Perspecta Inc.
Q2 2020 Earnings Call Transcript

Published: 14 Nov 2019

[Operator:]

Good day, and welcome to the Perspecta Incorporated Second Quarter Fiscal Year 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 and Strategy. Please go ahead.

[Stuart Davis:]

Thank you. Welcome everyone to today's quarterly earnings conference call. Presenting today are Mac Curtis, our CEO; and John Kavanaugh, our CFO. This call is being webcast on the Investor Relations portion of our website where you'll also find the earnings release and financial presentation slides that we will use for 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 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 3, 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 4.

[Mac Curtis:]

Thank you, Stuart, and thank you all for joining us this afternoon. I am very pleased with Perspecta's performance in the second quarter and I am proud of the progress we are making as a company. Now I'll communicate that through five key messages. First, we've had another outstanding quarter of operations with robust organic growth, strong earnings growth, and excellent free cash flow.Second, we've had another strong business development quarter. Third, the integration of Knight Point Systems is proceeding well. Fourth, our business portfolio is quite healthy and extends well beyond NGEN. And fifth, our first-year focus on getting the big things right has put us in a position to focus on the details to keep building a company that we can all be proud of.First, we again exceeded consensus estimates on all of our key financial metrics. Quarter-after-quarter, we are delivering on our growth, margin, earnings, and cash commitments. Revenue was up 6% sequentially and up 10% year-over-year, our fastest growth core yet.Adjusted EBITDA was up 11% and adjusted diluted EPS was up 20%. Free cash generation was again above our target at 118% adjusted net income. With this strong execution by the entire team, we are raising our revenue, EPS, and free cash flow conversion guidance.Second, bookings were seasonally strong with $2.3 billion, representing a book-to-bill ratio in the second quarter of 2x. This continues a positive streak for us. Our book-to-bill ratio for the trailing 12 months is 1.4x. Now, a clear area of booking strength in the quarter was our Intelligence Community business.We won our largest REIT compete outside of NGEN from the National Geospatial Intelligence Agency or NGA to perform full lifecycle systems engineering and integration work. With a maximum sailing of $824 million over five years, this contract significantly expands the ceiling value and the scope.We are thrilled to continue this critical work in support of national security and look forward to meeting the customers’ expanding commission needs. We were also awarded a prime position on a Defense Intelligence Agency’s Solutions for Intelligence Analysis or SIA 3 contract. This multiple award ID/IQ contract has a potential 10-year period of performance and a total maximum value of $17 billion.We will compete for task orders to deliver analytic support to multiple Department of Defense and Intelligence Agency customers, which will all be new work for Perspecta.We also received a $657 million extension on our NGEN work. More importantly, the Navy made an award to HPI on end-user hardware for EUH portion of NGEN Recompete. We are teaming with HPI on an EUH bid and we look forward to working with HPI and the Navy Marine Corps to ensure the smooth and successful transition of this portion of the program.Based on the transition timing, we do see the potential of some revenue drawdown in Q4 in advance of the SMIT Award and with HPI buying the hardware on EUH. We also await the names announcement regarding the Service Management Integration and Transport or SMIT portion of NGEN-R program, which is still on track for a first quarter calendar 2020 award.We remain confident only Perspecta can accelerate the Navy and Marine Corps IT modernization, getting there faster and more efficiently without missing a beat on operating the network.We received large new business wins in the Federal civilian agencies that point to growth ahead. We won a six-year $166 million contract to provide the U.S. Senate with IT support services for workstation and server hardware, operating system software and application system software. This win marked a clear demonstration of Perspecta's ability to enter into a brand new customer by leveraging the power of the pyramid.In the first two weeks of the third quarter, we won three more new defensive contracts. We won a prime slot on the new General Services Administration, CIO Modernization and Enterprise Transformation Blanket Purchase Agreement also known as GSA COMET BPA. We also won $147 million DHS specialized security services contract to enhance the HS' security posture against network attacks and cyber threats.Finally, we were awarded a new contract for about $150 million from the Department of Housing and Urban Development to transform their end-user experience. Now this contract has since been protested.Looking ahead, our three-year qualified pipeline remains robust at $75 billion, including $24 billion of proposals already submitted and awaiting decision, which is heavily weighted towards new business.Third, the Knight Point integration is firstly complete. Knight Point is shaping up to be a very successful first acquisition. They bring deep customer intimacy at DISA and DHS and a rich legacy of innovation, patented IP, and delivery of managed services programs. We are already integrating their offerings in the cloud, cyber, digital transformation, and enterprise IT with ours and bidding them successfully on new pursuits.Knight Point is fully integrated into perspective from an operations perspective. There are 380-plus employees who are aligned to Perspecta business groups and functional organizations on day one. Now, the acquisition has been very well received from a legacy perspective and Knight Point customers