Perspecta Inc.
Q3 2020 Earnings Call Transcript
Published:
- Operator:
- Good afternoon. And welcome to the Perspecta Third 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. Please note this event is being recorded.I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations. Please go ahead.
- Michael Pici:
- Thank you. And welcome everyone to our third quarter fiscal year 2020 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 at perspecta.com where we also have posted the earnings release and financial presentation slides which supplements our comments today.Turning to Slide 2 of the presentation. Before we begin, please note that during this call, we will make several forward-looking statements that are subject to the 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, these 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 presentation 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, Mike. And thank you all for joining us this afternoon. Before I go further, I want to introduce Mike Pici who joined us recently as a company's Vice President of Investor Relations. Mike brings over 20 years of relevant experience to his new role and we are excited to have him on the team.For today's call, first, we will address the recent NGEN announcement and then discuss our third quarter results.Obviously, we're disappointed with the outcome of the Navy's recent announcement regarding the service management integration and transport or SMIT portion of the NGEN program. I want to begin by providing an update on the contract schedule. First, we are currently under a contract extension it takes us through December of 2020, which consists of a six-month extension through September and three one-month options. We will go through the debrief process currently scheduled for February 24th to obtain insight into the award decision and will determine our next steps after that.Second, in accordance with the performance work statement in the new SMIT contract, there is a requirement for a nine-month transition out once the contract starts. This is a setback to our plans no question. As a company, we will weather the storm. Operationally, we're performing very well. We will discuss another solid quarter's results in a minute. In fact, it is a seventh quarter in a row of strong performance. We've basically completed the integration require to form Perspecta and are ahead of schedule in delivering the cost synergies originally contemplated.We've also integrated the recent Knight Point acquisition and are seeing strong bookings as a result of the combination; we have an $80 billion pipeline of qualified opportunities to prosecute over the next three years. Importantly, over this timeframe, we only have about 8% of our business in recompete versus the typical 20% plus based on a five-year period of performance. That means more investment dollars focused on new business versus recompete. We have a 1.4 TTM book-to-bill with an approximate new business percentage of 65%. Excluding NGEN, our book-to-bill is 1.6 TTM with an approximate 72% in new business.We have and will continue to be successful in winning new business. Over the last two quarters, we've been awarded $1.3 billion of awards adding three new customers and we're focused on continuing to grow our program portfolio. The prospective value proposition created provides a solid foundation for continued growth. We are confident we can grow our business. We have the team in place to do this. Our dedication to meeting our customers' complex missions, providing innovative solutions and support, motivating our employees to succeed and generating value to our shareholders continues to be our top priority.John will now provide some additional comments on the NGEN financial implications.
- John Kavanaugh:
- Thanks Mac and good afternoon, everyone. Obviously, as Mac stated, we are disappointed with the outcome of the Navy's decision. First off, in our press release this evening we disclosed that the Navy's recent decision will likely result in a non-cash pretax impairment charge of approximately $860 million primarily related to goodwill and intangible assets that will be recognized in the fourth quarter. This charge will be adjusted out for non-GAAP reporting purposes. While we normally don't discuss contract level financial details, given the importance of the recent announcement, we will provide as much transparency as we can at this point, while not compromising any competitively sensitive data.We're providing this information to help you better understand perspective without NGEN. In order to provide a baseline, the network portion of the NGEN program or SMIT represents approximately 18% to 19% of our expected FY20 revenues which is about 200 basis points higher than our historical performance as we have been addressing pent up demand over the last couple of quarters. In terms of margin impact. The SMIT component has minimal capital intensity and has been benefiting from end of contract program efficiencies and it's currently running approximately 500 basis points below our company's year-to-date adjusted EBITDA margin of approximately 17.5%.In terms of financial implications, there is no impact to FY20 from a non-GAAP perspective. Looking forward to FY21 and FY22, since NGEN was expected to remain relatively stable, it was not an incremental growth driver. Therefore, we still expect to grow consistent with our long-term growth targets of an FY20 base line that excludes the SMIT contract. As discussed earlier, we're under contract through December 2020 which consists of a six-month extension through September and three one-month options, which takes us through our third quarter of fiscal year 2021. Factoring in the moderation of the pent- up demand and only three quarters of performance, we see FY21 SMIT revenue approximately $250 million lower and adjusted EBITDA margin approximately a 100 basis point lower than FY20. Assuming the contract end date of December 2020, there would be no revenue or profits from the SMIT portion in FY22.In terms of adjusted free cash flow, we expect FY20's contribution from SMIT to be approximately $70 million to $80 million. From a net leverage perspective, we ended the third quarter at 3.1x for our credit agreement. Since the leverage ratio is a backward-looking metrics using trailing 12-month EBITDA, we wouldn't see the full financial impact on our net leverage ratio until roughly the fourth quarter of fiscal year 2022 which is almost two years from now. In the meantime, we're confident our business can grow and replace the NGEN cash generation over the next few years.Now I will turn it back over to Mac to discuss our third quarter performance.
