Perspecta Inc.
Q4 2019 Earnings Call Transcript

Published: 7 Jun 2019

[Operator:]

Good afternoon, and welcome to the Perspecta Incorporated Fourth 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, Investor Relations and Strategy. Please go ahead.

[Stuart Davis:]

Thank you. Welcome everyone to today's quarterly and full fiscal year earnings conference call. Presenting on the call today are Mac Curtis, our CEO; and John Kavanaugh, our CFO. Today's call is being webcast on the Investor Relations portion of our Web site, where you'll also find the earnings release and financial presentation slides that we will use for today's call.Turning to slide two 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 risks and uncertainties, please refer to our SEC filings including our latest Form 10-K. In addition, the statements represent our views as of today and subsequent events may cause our views to change. Though we may elect to update the forward-looking statements, we specifically disclaim any obligation to do so.Finally, as shown on slide three, we will discuss some non-GAAP financial measures that we believe provide useful information for investors. The slide deck for today's call includes reconciliations to the most closely comparable GAAP measures.At this time, it's my pleasure to turn the call over to Mac, who will begin on slide four.

[Mac Curtis:]

Thank you, Stuart, and thank you all for joining us on this afternoon's call. I'm pleased to report there was strong operational performance in the fourth quarter. We completed a very successful [inaugural] [ph] year. I continue to be amazed at the efforts in the entire Perspecta team. We jointed together to become one Perspecta, and have delivered both outstanding financial results, a customer measure of success. We've accomplished a lot in our first year, and we still have work to do. Well, if they look at our report card for the year, and where we expect to land next year, we're ahead of the aggressive plan that we laid out to the investment community at our Investor Day a year ago.I'll provide an overview of our financial performance in the quarter, and then turn to a discussion of the government marketplace, business development, our strengthening cyber presence, and a key addition to our leadership team. First, we once again exceeded consensus estimates on all of our key financial metrics. Our results for the fourth quarter demonstrated the fundamental tenants supporting the creation of Perspecta are sound, and our business model is on track. Revenue was up 3% year-over-year on a pro forma basis and up 2% sequentially. As a result of revenue growth and margin expansion, adjusted EBITDA was up 10% year-over-year, and adjusted diluted EPS was up 15% year-over-year. Our strong performance in the quarter also enabled us to exceed the top end of our fiscal year guidance for all measures, a truly outstanding result given the demands of a complex integration effort. In FY '20, we'll keep the momentum going. The guidance ranges that we're introducing today points to accelerating revenue growth and robust margins. Our guidance is above current consensus, and in line with the long-term targets that we laid out at our May 2018 Investor Day.Second, our financial performance is benefiting from a strong market backdrop. We're in the early stages of a long-term uptick in government spending. Since our last call, there have been many positive signs on the budget front. The President submitted his budget request with significant increases in national security spending, and an emphasis on priority areas like R&D, and cyber that line up well for Perspecta. All the House appropriation subcommittees have passed budgets. Perhaps most importantly, negotiations involving the House and Senate majority and minority leaders to reach a two-year budget agreement have begun.That said much still needs to be done. In addition to averting the Budget Control Act caps, Congress will have to deal with the deficit in the summer. Like most observers, we expect to begin the year with a continuing resolution. We also expect that congress will ultimately agree on a deal with budget growth in the 2% to 4% range, which is consistent with our Investor Day outlook. There was bipartisan support for higher defense and intelligence spending in a world that isn't getting any safer. Given the current threat environment funding for our programs will be secure. For example, when much of the government was shut down for more than a month this past winter, only 28 of our more than 14,000 employees were affected.Third, we had another excellent business development quarter. Bookings totaled $1.4 billion or a book-to-bill ratio of 1.2 times. 93% of the quarter's awards were new work for Perspecta. We've seen at a one times book-to-bill ratio in every quarter in the fiscal 2019, and closer to book-to-bill ratio of 1.6 times for the year. We're well positioned for growth as we enter fiscal year 2020. The largest award in the quarter was a five-year $905 million contract to support the Army's Cyber Command. ARCYBER is a landmark win for us, creating excitement both internally and externally because it was bid as Perspecta, none of the legacy companies would have bid it before the merger. We'll provide comprehensive cyberspace operations support for ARCYBER headquarters and its partners [indiscernible] of a new command as it moves from Fort Belvoir to Fort Gordon. This award is a major revenue synergy proof point, bringing together leading edge cyber R&D from Perspecta Labs, capabilities in past performance from Vencore support for the U.S. Cyber Command, and scale around enterprise IT and network defense from USPS.With good bookings we were able to grow our total backlog. At the end of the fourth quarter, total backlog was $10.7 billion, which was up 2% compared to the third quarter of fiscal year 2019. Funded backlog at the end of the fourth quarter was $2.2 billion, which was unchanged