Perspecta Inc.
Q4 2020 Earnings Call Transcript

Published: 22 May 2020

[Operator:]

Good afternoon, and welcome to the Perspecta Fourth Quarter Fiscal Year 2020 Earnings Call. All participants will be in 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. Welcome, everyone, to today’s fourth quarter 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 website, where you will also find the earnings release and financial presentation slides that we’ll use for today’s call.Turning to Slide 2 of the presentation. Please note that during this call, we'll 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'll 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 measure.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 on this afternoon’s call. I'm pleased to report that with strong operational performance in the fourth quarter, we completed another successful year. I'm extremely proud of the entire Perspecta team. We joined together to become one Perspecta and have delivered both outstanding financial results and customer mission success. Now let me start by saying we hope you and your families are all healthy and safe during these challenging times. We would like to thank all of the health care professionals, first responders and frontline workers that continued to work tirelessly to fight this disease.We are incredibly proud of the way our team has bonded together in response to this crisis and our performance reinforces my view that we have the most talented and dedicated employees in the industry. We remain committed to the health and safety of employees and have taken steps to ensure that end. Now, today, I want to share four key messages. First, I'll discuss the actions we have undertaken in response to dealing with the COVID-19 pandemic and the impact on our business; second, our excellent operational performance during the fourth quarter and fiscal year; third, our continued strong business development results; and fourth, I'll provide you with a long-term target and business update.Turning to Slide 4, let me begin by expressing our heartfelt sympathy for everyone who has been affected by COVID-19. As a company, our first priority is the health and safety of our employees and extended workforce. And we've taken a number of actions to help mitigate the risks to our employees, including social distancing, onsite temperature screenings, heightened sanitation procedures, teleworking and virtual meetings.We have a robust business continuity plan, which has allowed us to maintain a regular corporate and management cadence. We've also assembled a cross section of leaders from our executive functional, operational and business groups that convenes regularly to manage our coronavirus response efforts and host daily manager led meetings throughout the organization, across our company. Through these actions, less than 5% of our workforce has been disrupted or delayed by COVID-19. These areas where we're seeing the primary impact during the intelligence agencies where employees are unable to work because secured and classified government facilities are not accessible. In these situations, under Section 3610 of the CARES Act, we are able to recover our costs associated with this ready state workforce but cannot bill the fee.During this pandemic, the work we performed has been deemed critical infrastructure and essential to national security and thus far we have seen minimal disruptions to our business. We have implemented extra precautions to ensure our offices remain open to support mission and business critical operations. Importantly, we continue to support our customers' missions through these challenging times. Now let me share a few compelling examples with you. In March, we assisted our Navy customer to prepare both USNS Mercy and Comfort hospital ships for deployment.We equipped the Comfort with redundancy options to allow them rapid IT conductivity upon arrival in New York and we expedited the service request for the Mercy while providing members of our team to assist onsite in California upon the ships arrival in Los Angeles. We also assisted our Navy customer to dramatically improve their capability and capacity to work remotely in the highly extreme numbers required during the COVID-19 crisis. Along with the Navy teammates, Perspecta incrementally increased our broadband unclassified remote access service from 25,000 to 125,000 seats, network bandwidth by factor 10 and online web access session capacity from 200,000 to 300,000 in 24 days.Additionally, we implemented a new scalable state-of-the-art enterprise service desk capability and supported the Navy in implementing Microsoft Office 365 collaboration tools. Now for another customer, over the course of just 10 days, we managed to seamlessly equipped and convert 360 employees and one of our DoD customer support centers to 100% telework, including call routing capabilities. We are continuing to provide background investigative services, a critical component to government operations. Our investigators had been fully engaged while teleworking without reduced hours in order to maintain uninterrupted service to our nation.We successfully implemented remote pilot programs with select customers during this pandemic and we continue to develop other innovative solutions that will preserve the confidence and integrity of the investigative process when business as usual is not possible. We have developed programs to assist our employees, who are facing hardships and disruptions, as a result of the many repercussions caused by this pandemic. We established an employee paid time off donation program, a companywide stipend for masks and where possible. We've identified temporary reassignment to employees whose regular work has been disrupted to other programs within the company where the skills may be a match.Finally, we remain dedicated to helping our employees navigate these unique and challenging situations in a safe manner while executing our objective to support our customers’ mission. We are developing state by state, site by site plans to address the transition to new normal process or what we'd call T2M2. So our employees can return in a safe and efficient manner. We are implementing a phased approach coordinated with and approved by our government program managers.I'm extremely proud of the way our team across all levels of the entire organization responded properly and handle the obstacles created by this pandemic. From a financial perspective, we did not have a material impact to our fourth quarter results. Our best estimate or the potential impact in FY 2021 based on the information and circumstances in play at this time are reflected in FY 2021 guidance, which John will address shortly.Now turning to Slide 5, second, I want to comment on our financial performance. We once again exceeded expectations on all our key financial metrics. We are delivering on our gross margin, earnings and cash commitments. This marks the eighth straight quarter of surpassing our targets. It clearly demonstrates our ability to execute against our strategy. Our performance in the quarter also enabled us to exceed the top-end of our fiscal year guidance for revenue and free cash flow conversion rate while also meeting our expectations for EBITDA margins and achieving the high-end of our adjusted earnings per share range. For the full year, revenue was up 5% year-over-year compared to pro forma FY 2019. Adjusted EBITDA was up 2% year-over-year and adjusted diluted EPS was up 8% year-over-year.We generated $542 million of free cash flow, an increase of 29% over prior year and a conversion rate that once again exceeded our full target at 154% of adjusted net