- Mac Curtis:
- Thanks John. I'm very pleased with Perspecta's performance in the third quarter, which was in line with our expectations. Today, I want to share four key messages. First, we've delivered another solid quarter of operations with strong revenue growth, robust earnings and excellent free cash flow. Second, we've had another strong business development quarter. Third, our ability to deliver on our commitments and fourth, we continue to fine-tune the details to build a company we're proud of.First, we again exceeded consensus estimates on all of our key financial metrics. Quarter-after-quarter, we're delivering on our growth margin, earnings and cash commitments. Revenue was up 5% year-over-year, adjusted EBITDA was up 7% and adjusted diluted EPS was up 17%. Free cash flow conversion rate for the quarter was again above our full-year target at 109% adjusted net income. With this strong execution by the entire team, we were raising our revenue, EPS and free cash flow conversion guidance.Now John will share more on this in a moment. Second, bookings were strong at $1.6 billion representing a book-to-bill ratio in the third quarter of 1.4x. This continues a positive streak for us. Our book-to-bill ratio for the trailing 12-months is 1.4x. I'm very proud to share that 77% of our bookings this quarter represent new business for Perspecta. These will be key to our future growth as we achieve full run rate. Our defense intelligence segment is continuing its steady performance. This quarter we won new work and the key growth area of enterprise infrastructure as a service through teaming with our commercial partners to support the Army's pilot program. We were successful on recompete programs, received multiple renewals and extensions as well as additional work on existing programs.Overall, our business development teams are driving outstanding results to achieve both near and longer-term objectives. Before I move off to defense and intelligence segment, I want to comment on our trusted workforce business, specifically background investigations. We continue to work through the OPM to DCSA transition and are confident we will maintain our steady-state market leading position. Our pipeline in this business is growing and we see real opportunity and the continuous evaluation and continuous vetting space.Our Civilian and Healthcare segment had an exceptionally strong quarter of bookings. We won our largest new award this year from the US Department of State Council Affairs Office under its Enterprise infrastructure program or CAEIO to provide enterprise infrastructure support and operate the global counselor Affairs IT environment. This contract has a maximum ceiling of $810 million with a one-year base period and six one-year option periods. We are pleased with this win and look forward to cultivating a long-standing partnership. Also included in a booking these quarters are two FED contracts that we mentioned on our Q2 call. As a reminder, we won a prime slot on the new General Services Administration CIO modernization and Enterprise transformation blanket purchase agreement also known as GSA comic BPA.In addition, we were awarded an initial task order of $16 million to provide agile application development. Finally, we were awarded a five-year contract with maximum ceiling value of $147 million from the Department of Homeland Security to enhance its security posture against Network attacks and cyber threats. In the early weeks of Q4, our civilian and healthcare segments continue the momentum. As we were notified that the Department of Labor re-awarded their information technology operations and maintenance contract to Perspecta after their corrective action from a previous protest. This contract represents new work at a value of $277 million with a one-year base period and six one year option periods. We look forward to partnering with the Department of Labor on modernizing their IT environment.As I stated in my opening remarks, over the last two quarters, we've secured three new customers. Department of State, Department of Labor and US Senate. These are great examples of our investment efforts paying off and the future is bright for our civilian and health segment as these new business wins further enhances the diversity of the portfolio and the wins this quarter reinforce