sequentially. Our robust $68 billion pipeline of qualified opportunities includes $17 billion worth of proposals already submitted and awaiting decision. The submitted total includes our NGEN re-compete, which is always a topic of keen investor interest. There has been no real change since the last call, but let me clearly reiterate where we stand. Bids were submitted in January, and we expect to see the award late in calendar year 2019. We're currently under contracts through May of 2020. We absolutely expect to win this program. We believe the Navy and Marine Corps customer will see Perspecta as the best value, low-risk option to execute this critical mission. John and I have been deeply and personally involved in this pursuit, and we're excited for the award decision.Our performance on the program has been solid, it will part of the advantage that we have over our competitors. The move to best value allows our key differentiators to be scored and enables the Navy to get the solution they want. The Navy is looking forward to modernizing the network which fits directly with our focus on digital transformation and the innovations that are coming out of Perspecta Labs, and our world-class technology partners, like AT&T. We've also knocked some important wins so far in the first quarter. I'll describe one in particular because it is such a true power of the Pyramid award. We received a $75 million other transaction agreement, or OTA, to help modernize the IT systems that support a defense security service vetting processes including adjudications, background checks, and insider threat programs.Leading a team of several non-traditional partners will enable the DoD to achieve bold transformational change by combining commercial off-the-shelf solutions with our capabilities and expertise in emerging technology areas such as data ingest [brokery] [ph] and analytics enabled by artificial intelligence, machine learning, and natural language processing and enterprise-level DevSecOps, which continues authority to operate processes in a secure government cloud environment.Fourth, we continue to strengthen our leadership position in cyber security. Our deep expertise in researching, developing, and implementing adaptive and innovative solutions for a constantly evolving cyber landscape is unparallel. From a resource perspective, we are a leading provider of the cyber research for DARPA. Perspecta Labs is a key driver of technical differentiation for us, and cyber is one of its core sweet spots. Our demonstrated leadership in cyber research was absolutely essential to recent competitive wins by ARCYBER in this quarter in the Air Force enterprise logging win in Q3.Among the cyber commands, we now hold franchise positions at U.S. Cyber Command and Army Cyber Command. In the operating organization cyber can range from defense of massive enterprise-wide networks, like on NGEN, to integrated cyber and electronic warfare. We've recently bolstered our position in the field by winning prime positions on two large multiple-award indefinite delivery indefinite quantity cyber operations contracts. The first is the fourth quarter award of the AR4 contracts for Army Program Executive Office, or PEO, for intelligence, electronic warfare and sensors, or IEW&S, which has a potential ceiling value of $982 million over 10 years. Using our deep signals intelligence, wireless, and big data expertise, we'll compete to develop and deploy a comprehensive suite of cyber electronic warfare capabilities in support of the Army's Cyber Electromagnetic Activities Mission. This is brand new work for us, and it is integral to the Army's strategy. We won't be able to talk much about this contract, but we see good potential for growth in late FY'20 and FY'21.The second is a potential seven-year $740 million contract within Space and Naval Warfare Systems Command or SPAWAR, in San Diego, to establish and maintain cyberspace operations with a focus on interoperability at the tactical, operational, and strategic levels. This first quarter award offers a great opportunity to expand our presence with the full power of the Pyramid behind us.And fifth, I'm pleased to welcome Rocky Thurston to the leadership team as head of our Civilian and State and Local business. Rocky comes to us after successfully running large P&L units at AT&T and Accenture, and growing up at Lockheed Martin. Rocky is a hands-on leader with a strong growth focus. He is financially astute, and is comfortable with fixed price execution. I'm excited about the future of our civilian agency and state and local business.In conclusion, we are excited for the future and grateful for the support of our people, customer, technology partners, and shareholders. With integration so aggressively in our first year, we can now focus our efforts on one Perspecta to implement our strategy, which is all about growth, both by pursuing largely business opportunities by investing in our innovation, engine, and technical differentiators by partnering with leading technology companies to drive the transformation agenda for our customers and by acquiring companies in enhanced customer access or specific capabilities all while keeping our commitment to serving a federal government customers as you implement critical IT and mission solution for our nation.Before turning to John, I will call your attention to a filing that will cause the war during this call. It's the one-year anniversary of our news listing on New York Stock Exchange we're filing a shelf for registration on Form S3 to register 23 million shares owned by Veritas Capital. The S3 replaces the existing S1 we filed in November, and eliminates the requirements to file any more Perspecta supplements to incorporate updated financial statements going forward. Veritas Capital isn't required to sell any of its shares, and Perspecta isn't issuing any new shares related to this shelf registration.With that, let me turn the call over to John.

