can prove that we've done it behind a secured wall in the federal government, that gives us a lot of cachet in the other markets. So for us, John's kind of tired of hearing it. It's all about the data. It's about that cloud infrastructure and continuing to build that out for our clients. I think I've said what I would hope. And I thought the question from the audience was perfect. exactly right I mean I think in the three to five year period I think the growth the intent is to get our organic growth back into the high single digit range continue to leverage our balance sheet for strategic acquisitions that get us into the double dividend revenue range with a focus on you know that 10 to 20 bips a year over the next five year and so you know I would say past is prologue as I look to the future and I think we're generally confident we can there as we look down the road perfect any others from the audience that we wanted we've got a couple minutes left if you'd like otherwise I think we'll just go ahead and close on that long-term vision John thank you for coming and thanks for coming