and employees. We are hiring aggressively in the business and experiencing below average attrition.Most importantly, the revenue synergies we envisioned are real. The Rich, Agile DevOps strengths from Knight Point were critical to closing the GSA COMET BPA and their managed cyber services expertise help secure the DHSS assessment [ph]. All told, Knight Point is impacting a pipeline of opportunities valued at greater than $20 billion. Fourth our business portfolio is much more than just NGEN, it is very healthy.Let me just run through our major business lines and highlight our keys to success. Now we have a franchise position in the intelligence community built around analytics and model-based systems engineering and integration. With about $1 billion in awards in the quarter, we are well positioned to expand into new areas as we leverage our broader capability set.Our defense business is thriving. We are still building out the recent spate of wins, including ARCYBER and the two Air Force Award SuperNet and Enterprise Logging. These programs are through their integration of new milestones and are well on their way to driving transformative cyber solutions for the DoD.Up to this point, our Civilian and Health business has underperformed, primarily as a result of underinvestment by legacy companies. But the recent wins and strong qualified pipeline suggests that we will grow sequentially beginning in Q4.Finally, the trusted workforce market and our risk decision group of progressing as we expected. The demand for investigations will be steady and ongoing at about 280,000 ongoing investigations in the inventory and 50,000 to 55,000 new background investigation scheduled per week.Defense Counterintelligence and Security Agency or DSA took ownership of this function and contracts in October and we are in discussions with DCSA on a go-forward case allocation methodology, which may cause some revenue unevenness in Q4.Looking ahead, DCSA is moving out on insider threat supply chain security and industrial and facility security and we are investing in the business. So we've gone from having basically no pipeline a year ago to a robust multi-billion dollar pipeline today.I attribute our success, our mission focus, our strategic emphasis on growth areas like cyber and digital transformation and our innovation NGEN Perspecta Labs. Perspecta Labs is a key differentiator for us. I mean it's not the fact that we had just an applied research lab that makes a difference. It's that we invent real solutions leveraging emerging technologies to solve real problems and advance our customers' missions.Just last week, Perspecta Labs received the 2019 Industry Innovator Award, recognizing its solutions underdevelopment for DARPA to defend the power grid against attacks from nation-state adversaries. As part of our technology transition efforts, we are offering select innovations developed on this program as part of our SecureSmart critical infrastructure solution line, which was just designating a Cyber Catalyst Solution by Marsh.To give you an idea, more than 150 cybersecurity products and services were submitted and only 17 solutions received the designation this year. We're very proud of that. Perspecta Labs is also demonstrating its leadership role in developing innovative cybersecurity solutions in other ways.Our Bus Defender Solution reached DoD milestone B, and we signed additional contracts to further mature this technology. The Bus Defender is a novel solution that successfully detects and blocks cyberattacks and attempts to carry out adversary missions via the Mil-Standard-1553 data bus, while ensuring and maintaining proper transmission and operation.This applies to a large number of platforms operated by the Air Force, Army Navy, and given the wide use of the Mil-Standard-1553 architecture. Now we are not a product company, but this example hints and how we can monetize our patent portfolio. Since we're now in second year and we feel very good about where we are. We're operating more broadly and effectively. For the first time, we can make it to a call without saying the words pro forma.Our one-year mandate was to integrate and integrate fast. Year two, it's modulate which is engineers speak for now we can focus on details and tune the business. For example, we start to monetize the balance sheet by selling the Herndon facility. We'll use the $54 million in proceeds to grow the business and drive shareholder value. We just unified the HR platform on workday, which is another huge major integration milestone and now are source for real-time analytics that we can use to enhance retention and talent management. We've just kicked off our second benefits open enrollment and we've been able to improve the benefits to the employee and rain in cost.Now John and I have been very focused with the investment community on building credibility by doing what we say we're going to do. We've had that same focus internally and our people see what we're trying to do here. It's not perfect, but it's getting better every day as we hone our culture and build a company that we can all be proud of. You can see that pride and how we come together around social responsibility.We participate in two major community initiatives every fall. The first is the American Heart Association Hartwall. Employees around the country joined in fundraising walks, which culminate in a walk on the National Mall and it was earlier this month. Hundreds of our employees participated and we were again the top fundraising company with more than $320,000 raised this year.The second is the Home of the Brave Campaign. More than 350 of our employees volunteered for events, visiting wounded warriors and donated much needed items and celebration of Veterans Day. Our commitment to veterans is also evident in how we make Perspecta such a great place to work with transitioning members in the military, helping them move to survey life, while staying involved in a mission. In fact, we were featured on lifetimes TV's, Military Makeover