[John Kavanaugh:]

Thanks, Mac, and good afternoon, everyone. I'm extremely pleased with our performance in the fourth quarter and this fiscal year. Now, first year as the public company we've had four quarters of solid execution. I'll walk through the results for the quarter, quickly review our report card for the full-year, and then turn to our forward outlook both for fiscal year 2020 and the longer term.Turning to slide five, revenue for the quarter was $1.09 billion, which was up 3% from the fourth quarter of fiscal year 2018 on pro forma basis, and up 2% in the third quarter of fiscal year 2019. Q4 was our fourth straight quarter of year-over-year growth and almost rapid growth quarter yet. The growth driver in the quarter was our Defense and Intelligence segment, which increased 8% year-over-year, with strong performance in our Federal Background Investigations support business, and solid balanced performance across our remaining Defense and Intelligence customers. This growth came despite a $16 million rollover challenge in the Q1 contract divestiture.Civilian and Health Care segment revenue decreased 5% year-over-year, $6 million of the $19 million revenue decrease was from the final payments in the fourth quarter of fiscal year 2018 on the Kennedy Space Center engineering contract. The remainder spread across multiple programs that are ramping down. The government shutdown, which included the first three weeks of the quarter, had no material impact on our operational results.Q4 adjusted EBITDA was $207 million, which was up 10% compared to year-ago pro forma adjusted EBITDA, as margin improved from 17.8% to 18.9%. The year-over-year increase in profit reflects three primary factors

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Edward Caso with Wells Fargo. Please go ahead.

[Edward Caso:]

Hi, good evening. Congrats on the solid numbers here. I talked to the gentleman who runs the clearance for the government, and he said that he expects the use of vendors to do the clearances to go down now that they got over the initial hump of backlog. Are you starting to see a tail-off in the key point business at this point, and what's the outlook?

[Mac Curtis:]

No, we haven't. This is Mac, Ed, and thank you for joining the call. No, we haven't seen that yet. I know we do, as we talked about the backlog I think we'll see when that starts to -- if when that happens. And then one of the things we look at, Ed, is we talk about the suitability business, and I think we've talked about it over the calls, is how we really look at this as from the kind of a trusted workforce perspective, the trusted workforce market. I mean, look, there's a lot of moving parts here, from OPM to DSS, as DSS now goes from a defense security service to a defense counterintelligence security agency, there are a lot of moving parts there from the suitability, the continuous evaluation, continuous management. We just -- it was published, the whole OTA about building the system off for DSS, and we looking at trusted workforce no only in that vein, but also when you start to look at the counterintelligence, the HSPD-12 next generation.So there are a lot of moving parts to this thing, and they take a little while to sort out. I think what happens if you do talk to -- to certainly OPM, more people coming in the queue we have noticed frankly that the crossover has gotten a little bit quicker. We still haven't seen a downtick when you start to look at the different levels of clearance as we start to look at TS/SCI CI and some of the more complex cases, but no, we really haven't seen the so-called downturn with regard to the cases that we're getting. John, do you have any other comment?

[John Kavanaugh:]

Yes, no, I would just add on, I think we still believe there's even opportunity to get further market share. We're very, very pleased with the performance of that business. And as Mac said, as we continue to evolve into continuous evaluation and continuous monitoring, we're excited about that business.

[Mac Curtis:]

I mean it's a rapidly changing market, and we're right upfront, so we'll -- time will tell.

[Edward Caso:]

My other question is around access to talent. You obviously do a lot of sort of higher-end IT work. Can you talk sort of access within the D.C. -- Greater D.C. Area, and then maybe access outside the D.C. area what are you seeing?

[Mac Curtis:]

Yes, I think as we've talked about, about 74% of our workforce is not in the D.C. Area; we're in San Diego, and in Boise, Idaho, in spaces you would expect, Montgomery, Alabama, Huntsville, et cetera. So we don't have that kind of deadweight pressure, which it is tough. So 25% to 46% of our workforce is in the D.C. area. And it's always been challenging, Ed, because a lot of that workforce are the work in the intelligence community. So we're dealing with the TS/SCI CI, full-scope poly, and that's very, very competitive, there's no question about that. It's not so much -- and again, when we look at how we hire it's not just the dollar compensation, it's the benefits piece, it's all the 401(k), all these things are part of this competitive package. And frankly, with the generation we're hiring it's social conscience and social programs are also important.I'll tell you that about north of 80% of our offers are accepted, and about 45% of the new hire -- I think about 30% of the new hires this year have come from employee referrals, in the legacy Vencore business about 42%. And so when we talk about that, that makes us feel pretty good, Ed, because we're doing something right. When you think about north of 40% of your employees in this area in the legacy Vencore business are referred for one, friends and family to another. I do think, Ed, to kind of close out the answer, that the Amazon is going to put some stress on the system, I don't think there's any doubt about it. I think just in general in Northern Virginia when you look at the technology play it's a touch recruit. It's a touch recruit, no question about it, a lot - a little less pressure when you kind of get outside the D.C. area. Does that answer your question?

[Edward Caso:]

Yes, great. Thank you. Keep the good news coming.

[Mac Curtis:]

Yes, thank you.

[John Kavanaugh:]

Thank you, Ed.

[Operator:]

The next question comes from Joseph Vafi with Loop Capital. Please go ahead.

[Joseph Vafi:]

Hey guys, good afternoon. Good results. I was wondering we could just focus on the book-to-bill on the quarter, real nice to see a 122 on almost new business, it's a big number for just new business. So I just wanted to drill down on the recompete characteristics of the quarter. Was this just a really light renewal quarter; was there a win rate issue or something like that? And then I have a follow-up.

