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Edited Transcript of PRSP.N earnings conference call or presentation 14-Aug-19 9:00pm GMT

Q1 2020 Perspecta Inc Earnings Call

Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Perspecta Inc earnings conference call or presentation Wednesday, August 14, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John McNamara Curtis

Perspecta Inc. - CEO, President & Director

* John P. Kavanaugh

Perspecta Inc. - CFO & Senior VP

* M. Stuart Davis

Perspecta Inc. - VP of IR

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Conference Call Participants

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* Gautam J. Khanna

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Joseph William DeNardi

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst

* Justin Micahel Donati

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Perspecta Inc. First Quarter Fiscal Year 2020 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Stuart Davis, Vice President, Investor Relations and Strategy. Please go ahead, sir.

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M. Stuart Davis, Perspecta Inc. - VP of IR [2]

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

At this time, it's my pleasure to turn the call over to Mac, who'll begin on Slide 4.

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John McNamara Curtis, Perspecta Inc. - CEO, President & Director [3]

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Thank you, Stuart, and thank you all for joining us this afternoon. A lot has happened since our last call. First, we had another strong quarter of operations with robust organic growth, strong margins and excellent free cash flow. Second, the president has signed a 2-year budget framework that gives our customers the predictability they need to plan for when to execute their critical missions. Third, we had another strong quarter of new business awards. And fourth, we made our first acquisition as a public company.

I'll now address each of these points in more detail. First, again, we exceeded consensus estimates on all of our key financial metrics. Quarter after quarter, we delivered on our growth, margin, earnings and cash commitments. Revenue was up 1% sequentially and up 7% year-over-year on a pro forma basis, our fastest growth quarter yet. Controlling for last year's divestiture gain, adjusted EBITDA was up 19% and adjusted diluted EPS was up 18%. Free cash generation was again stellar at 189% of adjusted net income. It's just absolutely great execution by the entire team.

Second, the President signed a bipartisan act of 2019, which increases statutory spending limits by $323 billion in fiscals 2020 and 2021, and permanently ends a sequester threat. The law also suspends the debt limit through July of 2021, avoiding the risk of a federal default on credit payments until after the next presidential election. For government fiscal year '20, the defense budget will be $738 billion, which is up 3.1%, and the budget for civilian agencies will be $632 billion, which is up 4.5%. This deal is very positive for Perspecta and our industry. Budgets are up nicely and our customers can proceed with the new program starts and expansions of existing programs. Now Congress still needs to pass the 12 individual funding bills, so some of the agencies may begin the fiscal year on a continuing resolution. But all agencies should have full year budgets in the fall, which is a great outcome. Third, new business bookings are very strong with 76% of the $1 billion in total bookings representing new work for Perspecta. Book-to-bill ratio in the quarter was 0.9x. For the trailing 12 months, our book-to-bill ratio was 1.5x, so we are well-positioned for continued growth. An area of booking strength in the first quarter was Trusted Workforce, which is one of our strategic priorities. The Wall Street shorthand is background investigations, but Trusted Workforce is more than background investigations and our Trusted Workforce business is more than just the OPM contract. This market includes continuous vetting and insider threat, and a newly established defense counterintelligence security agency, or DCSA, is taking a broader view of how to attract and retain a trusted national security workforce. The Trusted Workforce market also encompasses industrial and facility security, supply chain security and other trusted-identity markets both in the U.S. and abroad. In the quarter, we had $42 million of bookings on our OPM NBIB contract, reflecting continued workload on that important mission. We also won $100 million other transaction agreement, or OTA, modernizing the IT systems that support background checks and insider threat programs. We have a team of several nontraditional partners who will enable the DoD to achieve bold transformational change by combining commercial off-the-shelf solutions with our capabilities and expertise in artificial intelligence, machine learning and natural language processing to automate and operate processes in a secure government cloud environment.

Now anyone who wants to understand the Trusted Workforce market should take a look at the July Bloomberg government report. Their key takeaway is it that demand for investigations will be steady and ongoing. Background investigations are required for all sensitive government positions. 200,000 ongoing investigations and 50,000 to 55,000 new background investigation requests per week will be the norm. According to the report, reducing the backlog will continue to be a major focus in the short-term. And in the long term, DCSA is seeking a balanced mix of technology, and human services to meet the demand and eliminate vulnerabilities. Perspecta is the best company positioned to succeed in this robust market.

Now we also won a 5-year $162 million award from the Air Force to develop and operate a modernized enterprise infrastructure for SIPRNet. Now SIPRNet is the Secret Internet Protocol Router Network. This is all new work for Perspecta. As part of this effort, we'll transform and standardize the network's infrastructure to improve management operations and enhance the cyber security posture for over 400,000 SIPRNet users, client devices and servers. Moving on, our intelligence community business remains strong. In Q1, we secured a $139 million 10-year sole-source award for one of our core intelligence community programs. And shortly after we closed Q1, we were competitively awarded a 5-year $824 million contract by the National Geospatial Intelligence Agency to perform full life-cycle systems engineering and integration work. This is our largest program in the intelligence community, and the new contract significantly expands the ceiling value and the scope.