[John Kavanaugh:]

Thanks, Mac, and good afternoon everyone. I am extremely pleased with our second quarter results making it six quarters in a row with solid execution. The performance on or ahead of plan for our key financial metrics, we are again upwardly revising our full-year guidance.Turning to Slide 5. Revenue for the quarter was $1.17 billion, which was up 10% from the second quarter of fiscal year 2019 and up 6% from the first quarter of fiscal year 2020. Revenue includes two months of Knight Point, which is performing very well. In addition, we booked about $60 million in revenue from transition services and the sale of IT assets as we ended our NASA Desktop support contract.The revenue came at essentially no margin, but we were able to deliver a positive outcome for the customer and ensure that we didn't have any program write-downs. This outcome was entirely consistent with our expectations as we set guidance for the year. Excluding this one-time benefit, revenue was up 4% year-over-year.The Defense and Intelligence segment continued its momentum as we ramped up recent wins and met increased demand on NGEN. Revenues for the segment increased 11% year-over-year, even though volumes on our Background Investigations business have begun to moderate and revenue was flat year-over-year.Civilian and Health Care segment revenue increased 8% year-over-year as a result of the one-time NASA transition revenue. Contract mix was a little heavier in terms of fixed price in the quarter. As a percentage of total revenue, 56% was fixed price, 19% time and materials, and 25% cost-plus.Q2 adjusted EBITDA was $197 million, which was up 11% year-over-year, as margin increased from 16.5% to 16.8%. Excluding the one-time NASA revenue at essentially no margin, adjusted EBITDA was near the middle of our target range driven by strong fixed price program execution and the full run rate benefit from merger cost synergies and operational efficiencies achieved last year.Depreciation returned to normal run rate at $40 million. Acquisition-related intangibles amortization which is backed out of adjusted net income and adjusted diluted EPS was $50 million.Q2 adjusted net income was $88 million, resulting in adjusted diluted earnings per share of $0.54 against a diluted share count of $162.9 million. Adjusted diluted EPS was up 20% year-over-year.Turning to Slide 6. During the second quarter, we generated $135 million of cash flow from operating activities and $104 million of adjusted free cash flow or 118% of adjusted net income. The difference between the cash metrics is $45 million of capital expenditures, which includes finance lease payments and $14 million of separation, integration and restructuring payments. The strong capital in the quarter was reflected in our days sales outstanding metric of 56 days, which is at the low end of our target DSO range of the mid-to-high 50s.During the second quarter, we paid down $23 million of debt and returned $27 million to shareholders. $10 million in quarterly dividends and $17 million in share repurchases. We also paid out $250 million plus customary purchase price adjustments for a total of about $265 million for Knight Point as discussed on the last call. We ended the quarter with $122 million of cash, $2.8 billion of debt including $283 million of finished lease obligations and $175 million on the revolving credit facility.In October, we completed a sale leaseback of the former EDS headquarters in Herndon for $54 million, which gives us more drypowder to pursue our growth initiatives. The carrying value of the land and buildings was included in assets held-for-sale on our balance sheet last quarter. We'll recognize a gain of approximately $30 million in Q3, but we'll exclude the gain from our adjusted EBITDA and adjusted diluted EPS and we’ll exclude the net proceeds from our adjusted free cash flow for the third quarter and full-year.Based on financial and business development performance in the second quarter, we are raising our fiscal year 2020 guidance as shown on Slide 7. We now expect revenue for the year to be $4.425 billion to $4.5 billion, which is an increase of $25 million to the lower end of our previous guidance.We expect adjusted diluted earnings per share $2.10 to $2.18, which is an increase of $0.02 to the lower end of prior guidance. There is no change to adjusted EBITDA margin, which stays at 17% to 18%.In Q3, we'll face about $65 million sequential revenue headwind, considering the NASA asset sale and two months of NASA execution, partially offset by another month of Knight Point, plus normal December quarter seasonality with fewer effective working days.Finally, we are increasing adjusted free cash flow conversion guidance from 95%-plus to 105%-plus of adjusted net income. At the midpoint of EPS guidance, this equates to additional adjusted free cash flow of about $35 million that we can deploy to drive shareholder value. We maintain a maniacal focus on cash and aggressively manage working capital.Operator, we're now ready to take any questions.