[Mac Curtis:]

Yes, no, I'll start, and then John will turn it over. It was a 93% win rate in new business, means there's 7% which is -- it was a low kind of award period, but we've talked about, Joe, we've got the big NGEN recompete, right. And we've talked about NASA NEST, where that is. In the queue there's just not that many other recompetes. I mean we start to look at the recompetes going forward what's in play right now, there's one classified recompete, that's about 3% of the business. After that there's a pretty substantial falloff in backend of '20 and '21. There's one in the healthcare space, but that's about it. But no, it's just that cycle, Joe, where we didn't see a lot of awards. We didn't lose anything, but we there also we didn't have any big recompetes that were awarded. Does that answer your question?

[Joseph Vafi:]

Yes, sure, that's helpful.

[Stuart Davis:]

Joe, this is Stuart. Just to put a point on that. We had less than $100 million of recompete adjudications in the quarter, so it was really a volume issue, and we're glad with the new business.

[Joseph Vafi:]

Great. Okay, that's helpful. And then I know, John, I think you mentioned at the end of your remarks something about some further capital deploy to some further restructuring. Is that -- should we expect to see more cost synergies from that or what's going on with that?

[John Kavanaugh:]

Yes, so I tried to give you some feel for what we would be doing as we talked about, our integration has gone very well this year, but there's still work to be done, right. We have chosen our IT platform. Specifically we're migrating to one financial system for the next year. So again, as I had also mentioned in my prepared remarks, we did a very good job this year, as I had kind of commented on all along through the year in terms of driving both our cost synergies and operational efficiencies. Matter of fact, again we did accelerate, we had said over three years, into this year. So I do expect us, relative to again the fixed price nature of our work, to continue to drive operating leverage and drive efficiencies. We'll continue to drive automation, we'll continue to drive against supply chain efficiencies, and we're continuing to work facilities' rationalization. So we'll continue to focus on that. Again, we're driving good profitability and good ROI on those investments, Joe.

[Joseph Vafi:]

Great. And then maybe if you could just sneak one more in, as we're sitting here already in June, a few weeks away from the end of the quarter, anything that you want to add to your commentary about how the June quarter is going in P&L and bookings? Thanks a lot.

[John Kavanaugh:]

Sure. So obviously we're pleased with the guidance we've just provided for our fiscal year '20. Again, we will be obviously reporting out in the August timeframe. So there's really nothing to add right now. Again, I think we set a very good foundation in FY'19. You're seeing the power of the Pyramid, right. Obviously we're very pleased with the $6.8 billion of overall bookings, 1.6 book-to-bill. We've got a very robust pipeline, all right, $68 billion, $17 billion under adjudication. So we're excited about obviously FY'20.

[Mac Curtis:]

Yes, I think the only comment I'd add, and it's out there, and I think we're -- that the $75 million OTA, Joe, is -- again, we talk about ARCYBER being kind of the first Perspecta kind of unified bid. This OTA, I can't say enough about how important that is to the company from leveraging the research we've done, applied research and artificial intelligence, machine learning, all these things that we're talking about, about building the next generation system for the new agency, which will be Defense Counterintelligence and Security Agency. And that goes -- DSS goes from, again, a kind of a medium-sized agency to having all the counterintelligence responsibilities for clearances and other things in the government. So, that really feels good. We're looking for to it, it's 18 months, $75 million, a lot of technology play.And this is the second OTA we've won from that organization. So it gets to where we're headed. It's not just suitability and background investigations, it gets to the next generation trusted workforce, which involves background investigation, which involves continuous evaluation, continuous monitoring, but also the next generation PIV cards, HSPD-12. We see this as the grander scheme, so a wider focus on the background investigations, as it should be. But that's just the platform, the baseline for us to get started. So again, that's kind of comment I'd have on the first quarter.

[Joseph Vafi:]

Sure, great. Thanks for that color, Mac.

[John Kavanaugh:]

Yes, thanks, Joe.

[Operator:]

The next question comes from Gavin Parsons with Goldman Sachs. Please go ahead.

[Gavin Parsons:]

Hey, good afternoon everyone.

[John Kavanaugh:]

Hi, Gavin.

[Mac Curtis:]

Good afternoon.

[Gavin Parsons:]

John, you gave pretty helpful color on the 4Q '19 margin strength. And then I thought I heard you say for the 17% to 18% going forward in fiscal '20 maybe you expect it to be a low end of that range. So maybe if you can help us bridge from the 17.1% adjusted in fiscal '19 into fiscal '20, and then what might get you to kind of the high end of that 17% to 18% over the next few years?

