Perspecta Inc.
Q1 2019 Earnings Call Transcript

Published: 17 Aug 2018

[Operator:]

Good afternoon and welcome to the Perspecta First Quarter Fiscal Year 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Stuart Davis, Vice President of Investor Relations. Please go ahead.

[Stuart Davis:]

Thank you, welcome everyone to today's quarterly earnings conference call, our first as a public company. Mac Curtis, our CEO; and John Kavanaugh, our CFO are here to discuss our financial results, business momentum and forward-outlook. Today's call is being webcast on the investor relations portion of our website, where you'll also find the earnings release and supplemental financial presentation slides that we will use during today's call. Turning to Slide 2 of the presentation, please note that during this call we will make forward-looking statements that are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from anticipated results. For a full discussion of these risk and uncertainties please refer to our SEC filings including our Form 10-Q which we expect to file momentarily. In addition the statements represent our views as of today and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future but we specifically disclaim any obligation to do so. Finally as shown on Slide 3, we will discuss some non-GAAP financial measures that we believe provide useful information for investors unless specifically called out all statements on the call reference pro forma adjusted measures. The slide deck for today's call includes reconciliations to the most comparable GAAP measures. At this time, it's my pleasure to turn the call over to Mac, who will begin on Slide 4.

[Mac Curtis:]