our commitment of not sacrificing growth for margins. Looking ahead, our three year qualified pipeline remains robust at $80 billion including $17 billion of proposals already submitted and awaiting decision, which is heavily weighted towards new business.Third, we continue to deliver on our commitments that we've made to our customers mission, employees and shareholders. John and I have been very focused on building credibility by doing what we say we're going to do. I want to provide evidence of this by focusing on four key areas. The value of our deep customer relationships levering the power Perspecta. Transparency around our business and our financial performance. Our customer relationships are aligned with mission needs focused on IT infrastructure modernization, cloud migration, cyber security, its accelerating digital investment and adoption. Key to these relationships as our ability to deliver service offerings and solutions which are unique each of their needs.You've heard me speak in the past about the power and the pyramid. We have to anchor programs and our prime examples of leveraging our capabilities and a consolidated offering. One is the army Cyber Command and the second is the new US Department of State Counselor Affairs Office contract. These wins represent new business for Perspecta and a total contract value of $1.7 billion. These deals demonstrate the power of Perspecta because of our full suite of capabilities, coupled with the deep customer insight to drive successful prime bids; we're not present in the independent businesses prior to the formation of the company.A final example of delivering on our commitments is our financial performance. Now fourth, we continue to fine-tune the business while remaining focused on meeting the critical mission of our customers. Perspecta labs, our innovation NGEN continues to develop new intellectual property that we transfer into existing programs and leverage in our proposals for new business. As an example, we are applying our commercial solutions for classified technologies as part of Perspecta IT service offerings and using certain IP in the US Cyber Command program.Second, the recent key wins due to our capabilities are aligned with critical customer needs in the areas of IT modernization; cloud computing, cyber security, infrastructure engineering and support. Third, our employees and leadership are engaged and dedicated to executing on our financial and non-financial objectives. We have aligned our business development organization to support our strategic growth expectations and our general managers bring years of experience and customer relationships to grow the business.In summary, I'm very proud of the performance we delivered this quarter. Our ability to support our customers mission and the employees and leadership team we have in place to drive us forward. With that let me turn the call back over to John.
- John Kavanaugh:
- Thanks Mac. In terms of our third quarter results, I'm extremely pleased with our performance making it seven quarters in a row of solid execution. The performance on or ahead of plan for our key financial metrics. We are again raising our full-year guidance for revenue, adjusted diluted earnings per share, adjusted free cash flow conversion.Turning to Slide 5. Revenue for the quarter was $1.13 billion which was up 5% from the third quarter of fiscal year 20199. And as expected down 4% from the second quarter of fiscal year 2020 due to the $60 million in transition services and one-time revenue from the sale of the IT assets related to the NASA desktop support closeout recognized last quarter.In Q3, we recognized approximately $15 million in revenue anticipated in Q4 related to accelerated purchases driven by customer demand. The defense and intelligence segment continued its momentum as we ramped up recent wins and that increased demand on NGEN. Revenues for the segment increased 15% year-over-year. For Civilian and Healthcare segment revenue decreased 14% year-over-year mainly due to NASA and other programs run off. Key Q3 new business awards Mac referenced earlier provide momentum moving into FY21.Overall, our contract mix was a little heavier in terms of cost plus in the quarter. As a percentage of total revenue, 54% was fixed price; 18% time of materials and 28% cost