[John Kavanaugh:]

Sure. Yes, so as I said, we are guiding 17% to 18%, as you'd pointed out. Again, we ended FY'19 at 17.8%, but when you adjust for again the gain we had in the first quarter, and then the $8 million again subcontract we're about 17.1%. So what you're really seeing again is solid execution and strong performance in both the reporting segments. We were able to accelerate again some of the cost takeout and synergies, so we got a pop in the quarter and for the full-year, and that'll give us a running start as we go into next year. And then it's really about, obviously with our fixed price contract mix of 54%, and when I look at the pipeline, right, that pipeline has north of 60% fixed price, we're going to continue to drive operational efficiencies as we manage the business. We're very disciplined, we're pretty monopole about the cost stacks. So again, as I said in my prepared remarks, we feel good about the guidance. We are looking at lower end of that adjusted EBITDA right now.

[Gavin Parsons:]

Okay, thanks. And then on background investigations, could you help us size how much of percentage of business that was in fiscal '19, and then what that looks like in fiscal '20, roughly?

[John Kavanaugh:]

Yes, we certainly don't provide any specific contract or business, obviously, data. We report at a segment level. What I would say, echoing what Mac talked about, obviously they have been a solid performer in the business, a good contributor. We're excited about the future, and I'll leave it at that.

[Gavin Parsons:]

Okay, thanks.

[Operator:]

The next question comes from Gautam Khanna with Cowen and Company. Please go ahead.

[Gautam Khanna:]

Thanks. Good afternoon, guys.

[John Kavanaugh:]

Good afternoon.

[Gautam Khanna:]

So, a couple of questions, first I was wondering if you could just again enunciate, articulate, quantify the known headwinds in fiscal '20 to revenue relative to fiscal '19, NEST roll-off of the one contract, et cetera, whatever you got?

[Mac Curtis:]

Yes, I think NEST is -- and Gautam, this is Mac. NEST on an annual basis is about $100 million. You've got rather residual from the contract investors is about $10 million. And I think that's kind of the large numbers, John mentioned a little bit about some of the contract ramp-down, I'm not sure exactly what that number is. It's additive to that, but it's not a huge number. So that's kind of that headwind that we're thinking about in the revenue category. Does that answer your question?

[Gautam Khanna:]

It does, I guess. What's the phase-down of NEST? I mean I imagine it takes a while to…

[Mac Curtis:]

Well, let me tell you where we're at -- so where we are on that, and it's under -- it's not been under protest, Gautam. We've talked about it on the call. Let me kind of give you a little background. That was a contract that was awarded several years ago to HPE, and it was -- it's really kind of the desktop managed services, so it supports the headquarters at NASA and the centers, so you have people onsite at Marshall, in Kennedy, and Johnson where they're working on peripherals, if the printers doesn't work, and then the printers, the mouse, all that kind of stuff. So it's kind of managed services business, about $100 million-$110 million a year. It's very low margin business for us. I think the challenge that we had as Perspecta is about 10-year contract, seven years in, and the HPE customer showed development, and that kind of leaves a bad taste in your mouth. So that's kind of a bad, but I'm not sure if you have the color on it or not.So it was protested. We protested it, and just to give you up to current speed, from back from GAO the protest was dismissed, and I can't into much more detail on that. The next step, as you know, we go to the Court of Federal -- the CFC, the Court of Federal Claims. We've got options, but look, I can't go in more than that, but that's kind of where we are in this process, so we'll do what we think is best for the company, the customer, coming up short. I can't go into more detail because where it is in the protest. Is that helpful?

[Gautam Khanna:]

That is helpful. And then in the outstanding bids number that you gave, $17 billion, is GSMO too in that number because I saw that that was protested by you guys of late, and I'm just curious if that $6.5 billion we should take out of that number of how should we view the $17 billion?

[Mac Curtis:]

Well, yes, what I would tell you given where we are, that the GSMO is in the number. The late breaking news it was protested, and so it was written that we were out of the competitive range, we've protested it. Because we felt there were some things that maybe the government didn't see. As of last night, we are -- just have sent the GAO formal notice taking corrective action. So we're back in the competitive range, we're in play, we got a lot of dollar over this. So the short answer to your question is that number is in there.

[Gautam Khanna:]

It's in there and it should because you're back in the competitive range.

[Mac Curtis:]

That's correct. Exactly, that's correct.

[Gautam Khanna:]

And then just -- I know NGEN bids are in, we're all waiting on it, NGEN-R, but is there -- what is your expectation for the margin transition from the current contract to the new contract, recognizing you're not willing to sacrifice growth for margin. Just is there something we should worry about just kind of the year one of the new terms being substantially less profitable than year whatever, 18 or whatever, year five of the yield, do you expect…

[Mac Curtis:]

Well, just to give just a little backdrop. As you know, the NGEN contract, the percentage of revenue it is and what said all along, and I can't go in too much detail because we're in a competitive state here, is that it's not the highest, it's not the lowest. And so when you look at how to operate this contract there's a lot of fixed price business in it. Yes, it's competitive. We're not -- I'm not going to go into a lot of detail, but again it's not, given the size of the revenue, I have to be careful here, Gautam, the size of the revenue, again, the margin is somewhere in between. So I can't really talk too much about because we -- the bids have been submitted. They have many questions, clarifications yet, so I'm a little hesitant to get into a lot of detail about it, but you got to kind of glean from where we talk about where the margin is currently. We kind of talked about that a little bit. I'm just hesitant; really I'm kind of dancing around it. I don't want to go into too much detail because I don't think -- well, let's see when we get some more, like I'm a little hesitant to talk too much about it. I'm sorry about that.