Thank you, Stuart, and good afternoon. On behalf of our 14,000 employees I want to thank everybody on the call for their interest in Perspecta. I'm proud of the accomplishments of our entire team our first quarter as a publicly traded firm, as we work aggressively to integrate three companies and drive top and bottom line growth, all without missing a beat and delivering critical IT emission solutions for our customers. Our first quarter result support our overall investment thesis and build a strong foundation for our long-term earnings model. Specifically, I want to talk about four key messages from the quarterly results. First, our financial performance is on track. Second, integration is proceeding well. Third, we are focused on business development and have conviction around our growth engine. And fourth, we have high confidence in our ability to meet the guidance we laid out at Investor Day. Now, I'll explore each of these areas in more detail. Message number one from top to bottom, our results meet or beat our expectations. Pro forma revenue was up 2% year-over-year and we're expecting sequential growth throughout the remainder of the year. Profitability remains strong with pro forma adjusted EBITDA up 20% year-over-year after excluding a one-time gain from divesting a contract as part of the merger. Benefiting from revenue growth and margin expansion adjusted diluted EPS was up 22% year-over-year, again, excluding the divestiture gain. Around the asset financial and key financial measures collections were excellent and adjusted free cash flow was 145 million or 161% of adjusted net income. Kudos to the team on strong performance. Message number two, we are up and operating at Perspecta and working all aspects of our integration plan. Integration isn't easy but we have done it before when we put together Vencore three years ago so we know what right looks like. We started out day one with a complete management team organization structure so everyone knew their role and now they fit within Perspecta. We built this team with a best at lead approach and have a great blend of talents of all three of the legacy companies and some key executives with public company and spin merge experience brought in from the outside. Based on our experience to date Perspecta is a top talent destination. An important part of our integration process is to go out and meet with our customers and employees face to face to make sure that they are on board and see the power of Perspecta. Beginning of the day of the close members in the senior team conducted town halls at all the major sites and completed a comprehensive customer call plan. All the three vectors been very positive. Customers get the power of combination innovation and mission combined with IP prowess. Employees see the abilities to do more for customers and on the legacy USPS side they feel like they've come home to a focused public sector company. One of the things that drives people to be in this business is the mission bug. It's about the customer mission whether its National Security or delivering student financial aid, or supporting Medicare and Medicaid processing. It’s a mission centric business that is outcome based and as we go around talking to the employees they are really excited about that. As part of the integration planning we committed to specific cost take out targets for fiscal 2019, $20 million on the delivery side and $43 million in the indirect cost synergies. And we are ahead of plan on both. We are aggressively working plans to consolidate systems, streamline processes and accelerate to stand up of organic capability to eliminate transition service agreement cost. We are working with speed and purpose. This is all being accomplished is part of a broader strategic planning and integration execution effort to maximize the benefits of the mergers. The ultimate aim of the integration is to create unified outcome driven culture built around mission and shared values. And Perspecta, we talk about raising the bar, with our focus on the respect, accountability, integrity, success, and empowerment, as core values and are important to everyone of our 14,000 colleagues. We have 20% of our people in military veterans in the service and the unique skills leadership and alignment to our core values make them an invaluable addition to our team. In last two weeks, we have received recognition from US Veterans Magazine and GI Jobs as one of the top military and veterans friendly employers. It's great to get such an early validation of our culture. Message number three, we see business development as a linchpin of our success, and we are prioritizing our investments towards BD. On a pro forma basis bookings totaled 1.3 billion in the first quarter, representing a book to bill ratio of 1.3 times. The first quarter awards took out a significant portion of the recompete risk that we faced in 2019. They included renewals and recompetes for some of our most important programs, including a County of San Diego, IP outsourcing contract, claims processing for the Center for Medicare Medicaid services, and sample data collection and analysis for the Army Material Systems Analysis Activity. We also won a new contract with U.S. Postal Service, because this is a multiple work contract it's not in bookings, but we have a $476 million ceiling just for us, more than half of which would be for new work. Now two incumbents did not receive awards and we see significant opportunities to expand our presence in areas like application development and modernization, that of support and information and data engineering for the postal service. Now off course our largest recomplete engine is on the horizon. As you know we've been supporting Navy and Marine core internet since the initial contract award in 2000. Our current five-year contract is set to end September 30, 2018 and we're in negotiations with the Department of Navy for sole-source extension to the current engine contract referred to you EngineX. We expect to sign the extension in the next several weeks. At the time of the Investor Day, we were expecting our RFP for the compete or NGEN-R to be issued later in the year. The Navy has announced its plans on issuing RFP sooner. We expect NGEN-R will grow in scope, compared to NGEN, and then we split into separate procurements, one for end user hardware and the other for services, management, integration and transport. Importantly the services fees will be completed on the best value basis. The timing of our spin merger is ideal for the re-compete because we can layer Perspecta's rich IP and innovation portfolio in data analytics and cloud capability on top of our long history of performance. We can accelerate the Navy and Marine course IP modernization journey without missing a beat on operating the network. Now let’s take a broader view, we've got a very robust pipeline of about $66 billion of qualified opportunity over the next three years. Looking just what we expect to be awarded in fiscal 2019 we're working on $27 billion worth of deals with approximately 84% of those representing new business for Perspecta, we're ramping investments in our business development machine to pursue these opportunities and accelerate our growth. Although it's still early, we're already seeing some revenue synergies. For example, we were recently awarded and other transaction authority or OTA to support the national background investigation services investigation management program. On this new $49 million 18 months effort we're delivering stream lines scalable and next-generation IT platform to support suitability, security and credential investigations for all federal employees. Similarly, we recently won one of three OTA awards to develop a prototype for the Army Training Information Systems or ATIS. This digital transformation effort is a perfect combination for Vencore and USPS with strong mission in IP components. To a massive data migration and integration efforts, our system will provide centralized seamless persistent access to training and a common operating picture of the training environment for over 2.5 million users all to drive combat readiness. If our prototype is selected in the competition we will begin to deploy the system only lag in about a year and we are getting traction in leveraging the innovations developed in Perspecta labs across the USPS business. We've already integrated our secure mobility solution within our health concourse analytics platform and automated manual and data processing task for CMS using our Aurora analytics workbench. Now we see tremendous opportunities to apply our current research work in areas like defense against distributed denial of service, cyber region volumes, data analytics and machine learning models to the current customers and contracts. And finally, message four we're 75 days in but we haven't uncovered anything that changes our view on our financial targets. In fiscal 2019 we will establish a performance base line and lay the foundation for longer term growth. Now look, we like the platform, the revenue cost synergies are real and we fully expect to grow organically at the market rate or better. Our margins are sustainable and we expect to grow EBITDA dollars, EPS and cash as we prudently deploy capital for shareholders. Now before turning it over to John for the financials I want to take this opportunity on our first quarterly call to reiterate our strategy and differentiators to give an understanding of who we are and where we have taken this company. Now let me start with how we came into being. Now I’m on Slide 5 of the presentation deck. Now Perspecta is a combination of three entities DXC's USPS business which is a leading enterprise IT services provider to government; Vencore, which has a franchise position in the intelligence community with industry-leading cyber capabilities intellectual property and Keypoint, which has a proprietary platform and is a largest provider of security clearances for U.S. government. A very powerful combination with a unified focus on the government sector. So what we are really doing here is creating a vertical stack that includes mission as well as IT services, and we think that combination of people, skills platform as well as intellectual property creates a very different footprint in the U.S. federal government space. Another important point is that at the bottom of the pyramid funding comes out of the CIO and IT shop, but above that you get into the mission funding stream. So we can affect a much larger total adjustable market through the merger. And the final point is at the top of the pyramid includes about $85 million a year of applied research funding from defense and intel labs. Now I like to think of it as a centrifuge that keeps spinning out new ideas, and we can apply for competitive advantage in every layer of the pyramid. Within this R&D portfolio we are 12 to 24 months ahead and dealing with the most complex problems that government needs to solve and that’s a great opportunity for us and a great opportunity for our customers to leverage. We know the IT integration leverage model works because we have done in Vencore and now we can spread this across the $4 billion Perspecta business. Now John will go through the financials in detail and provide a forward outlook.