[Operator:]

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

[Edward Caso:]

Great. Thank you. Just to get out of your crystal ball a little bit, Mac here, it looks like we're looking at extending the continuing resolution to December 30. Some thoughts on how that might impact your revenue outlook? And if we end up with a full year of CR, how that might change your view, your guidance? Thanks.

[Mac Curtis:]

Yes. Ed, thanks. Yes, it does look like we're going to have a continuing resolution. And when you go back and look at the history, I mean, in the last 13 out of 18 years DoD started with the continuing resolution. We are a little disappointed, because we had a great budget deal we're lining up. But it is what it is and it's not surprising. And they're talking about end of the year. We're also hearing extending [indiscernible] in the house is going to put a vote on the floor to extend it to probably March, maybe February-March.And then we've gone through and looked at it and we don't see a whole lot of impact to our business. And I think a lot of that is specific to the fact that so much of what we do is really mission-focused, mission-important, and mission-driven. So, based on our analysis, we really don't see a lot of impact as we go forward, but being on this continuing resolution.

[Edward Caso:]

Maybe just a sharper point, if we actually do something foolish like a shutdown, like the 35-day one, will there be any impact from that, if it fall within the quarter?

[Mac Curtis:]

Yes. Well, we can look at history and what happened in the last shutdown that we had. I mean, that was about 30% of the government. And I think we talked about it on previous calls, where out of the 14,000-plus employees, we had 28 that were impacted and that was based on the NASA contract that just ended. So, it's hard to project which part of the government, how much of the government, but we haven't seen a whole lot of impact in the last couple of shutdowns. I mean, kind of, more news at 11, but that's what is the best of crystal ball can look at it right now.

[Edward Caso:]

Last question. How big was the Knight Point contribution, so we can come up with some kind of organic growth rate? Thanks.

[John Kavanaugh:]

Yes. This is John. So as we talked about on an annual basis, about $150 million. So, for the eight months, it was $100 million. So, it was roughly $12.5 million per month. So, that's the metrics and they're performing very well.

[Edward Caso:]

All right. Thank you.

[John Kavanaugh:]

Sure.

[Operator:]

Our next question will come from Gautam Khanna with Cowen & Company. Please go ahead.

[Jeffrey Molinari:]

Good evening, gentlemen. This is Jeff Molinari on for Gautam. Thanks for taking my questions.

[John Kavanaugh:]

Hey Jeff.

[Jeffrey Molinari:]

Hey. Yes, I'd like to focus on the drivers behind the increased sales and EPS guidance. So the sales guide was increased $25 million on the low end, and I think you cited strong Q2 results. So my question is how large was the assumed contribution from the ACE asset sale in your prior guidance?

[John Kavanaugh:]

Sure. Hi, Jeff, this is John. Happy to take that. Yes. As we've said, we are increasing revenue at the lower end of the guidance to 44.25 to 45.00 okay. So relative to the guidance what we talked about at NASA, the transition services, the IT asset sale was always included in our original guidance. We knew the awardee would be required to purchase the assets per the contract and we certainly understood the transition services. So that was already embedded and included in our guidance. As I said in my prepared remarks, we're very pleased with both segments, the operational performance and certainly the business development results.

[Jeffrey Molinari:]

Okay. And that's helpful. And for the EPS increase of $0.02 on the low end, was that solely a result of the higher sales or is there any other drivers there?

[John Kavanaugh:]

Yes. So again, we did increase it by $0.02. We feel very good about our performance again in the execution. So, consistent with that revenue increase, we feel good about the performance. So yes, that's what's driving it.

[Jeffrey Molinari:]

And then for the EBITDA margin range, in the beginning of the – I guess when you first introduced, you said you were going to be towards the mid – you're now trending towards the middle of that range, is that still your expectation or…?

[John Kavanaugh:]

Yes. Yes, we're seeing, as I said very strong performance and solid execution. Again, we did the three-year cost takeout. We accelerated it. We got an uptick. So right now, performing well and we are trending toward the middle of the range.

[Jeffrey Molinari:]

Okay. Thanks. I will jump back in line and hold my questions…

[John Kavanaugh:]

Thanks, Jeff.

[Operator:]

[Operator Instructions] Our next question will come from Gavin Parsons with Goldman Sachs. Please go ahead.