income. In FY 2021, we’ll keep the momentum going, building on our commitment to provide more detail and insight into the drivers and performance of our business. We are providing additional information on the estimated impact of the network portion of NGEN or SMIT in fiscal year 2120. We believe this additional detail will provide more insight into the strength of our business, including our ability to drive sustained revenue growth and generate strong free cash flow.Third, our business development results. We had another excellent quarter of winning business. Bookings totaled $1.2 billion for a book-to-bill ratio of 1.1 times, 56% of the quarter’s awards were new work for Perspecta. This builds on a momentum we saw in Q3 with 77% of our awards were new business and continues to give us confidence and our ability to win and drive growth.We recorded a book-to-bill ratio of 1.4 times 40 year with an approximate new business percentage of 57%. Over the last eight quarters, our quarterly book-to-bill averages 1.5 times. We achieved total bookings in fiscal year 2020 of $6.1 billion. Excluding NGEN SMIT, our book-to-bill ratio for the year is 1.5 times and new business represented approximately 64% of that number. These new business wins are key to fueling our organic growth moving forward and demonstrates the strength and our ability to grow our customer base.At the end of the fourth quarter, total backlog was $13.3 billion, which was flat compared to the third quarter of fiscal year 2020. Funded backlog at the end of the fourth quarter was $2 billion, which increased sequentially. Excluding NGEN, total backlog was $12.7 billion and a funded backlog was $1.7 billion. Our three year $70 billion pipeline of qualified opportunities includes $13 billion of proposals already submitted and awaiting decision of which 90 plus percent is new business. Over the same three year timeframe, we only have about 8% of our revenue up for recompete. So we remain focused on winning new business and have put the resources and team in place to continue to do so.This strong business development performance has us well positioned for FY 2021 with less than 5% revenue as new business we are very confident with our FY 2021 guidance. Now, I want to touch on a new addition to our business development team, Orlando Figueredo. Orlando left DXC Technology just before Perspecta was created and has rejoined the organization as a Vice President, Business Development for Intelligence Group. Orlando joins us from SAIC. We're thrilled to welcome him back. The powerful combination of his intimate customer knowledge and strategic thinking will further strengthen our position to support the evolving digital and cloud transformations taking place across the Intel community. We look forward to his leadership and involvement in mapping opportunities for organic growth.Fourth and finally, we are introducing our FY 2021 guidance this evening and have also updated our three year targets for our business. Now, I want to spend some time discussing our strategy and some key developments that support those targets. We remain focused on six strategic priorities, which serve as the foundation for every decision we make and every action we take.Number one, be our customers' cloud and IT application transformation partner of choice; number two, accelerate cybersecurity dominance in the marketplace; number three, enable critical mission success through intelligent tools utilizing artificial intelligence and machine learning analytics; number four, shape and lead the trusted workforce market; number five, solve our customers' emerging challenges with innovative mission IT solutions; and finally, number six infused Perspecta Labs innovation and applied research driven solutions across our portfolio. Now this strategy is working well and we continue to execute against that plan.Through the Knight Point acquisition in FY 2020, we now hold franchise positions at the Department of Homeland Security and the Defense Information System Agency. And with new capabilities of strong emphasis enhancing intellectual property around digital transformation, cloud and cyber further complement the existing Perspecta portfolio. Specifically, the patented and trademark, cloud technologies, Zeus and Cloudscene, and they differentiate us in the market and significantly enhance our position and our top three strategic priorities. Our innovation NGEN Perspecta Labs continues to win and develop solutions that we leverage across our portfolio to further enhance our service offerings and they added 10 new patents in FY 2020.Earlier this month we announced the tuck-in strategic acquisition of DHPC, a niche developer of enhanced innovative electronic warfare or EW, technology with market-leading technical solutions and rapid prototyping capability. At this acquisition will further enhance Perspecta Labs’ capability to offer a robust, comprehensive, full life cycle EW and cyber solutions from designing and prototyping to deployment, integration and maintenance across multiple domains, including manned and unmanned air grounded missiles.I want to emphasize several key certifications. We recently announced to further support our strategic direction. First, building upon our Amazon web services, government competency attained in the second quarter, we recently achieved AWS DevOps competency status. This certification validates Perspecta’s ability to securely drive the delivery and efficiency of advanced cloud-based technology using DevSecOps solutions across the federal government.Second, we achieved Amazon web services migration competency status. And this sort of occasion identifies our ability to move existing applications to the cloud to reduce costs, increase agility, and improve security for the federal government. These AWS cloud competencies complement our existing designation as a Microsoft Cloud solution provider, termed CSP and a Microsoft gold competency partner, which is the upper most level within the Microsoft Solutions ecosystem. With cloud companies across Microsoft Azure, Dynamics 365 and Office 365, we have the highest level of competence and expertise with Microsoft Solutions.Additionally, we are a ServiceNow premier technology and services partner with expertise in implementing enterprise-wide cloud-enabled services on the Now platform. Together, our attainment of these competencies differentiates us to our customers by showcasing our expertise in cloud-based services, while enabling our customers to host their workloads on the optimal platform across hybrid multi-cloud as well as legacy infrastructure environments. We combined our deep government customer experience and Perspecta’s full suite of cloud computing and infrastructure services backed by leading-edge technology and research from Perspecta Labs to gain the cloud benefits of agility, mission performance, cost savings and innovation.These strategic developments provide us a competence that our business can continue to deliver organic revenue growth, industry leading margins and generate strong free cash flow. The continued ramp of the new program wins we secured in FY 2020 and limited recompete risk over the next three years, provide a clear path towards strong organic growth and our business excluding NGEN SMIT in FY 2021 and over our three-year planning horizon.We’re excited for the future and grateful for the support of our people, customers, technology, partners and shareholders. We remain committed to growth by pursuing large new business opportunities, by investing in our innovation NGEN and technical differentiators, and by partnering with leading technology companies to drive the transformation agenda for our customers, all while keeping our commitment to serving our federal government customers as they implement critical IC and mission solutions and delivering strong financial results.