[John Kavanaugh:]

Thanks Mac, and good afternoon everyone. I’m extremely pleased with our first quarter results. Our teams stayed laser focused on seamless integration and execution of plan, despite a very complex transaction. There are a number of moving parts in the quarter. I’ll go through each of them very directly to provide you with a clear view of our performance. I'm on Slide 6. In my remarks, I’ll refer to the pro forma adjusted results disclosed in our press release. These figures assume the spin and mergers occurred at the beginning of fiscal year 2018, and they exclude costs directly associated with either the spin merger transactions or the ongoing integration process. We believe pro forma adjusted results provide useful insights into our current run rate and an important baseline for comparing performance across periods. Our press release and accompanying slides provide the reconciliations from pro forma adjusted results to GAAP. Now let's walk through the Q1 income statement from top to bottom. Pro forma revenue for the quarter was 1.04 billion up 2%, from first quarter of fiscal year 2018. This growth was driven mostly through our defense and intelligence segment, which increased 11% year-over-year with strong performance in our support to the intelligence community and the federal background investigations process. Conversely, we saw 11% year-over-year decrease in our civilian and healthcare segment, primarily from the completion of December 2017 of a large engineering support contract for the Kennedy Space Center. Q1 pro forma adjusted EBITDA was 195 million which benefited from a 24 million gain on the divestiture of a contract to avoid a potential organizational conflict of interest arising from the Vencore merger. Excluding the gain pro forma adjusted EBITDA margin was 16.5%, which was up 240 basis points from last year and within our guidance range of 16% to 17%. The strong EBITDA performance was driven by both of our operating segments, which reflects outstanding execution across our contract base and the initial effects of our merger cost synergy and operational efficiency programs. Contract mix is one of the key drivers of our margin differentiation and it moved even further in the direction of fixed price in Q1; as a percentage of total revenue our contracts were 53% fixed price, 20% time and materials and 27% cost plus. That fixed price content gives us operating leverage which allows us to drive efficiencies which we can drop to the bottom line. As Mac indicated we’re on course and speed to meet our commitments around merger cost synergies and operational efficiencies. In terms of realizing the cost synergies as you know we have committed to 43 million in run rate savings this fiscal year, which will result in 17 million net benefit to our FY ‘19 pro forma adjusted EBITDA. Additionally, we will drive ongoing delivery cost savings with a commitment to drop 20 million of savings this year. These savings are already baked into our adjusted EBITDA guidance for fiscal year 2019 and beyond. Perspecta is not fundamentally a cost take outplay, a cost discipline is part of our corporate DNA; every year we will be looking for efficiencies that we can leverage for competitive advantage and shareholder returns, through automation, workforce optimization, facility rationalization and shift to low-cost delivery centers within the states. Depreciation and amortization totaled 82 million on a pro forma adjusted basis in Q1; split into 42 million of depreciation and 40 million of acquisition-related intangibles amortization, which is backed out of adjusted net income and adjusted diluted EPS. We also incurred 85 million of transaction and integration expense which is excluded from all adjusted metrics. Interest expense totaled 30 million on a pro forma adjusted basis in Q1. This figure applies effects of our post spin and post merger capital structure for the full quarter, including the interest on our term loans, revolving line of credit debt and capital leases, as well as a deferred financing costs and original issue discount on the debt. To calculate pro forma adjusted earnings we’ve applied our expected long-term effective tax rate of 27%. This resulted in Q1 pro forma adjusted net income of 90 million or $0.54 per share against a diluted share count of 166 million; pro forma adjusted diluted earnings-per-share for the quarter were up 50% year-over-year as a result of increasing revenue and profitability. The gain from the contract divestiture added about $0.10, excluding the gain pro forma adjusted diluted EPS was $0.44 which was up 22% year-over-year. This year-over-year EPS growth rate that Mac and I cited are based on fiscal year ’18 Q1 pro forma adjusted diluted EPS of $0.36 which is consistent with today’s press release but differs from the $0.34 that was in the 8-K we filed on July 19. We’re updating our presentation method to apply a consistent pro forma effective tax rate for all of fiscal year 2018. We believe that adjusting for the effects of the tax cuts and jobs act of 2017 provides a more relevant comparison to the current financial results. This change resulted in an increase of 4 million of pro forma adjusted net income and $0.02 in pro forma adjusted diluted EPS for the year ago period. We will use this approach going forward. Turning to Slide 7, the complexity of the cash flow statement reflects the creation of our capital structure, at the time of the spin merge, we received 2.5 billion of net proceeds, new debt financing and used it to pay off Vencore's existing debts and hedges and distributed the cash portion of merger consideration to Veritas and