plus. Q3 adjusted EBITDA was $195 million which was up 7% year-over-year as adjusted EBITDA margin increased from 16.9 to 17.3% driven by strong fixed price program execution.Depreciation declined slightly to $38 million. Acquisition related intangibles amortization which is backed out of adjusted net income and adjusted diluted EPS was $54 million. Q3 adjusted net income was $90 million resulting in adjusted diluted earnings per share of $0.55 against a diluted share count of $162.5 million. Adjusted diluted EPS was up 17% year-over-year.Turning to Slide 6. During the third quarter, we generated $120 million of cash flow from operating activities and $98 million of adjusted free cash flow for a 109% of adjusted net income. The difference between the cash metrics is $40 million of capital expenditures, which includes finance lease payments. $17 million for the initial sale of qualifying receivables and $35 million of separation, integration and restructuring payments. For the quarter, our operational day sales outstanding metric was 59 days.During the third quarter, we paid down $149 million of debt and returned $23 million to shareholders; $10 million in quarterly dividends and $13 million in share repurchases. We ended the quarter with $69 million of cash and $2.7 billion of debt including $271 million of financed lease obligations. During the quarter, we completed the sale lease back of the former EDS headquarters in Herndon and another owned property for total net cash proceeds of $77 million. These proceeds provide us more dry powder to pursue our growth initiatives. We recognized a combined gain of approximately $33 million from both transactions, but have excluded the gain from our adjusted EBITDA and adjusted diluted EPS. And the net proceeds from our adjusted free cash flow.Turning to Slide 7. Based on our financial and business development performance in the third quarter, we are raising our fiscal year 2020 guidance. We now expect revenue for the year to be $4.45 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 of $2.12 to $2.18 which is an increase of $0.02 to the lower end of prior guidance. And there's no change to our adjusted EBITDA margin range of 17% -18%. Lastly, we are raising our adjusted free cash flow conversion guidance from 105% plus to 110% plus from adjusting net income as we continue to have a laser focus on cash collections and aggressively managed working capital.Operator, we're now ready to take any questions.
- Operator:
- [Operator Instructions]Our first question comes from Gavin Parsons of Goldman Sachs. Please go ahead.
- GavinParsons:
- Hey, good evening, gentlemen. Thanks for all the color on NGEN that's extremely helpful. The $70 million to $80 million free cash flow, is that the full impact that we should expect on medium term free cash or are there dynamics of whether it be overhead allocation or changes in CapEx or DNA that make it more or less than that? Thanks.
- JohnKavanaugh:
- Yes. So, Gavin, this is John. So appreciate that again. Our intention here is to give you as much transparency as we can, okay, and obviously we're trying to ring-fence is scale and sizing. So the $70 million to $80 million it is effectively, it's tax affected, it's the overall adjusted free cash flow impact or contribution right from the SMIT component, okay. As you saw for this year, we've raised our obviously adjusted free cash flow guidance metric so everything is fine.
- GavinParsons:
- Got it. And then just on the strength of the book-to-bill ex NGEN at 1.6. If I back into implied organic growth for the year, I think it's slightly negative. So can you just help reconcile how long it takes for that 1.6 x NGEN book-to-bill to convert organic growth or what we should expect that to drive growth X NGEN?
- JohnKavanaugh:
- Yes. So, first of all, we're expecting right now to take a look at revised revenue guidance if you look at the midpoints roughly 5% growth, 3% of that is organic, okay. So again feeling really good about the great business development results. The momentum we're getting. You saw what we're doing relative to both within the quarter and then more importantly on the trailing 12-months. And we even provided you again the metrics excluding NGEN, okay, which is 1.6x trailing 12-months and a significant amount of new effectively 72% new.