[Gavin Parsons:]

Hey, good evening, everyone.

[Mac Curtis:]

Hey, Gavin.

[John Kavanaugh:]

Hey, Gavin.

[Gavin Parsons:]

Hey. John, you mentioned seeing a little bit of moderation in back on investigations. Mac, I appreciate the update on kind of the backlog and the kind of ongoing scheduled weekly investigations. Can you give us some idea of when that peaked, when do you expect that headwind to end and any magnitude of the headwind would be helpful.

[John Kavanaugh:]

Yes. Sure. It's a good question. So, I think as we mentioned in the call that one of the things that has happened at its last call is the migration of the business, the functionality in the contracts from background investigation suitability as they call it from OPM to this organization, DCSA which stood up on October 1.And a couple of things, one of the things that now happens that we've talked about on previous calls the trusted workforce 2.0 that we're very pleased about is now it's a much larger mission, Gavin. It's not just the background investigations that was kind of the old mission of OPM.Now, we've got this trusted workforce composition is background investigation. It is also a responsibility for insider threat. It's a responsibility for continuous value, continuous evaluation, and continuous monitoring as well as protecting supply chain. So this organization from DSS to now Defense Counterintelligence and Security Agency has just blossomed.And we're excited about that from a go-forward perspective, because we wanted the two of the OTAs to build the next system that looks at continuous evaluation could do monitor. So we see this business. The trusted workforce is really growing with the algorithms all the things that we've got as a portfolio to focus and it's really one of our strategic imperatives.Now what's happened with the suitable? Let's talk about that well, what I mentioned it in the script – is a potential headwind in Q4 that we may talk about. But let me kind of dig into that just for a second. So as you know we went through this backlog last year. We've talked about that. It went from 720,000 cases to roughly 280 million to 290 million. We're back to a normal run rate.So one of the things that's going on is the move from OPM to DCSA is dialogue with the customer about looking at how they may want to look at a case allocation methodology, and so that's kind of one of the things that we look at it. It may make things a little uneven in Q4 as we work with the customer to figure out the best way for them to do the case mythologist. Not an inventory issue, it really is – or looking at that methodology with regards to kind of the cases on a daily basis and how they're allocated to the contractors. Does that help?

[Gavin Parsons:]

That's great. I appreciate that. Can you provide a little bit of color around the NGEN upsizing what the additional scope work is? How much that is? And if the repeat...?

[Mac Curtis:]

Yes. So yes, so as we got – we talked about it. We've got a $657 million extension. As you all recall we've talked about since May of 2018. So what happens regarding the extension you take it from May to potentially December, so that's what's roughly seven months and that gives maybe all the time they need as they go through their process.Now as you know that they have – they took the old NGEN contract and the year recollect it and split into two. EUH, the end user hardware and then there's a SMIT contract, which is the much larger and that's the integration and transport. EUH was – basically bid was awarded to HPI, Hewlett Packard Incorporate, HPI, and that was awarded, I guess about maybe a month or so ago.So, the first one is done, the schedule for NGEN re-compete still holds the same. We think it's going to be the first calendar quarter of 2020 or our fourth quarter, so sometime January through March. So that's kind of the schedule not much change there. They're going through the process and they've been doing a very good job. They had success.We're having competition splitting it up, which was certainly a key point they wanted to have. We still feel very strongly about where we are and moving ahead. But one of the things that will happen and I mentioned it in the script is possible modern headwind – potential headwind in Q4 is that HPI now with a contract at some point in the near future won't start selling hardware.So under the existing contract, we do all the services and we do – we buy all the hardware. Well, over a period of time for a couple of months HPI starts to sell hardware, well, we won't.Now we've looked at that as the engine contract currently. What we said historically and what is the truth as we go forward is engine re-compete won't have the hardware, but they've added additional services like one net additional network of data centers, so the total contract will be bigger than the existing contract with hardware. I know that's a lot, but that's kind of what we're looking at. Does that make sense?

[Gavin Parsons:]

Yes. It does.

[Mac Curtis:]

So let me just kind of summarize these two points is that we've talked about. I mentioned them as just – look we're very transparent. We talk about the business. A lot of tailwinds in this business had a great quarter. We have won some business. It wasn't forecasted, which is positive.We've got $24 billion in evaluation some big deals. We're excited about where the business is. But we do have these potential headwinds that we brought in the script. And so we're dealing with that as we go forward. But our job here is to just inform not to create a mountain out of mobile, but just informed. So I think that's the way we look at it John, I think…

[John Kavanaugh:]

Yes. Yes. Exactly right, Mac. So again as Mac had stated on NGEN, we had been trending toward the higher end of our 15% to 20% revenue based on addressing the pent-up demand that Mac talked about and we may see some moderation in Q4 as we lead up to the SMIT award, so exactly what Mac said. Again feel good about the performance there, but I just want to provide a little bit more information.