DXC. During the quarter on a pro forma basis, we generated a 176 million cash flow from operating activities and a 145 million of adjusted free cash flow or 161% of pro forma adjusted net income. The primary difference between the cash metrics was 50 million of capital expenditures, which includes capital lease payments. A relatively high asset intensity is consistent with our high mix of managed services enterprise IT delivery. These assets lead to higher adjusted EBITDA margins and stickiness with our customers. Working capital management performance was very strong across the board, but because of the complexity of the spin and merger transaction and the intricacies of [indiscernible] accounting I would not put too much emphasis on the outsize free cash flow performance. We still expect to generate adjusted free cash flow on a 90% to 100% band with the rest of this fiscal year. We spend 50 million to pay down debt and finish the quarter with 201 million of cash, 303 million of capital leases and 2.5 billion of term loan debt. With the steady cash flows our business has generated historically and with a 600 million of undrawn revolver capacity we’re pleased with our liquidity and financial flexibility. Our cost of debt is very manageable and we have locked in fixed rate about 60% of our term loan debt through a hedging program. We noted in our May investor day presentation that we used a portion of our future free cash flows for shareholder returns in the form of both dividends and share buybacks. To that end on our first day as a public company our Board of Directors established a $0.05 per share quarterly dividend and authorized a 400 million share repurchase program effective immediately. You will see the dividend payments that we've already made and authorized in our Q2 statement of cash flows. Up to this point, we have been precluded from buying back stock due to the 10-K we filed with the end of June, followed by a quarter restricted period. Turning to our forward guidance on slide eight, we are reaffirming guidance for fiscal year 2019 that we gave at the Investor Day. We expect pro forma revenue for the year to be 4.15 to 4.25 billion which will represent flat to 2% growth on adjusting for lost revenue from the contract divestiture. We expect to generate pro forma adjusted EBITDA margin of 16% to 17%, which would then translate to pro forma adjusted diluting earnings diluting earnings per share of $1.80 to $1.95. Finally, pro forma adjusted free cash flow for fiscal year 2019 will be 90% plus of adjusted net income. The guidance was supported by our 9 billion backlog and the 4.2 billion in pending new business bids, as well as a positive customer budget trends. We're expecting sequential growth throughout the year despite of 40 million full-year headwind from the contract divestiture. Year-over-year revenue comparisons will ease in the fourth quarter, as we anniversary the completion of the Kennedy Space Center work. Adjusted EBITDA margin should be relatively constant throughout the year consistent with our first quarter results excluding divestiture gain, the expenses below EBITDA all running a little ahead of our original expectations were not in our adjusted EBITDA or EPS guidance transaction to integration-related costs, will diminish materially in the back of the year. FY20 integration cost should be even smaller, primarily related to our ongoing IT system integration projects. Like Mac, I want to take some time on our first earnings call to talk about our long-term financial model. I'm now on Slide 9. Looking at revenue, we expect growth to accelerate to 3% to 5% compound annual growth rate for fiscal year 2020 through 2022. We will drive that through leveraging our core customer capabilities, utilizing our deep intellectual property and our expansive patent portfolio in cyber security, analytics and networking, and we've already capitalized on the governments increased focus on digital transformation in areas like agile software development and migration to the cloud. We're projecting sustainable industry-leading adjusted EBITDA margins of 16% to 17%, driven by a favorable contract mix and asset intensity. We've got a very proven seasoned management team with significant fixed-price experience. We will employ a very disciplined and rigorous focus on cost management with keen attention to detail to drive the business and as you know we have a very solid track record relative to program delivery and execution. And then our adjusted diluted earnings per share will grow at an 8% to 12% compound annual growth rate, combined with our dividend we believe Perspecta will be an attractive investment to our long-term shareholders. We will generate strong free cash flow as you can see we are projecting a 100% plus of adjusted net income. We expect to generate in excess of 1.5 billion of adjusted operating cash flow over the next three years, we're going to use that to reinvest in the business. It is the priority of ours to drive growth. We will be investing back into talent acquisition and retention and certainly enhancing our capabilities and offerings, all about driving growth. We will deliver the balance sheet to achieve our target leverage, and we will return capital to shareholders with a sustainable dividend and being opportunistic as it pertains to share buybacks. We will be very selective and strategic on tuck-in acquisitions that will be directed towards continuing to enhance our capabilities. So again, I think we got a very compelling financial profile and I have high confidence in our ability to meet our commitments. Operator we are now ready to take any questions.