[Gautam Khanna:]

Oh, I understand. I think reading between the lines it appears that's probably at the corporate average not above it, but I guess I'm just curious about when you bid on these new things in the past when NMCI moved to next-gen, was there a flip, if you will, was there -- I mean there was, I guess, because I went to LPTA, but is there any…

[Mac Curtis:]

Correct, yes. Yes, that was -- you know, as you recall, that was 12 years operating the contract as a co-contractor or operator…

[Gautam Khanna:]

Yes.

[Mac Curtis:]

Through 2000 to 2012, 2013 was LPTA. We know that. And I think the Navy early on -- very early on decided -- the Navy decided that that LPTA would not work as it did not allow them the flexibility to do the network modernization that they needed to do. Hence, the Navy decided that this would be best value, and put that out on both EUH and SMRT, and this is the one that we're talking about. So having said that, it's a complex bid, there are a lot of clients, fixed price, some P&M, et cetera, et cetera. So it's the operational side, ability to inject, you know, the technology as you go forward for modernization. It's a very complex bid with a lot of contract lines as you go forward. So, yes, it's hard -- again I've got to be careful where we aren't competitive -- in this competitive nature of where contract is to provide any more details about the margin.

[Gautam Khanna:]

Understood. Last one for me, and I apologize for asking all these questions, but…

[Mac Curtis:]

No, no, it's fine, it's great.

[Gautam Khanna:]

In the opening remarks, I think there was a comment about opening up the cash redeployment aperture to look at acquisitions, but I just wondered given where the stock trades on an EBITDA multiple and kind of what the other companies out there trade at, how do you balance kind of valuation with -- I mean are you seeing anything of promise that would be economically accretive given, where Perspecta stock trades today?

[Mac Curtis:]

Yes. Well, look, we have to be opportunistic and you hit the nail on the head, and as we've talked about -- John has talked about, I've talked about it; we're looking at opportunities that help enhance the capability set. We're not into buying -- just buy the stock, that's not our mission, that's not what we do. So we're actively looking where we see the books, since we see a lot of the deals, and we're looking if those things can help drive the business, and the valuation survey is something that have to play into it, because that's part of the judiciary responsibility, but we are out there looking for things drive the capability set across either in deep rental customer set, from a broad research, into the program executive offices or even deeper into some of the customer sets where that governments customers mission is so critical to moving forward. So, John, any…

[John Kavanaugh:]

Yes. And I would just say we have always had M&A as part of our capital allocation plan from day one Investor Day. Okay? So we've always talked about again being selective and strategic would be more tuck in versus transformative, but it would be directed toward enhancing capabilities and more access to customers. So overall, we feel good about the balanced capital allocation plan we put together.

[Gautam Khanna:]

Thank you, guys.

[John Kavanaugh:]

Thank you.

[Operator:]

The next question comes from Joe DeNardi with Stifel. Please go ahead.

[Jon Ladewig:]

Hey, guys. This is Jon Ladewig on for Joe. You guys have been giving some good color on the '19 market -- fiscal fourth quarter '19 margins and '20 guidance, how should we think of out your guidance, is that still in the 16% to 17%, and what's kind of driving this -- your guidance?

[Mac Curtis:]

Yes. So as we - I had said in my prepared remarks, okay, we're basically reaffirming our long-term targets through FY'22. So that is again 17% and 18% CAGR that we're going to basically be able to sustain here. So what's driving it, okay, is really again, number one, our continued good strong performance and execution, right. And then our contract mix, right, were 54% fixed price. We do have a lot of operating leverage and we drive those efficiencies. When we look out over the horizon, over the next three years, when I look at the pipeline, we're north of 60% fixed price. So again, we feel good based on visibility right now in the composition of portfolio of sustaining those markets.

[John Kavanaugh:]

I mean just to be clear what we're talking about is that that same 3% to 5% revenue growth that we talked about Investor Day, that same eight to 12 EPS growth, and we've always talked about sustaining margins. Obviously, we've taken it up kind of the step function, and we're continuing to see them now at higher level of 17% to 18%.

[Jon Ladewig:]

All right. Thanks to that color. So then kind of pivoting to your customer sets, when you're talking with aerospace, the defense group, and to a lesser extent the civilian, what are they kind of telling you about their FY'20 plans? Are they comfortable? Are they optimistic? What's kind of vibe that they're putting off and telling your employees?