- GavinParsons:
- I mean is there a certain amount of time that it takes for those bookings to convert to revenue? Or is it six months, 12-months, 18? I know it's all of them on one by one basis but is there -
- MacCurtis:
- Yes. That's a good question. Maybe it does depend on the type of contract it is and we can actually give a couple of examples. The Department- the US Senate which is a contract that we won probably, I think in maybe 90 days ago that's up and running, fully staffed, up and running. So the complexity associated with the Department of State Counselor Affairs which is a new piece of business. That's going to be over a period of time right. And a lot of the transition is worked out with the customer that could be a six month kind of transition in Department of Labor probably a little less than that. And part of it too is we've got a lot of job openings and one of these we do a very good job of is moving people around in the business to fill those jobs.It's also about career advancement. It's also about career opportunity. And so I think when you think about civilian agencies, a little quicker right in some cases when you look at things like the ARCYBER, in some cases you've got - or foreign to operate systems that takes a little bit longer, but for the ones we've won the three new customers we referred, we're up and running. We're moving out bringing people on board not going to give you this too many of the specifics, but in one case in the Department stage hundreds of people and so we have to go in some cases in the clearance process but those are that are moving along I can tell you.ARCYBER, that's up and running. We're probably 98, almost a 100% staff there now we start to migrate from Fort Belvoir to Fort Gordon. So we really, really focus on that NGEN, Gavin, so to get the revenue generation as quickly as we possibly can. Is that answered your question?
- Operator:
- Our next question comes from Gautam Khanna of Cowen. Please go ahead.
- GautamKhanna:
- Hey, guys. How are you? Hey. So I had a couple questions and I apologize. I'm certain you address this in the opening remarks, but I was late to the call. The EBITDA represented by the SMIT portion of the contract. Did you quantify that or can you do so now for my benefit?
- JohnKavanaugh:
- Yes. So this is John, Gautam. So again in the spirit of trying to provide as much transparency right we're trying to make sure people understand the NGEN SMIT component. So in my prepared remarks it was effectively about 500 bps lower than our Q3, if you will, year-to-date EBITDA which was roughly 17.5%. So the reasons are again that component I think as you know has minimal capital intensity. And it had been benefiting right from end of the program efficiencies.
- GautamKhanna:
- Okay.
- MacCurtis:
- We run - this particular program for seven years and so as you would expect there you get pretty efficient with what you're doing, how you operate the program. I think it was to John's point.
- GautamKhanna:
- Got it. So are 12.5% EBITDA margins on a revenue base of how much on an annual basis?
- JohnKavanaugh:
- Yes. So what we provided here in the prepared remarks, it's roughly if you will 18% to 19% of our revenue. So you've seen our revenue range, assumed through the midpoint-ish that's how we provided it, got it.
- GautamKhanna:
- Right. Thank you. I apologize for making you repeat that. As a follow-up, have you been debriefed yet by the customer and do you have a sense for maybe whether this is something you're likely to protest or maybe we'll keep the business longer as that process plays out or when do you get debriefed and when do you make that decision?
- MacCurtis:
- Yes. So that's a good question, Gautam. So our debrief is scheduled for February 24th. And so just by way of process what happens you have debriefed on February 24th. You've got about five days to decide or you want protest or not and frankly where do you want to protest to? You can protest to the agency which will be the Navy. You can protest at GAO or you can protest to poor federal claims. Historically in our space in most protest to GAO and that's a separate process where normally if they're -they go through this 100-day valuation. There's a lot of to and fro between the GAO, the attorneys and the agency to kind of figure out what's what and at some point, in that period time they provide an opinion back to the agency. So that's kind of in the services. That's kind of where you go. So from our view, look, we've got a mission to continue to deliver on. We'll go through the debrief and we'll make a decision that you always have stated before state unless called. You go into a debrief to learn exactly what happened, why it happened and were you were right, were you wrong. And then you make -you hopefully come out knowing more than you went in with and then you make a decision accordingly. So you're probably looking at just by schedule somewhere which would be the 29th of February which is actually a date this year because this is a leap year. So that's kind of the way we think about it. Is that helpful?
- GautamKhanna:
- Yes. That was extremely helpful. And somebody asked it earlier and I apologize, but it just is there any other linkages we should think about? You mentioned the free cash flow impact. Are there any other linkages that we should think about indirect that affect wrap rates or your broader competitiveness elsewhere? If in fact this business does go away for good, just thoughts about kind of deleverage, if you will.