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 the fiscal year. This marks another year of solid performance and execution. I’ll walk through the results for the quarter, quickly review our full year and then turn to our forward outlook, both for fiscal year 2021 and the longer term.Turning to Slide 6. Revenue for the quarter was $1.1 billion, which was up slightly from the fourth quarter of fiscal year 2019. The growth driver in the quarter was our Defense and Intelligence segment, which increased 3% year-over-year, driven by on contract growth and contributions from new programs ramping up in the quarter, partially offset by the expected moderation in background investigation volumes. Civilian and Health Care segment revenue decreased 4% year-over-year with momentum from recent new business wins offset by NASA and other legacy program wind downs.Overall, our contract mix was similar to last quarter. As a percentage of total revenue, our contracts were 53% fixed price, 19% time and materials and 28% cost plus. Q4 adjusted EBITDA was $182 million, which was down 12% compared to year ago adjusted results. The year-over-year decrease in margin is related to a higher cost plus mix in the current year and prior year background investigation volume surge and a one-time $8 million gain from a subcontractor negotiation.Acquisition related intangibles amortization, which is backed out of adjusted net income and adjusted diluted EPS was $54 million. Net interest expense totaled $32 million in Q4 and our effective tax rate for the quarter was 21% as we benefited from our tax planning initiatives. Our Q4 adjusted net income was $89 million, which was flat year-over-year, resulting in adjusted diluted earnings per share of $0.55 against a diluted share count of 162.3 million. Adjusted diluted EPS for the quarter was up 2% year-over-year. The impact of COVID-19 was not material to our overall fourth quarter results.Turning to Slide 7. For the fourth quarter, we generated $186 million of cash flow from operating activities and $179 million of adjusted free cash flow or 201% of adjusted net income. The difference between the cash metrics is the $37 million of capital expenditures, which includes financial lease payments and $30 million of restructuring and integration payments. The strong cash flow in the quarter was reflected in our operational days sales outstanding metric of 59 days.We continue to execute our balanced capital deployment plan with a mix of debt pay down, share repurchases and dividends. During the fourth quarter, we paid down $24 million of debt and returned $30 million to shareholders, $10 million in quarterly dividends and $20 million in share repurchases. We exited the quarter with $847 million of total liquidity, including $147 million of cash and $700 million of available revolver capacity.We ended the quarter with $2.6 billion of total debt, of which $2.4 billion is flexible prepayable with no refinancing and limited repayment requirements over the next several years. Our ending net leverage ratio was 3.1 times per our credit agreement compared to our financial covenant maximum of 4.5 times. In summary, we began FY 2021 with a solid balance sheet, substantial liquidity and strong financial flexibility.Turning to Slide 8. Revenue for the full year was $4.5 billion, which was up 5% from pro forma fiscal year 2019 and exceeded the high end of our guidance range. The performance was mainly due to growth in our Defense and Intelligence segment, which increased 10% year-over-year, partially offset by declines in Civilian and Health due to program wind downs.Full year adjusted EBITDA was $778 million, which was up 2% compared to year ago pro forma results. Adjusted EBITDA margin decreased from 17.8% to 17.3% in line with our guidance range. Acquisition related intangibles, amortization which is backed out of adjusted net income and adjusted diluted EPS was $206 million.Net interest expense for the year was $137 million and our effective tax rate was 26%. Our full year adjusted net income was $352 million, which was up 7% year-over-year on a pro forma basis, resulting in adjusted diluted earnings per share, $2.16 against a diluted share count of 162.7 million. Adjusted diluted EPS for the year was up 8% year-over-year and at the high end of our guidance range.For fiscal year 2020, we generated $542 million of adjusted free cash flow or 154% of adjusted net income, well above our guidance of 110% plus conversion. Fiscal 2020 adjusted free cash flow benefited from two discreet items totaling approximately $60 million. These items included a one-time benefit due to our switch from a fully insured medical plan to a self-funded medical plan and increased account receivables facility sales during the year. I’m extremely proud of the entire organization with regards to this outstanding cash flow generation.On Slide 9, we have provided fiscal year 2021 guidance. To better assist investors in understanding our performance, we are providing information excluding the estimated impact of NGEN SMIT. We believe this additional detail will provide investors with more visibility into the underlying performance and the outlook for the business.Our guidance includes an expected COVID-19 impact. Conservatively, we assume headwinds of $75 million in revenue and $20 million in operating income. This represents roughly a 2% revenue and 3% operating income impact on our business, excluding NGEN SMIT. Also included in the guidance is our recently announced strategic tuck-in acquisition of DHPC. On May 1, we acquired all of the equity interest of DHPC for a purchase price of $53 million, subject to customary closing price adjustments. The acquisition should contribute roughly $70 million to FY 2021 revenue as a cost plus margin profile and will be slightly accretive to EPS. The EBITDA multiple paid is similar to our own.We expect revenue for the year to be $4.26 billion to $4.41 billion. Adjusted EBITDA margin of 15% to 16%, adjusted diluted earnings per share of $1.90 to $2.03, and adjusted free cash flow conversion of 100% plus of adjusted net income. Excluding the estimated impact of NGEN, revenue for the year would be $3.66 billion to $3.81 billion, adjusted EBITDA margin of $15.5% to 16.5%, adjusted diluted earnings per share of $1.60 to $1.73, and adjusted free cash flow conversion of 100% plus. In our appendix, you will find a slide bridging FY 2020 as reported results to these figures.Implicit in our guidance is the assumption of an effective tax rate of 25% as we continue to drive tax planning initiatives. Finally, the Board of Directors has approved $0.01 increase per share to our quarterly dividend, which translates to an additional $6 million in annual dividend payments.On Slide 10, we’re providing updated three-year targets for FY 2022 through FY 2024, anchored off FY 2021, excluding NGEN SMIT. We have targeted 4% to 6% organic revenue CAGR, 15% to 16% margin range for adjusted EBITDA, and 8% to 12% adjusted diluted EPS CAGR and adjusted free cash flow conversion of 100% plus. These figures all exclude the impact of NGEN SMIT and provide you more visibility into the strength and trajectory of our ongoing business. We are confident that with our talented workforce, robust pipeline, suite of capabilities and strong foundation, we can deliver on our long-term financial targets.Operator, we are now ready to take any questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Joseph DeNardi of Stifel. Please go ahead.