[Operator:]

[Operator Instructions] And our first question will come from Joseph Vafi with Loop Capital. Please go ahead.

[Joseph Vafi:]

Good afternoon and congrats on getting to your first public conference call. A lot of good work so far. I was wondering if we could maybe just get a little more color on revenue in the quarter. I know you had a -- there are two months, kind of, the pro forma combined in the numbers, or I guess, basically one month where Vencore wasn't truly combined at least and then wasn't truly broken out at least in the numbers that we saw, so just wondering if you looked at the 2% growth year-over-year, is it on a pro forma basis, is it possible to say was that USPS? Or was that Vencore growth? Or any other color on where that 2% came from versus the legacy entities? And then I'll have a follow-up.

[Mac Curtis:]

Yes, Joe let me -- this is Mac. Yes, I think one of the -- when we look at it on the core, we haven’t really spent a lot of time looking at where it came from frankly. We have looked at the reporting segments, when you look at as we have talked about it, the defense and intell business, which is a good amalgamation of all the business. Yes, that was up 11% and then the civilian healthcare,, which again, is a good amalgamation of -- from the different companies was down about 11%. I think as John's comments Joe reflected the runoff of the NASA contract, which is 25 million-30 million roughly in the quarter. So I have to spend a lot of time looking at rearview mirror on that frankly and John if you have any comments that you want to…

[John Kavanaugh:]

Yes, spot on, Mac. So Joe, thank you, first of all for the comments earlier. Yes, the 2% growth is on our apple to apple pro forma basis as Mac said but 11% growth out of defense intelligence segment. Again we have seen strong performance in the quarter in the intell community and also with a background investigation process.

[Joseph Vafi:]

And then, I think, I heard Mac say something about having sequential growth for the remainder of the year, which is encouraging. Is that -- do you expect that kind of, broad-based across both civilian and DoD? Or any other color where that sequential momentum could be coming from?

[John Kavanaugh:]

Yes, we are expecting sequential growth in the future quarters. It is coming from across the board. Again, I think when you take a look at what our pipeline is right now the opportunities we have out there we feel really good about those opportunities.

[Stuart Davis:]

Consistent with what John said earlier we still have sequential and we also have year-over-year headwinds until we anniversary the NASA work. But on the sequential basis, we are expecting positive traction across both ends.

[Joseph Vafi:]

I’ll be curious to know how the more specifics perhaps on the business development engine now that you are no longer a part of DXC are you getting more business than you used to? Are you getting different types of business? And has the philosophy on contract bidding perhaps changed versus a year ago?

[Mac Curtis:]

So we have got about 66 billion in the pipeline. So we have integrated the pipeline when you think about this think about the pyramid that we put together. We have got a nice spread when we think about between '19 through '21 its 50% almost 60% plus is in the firm fixed price, remaining split between cost plus in P&M I think we look at it with regards to -- in the defense and Intel space -- again we've got a good Intel practice we’re looking at expansion in the number of the three letter agencies, we see a lot of opportunity frankly in the DoD space when you think about the cloud migration and network modernization that’s a lot of kind of legacy USPS bids, and civilian we start to apply our innovation engine and cyber security data and analytics practice looking at what we can do in homeland security so I think the net of it is $66 billion in the pipeline we got about 7 billion in evaluation now another 2 billion to almost 3 billion going in the next 30 days and then we’re looking at about another 18 billion that we’ll prosecute between now and end of our fiscal year. So in that pipeline as we go forward we see the predominance of that being new business opportunities and again we’re really working that pipeline to look at where we can drive in the innovation we get from the applied research interest from the Vencore labs, into the Mission IT space, and then kind of cross field the Mission IT space into the intelligence community, so point is innovative pipeline, integrated team we focused on -- the business development team is focused in the Intel space, the defense space, surveillance state and local and as well as the healthcare, so we’ve got the right leaders in that business, integrated working with the General Manager’s. We’ve got a good proposal shop it’s at the best of breed from both companies. So I think we are working to integrate that, I think the people are excited about it, part of that Joe to get the enthusiasm is we’re excited about being part of 14,000 person public sector company where we all speak public-sector, we understand what being BMP means, we understand what fore pricing rates mean, so I think that’s been a help and so we’re working our way through kind of the rough edges of that but again I think it’s the kind of the best staff that we put together, we’ve got plenty of BMPs to prosecute this pipeline and we’re just excited to get after it.

[Joseph Vafi:]

Thanks, very much guys.

[Operator:]

And our next question comes from Lucy Guo with Cowen and Company. Please go ahead.

[Lucy Guo:]

So first question unfortunately or fortunately on end edges, can you help us clarify what exactly in terms of the run rate and for maybe margin progression that’s baked into your FY ’19 and long term guidance?

[Mac Curtis:]

Lucy this is same answer we gave at Investor Day and it’s 15ish plus percent of the overall business like we said at the Investor Day, it’s not the high end, it’s not the low end, we’re in a competitive situation we got to be careful about kind of how we talk about it, don’t see that changing while Lucy as we go forward from a revenue perspective or a margin perspective just to give you an update since you asked we’re already in the process of what we refer as NGEN-X, and as you know the engine contract, the current contract ends at the end of September this year, so in the process -- and it’s out there on the [indiscernible] website, it’s out there for -- we’re in the process and negotiating the sole source extension for this contract and we expect that to have that signed in the next two to three weeks and then we’ll look forward to -- going through the process of the recompeting engine.

[Lucy Guo:]

So there’s been a roof on recompete probability of when of around 80% or even better than that is the engine recompete just a different animal where that's not necessarily the case or do you feel any differently on the plus side or the minus side about your win rate here.