[Gavin Parsons:]

Great. Thanks.

[John Kavanaugh:]

Okay.

[Operator:]

Our next questioner will be Jon Ladewig from Stifel. Please go ahead.

[Jonathan Ladewig:]

Hey, guys. Good evening. Good results.

[Mac Curtis:]

Hey, Jon.

[Jonathan Ladewig:]

First question I have is if you guys can kind of elaborate on the current cloud opportunities in the DoD, especially now that the government customer has awarded some of the larger items such as JEDI and this is now talking about taking over most of the fourth estate IT services?

[John Kavanaugh:]

Yes. Sure. Happy to do that. So I think everybody knows what's going on with JEDI and I think just a note on that. We are the cloud migration transformation. We call it digital transformation is the number one as part of our strategic initiative.And just as commercial, the [indiscernible] contract we won is enterprise architecture. It is transformation that GSA COMET and CIO modernization, enterprise architecture, enterprise transformation. So we're doing it all over the government.I think in the DoD – so with JEDI, we are agnostic right. We have to work with both. And we are Microsoft certified – gold certified and so they will do, what they will do and we are there to really focus on the mission side, application transformation, modernization and architecture to hit our customers' applications in the cloud, certainly enabled by the patented and the patent and IP from Knight Point. So that's a bit of a commercial.But on the DoD side, there are a lot of opportunities out there. I mean everybody is looking at kind of enterprise IT as a service. You think about the fourth estate that's certainly something that is in our wheelhouse. You start to think about additional transformation such as things like [DOS PCS 2] and some of those.So they are coming along. I think it is a question with regards to what's going on in DoD. We look at some of the other – some of the other agency DISA like this whole DISA SETI contract. That's systems engineering and that's looking in IT transformation. So we're excited about that.So there's a lot going on in DoD. I think there is fourth estate is going to be really interesting. The Army is moving out. The Air Force is moving up. The Navy NGEN is really that IT as a service contract. If you think about the DoD branches, the Coast Guard has got plans in place to look at IT as a service. And so yes, there's a lot of movement, large contracts and small contracts. So we've got a pipeline that our $75 million pipeline is full, a lot of those ones that I just mentioned.

[Jonathan Ladewig:]

Okay. Thanks guys. And then just kind of pivoting over to labor. There's been a lot of talk about Amazon moving into the capital region. And obviously there's been strong pressure on the labor market overall here in D.C. I'm just curious are you guys finding it to be a challenging environment to staff to the levels the customer wants? And what are you doing these days to differentiate Perspecta relative to some of your peers and enticing labor to jump ship and join you?

[John Kavanaugh:]

Yes. Well, I'm not going to give you honestly because – listen some of our competitors are on the phone. So, I will just speak. It is a competitive environment here in Washington for sure. And I gets about 26% of our workforce is here, the remaining – or the 74% all over the country and that can be good in most cases. So a lot of the delivery is not here.But we do have to differentiate ourselves. And frankly that's why we talk about our social responsibility. That's why we talk about focusing so much on hiring veterans. That's why we look at employee referrals being such an important part of our business.So about north of 80% of our offers are accepted. And in FY 2019 for full-year, about 45% of our hires were from employee referrals. So that means that we're doing something right. We look at our strategic certification program. So what I would tell you it's not a single initiative. Its multiple initiatives, it's about the culture, social responsibility, continuing education, the certificates, employee referral. It's having hundreds of your employees out in the mall to do a hard wall.So, it's not a single thing. I mean the pay bands are important. I think what we have – we as an industry have is what we do have that Amazon has not gotten there certainly yet is we have a mission, right. And most of the 4,000 employees we have in the area here D.C., in Virginia and Maryland are cleared, right. And I think that's an important part because that really focuses on the mission.So, I would like to go into a little bit more detail on a lot of the things we do, but it's we do try to differentiate ourselves as is everybody else. So I think we've been pretty successful. I think we've been successful in recruiting. It's always a challenge no question about it. But I think we've been pretty successful with regards to recruiting and certainly managing the attrition.

[Jonathan Ladewig:]

Excellent. Thanks guys.

[Mac Curtis:]

Yep. Thank you.