[Joseph DeNardi:]

Thanks. Good evening, guys. John, I think two questions for you. Can you just provide a walk from FY 2020 margins ex NGEN to FY 2021 margins ex NGEN so that we can understand kind of why that new run rate is sustainable over the three-year target? And then is the pipeline consistent with that margin profile also?

[John Kavanaugh:]

Yes. Sure, Joe, I’d be very happy to. First off, very, very pleased with the continuing strong execution and performance in both of our reporting segments, okay? So in terms of providing a bridge, as we’ve been talking about over the last year, we are obviously seeing lower asset intensity level, so we’re having less depreciation as we go into FY 2021, associated with, again, the NASA loss to EUH roll down, okay?Secondly, again, we’ve had a little bit shift to higher cost plus mix, that’s associated with some great new business wins that we’ve had. We’re starting to see those ramp up. And thirdly, again, at this point, conservatively, we’ve taken a look at COVID-19. We try to put our arms around it and it’s about $20 million. So that’s kind of bridging.So again, feel very good about the performance. Now relative to the pipeline, when I look out over the horizon, very strong pipeline, again, $13 billion in adjudication right now, $70 billion pipeline over the next three years, north of 60% of that is fixed price. So we feel very good about obviously the guidance we put forward in FY 2021, is very, very good about the long-term profile.

[Joseph DeNardi:]

That’s great. And then John, can you just clarify what the disclosure around 8% of contracts up for recompete over the next three years? What does that mean exactly? Like how much revenue are we talking about per year or over that three-year period?

[Mac Curtis:]

Yes, Joe, this is Mac. So, yes, what it means is when you look at the $70 billion, normally if you have five-year run rate contracts, that means 20% of your business would normally be up on any given year. We’ve gone through a lot of large recompetes. We are seeing the period of performance, a little longer on some of these contracts. So if you look out from 2021 through 2023, $70 billion you have about 8% is new business. So that means 92% times $70 billion is really new opportunities for us. In some cases, it’s new starts. Other occasions, it’s takeaway from other people’s business. So that’s really the way we kind of think about it.One of the things that we’ve talked about, we mentioned that in the remarks is that we really focused on, and Sean Mullen and his team, we’ve got Orlando Figueredo who’s coming back into the company to help drive the Intel business. So we’re really investing and looking at that three-year run rate where almost all of our business is going to be focused on new business, right? We’ve got a couple of recompetes coming up in the next 12 to 18 months, nothing the size of what we’ve been through.So we’re going to take advantage of this run rate as we go forward to look at really focusing on the new business wins. We sure may not win. And so now we’ve just got to expand the BD team, get the right focus, speed and serve the enclosure of opportunities and just continue to drive revenue, but that’s what we’re talking about, two years into this business, Joe, that we’re talking about focusing – it was two years to the day, we were in New York with the Investor Day. We felt two years from now, and two years later we should put up kind of the guidance going out here. And so we focused on really on winning new business. We know how to do it and really focused on driving revenue growth and EPS growth and generating cash flow.

[Joseph DeNardi:]

That’s great. Thank you.

[John Kavanaugh:]

Thanks, Joe.

[Operator:]

Our next question comes from Gavin Parsons of Goldman Sachs. Please go ahead.

[Gavin Parsons:]

Hey, good evening, gentlemen.

[John Kavanaugh:]

Hi, Gavin.

[Mac Curtis:]

Hi, Gavin.