- MacCurtis:
- Well, I'm going to turn it over, John to say, but just from the name, if you will, you look at transition. And then into the obviously versus the previous question about the story. We're not going to go into too much about transition, but clearly this is not our first rodeo. When you think about how you would transition a program out and by the way that is a nine-month transition as you may -you will may or may not know that is in the PWS, Performance Work Statement for us, if this is the case to transition out. So you look at how you deal with those talks associated with running for business. Now frankly most of this contract is kind of labor base.And so you deal with it accordingly. We haven't had a debrief yet, don't want to get ahead of ourselves, but there is a process by which you do this, so you deal with the old cost envelope of running a program like this. John, I'll turn it over to you.
- JohnKavanaugh:
- Yes. And I would just echo that, Gautam, so first off as we said in prepared remarks, we are under contract through obviously December with being they are through September three-month options. We clearly had developed already contingency plans in the event of a SMIT announcement that didn't go away. The other things I would comment from any kind of stranded or an overhead absorption, a lot of the people are on customer owned facilities. We would immediately clearly right-size the indirect structure and we've got again a very demonstrated proven ability to be very disciplined and caustic out. So I feel good about where we are relative to plans, we had in place.
- MacCurtis:
- And I think the only follow on to that, Gautam, would be, look, we've got hundreds - plenty of jobs, plenty of work for most of it, many of this workforce because I mean look, we just -it's hundreds and hundreds and hundreds of people we're hiring now. These are Perspecta employees, many of them have worked on this program for a long time and we think about our family first to move employees from one program to other stuff things happen in this business, we do a great job of moving employees around. So we got a great core of really smart people who've done a really good job that we've got plenty of work for in the business on direct contract.
- GautamKhanna:
- Okay. Now that's very helpful. And maybe to change the subject, I apologize but there was a recent report out that the DoD had kind of whittled the backlog of background investigations to just over $200,000 down from whatever was $700,000 plus a couple years back. I was wondering how does- you guys have talked about that business being kind of strong and there's an opportunity to pick up share. I was wondering if you could elaborate what your expectations for that base of businesses over the next couple of years? Because that was another thing that this has gotten people nervous when they look at those headline backlog numbers and how do we - how should we think of its broader context for Perspecta on that?
- MacCurtis:
- So, yes let me get - that's a good question and so again although we constantly talk about not talking about specific contracts with the portfolio, but we're doing it today and again when we think about the background investigation business what is going on and we've been very transparent about this, I mean we talked about it in previous quarters. One point the backlog in 2018 or 2019 it got up to $720,000 and so obviously got lot of attention on Capitol Hill and so we were one of the main stages helping the government work that backlog down to something up close to about $200,000 - $220,000. So now we're in the steady state inventory and we basically said, look, we'll never see those kinds of numbers and from FY18 and 2019 and it was a surge capacity. We helped the government deal with that problem. And now we're kind of back to steady state.I think a couple key points here is in this steady state it is always going to be between $200,000 and $220,000 because you have people coming in and people going out. So I think that's one of the things that we've seen we manage this business by portfolio. And as John said, there are ups and downs in this particular business or in our FY20 guidance and so that's the way we think about looking at that business. Now a couple other comments about this and in this $200,000 plus, one of the things that is, it is the nuance is the complexity of the cases, the type of cases whether it is top-secret to confidential that sort of the complexity of cases hasn't changed since the -over the last couple of years. So this 200,000 case backlog are as complex and similar to what it was before. So I think that's an important point to make when you think about the revenue and the cost of doing background investigation.So I think we may need some more explanation on that offline but that's a fact. And I think we can sort of talk about that. I think now I am going to kind of continue we know that this is frankly managed by portfolio. This was clearly a headwind going into Q4 and again we managed by portfolio forwarded contracts in the main. Couple other things that I will tell you. This process as you move from the Office of Personnel Management to the defense counterintelligence, Security Agency we will see the largest change over the last 50 years. It is getting completely realigned while there always be background investigations, the notion of a couple of things moving to DCSA, you've got this continuous evaluation to tell you it's learning process. And then you've got the whole notion of the mission of DCSA being responsible for insider threat.So there are a lot of opportunities in this business. This market is changing. There's no question about it and we were right there. It's one of the four key strategic initiatives we've got as trusted Workforce 2.0. So they're building new systems to deal with AI and machine learning. We are building that system and we're looking at how this industry's going to morph itself into more electronic based as well as leveraging the workforce in the field to deal with issues associated with continuous evaluation continuous vet. So I think kind of more news at 11, the customers working is, working through these details but we see this is a huge opportunity, it's changing. It's not the way was 50 years ago and I think we're riding along with that and we look at this again as part of managing the portfolio. And the guidance going forward. Does that -that's a long-winded answer to question, but I think there's more to it, there's a lot more to it than just saying, hey, it was up in 2018 and 2019, how is that? Well, we know that. We predicted that. We've been talking about that. So there is a steady state and there are a lot of opportunities in this market. So sorry for the long winded answer.