[Mac Curtis:]

Well look, we’re very bullish about where we are, we been doing this work for almost two decades. It was a complication we understand that, we understand that you have to be serious about the competition, we understand it’s a very complex contract, we take the competition seriously, but we feel we’re in a good spot, we treat this, recompetes you have to put your best foot forward and we feel very good about spending a lot of time on it as we should a big part of the business, we’re serious about it. I think the notion of being part of Perspecta where it's 14,000 versus $4 million plus public-sector company with the ability to innovate with the patent portfolio, with the advance networking and really focus on doing what’s best for the government customer is good for us and I think it's been well received by the customers set.

[Lucy Guo:]

Make sense and then moving on to new business you have a $4.2 billion pipeline of pending can you just talk about, maybe John if you can talk about what timeframe is that over and then anything notable that’s included or maybe not included in that and I’m thinking that there is a impact there in light of recompete that's over $5 billion, if you maybe, if that’s in your warehouse as well.

[Mac Curtis:]

Well Lucy this is Mac and I will turn it over to John, so one of the things we like about Perspecta there is not a deal out there when you think about these big deals or the DOD deals whether it's the GSMO contract, which is the one you’re referring that we can go after, if we so decide. We've got the wherewithal, we've got the knowledge, we've got the innovation, we certainly have the resources to be able to go after some of these big deals and I think that was part of the value proposition for Perspecta. So we’re excited about the opportunity to look at some of those larger deals. On the pending award, it's at about 7 billion right now and this moves as you would expect, we got about another 2.9 that you go in about the next 30 day, we will be sitting by the time we get to the next call probably 9 billion to 12 billion in the valuation and again at Investor Day we talked about the first part of the year, we had a significant number of recompetes and those kind of plans that we talked about it in the call, those ones that we won and still a few out there with the back end of the year being focused on, heavily focused on the new business. And so when we think about what’s valuate in this work, what’s also out there and it's another $18 billion, out of this 27 billion. It's in valuation, what’s going in and what’s falls of all should be prosecuted in this fiscal year, it's about 18% plus is in business opportunities, I hope that helps. Following just the path we followed in the Investor Day, heavily frontend recompete back end is prosecuting new business and the expand to join pipeline of Perspecta. John anything else…

[John Kavanaugh:]

I would just add again, I think we feel really good again with provided guidance to the same we are going through revenue, sequentially. We have done very good in the first quarter, we got some ramps ups coming up here with the work that we in the won intelligence agencies and obviously with the new wins in both postal and DISA, so we feel very good about our pipeline and our ability to generate that sequential growth.

[Lucy Guo:]

One last follow-up before I pass it on is this just housekeeping question for John perhaps, the pro forma results for Q1 is a bit nicely and can you just help us with the run rate on gross margin and SG&A for the pro forma company going forward?

[John Kavanaugh:]

Yes, so as I've mentioned in my remarks obviously it’s a very complex spin merge transaction, so there are lot of things to deal with again when you take a look at our margin excluding the gain how we are effectively at 16.5%. We expect that to be constant moving forward which again has us on more of a trajectory toward the higher end of our range, again we feel good that we are taking all the actions necessary to get there and again as we said from the revenue perspective we feel good about growing sequentially and again the guidance will be provided and we feel very comfortable with this point, Lucy.

[Lucy Guo:]

Thank you, appreciate it.

[Operator:]

Your next question comes from Krishna Sinha with Vertical Research Partners. Please go ahead.

[Krishna Sinha:]

So just looking at your capital expenditures of $50 million, it seems a little higher than the implied run rate, which I think is closer like $150 million or $160 million for the year. Are there any onetimers this quarter? And can you help us think about what the quarterly CapEx run rate is from this point on?

[John Kavanaugh:]

Yeah, sure Krishna. So our CapEx depreciation expense was up slightly higher that was driven by some customer program requirements as you can see we've suddenly generated operating cash flow more than a sufficient to cover it. I do think there is a little bit of headwind there we might be slightly higher but again I think we are very high at operating cash flow to be able to cover.

[Krishna Sinha:]

Okay. And then on that cash flow, do you have an -- what were your DSOs in the quarter? And what's your expectation going forward to either reduce it or maybe goes up? I actually don't know, I didn't calculate what your DSOs is, but can you just tell us what it was?

[John Kavanaugh:]

We are overall pleased with first of all the working capital management we did in the quarter. I think we've done a very good job there, we were running DSOs in the upper 50s which are industry-leading and we've put a lot of the time and attention into our collection process so I feel good about that, so we will look to continue to drive that, but we feel good about the performance in Q1.

[Krishna Sinha:]

Okay. And then on the debt, you paid re-50 -- repaid $50 million of debt. What's going to be the pay down cadence for the rest of the year? And how much are you expecting to delever by the end of this year?

[John Kavanaugh:]

Well consistent with what we said at Investor Day delevering the balance sheet is our primary -- absolute priority consistent with that, again we paid back the 50 million we are as we said at Investor Day targeting our net leverage to be between 3x to 3.5x it will continue to be a priority of ours and I think again as we demonstrated what we did in Q1 would be disappointing and the good progress in that area?