[Gavin Parsons:]

John, I was hoping you could help us walk kind of the free cash flow, kind of similar to the margin bridge, which is really helpful just from fiscal 2020 to fiscal 2021. You guys have exceeded your guidance on conversion pretty handily over the last few years. And I mean even if I strip out the $60 million one-time benefit you called out this year, I think it was still better than 130% conversion. So I mean, is that sustainable going forward? So I’m just trying to think about kind of what the right sustainable number is. Thanks.

[John Kavanaugh:]

Yes. Sure, Gavin. So first off, very, very pleased, as I said in my prepared remarks on our free cash flow generation. As you know, we have industry-leading day sales outstanding. We’ve got industry-leading conversion and free cash flow yield. So very, very proud of the entire organization there.I did layout about $60 million of discretes that we did benefit from this year. So when I’m looking forward, obviously, we’ve got the NGEN headwind, obviously, we’ve got the COVID, but overall I think, again, we’re guiding probably conservatively right now, it’s a 100% plus. I think we’ve got a solid track record and you’ve seen what we’ve been able to do over the last couple of years. So we’re maniacal about cash collections and we’re going to stay absolutely focused. So I remain bullish in that area.

[Gavin Parsons:]

Got it. And then on the $75 million revenue guidance headwind, if we were to strip that out, can you talk about kind of what the core underlying ex NGEN business – sorry, ex NGEN, what the business is growing this year, I mean, is that kind of still around that, that 4% to 6% you’re talking about or does it take a little bit of time to accelerate up to that?

[John Kavanaugh:]

Yes, I’m happy to. And that’s, again, why we’ve tried to provide that type of visibility. So what you see in terms of excluding the estimated NGEN impact, we’re growing effectively 4%. Again, the COVID impact of $75 million is roughly 2%, again, that’s a conservative estimate, but that is showing you, again, you saw these leading indicators on the book-to-bill, the new percentage of work and we’re really seeing that to start come to obviously the forefront. That’s one of the reasons we wanted to make sure that you had this visibility because there’s an underlying strong healthy business and we’re going to continue to drive this organic growth.

[Gavin Parsons:]

And Mac, with the 8% recompete over the next few years, sounds like you’ve got pretty high visibility into that. I mean, is there a certain book-to-bill that you need to achieve that or is that – a lot of that in the backlog already?

[Mac Curtis:]

Well, I think what – I think the way to think about it, Gavin, is if you look at the 8%, again, this is not impair, this is rough order math. I just want to make sure. If you say 8% to 10% that made out of $70 billion, you’ve got somewhere between $5.6 million to $7 billion out of that total number would be up for recompete. And let’s say, you look at the period of performance over five years, that’s the way to think about that. So normally it’s a lot higher than that. All we want to show is, is that we’ve got the real chance in three years to spend our B&P, variable recompete, probably 10% to 12% less than you normally have on a five-year period of performance to focus on new business.So book-to-bill, I mean, as you know, we’ve got 1.5 kind of TTM. So, I’m not saying we want to stay certainly there, but I think, again, it’s just to show that we’ve got – we’re focused on revenue growth, focused on generating cash, and really looking at having a huge opportunity. If you say it’s 8%, then we’ve got roughly $60 plus million, $65 million, $60 million worth of new business opportunities, Gavin, is the way to think about it. Can’t really project the book-to-bill, but I think that’s kind of the way we think about kind of comfort in the guidance in 2021, comfort in the revenue growth guidance in 2022, 2023, 2024. That’s really the point.

[Gavin Parsons:]

That’s helpful. Thank you.

[Operator:]

Our next question comes from Edward Caso of Wells Fargo. Please go ahead.

[Edward Caso:]

Hi, good evening. I was curious about – you’ve isolated NGEN SMIT, but what about NGEN hardware, which I believe you’ve sort of been running above expectations on? When does that sort of come out of the numbers and what sort of contributor was in FY 2020? And what are you assuming in FY 2021?

[Mac Curtis:]

Let me give you, I’ll let John to answer part of it. We’re not going to break all that out, but let me tell you where we are at. You got SMIT, you got EUH. So we’re running EUH probably through July. What I can tell you is we just signed an agreement with HPI, who’s you know, when they split NGEN up SMIT and EUH, HPI, Hewlett Packard, HPI, won EUH. So we have just signed a contract with them for $125 million, $130 million over about 2.5 years to help them the services and integration of the hardware. So that’ll start-ish probably in July end and roughly go for roughly 2.5 years and we’ll figure out the run rate, but that’s really kind of the focus. So we’re not buying hardware and haven’t bought hardware for a bit.Is that helpful? I can’t – John, if you want to try to add some more color to that, but I think that’s the way we’re going to run the hardware piece.

[John Kavanaugh:]

Yes, exactly, right. So Ed, as you’re aware, it’s more asset intensive, we’ll be running it over the next couple of years. We’ll start to see that depreciation coming down over the next couple of years. Again, we’re just providing legacy support to the assets for the remaining useful life. So – and we talked about this last couple of quarters, and we’ve solidified our subcontractor position.

[Edward Caso:]

The other question is sort of related. I’m trying to understand you have two somewhat meaningful and one not meaningful acquisition that’s sort of working their way into the numbers here. So what’s the inorganic contribution in F 2021? And the related question, which is roughly what quarter do you think you will go positive on year-over-year organic growth? Thank you.

[John Kavanaugh:]

Sure.

[Mac Curtis:]

John’s going to answer the numbers. But I might add, let me clarify the question. We did acquisition in August and then did this one – we’re thinking about – I just want to make sure we’re grounded. It was Knight Point in August, and then this DHPC just recently, those are the two. We –

[Edward Caso:]

You did a little one in – you did a little one at labs, right?