- Operator:
- Our next question comes from Matt Sharpe of Morgan Stanley. Please go ahead.
- MattSharpe:
- Yes. Good evening, gentlemen. I think for, John, can you guys just help us understand the dynamic we're observing in funded versus unfunded backlog? I think while total backlog was up notably per the 1.4x book-to-bill, I think funded year-over-year was down some 20% or so. Is there sort of duration shift that's going on or some sort of customer buying pattern that's shifting here that's driving that?
- JohnKavanaugh:
- Hey, Matt. This is John. So, yes, so obviously our backlog right now is about $13.3 billion funded right now effectively about $1.8 billion. There's always kind of snapshot dynamics on a funded amount in general though okay what's important to us as you see the kind of business development results that we have been driving, okay. You see what amount has been new okay so we feel good about continuing to grow this moving forward, but there are multiple dynamics that you can get into but the key is continuing to drive the book-to-bill, continuing percentage of new and continuing the momentum that we've been demonstrating.
- MacCurtis:
- And again to add to John when we put the total contract value in it, very, very seldom do we see an option not being exercised. In some cases it may be year and money that's operation and maintenance versus all the procurement dollar. So it's - in color money it's a confusing picture but no we don't read a whole lot into that at all. It's more timing than it is anything else as opposed to commitment.
- MattSharpe:
- Okay. Got it. Thanks. That helps. And then just on the hardware piece of NGEN. Are you guys experiencing any headwind at this point in time or degradation to revenue or is that more of a 4Q event when HPI starts to ramp? And have you guys quantified or can you quantify what to expect in terms of the headwind from that component to the NGEN contract?
- JohnKavanaugh:
- Yes. So this is John, Matt. And I'll turn it over to Mac. So on the end-user hardware component that you're referring to as we talked about previously, we're working very closely with HPI. That work has been going fine. That's not impacted by this mid announcement and things are going fine there. I won't get into specific level contract detail on that because that is not our normal practice. Obviously, we provided it for SMIT to provide transparency for base lining, but we're basically moving forward with HPI. Mac?
- MacCurtis:
- Yes. I think and as we go into this transition period, a lot of this is being done under the support to HPI is being done under the existing contract. Now we're not buying the hardware per se that HP is mine but we are doing the integration. We are touching the network and we will continue to that. In fact, we just got a four-month extension from the Navy on our existing contract is the NGEN contract to continue HPI, get engaged and kind of line up what they need to do going forward. So it's a healthy relation. This mission is all we are making sure we support the Navy. I mean that's first and foremost and so good relationship with HPI and we will continue to make sure we help them be successful and EU ender user hardware.
- Operator:
- Our next question is a follow-up from Gavin Parsons of Goldman Sachs. Please go ahead.
- GavinParsons:
- Hey, thanks for the follow-up. If I look at total free cash flow this year going into next year excluding NGEN, do you think you can grow free cash flow next year or maybe asked another way are there any kind of big one-time helps or headwinds this year that don't recur next year? Thanks.