[Operator:]

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

[Jeffrey Molinari:]

Hey. This is Jeff again. Thanks for the follow-up. So bookings have been pretty strong, particularly strong this quarter. Looking forward, what do you anticipate bookings to look like in the next two quarters? Can you kind of continue that – does the pipeline look like you can continue that strength? Any color would be helpful.

[John Kavanaugh:]

Yes. It's a tough one to project. But what I'll tell you is – and so here's a way I think about it with $75 billion kind of pipeline through 2022. We've got $24 billion that's in evaluation now. Really when you think about it, this last quarter of the calendar year, historically, is a little slow just because you've got Thanksgiving, you got Christmas.So, it's hard to project where we'll be. We've got some big deals out there. We've got a couple frankly. We hope the protest clears because we've got about $450 million worth of awarded deals that have been protested. Hopefully, well one of them may clear, the other won't because it was just protested and you're going at 100-day march.So, we were bullish about the pipeline. This quarter it's hard to tell because it is – I mean it's the middle of November. You have roughly 45 days left and there's not a lot of activity after about the 15 of December. So it's hard to project. And certainly I don't think we'll see as big as this quarter. And I think in the industry in general you do not see the fourth quarter of the calendar year as big as the third quarter of the calendar year.I think going into our fourth quarter, we're certainly hopeful. Again we've got this $24 billion worth of engine is supposed to get awarded in the January through March timeframe, our Q4 of FY 2020. So I'm kind of giving you a ramp on visitation here but I think it's hard to project exactly what we get awarded. But we've got a 1.4x TTM book-to-bill. We feel pretty good about that. We certainly have enough in the pipeline. We just got to get them awarded.

[Jeffrey Molinari:]

Okay. That makes a lot of sense. And then just with those bids waiting to be judged on do what are the margins in the mix on that? Are those similar fixed price mix as your current business?

[John Kavanaugh:]

Yes. So when you kind of take a look at our pipeline, right north of 60% is fixed price. So you'll see a more weighting in fixed price over for time. Again an area we certainly like to play at and we perform very well with.

[Jeffrey Molinari:]

Okay, and then one last one. The bookings in this quarter, what percent was new work?

[Mac Curtis:]

About $800 million about 35% was new.

[John Kavanaugh:]

Yes. $800 million.

[Mac Curtis:]

$800 million was new out of the $2.3 billion.

[Jeffrey Molinari:]

Okay. Thanks.

[Operator:]

[Operator Instructions] Our next question is a follow-up from Gavin Parsons with Goldman Sachs. Please go ahead.

[Gavin Parsons:]

Thanks. Is there anything you're able to provide us on an update on DOS? Anything you learned about why is initially work that you did later process was successful? Just any...

[Mac Curtis:]

Well, yes I can't give you too much detail Gavin. I think a lot was put out there more than you normally see. But look I just think in general you go into a debrief you want to come out knowing more than you do when you go in. And in some cases you come out and say you need to kind of look and get a little more data. I don't think – look we don't protest. We're not litigious company by any stretch of the imagination.We don't protest very often. I think this particular protest we felt warranted given the feedback that we received, I wasn't frivolous. I think corrective action is on its way. And I think it's substantial. And so we'll see what happens. But we feel where we should be given all the things that have happened Gavin. So we'll see. I don't think it's going to take a long time, but collective action wants to keep the same role. And then so we'll see where it ends up. But it wasn't frivolous and we feel good about the outcome so far.

[Gavin Parsons:]

Got it. And then if I could just ask you about maybe duration of backlog and awards. I mean, a strong 1.6x last year 1.4x trailing 12-months, but if I back the $60 million NEST out of revenue this year and the $100 million contribution from Knight Point, it looks like the organic growth would be only a little bit. So what's the duration of that backlog? And kind of what gives you confidence that will fully come through an organics contribution? Thanks.

[Mac Curtis:]

Well – yes. I mean we don't normally look at it quite that. Well, I mean you obviously are. But I think the backlog I mean historically these are five-year contracts, right. I mean I think – I'm trying to come away to try to answer your question just kind of on the phone, I'm not sure that there was – so John…?

[John Kavanaugh:]

Yes. Let me give you a little bit more color, right. So backlog position right now is about $13 billion. That's roughly up 20% right year-over-year, up even 20% sequentially. Just another example right of the business development engine, the performance momentum that we have going, okay.So again when you take a look, we feel very confident. Obviously, we raised the lower end of the revenue guidance that tells you right there how we're feeling about the business. So everything is going in the right direction. Right now, at the midpoint, right, you're looking at about 4% – a little over 4% growth. And again, we're laser-focused and continuing to try to drive the business.