[Mac Curtis:]

No.

[Edward Caso:]

No?

[Mac Curtis:]

No, we did just two, August and the one we just did. Go ahead, John.

[Edward Caso:]

Okay. Two acquisitions?

[Mac Curtis:]

Yes, two acquisitions.

[John Kavanaugh:]

So let me just note it out for you, Ed. So again, Knight Point, which we did last August, we’ll see roughly, as we’ve been always talking about, about $50 million contribution this year. And then recent acquisition, as I said in my prepared remarks, was roughly about $70 million. So you’re looking about $120 million inorganic, which is roughly about 2%, okay?So again, relative to the latter part of your question, we’re seeing obviously a lot of good tailwinds associated with these contract ramp-ups. We’ve had significant amount of new wins, new business wins, Department of State, Department of Labor, right, the DHS, the U.S. Senate, a lot of classified. So we’re starting to see this, right? So we will see, certainly, by the back half of the year, you’re going to see good year-over-year growth, but we’re going in the right direction, and we are driving organic growth. It’s one of the reasons we put the appendix in to really try to peel back the onion. Everyone was aware of NASA, everyone’s aware of SMIT. We wanted to bring to the forefront what is going on here relative to underlying strong, healthy growth – organic growth. Hopefully, that helps you.

[Edward Caso:]

Great. Thank you.

[John Kavanaugh:]

Thanks, Ed.

[Operator:]

Our next question comes from Louie DiPalma of William Blair. Please go ahead.

[Louie DiPalma:]

Mac, John and Michael, good afternoon.

[John Kavanaugh:]

Good afternoon.

[Mac Curtis:]

Hey, Louie.

[Michael Pici:]

Hey.

[Louie DiPalma:]

Mac, you referenced your $62 billion pipeline of new opportunities and you’ve highlighted your expertise with AWS and Azure migrations. Over the past year, you pursued the DEOS office cloud contract, which I believe is under protest. But I was wondering, do you believe that you have the resources to win an integrator role for the next-generation intelligence community cloud, the C2E cloud? And is that something that Perspecta investors should be on the lookout for over the next several quarters?

[Mac Curtis:]

Yes, that’s a good question. So, yes, DEOS is under protest. I’ll just categorically, Louie, what I’ll tell you, there’s not a deal out there that we don’t think we’ve got the capabilities and the resources to be able to bid. We’re very comfortable with that. Now it’s going to be interesting to see the next-generation contract with regards to cloud and in the intelligence community because the way they’ve kind of got it bifurcated, they are the cloud providers and cloud providers only, very similar to the current contract, which is – it was a single award to AWS.So the way they’re looking at it is, they’re saying, there’s the cloud provider, which is kind of setting the table. And then you’ve got all the applications and all that application transformation kind of come underneath it. The way – and it’s kind of slowed down, actually it’s come to a halt now with COVID-19. But the way we’re lining it out is it’s the cloud providers only, is that when you really think about this contract, similar to what AWS has right now and what could be a multiple award contract with AWS and/or could be Microsoft or even or Google or somebody else.So that kind of contract, none of the integrators will be able to bid on that. There’s the services and the application transformation in general, that’s where you would see Perspecta and some of the other companies around the Beltway bid. So I don’t know it answers your question, but it’s pretty specific to just like the original contract that was bid in the intelligence committee, it was just the cloud providers, right? So that’s – they basically set the table. What we like is understanding the mission in these customers to come in, that’s where you do the application transformation, right, and application migration, which we’re very adept at and very good at.So I’m not sure if I look at the second piece, yet how that’s exactly going to come out, right? There is – you’ve got a lot of kind of factors that are thinking about it. I know one customer is thinking about it in a different way than another. But if it comes out with the integration of the transform – the application transformation migration, that’s clearly an area we’ll play it. We’ll just have to see how they do the acquisition strategy, and I believe it’s still up in the air.

[Louie DiPalma:]

Sounds good. Thanks, Mac.

[Operator:]

Our next question comes from Gautam Khanna of Cowen. Please go ahead.

[Gautam Khanna:]

Yes, thanks. Good afternoon, guys.

[Mac Curtis:]

Hi, Gautam.

[Gautam Khanna:]

I was wondering if you could first elaborate on the conservative $75 million of COVID impact on revenues? And like specifically, where might you actually see that impact the margin associated with it seems fairly high. And would we expect it to basically all be concentrated in the first fiscal quarter of the year? Any sort of flavor you can give us on how you came to that number?

[John Kavanaugh:]

Sure. Be happy to. And my opening comment would be as, obviously, the situation is still fluid. We are monitoring it very closely. Right now, as you stated, and I said in my prepared remarks, we're conservatively saying about $75 million, which is roughly about 2% of revenue. And right now about $20 million of EBIT. We'll see it most prevalent in the first half of the year, we believe, obviously, under the CARES Act 3610, we can recover cost with no fee for our labor and also for our subcontractors. We don't recover subcontractor fee. So at this point in time, again, it's our best estimate. That's – hopefully, that answers that question for you.

[Gautam Khanna:]

And would it be more pronounced in the civil side or in the defense side, any flavor for where it would fall?

[John Kavanaugh:]

Yes, primarily in the intelligence business, which is part of our Defense and Intelligence segment. So it's pretty much focused there.