The pipeline continues to build as we aggressively pursue new opportunities. Our 3-year qualified pipeline is $77 billion, including $24 billion of proposals already submitted and awaiting decision. Now this is up $17 billion from this time last year. The pipeline is a lot more than NGEN. We're taking some big swings on programs that have the opportunity to reshape this company.

Now while we're on the topic of NGEN, there have been some positive developments since the last call. As part of the procurement process, bidders on the service management integration and transport, or SMIT, have received evaluation notices, or ENs. Also the Navy has indicated that they want to extend our current contract on a sole-source basis. We view this extension as wholly positive for Perspecta. The Navy now has a schedule they can execute to. We're on track for an award in the first quarter of calendar year 2020. So they'll extended our contract for up to 7 months, which could be to December of 2020. This is an acknowledgment of what we've been saying since Investor Day. NGENR is a very complex procurement. The underlying work is complex is made even more difficult by splitting the work into end-user hardware and SMIT components. We believe that complexity strengthens our incumbency advantage.

Fourth, we're excited to complete the acquisition of Knight Point Systems, and welcome their employees and customers to the Perspecta team. We paid $250 million for the company, which represents a single-digit multiple on a forward 12-months EBITDA. The deal will be immediately accretive to Perspecta. Throughout the process, we were impressed by Knight Point's deep customer intimacy, rich legacy of innovation, patented IP and delivery of managed services programs. The acquisition further enhances our already robust and proven offerings in cloud, cyber, digital transformation and enterprise IT that modernize and transform government mission delivery. Knight Point is a perfect acquisition for us. They're complementary to our culture and our offerings while accelerating our growth strategy. And they look a lot like us, which will ease the integration. They have a heavy mix of fixed-price contracts and an IP portfolio that differentiates them in the marketplace and very focused in both terms of target customer footprint with franchise positions at the Department of Homeland Security and DISA and in capabilities with a strong emphasis and IP around digital transformation, cloud and cyber. They offer patented and trademarked cloud technologies that will differentiate us in the market, including Zeus, a managed services automation tool that allows full visibility in the public, private and hybrid cloud instances and [Cloud See], a Fed ramp-authorized cybersecurity-as-a-service offering, with 24/7 SOC operations, certification and accreditation, ISSO and vulnerability management.

Now last fall, we laid out a strategy with 5 strategic priorities, and Knight Point significantly enhances our position in 3 of them: cloud and IT, cybersecurity and emerging mission challenges. As a result, we expect significant revenue synergies. Just looking at our current pipeline, we see many large opportunities where our win probability is much higher as we integrate our solutions.

In conclusion, I hope that it's very clear that we are focused on growth. Our financial results show it and our end-markets support it. Our [BD] engine is focused on delivering it, and we've now allocated capital to enhance it. The market appears focused on NGEN, but we've got 400 other contracts in the portfolio, and frankly, we're not waiting around for it. We're competing aggressively in the market. Over the last year, we submitted $28 billion in proposals, and it's showing up in our bookings with a trailing 12-month book-to-bill and a ratio of 1.5x with 50% of that being new business. With the 2-year budget deal, now is the time to take advantage. We've seen revenue synergies come in sooner than we expected. And we're finding that when we really go after something, we can be successful, whether it's in Army Cyber Command or the U.S. Senate. The Knight Point acquisition is also exciting to us as it opens up new growth areas. I'm confident that once we win NGEN, the market and our valuation will award us and our shareholders for our ability to drive growth.

With that, let me turn the call over to John.

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [4]

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Thanks, Mac, and good afternoon, everyone. I'm extremely pleased with our performance in the first quarter, making it 5 quarters in a row of solid execution. Once again, we delivered strong margins and cash generation, which enables us to deploy capital to grow the business and enhance shareholder value. With an accretive acquisition, we are able to raise guidance and accelerate our strategy.

Turning to Slide 5. Revenue for the quarter was $1.11 billion, which was up 7% from the first quarter of fiscal year 2019 on a pro forma basis, and up 1% from the fourth quarter of fiscal year 2019. On a year-over-year revenue growth basis, both segments performed at their highest levels as a public company, and our 7% growth well-exceeded our best performance to date. The growth driver in the quarter was our Defense and Intelligence segment, which increased 13% year-over-year despite an $11 million grow-over challenge from last year's contract divestiture. Civilian and Health Care segment revenue decreased 4% year-over-year. In total, the growth in background investigation support as well as the ramp ups of new Department of Defense and intelligence community programs more than offset the decrease in a few civil agency contracts.