[Mac Curtis:]

Well, clearly, Joe, we're trying pretty hard, but I think to tell you, I think with the business wins we've had, it's strictly Defense and Intel, there's a lot of opportunity, ARCYBER is an example, we won in the fourth quarter, that's going to be a big revenue driver. I think they are confidently -- confident about their market, confident about the pipeline, the wins we've had. So I think we feel good, but there always are -- we always push them a little bit, for sure. I think on the civilian side of the house, the pipeline is getting better. I think we're kind of moving that moving forward. We've got Rocky Thurston as a new business leader in there as experienced, and really focused on the civilian market, really focused on the civilian market, because that's where we look at it that's critical to us given this technical agencies and that's a Greenfield for us, you know, the ability to look at doing some of IT modernization, additional modernization in Housing Urban Development, and looking at things at HHS and certainly Department of Labor et cetera. So we're really kind of focused on driving that business forward. And I think that they feel good about the market, they feel good about what perspective, what we can bring to the party, but yes, we really we make them move forward, push it pretty good. I think they're confident in the business, they're confident in what they can deliver. Does that answer your question, Joe?

[Jon Ladewig:]

Yes, thanks guys.

[Mac Curtis:]

Thanks, Joe.

[Operator:]

[Operator Instructions] The next question comes from Matthew Sharpe with Morgan Stanley. Please go ahead.

[Matthew Sharpe:]

Good afternoon, gentlemen, and thanks for taking my question. I'm just curious if you guys could give us a sense of maybe how the fiscal year builds in terms of revenue and earnings, what the cadence looks like through the quarters?

[John Kavanaugh:]

First of all, we guide on an annual basis, okay? So again, as we've laid out, we're looking at revenue of [indiscernible], okay, so we're bracketing 3% growth, and really that's an effective growth rate implied by the FY'20 guidance of really 4% to 6%, right. Adjusted diluted earnings per share, we're guiding 3% to 8%. Again, we're growing over the $32 million one-time items in FY'19. So that's an effective growth rate implied in FY'20 guidance of about 9% to 15% based on the plan we laid out in Investor Day. So again, we guide annually, and we feel good about what we've put out there right now.

[Mac Curtis:]

Yes. So Matt, this is Mac Curtis, looking forward to meeting you face to face, if we get a chance. One of the things that we look at is, and I think we've kind of said is, you know, the contract - I'll give you some color on this, contract on Army Cyber, we call it, ARCYBER now, we're just getting started, maybe 90 days into it. That's a big, $100 million sealing over five years. We've got to make that work, and it takes six to 12 months to really kind of get that on line. Matthew, when you think about the complexity of helping stand up a new command, right, is somewhat of a nation command at Fort Belvoir, and moving that, you know, there's construction Melcon [ph] going on in Augusta, Georgia, where Fort Gordon is to build that and that's a new MOS, that's a Military Occupational Specialty now. Cyber is now cyber security. So it just takes about six to 12 months to get those online.We had another good win in the fourth quarter with a classified customer, it's called Dues [ph], I can't put both of them together. It's about 130 million over five years, which is high and analytics work. And again, it just takes about six to 12 months to really get that run rate, if you do the live -- the division of 500 to 900. That's our expectation. It is a sealing, but you can count up where you get six by the close of the 12 months to really get these things running just because of the complexity, just because these are kind of driven by task orders that kind of get it laid. So that's what we see if you do the math on our cyber, you'll kind of see this thing really kind of driving forward that kind of the back end of year. And I might give you guidance on a quarter, but what I'm saying is this is kind of the way these things kind of line up. Is that helpful?

[Matthew Sharpe:]

Sure. Yes, absolutely that helps me, sort of get a sense of what the cadence might be. Just as a follow-up question on the revenue guidance, I was wondering if there were any discrete factors or potential drivers that would push you to the upside or the downside, what variability is there in that growth rate?

[John Kavanaugh:]

Yes. So, as we've discussed, when you kind of take a look at headwinds, we've talked about NASA NEST. We've talked about again the civilian in health care, some ramp downs, really due to some prior legacy year's underinvestment, but big picture is more tailwinds and headwinds, right. So, we're excited about the ramp up opportunities on our Cyber Air Force slogging, various classified winds, some work obviously in a civilian segment with contract growth opportunities, again, the pending awards that we have out there right now, so big picture more tailwinds and headwinds as we move through the year.

[Matthew Sharpe:]

Got it, thanks. I'll get back in the queue.

[John Kavanaugh:]

Thank you.

[Operator:]

The next question is a follow-up from Gavin Parsons with Goldman Sachs. Please go ahead.

[Gavin Parsons:]

Hey, thanks for taking the follow-up. And I think you kind of addressed this with your ARCYBER, answered just a second ago, but now you look at the strong 1.6 times book-to-bill 2% to 4% revenue growth in fiscal '20, 3% to 5% revenue growth over multi-year period implies some acceleration into fiscal '21 or '22 to hit that. So, how much kind of visibility do you have into that acceleration in the out years, and then it sounds like ARCYBER is a little bit of that, but if you could just give a little more color that would be great.