[Krishna Sinha:]

Okay. And then on the growth side, you did mention that you expect growth to come from across-the-board, but can you just talk about what the actual year-over-year headwind will be, as you -- before you anniversary that NASA work?

[Mac Curtis:]

It is the primary headwind as the 40 million divestiture year-over-year headwind but as we've said that was included in our guidance so we are going to go through we will go through it and again, we feel good about the pipeline is next dated and we feel really good about the guidance we provided this point.

[John Kavanaugh:]

Krishna, I think that as Mac said that you could think about if you are looking about 11% decline in the civilian and healthcare segments that that’s -- a good piece of that may be half of that..

[Mac Curtis:]

More than half of it.

[John Kavanaugh:]

Came from that NASA business. So you can think of it as $100 million plus annual run rate that will tail off in our third quarter.

[Mac Curtis:]

And then just for posterity's sake that was not a recompete loss. That was a contract that just was not contract expired. It was design integration work for NASA and when we finished the work, it moved on to sustaining engineering, so a natural runoff.

[Krishna Sinha:]

And then one final one. You talked a lot about the bid pipeline, and what you are expecting for this year, but you can you just talk about what you plan to build the bid by applying to and then like, I said, normalized run rate going forward. So do you have a plan to hit a certain amount of bids per year, as you go forward, sort of, rate? And how much of that do you expect to win every year to drive your 3% to 5% growth CAGR over the long-term?

[John Kavanaugh:]

Yes, that’s a good question. I think the way we do the math I won't go in too much detail as we need to have a bid volume of about 16 billion. If you think about the high end of 5% and you can pick typical win rates, typical run-off, typical combinations. So we -- in order to -- we look at the recompetes being at 90% and that’s what we factored the math. So this 10% you have to replace a certain amount of run-off. We do that calculation we need to be bidding it at about -- have good quality bid about $16 billion a year, is the way we think about the math.

[Krishna Sinha:]

And then new awards, you would expect to win 20% to 25% or something that you'll have?

[Mac Curtis:]

Exactly, you got it. That's right.

[Krishna Sinha:]

Okay, that's great guys, thanks appreciate it.

[Operator:]

[Operator Instructions] Our next question comes from Edward Caso with Wells Fargo. Please go ahead.

[Justin Donati:]

This is Justin Donati on for Ed. First can you breakdown the book to bill this quarter between the different segments if one kind of outperform the other.

[Mac Curtis:]

I think when you look at it, on the one to three -- not to go into too much detail. Certainly, kind of heavy on the civilian, state and local, I think, then following equally between DoD and the healthcare and intelligence communities, a little below that. So it was pretty even when you look at the 1.3, I’d say some in state and local was -- -- was a little larger just given the San Diego deal. And then certainly the post -- not the postal deal. But the -- I think the healthcare with there, of the CMS win. So that’s kind of way it broke out.

[Justin Donati:]

And just to clarify, anything with the NGEN bridge that was not included in this quarter's bookings.

[Mac Curtis:]

There was nothing for the NGEN bridge included in this quarter. We expect to sign -- we expect that to happen, obviously, got to happen before the end of September because -- but we'll -- that will be a second quarter booking.

[Justin Donati:]

Kind of moving on to integration, I know it's still kind of early on here, but where do you think you are ahead of schedule may be about in-line what have been kind of the biggest challenges so far? And have any key executives left since the merger?

[Mac Curtis:]

No. Since we've closed, no direct reports that I've got, that if -- they are gone. I have a little bit of attrition just because it's uncertain, but by large I think it's been pretty steady in fact. When you think about the team it’s filed at 40% -- 35%, 40% Vencore, 35 and 40 percentage from USPS and then the remaining from outside the company and then in some with KeyPoint; so we haven’t had a whole lot of attrition in the side of market.

[Justin Donati:]

Want to know sort of where we’re kind of ahead of plan..?

[Mac Curtis:]

Yes I am sorry -- so I think from the integration perspective one of the things that we did do -- there was a lot of things we couldn’t do prior to close but there was SEC regulators, we follow that to the letter, but we could kind of design the G&A organization what we thought putting the three companies what it would take to run a 4.2 billion company and that’s the number of people on contracts and we don’t finance and we’ve had some experience doing that, we did it with Vencore, in a smallest scale, we kind of had a good sense of what the tempo and model should be; and so that’s kind of right on track; as I think we followed that and designing it to the bottom, so we know exactly how many people on contract, how many we need and how many we need in the security and that’s one of the things we could spend a lot of time on, right as looking at how we want to do that and so I think that's a big piece. So I think that’s ahead of schedule and we start to look at where we are as we start to drive to looking at putting the floor -- the Perspecta fore pricing rate packages together to be shared; so we kind of all over that; on the delivery side we spent a lot of time in the field; trying to understand where is the managed services, where is the leverage in that delivery model and we’ve got a few experienced executives that have looked at that as well; so I think the focus is in those two categories, where both of the cost synergies -- John is running the value of payment game, and he was -- is doing a great job of making sure we’re capturing that, we are disciplined and the indirect arm, making sure we’re following that model so I think that's where we are kind of ahead of schedule. I think we are -- not behind, but we’re right at where we should be, is the go forward IT architecture, and that’s just difficult because you’ve got to looking to due diligence and the three company networks and you’ve got to look at the endpoint solutions and all those kinds of things, so I think we’re just about on schedule there, I think we’ll be able to catch up a little bit next couple months so I think we did a lot of planning we did a lot of planning and I think what we’re doing is executing not only the integration plan but also looking at the strategic planning which all we can do is plan, interesting how that’s going to go to the end of the year. John any…