[Gautam Khanna:]

Okay. You guys talked about the $13 billion of outstanding bids. I was wondering if you could give us some flavor on how the government pace of adjudications has been in the second calendar quarter, we saw the Army win a week ago, the $270-odd million that looked like new business? And maybe can you also just comment on like just the general pace of activity and how big DOs is in that $13 billion? Is it $7 billion to $8 billion of the $13 billion?

[Mac Curtis:]

Well, that’s a good question. So I will tell you that DOs isn't in there, but I mean certain forecast I can't give you what we bid, but it in there. It is in there. But in the – over the last two months, in the intelligence community, it's kind of slowed down significantly. We had some big deals in that $13 billion that we're very excited about doing good work. That's kind of come to a crawl, Gautam. Now on the DoD and severance side, we booked over $400 million of the new business last week. You saw the at this thing, and I just mentioned the EUH. So – and that's all fixed price work, by the way.So again, kind of to the margin piece, just on we go off on it, just a slight tangent here. In Q3, we had roughly $1.2 billion between Senate and that was Senate, labor and state, those are all cost plus. Now here, you come into this quarter, right, although the Q1, and they've already been announced. So it's really all fixed price. So I think that speaks waves to the pipeline, and we talked about Joe's question about sustaining 15% to 16% margin. On the civilian side, defense side, it's moving. I mean we're seeing RPs drop, RFIs drop. We probably got – just in the last three weeks, maybe another $1 billion, $1.5 billion of deals that are dropping.So it's all slow, kind of almost to a crawl, everything associated with it. But the defense side, civilian side, it's moving. I mean they the Army award, and that was an OTA. And so we've seen some other awards that we'll talk about next quarter. So yes, it's kind of gets us gets can, but outside of the Intel, things are moving along. I mean there's all over the customers. And so we're pretty bullish about that what inside of that $13 billion.

[Gautam Khanna:]

Okay, that’s really helpful.

[Mac Curtis:]

Yes.

[Gautam Khanna:]

And then I was wondering if you could speak a little bit about the NGEN debrief that you guys did receive after the earnings call last time. Can you share any sort of takeaways or lessons learned? I mean, is there anything you can relate to the investor community just kind of on what you know about how that one went? I know it's still in the process.

[Mac Curtis:]

Well, just to kind of reset, that's a good question. So there were two protests. I think the earlier – we processed on the 9th of March, and there was a protest prior to that. So the two protests on NGEN are – I don't know about any other protest. I do know about ours. We filed the protest to GAO and, again, we're not a litigious company. We felt that we always say that if you come out of a debrief, you don't quite get everything you hope you'd get while then you've got – of course, the alternative courses to file a protest, which we did.So I really can't go into much detail about what we learned because it is still under protest. There's a decision do from GAO on the 17th of June, whether it's sustained or they – they decide to provide some sort of corrective action request or recommendation to the Navy. So we're still in that period. Gautam, I can't give any more detail than that, just given the sensitivity of it. But we'll have an idea within the next month of how this will move forward.

[Gautam Khanna:]

And do you expect it to still require a 9-month transition once it's completely adjudicated and behind us? Or do you still think – in other words, I would just do the math and say, gosh, you might keep it through March, if it takes the GAO until mid-June to rule as opposed to just through December. Any sense for that? I know it's only an extra quarter or so, but...

[Mac Curtis:]

Well, so what I'll tell you, and it's a good question. What I'll tell you, we are under contract in December of 2020. And can't opine, can't project prognosticate on the customer will do with regard to any time after that. I mean what they've asked for is a nine-month transition. We don’t know anything any different than that. So that math doesn't work, to your point. But I could tell you, we're in a contract in December of 2020. And so we'll see what happens. What I will tell you, and I think I talked about it in the script, we're working as hard as we can with our customer. And through COVID-19, when you talk about going from 200,000 to 300,000 people that can use what it was is Microsoft teams as a virtual BTC technology.So we're working as hard as we can with the customer. We'll see what happens with the protest. We're under contract now to continue working end user hardware piece of it as a subcontract into HP. And again, we're lined up through the end of the calendar. And by the way, that is in the guidance. So John, that's a footnote in the guidance. So, that's what we've got is going through the end of the contract, which is December 31.

[Gautam Khanna:]

Thank you very much guys. I appreciate it.

[John Kavanaugh:]

Yes, pretty good.

[Mac Curtis:]

Thanks, Gautam.

[Operator:]

Our next question is a follow-up from Joseph DeNardi of Stifel. Please go ahead.

[Joseph DeNardi:]

Yes, thank you. Mac, sorry to do this. I just wanted to revisit the 8% recompete. Just to understand kind of how you're looking at it. Is the idea that in a normal scenario, over a three- year period, call it, 45% to 60% of the business should be able to recompete, if it's 15% to 20% a year, and you're only seeing 8% over a three year period. Is that right?

[Mac Curtis:]

I would prepare it this way. What I would compare, Joe, is in a straight-line calculation. And if you got all your business starts on the same-day in all five-year contracts. Every – so every year, 20% of your business would recompete. What we're saying, it's not 20% for us, it's really 8% because we've gone through a lot of the recompetes in the last two or three years, one most of the NGEN that’s approached us and won most of them. So it's just an anomaly that we happen to have these three years. And normally, you would have 15% to 20%. And what we've got is 8% because we've gone through a lot of recompetes in the last two to three years. That's it.