[Mac Curtis:]

Yes. So, I think you're right, and that's a pretty good example, Gavin, when you think about ARCYBER, kind of growth when you do the division. Now again, it is a task order and when you think about standing up command there are a lot of unknowns, but I think that's a pretty good example where -- you know, the real question is where would they be 12 months from where we really get started not a 12 months from now. Now, that's a pretty good -- that's pretty good predictor of how these things work as things contract is the same way, and in the third quarter a contract called Acadia, another classified contract, that's a pretty good one. Again, say, six to 12, probably leaning closer to 12 before you're fully up and running, particularly on complex contracts like that, where it's in disparate locations, you have the kind of clearances picture, I think that's the best way to think about it when you look at new wins. Is it that helpful?

[Gavin Parsons:]

Yes, absolutely. So the 1.6 times book-to-bill, that's got multi years of kind of growth behind it?

[Mac Curtis:]

Yes, it does. And again, as you think about the denominator, we haven't gone back and done an average, but the ARCYBER contract is five years. The Dues contract is five years. And we have some that are seven years. So it really depends on the periodicity of that particular contract award when you look at it, so every one is a little different. It used to be expanded with five, now these contractors get all the longer and, so I mean that's -- it's hard to predict exactly what the denominator is, but we're thinking about it the right way.

[Gavin Parsons:]

Got it, thanks. Appreciate it.

[Mac Curtis:]

Thank you.

[Operator:]

The next question is a follow-up from Gautam Khanna with Cowen and Company. Please go ahead.

[Gautam Khanna:]

Yes, I just wanted a quick point of clarification in the -- in one of the responses I think you talked about how some of the background investigations are incrementally more complex, I was just curious does that actually have a negative margin consequence because…

[Mac Curtis:]

No, it does not. No, it does not. It does not. It's more complex. Think about it this way, Gautam, if you think about from a cold started secret clearance has gone a certain procedure have to follow, then you have a top secret clearance which has a much more complex and longer background investigation in multiple places. And then you start to look at some of the polygraph things, but now it's a case-by-case that you bid. So, one -- I would put it this way, one price per case does not fit all, that's the best way to put it. Is that helpful?

[Gautam Khanna:]

Okay, interesting. Yes, that is. And then, as a follow-up, the discussion about a potential operative to pick up some share from some of the other clearance providers, is there anything like what gives you that confidence or what should give investors that confidence, I guess that you could share with us why that would be?

[Mac Curtis:]

Well, I think simply put -- I think it's -- right, I think simply put, it's process, it's completeness, it's quality, I guess that's probably the best way to put it. I think it is -- I think that's probably the differentiator.

[Gautam Khanna:]

Okay. And then just in the near-term bid pipeline, I'm just curious do you have any sort of larger contracts that you anticipate being adjudicated in the June quarter? And do you have like a whole lot of them in the September quarter? If you could just give us a flavor for how many, you know, $100 million plus annual revenue type jobs…

[Mac Curtis:]

Well, yes, just to kind of give you a sense, right, we talked about -- 68 being in the pipeline, 70 being adjudication, and so about now 60% of that 17 is new. And I think -- you look at it, well, certainly, if you think about NGEN is certainly in play, GSMO is certainly in play, those had these behind them, DRS is certainly in play, you've got -- we have the Department of Labor that's being kind of adjudicated now, and most of these are all 100 million, 200 million, you know, some deals in the FBI that are 100 plus million. And so, when we really look at those larger deals, we've got a couple of other DIA deals that are $300 million plus, I mean there are a lot of deals in there, but it's a pretty robust pipeline. And Gautam, I would tell you as Perspecta they're known of these large deals that we -- if we want to go after, we can go after, we've got the resources, we've got the capabilities, we've got -- certainly all these deals we've got the past performance in the C part that allow us to be competitive. So it's a very robust pipeline. There're probably not too many big deals that are digital transformation as inside the federal government that we're not focused on, and those are really big -- they're big deals. These are well over $100 million.

[Gautam Khanna:]

And do you anticipate it will be in normal SKU towards the September quarter in terms…

[Mac Curtis:]

Yes. Yes, I think you are looking at it, I mean, I think these are having $17 billion in adjudication, when you think about the size of the pipeline, that's pretty substantial. I mean normally you're sitting in about 10 to 11. I think as I kind of look across it's kind of hard to -- we haven't kind of look across the pipeline, it looks pretty even, right, It always looks pretty even until it does it, right, but it looks pretty even as we kind of look at the quarters. But again, that's the one thing. There are lots of things we can control as you well know, but that's one we can't control, right? I mean, we were awarded a contract, it's almost a $30 million contract, it's been [indiscernible] already in March, and it's broadcasted. So, we can end up having a resolution of that in June, it could be September, it's hard to predict, I mean we just can't control that.

[Gautam Khanna:]

Understood. All right, I appreciate the color. Thank you, guys.

[Mac Curtis:]

Yes, very good, thank you.

[John Kavanaugh:]

Thank you, Gautam.

[Stuart Davis:]

And Gary, it looks like we're kind of at the top of the hour. So I think we'll call it there. I want to thank you for your support on the call, and thank all those that called in and listened for their interest in Perspecta.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.