[John Kavanaugh:]

As Mac stated, I would just summarize, the integration activities are proceeding well. We are ahead of plan on both driving our cost synergy commitments and our delivery operational efficiencies and we’re going to continue drive that, so feel good about the progress we’ve made.

[Unidentified Company Representative:]

I think we’re kind of ahead of plan, at least ahead of my expectations, and making this one company I mean I’ve never been in the place where day one you got all the buildings branded, you got all the people talking about Perspecta as opposed to their legacy company and I think that's proceeding certainly ahead of my expectations.

[Justin Donati:]

Similarly when you could see some tangible revenue synergies?

[Mac Curtis:]

So there are a couple of it -- two parts of the question, one is the revenue synergy, we’ve talked about that and that’s the one it takes a little bit longer for people to really understand what you can do, what you can't. We got a lot of off sides, where we had the innovation engine whether it’d be IP, it’s developed from the either company and also Perspecta labs involved with customers and I mentioned that in my remarks, where we have actually leveraged some of that technology to make the claims processing in CMS given some algorithms that we have developed over the years making that it takes cost out of the process. So I think one of -- the couple of things that have had happened and I mentioned these two OTAs, other transaction authority option. One is the one with NBIS. And as you. And as you know the part of the legacy company's KeyPoint we do the majority of lot of the background investigations that we do. And so we talked about in investor day and part of the thesis is that they understand how this works the process to do very well, the notion of where this end’s up going with regards to continuous evaluation continuous management and what the next step is to deal with this backlog, perfectly suited as Perspecta to deal with here is the process that happens now, here is the algorithm, here is the technology we can bring to bear from the data processing perspective and you have to have a robust computing environment. And so we put in this OTA, we won the OTA and is to build bus system in the future, it's cloud-based, it’s certainly cyber protected and we’re building that for DISS it’s a roughly $50 million contract to build this system over the next 18 months. So that proves the thesis that we talked about and that so certainly a revenue synergy. I think in the other case is another deal with the Army, this Army training information systems, that’s another opportunity where it's looking at the model based system in here we bring to the party it is looking at algorithms, looking at science of data and then you need to have this computing power could be able to operate that's another one where we won that. So we’re just trying to getting start, we’re 75 days in, lot of people here have two big offside for people and excited about the company and we got great looking baseball ads and we really want to do is make sure people understand what the power or Perspecta is and just to take, that going to take some months but we are seeing when you have success like we like in this NBIS contract, success drives success and it breeds success. And I think, we're excited about other opportunities, other bids we’re putting in, what we’re leveraging the cross field power, this prospective that has worked back. So that’s good cases, there are others I could go into but I don't to take up the whole call and talk about that.

[Justin Donati:]

Okay appreciate the time, just one last quick one for me and I will jump back in queue with more and more companies talking about commercial IT, Cloud migration getting into more fixed price work, have you seen that become more competitive versus the year or two ago, is that impacting that win rates, on some of those contracts.

[Mac Curtis:]

I don’t haven’t seen that, I mean again we’ve talked about this. The USPS business, it goes all the way to EDS, kind of, wrote the book on fixed-price managed services. And I think they will understand it really well, so it's hard for me to discern whether we've seen much of a change in that or everybody talks about cloud migration the proof is in the pudding. So I can’t say I've seen any disenable change and margins or the way we were bidding a lot of these larger cloud migrations.

[Justin Donati:]

Alright, thanks for the question.

[Stuart Davis:]

Justin and I actually think that we don’t have anyone else in the queue, so if you do have another question. Operator do we have any question still out there.

[Operator:]

At this time I’m showing no further questions. So I would like to turn the conference back to Stuart Davis for any closing remarks.

[Stuart Davis:]

Okay, Austin truly appreciate your help today on today’s call. Obviously I think the team is excited about the results and we’re also excited about getting out on the road when we get into the September timeframe and hope to see and speak with many of you during that time. Thank you all for your interest in Perspecta.

[Mac Curtis:]

This is Mac and John speaking for John. Thank you for your interest.

[Operator:]

Thank you everyone. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.