[Joseph DeNardi:]

8% per year, right. Okay.

[Mac Curtis:]

There's no more than that one. Yes. Exactly. That's exactly right. An aggregate of 8% over the next three years per year, right? So if you're 20%, it's 8% compared to 15% to 20%. That's all it is. It just goes to show you that again with confidence in our guidance because we have got a very little recompete revenue in place we can focus on new business period. I don't want to – I don't want it more any more complicated in that.

[Joseph DeNardi:]

Yes, very clear. And then just unrelated, can you talk a little bit about maybe the opportunities that you're seeing kind of within the customer, whether they're your customers or not within the government to be an enabler for of remote capabilities or other opportunities that COVID-19 are going to create? I mean are there lessons learned in the background investigations business that more of that can be done remotely? Just, I don't know what structurally opportunities get created for you all as a result of this, if any? Thank you.

[Mac Curtis:]

Yes. So, Joe, it's a very good question. And I think we kind of recall this new world order kind of remote revolution, if you will. And so again, if you've got 14,000 employees and you’ve got 750 that are either working shift work or can't get into a building, we've done a lot writing that goes to show that this criticality of the business and the critical infrastructure. And so we've told some stories out and getting people to telework. Right now, we're kind of looking at plans coming back, but I think we have learned a lot. And I think when we start to think about the fidelity of our network solutions to telework, particularly when you look at background investigations, right. I mean they're all teleworks, right. All of them work from home every day and we've got a very robust, secure network to deal with that kind of work. That's a lesson learned that we think we can apply to do other kinds of work even to the point of looking at encrypted data and those kinds of things. So yes, we're leveraging the experience there. We're leveraging what we've done with regards to even working with the Navy, looking at how we have basically increased the size of the pipes with very little increased cost.One of the things we're seeing out of COVID-19 is there are some real estate that we may not need, when you think about it. So I think that's part of it. I think it is that we're also looking at some of the lessons learned in the technology in one customer we have delivered [indiscernible] in Montgomery, Alabama. So a lot of these are – yes, I think, frankly, as an editorial comment as it was difficult going out because of COVID. And I think for all of us in this market, it is going to be even more difficult, kind of, it's going to be hard to go back because you've got all these guidance, federal, state, local mayors and then there is the customer dollar you need to have.So it's a more complicated process for the ingress than I take in the egress. But we have learned – and it's really about network solutions, I think, Joe, of where you can do more robust, higher speed work in a more classified environment to be able to do from home. So I think that's a lesson learned, kind of more to come as we look at after action. So, yes, and I think that the background investigation team has done a phenomenal job, haven't lost any hours, right. They're all working. They're working from home, being very creative, working with the customer, the DCSA on better ways to try to do this given the pandemic environment, so pretty excited about that, post-COVID. We're excited about what the new workforce will look like and where they will be.

[Joseph DeNardi:]

All right, thanks, Mac.

[Operator:]

Our next question will come from Gavin Parsons from Goldman Sachs. Please go ahead.

[Gavin Parsons:]

Hey, thanks so much for the follow-up. I just wanted to ask on the NGEN free cash contribution and just kind of maybe how the dynamic works. I know last quarter you guys sized that as around $70 million to $80 million contribution. But, John, you mentioned lower asset intensity. So is the way that that works, mechanically, you may have lower margins on the program, but your payment on lease liability also goes down, so the net impact to the cash flow is negated? How do we think about that?

[John Kavanaugh:]

Yes, so let me just try to give you some color there. So, again, what we saw on the SMIT component, as you correctly said, it contributed roughly about $80 million to adjusted free cash flow. Similar to this year, we've tried to provide the visibility. It would be roughly about $50 million contribution. So it's about a $30 million headwind, okay. Remember the SMIT isn't asset intensive, right. So those are the numbers you can work with, Gavin.

[Gavin Parsons:]

Great. And then is there any opportunity for you to kind of have a one-time benefit on the sale of assets or anything like that?

[John Kavanaugh:]

No, right now, we do a real good job obviously generating cash. We're going to continue to lean forward, but there is not, per se, any asset sales included in there, but we're going to continue to drive hard and generate the kind of cash flow you've seen before.

[Gavin Parsons:]

Got it. And then just one last one on background investigations. You’ve mentioned moderating volume in fiscal 2021 and obviously it looks like you're going through that, but can you give us some idea of quantification of that and when do you think that stabilizes? Thanks.

[Mac Curtis:]

Yes, I think, we've talked about this before, Gavin. I mean, we – the back end of 2019, Q1, Q2, Q3 of 2020, we were just kind of finishing the digestion. And remember 760,000 case backlog, right. So we were one of the leaders have worked that off at Q4 of 2019, Q1, Q2, Q3. We are at a normal pace now. And kind of in Q4, kind of got down to a regular inventory, that's the word we use of about 260,000 cases. So we're in a normal run rate. And we went through that and John spoke about that, all that is in our guidance. And so, as we kind of move forward, that's all kind of baked in. So we feel very good about where we are. We're moving through DCSA and we're just kind of risk – it's another one of the 400 contracts we run in the business.

[Gavin Parsons:]

Got it. Thanks again.

[John Kavanaugh:]

Thanks, Gavin.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to the management team for any closing remarks.

[Michael Pici:]

Thank you everyone for joining us today and appreciate your ongoing support in Perspecta and look forward to speaking with you again soon.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.