[Gavin Parsons:]

So, am I just thinking about that the wrong way then? So should I not think about total book-to-bill is correlating to future organic growth?

[John Kavanaugh:]

Certainly. Book-to-bill, obviously, is an important metric, but you need to look at the obviously numerator and the denominator and not at all selectively pull things out. So again, we feel good about overall performance and we feel really good about the trailing-twelve-month and more importantly, we feel good about the future.

[Mac Curtis:]

And, Gavin, I think there are a couple other points that helped drive growth. As we book what we just had two – well, one, the one DIA contract, $17 million, I think what is over 10 years. We booked that at zero. We don't book any – and that's all new – that's all new business for us.So we go in and compete for these task orders. And these are big task orders, $25 million, $30 million, $40 million, $50 million, $60 million, $70 million. That doesn't appear anywhere in the total contract backlog today. But when you win that, right that goes into the contract backlog.So, I think certainly that's one thing. We also are pretty good at, what we call, on-contract growth, where you've got these vehicles like our cyber contract of the $905 million ceiling, 180-plus-million a year, where we're bringing work for that contract to continue to grow that.So that also contributes. It's not in the contract backlog today, per se, it also attributes to growth along contracts. So I think, there are a couple of other pieces of the equation that consider it would certainly drive organic growth. It's not necessarily just in the pipeline. Is that helpful?

[Gavin Parsons:]

Yes.

[John Kavanaugh:]

And the only other thing I'd add, Gavin, is that if you're trying to translate from book-to-bill strength to organic revenue. There are a couple of things. One, obviously, sometimes it takes time to ramp up these contracts.And the other thing that we – it's not really an issue in the quarter, but what we talked about in the past and it is important for some of these year-over-year comparisons is, there was underinvestment in the civilian and healthcare business that we're frankly having to grow over. And some of the growth that's reflected in that 1.4x book-to-bill is helping offset some shrinkage in underinvested in businesses.

[Gavin Parsons:]

That all makes sense. Thanks for the detail

[John Kavanaugh:]

Sure. I think that, Sean, we've got time for one more question here.

[Operator:]

All right. Our final question will be a follow-up from the line of Gautam Khanna with Cowen and Company. Please go ahead.

[Jeffrey Molinari:]

Thanks for squeezing me in with one more here guys. So, Mac, one last one for you, what's the M&A pipeline look like? And kind of the pricing questions, the assets there and kind of the general pricing and the likelihood of another – some potential more deals for you guys? Thanks.

[Mac Curtis:]

Yes. So I think that's a good question, Jeff. And I think we've talked about it again since we thought about being perspective that capital allocation, M&A, tuck-in acquisitions is something that's very important to us and we continue to do. So that the Knight Point is deal done, I think that was a good deal for us and it's doing what we wanted it to do.And so we're active. We're out there looking for things that can make a difference to the company. And we're – from a pure capability perspective or its additive to IP and these other things. So I think it's a decent pipeline.I think the pricing it depends what it is in this space. I will never overpay. You look at where we are right now. Our leverage is at about 3.3 and 34 to 33, so a good spot. We got some cash from the sale of the building and we've got a good – the revolver, et cetera.So we are looking Jeff I think is the short answer. As an example what we would look at is, as you start to look at mission set in DoD with one of the services where they were looking at whole electronic warfare methodology and wrapping cyber around it.Now cyber is intricately linked into everything. So if there are a company out there that thought that way that understood that that had some submissions at skill set that we could integrate in with our defense business and/or the prospective labs is what they do that would be something that would be interesting.We're not interested in just buying and grabbing it. That doesn't – that's not what we're about. So I think we'll find the beginning of the year. Jeff, I think it's going to be on an aggressive market. I think you're going to see a lot of things start to pop out there, a lot of midsized companies. I think pricing is what it is, when you start to look at some of those valuations in double-digits.So I think we're careful. We've got an experienced team. We do all the due diligence ourselves outside of the quality of earnings and the legal stuff you have to do an experienced team. So we kind of know what we're looking for by knowing

[John Kavanaugh:]

Okay. Thank you, Jeff for that question. And Sean, it does look like we have no more questions now. So I really appreciate your help on the call today Sean, and thank you all on the call for your interest in Perspecta.

[Operator:]

This will conclude today's conference. Thank you for attending today's presentation. And you may now disconnect.