- JohnKavanaugh:
- All right. So what I would say right now, Gavin, obviously, we're not going to talk about FY21 guidance on this call. We will certainly be talking about it in our fourth quarter call. But what I would say is as follows. You've seen since we've been a company what we've been able to do there. We have industry-leading operational DSO, okay. We do an excellent job in working capital management, okay. We are cash generating machine. We've just taken up again this year right from 105% plus to 110% plus. So as I said my prepared remarks, okay, relative to the business, if you will, excluding the network SMIT, I confident okay we're going to continue to grow. We are going to continue to have a laser focus on cash generation. So again we'll be providing guidance at another point in time, but I like what we're doing in the business. We have a lot of good discipline and a lot of good focus.
- GavinParsons:
- Got it. And then if you don't mind maybe just updating us on capital deployment priorities. You mentioned the change in leverage from the decline in NGEN EBITDA contribution.
- JohnKavanaugh:
- Sure. So from a capital allocation we will continue a balanced approach, obviously, we're going to remain focused on obviously deleveraging and you heard what we did in the quarter. We paid $149 million in debt. We got the leverage down to 3.1x per our credit agreement. We will continue to return capital to shareholders right. It's a key part of our allocation strategy. We will remain opportunistic if you will on the buybacks. You saw what we did in the quarter. And we will continue to pursue tuck-ins; we will be very selective and strategic.So, overall, my message would be we will remain responsible and discipline in capital allocation. We've got good financial flexibility. And we're going to continue to drive this business.
- GavinParsons:
- Got it and then, Mac, appreciate all the color on background investigations. Can I ask you what that did this quarter? Or up, down year-over-year or sequentially?
- JohnKavanaugh:
- So again as we've talked about right as Mac said multiple times now, we always knew FY19 would be a high-watermark, we knew that would be higher than FY20 and we would see some obviously trending down. It is a headwind going into Q4; it is already embedded in our FY20 guidance. We feel very excited about the future for reasons Mac talked about.
- GavinParsons:
- Got it. And then maybe on that front if you could just address you mentioned in addition of software some of the work, you're doing there's and then obviously the more complex investigations. I mean are there - is the cost per investigation moving up at a pretty significant cliff because if I look at the total investigators that seems to be down by about 15% over the last three quarters?
- MacCurtis:
- Yes. I think what I would tell you and as we talk about this with the customer that the cost is about the same, Gavin, is my point. And again, I think and it's primarily the rationale because we are still -that we still haven't gotten into the movement of CE/CV. There's still a lot of PRs of primary evaluation and that's kind of getting hung up a little bit too. I don't get too detailed here. So if you think about the $200,000 what I'm saying is the mix is about the same of the $200,000 as it was primarily before you've got the $700,000 and therefore the price is really haven't changed much and the cost hasn't change much. And, look, we're happy to go offline and give you kind of a little more detail on this. And I think we've talked about that and so that might be worthwhile because that's what when you dig into the background information that's what it shows is the prices are affirmative.The backlog has come down; inventory is having about $200,000 plus but we're not seeing much change in historically in the cost.
- Operator:
- This concludes our question-and-answer session. I would like to turn the conference back over at a Michael Pici for any closing remarks.
- Michael Pici:
- Operator, thank you for your assistance with today's call. And thank you all for your interest in Perspecta. And look forward to speaking with you soon.
- Operator:
- The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Other Perspecta Inc. earnings call transcripts:
- Q2 (2021) PRSP earnings call transcript
- Q1 (2021) PRSP earnings call transcript
- Q4 (2020) PRSP earnings call transcript
- Q2 (2020) PRSP earnings call transcript
- Q1 (2020) PRSP earnings call transcript
- Q4 (2019) PRSP earnings call transcript
- Q3 (2019) PRSP earnings call transcript
- Q2 (2019) PRSP earnings call transcript
- Q1 (2019) PRSP earnings call transcript