Contract mix was consistent with recent levels. As a percentage of total revenue, our contracts were 53% fixed price, 20% time and materials and 27% cost plus. Q1 adjusted EBITDA was $204 million, which was up 5% compared to year-ago pro forma adjusted EBITDA as margin decreased from 18.8% to 18.4%. Pro forma earnings in the first quarter of fiscal year 2019 benefited from a $24 million gain on last year's contract divestiture. Excluding the divestiture gain, adjusted EBITDA was up 19%, and adjusted EBITDA margin was up 193 basis points year-over-year driven by strong fixed-price program execution and the full run rate benefit from merger cost synergies and operational efficiencies we achieved last year. Also, depreciation and amortization totaled $101 million in the quarter, which was higher than its normal level. Continuing the trend from Q4 of last year, depreciation of $53 million ran hot from additional asset acquisitions in support of customer requirements. Acquisition-related intangibles amortization, which is [stacked] out of adjusted net income and adjusted diluted EPS, was $48 million. We expect depreciation and amortization to moderate over the coming quarters and for D&A to be only slightly higher in fiscal year 2020 than in fiscal year 2019. Net interest expense totaled $35 million in Q1. We also incurred $21 million of transaction, integration and restructuring expense, which was down $7 million sequentially. Q1 adjusted net income was $85 million, resulting in adjusted diluted earnings per share of $0.52 against a diluted share count of $163.3 million. Excluding the year-ago divestiture gain, adjusted diluted EPS was up 18% year-over-year on a pro forma basis.

Turning to Slide 6. During the first quarter, we generated $185 million of cash flow from operating activities and $161 million of adjusted free cash flow or 189% of adjusted net income. The difference between the cash metrics is $36 million of capital expenditures, which includes finance lease payments and $12 million of integration and restructuring payments. Note that we adopted ASC 842 this quarter and now use the term finance lease instead of capital lease as we used previously. The strong cash flow in the quarter was reflected in our days sales outstanding metric of 55 days, which is at the low end of our target DSO range of the mid-to high-50s. Adjusted free cash flow was higher than normal, partly based on timing, with some finance lease payments slipping into Q2, no tax payments in the quarter and 1 fewer payroll cycle than we'll have in Q2. During the first quarter, we paid down $22 million of debt and returned $23 million to shareholders, $8 million in quarterly dividends and $15 million in share repurchases. We ended the quarter with $179 million of cash and $2.7 billion of debt, including $293 million of finance lease obligations. After the close of the quarter, we amended and extended our credit agreement to provide us greater financial flexibility. We extended the maturities on our revolver, term loan A1 and term loan A2 by 15 months. In addition, we increased our maximum total net leverage financial covenant to be more in line with our industry peers and increased our size of our revolver by $150 million to $750 million. We also acquired all of the equity interest of Knight Point for $250 million subject to customary purchase price adjustments. Knight Point is roughly $150 million in annual revenues with an EBIT and EBITDA margin profile similar to ours. The acquisition should contribute roughly $100 million to FY '20 revenue and about $0.02 to $0.03 to FY '20 adjusted EPS. The EBITDA multiple we paid is very close to our own.

Consistent with our capital allocation model, we have built a modest amount of acquisition revenue and profit into the guidance we gave on the last call. As Knight Point was larger than anticipated, we're able to raise fiscal year 2020 guidance as shown on Slide 7. We now expect revenue for the year to be $4.4 billion to $4.5 billion, which is an increase of $15 million to the upper and lower ends of our previous guidance. We expect adjusted diluted earnings per share of $2.08 to $2.18, which is an increase of $0.02 on the upper and an increase of $0.03 on the lower end of the prior guidance. There's no change to adjusted EBITDA margin, which stays at 17% to 18%, and we are now trending to the middle of the range, so up compared to when we originally gave the guidance. Finally, there is no change to adjusted free cash flow conversion guidance, which remains at 95%-plus of adjusted net income.

Operator, we are now ready to take any questions

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Edward Caso of Wells Fargo.

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Justin Micahel Donati, Wells Fargo Securities, LLC, Research Division - Associate Analyst [2]

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This is Justin Donati on for Ed. It looks like, with some of the recent contracts that you've won, you may have been able to fill in the revenue hole of NASA NEST. Could you provide any more color on that?

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [3]

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Sure, Justin. This is John. So again, as we indicated, we are increasing guidance on an annual basis. We're taking it up $50 million on the lower and upper end, okay? Clearly, NASA NEST is still a headwind, that hasn't changed. As we laid down in previous calls, it's roughly about a $100 million headwind for this year. That said, again, based on the strong business development performance, the ramp up of some new business wins that were happening. We feel overall, big picture, tailwinds will outweigh the headwinds, but NASA obviously still remains a headwind for us.

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John McNamara Curtis, Perspecta Inc. - CEO, President & Director [4]

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Another way to look at it, Justin is, we've talked about revenue visibility. Those new wins have allowed us to increase our revenue visibility as we go through, and we're kind of on plan with where we were last year.

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [5]

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Yes. Well, the guidance is the guidance.

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Justin Micahel Donati, Wells Fargo Securities, LLC, Research Division - Associate Analyst [6]

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Okay. And then last quarter, you talked about some greenfield opportunities in Fed Civ. Could you talk about kind of the potential timeframe for how you see that playing out or how long it could be until it becomes a more meaningful piece of the business?

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John McNamara Curtis, Perspecta Inc. - CEO, President & Director [7]

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Also what that's a good question. We also spoke that part of the business was somewhat under invested as it was part of USPS. And we are reinvesting in the business. We have a new leader on, Rocky Thurston, who understands how to grow a business in the civilian sector. And so we've got some bids. We're focusing on some larger bids. There's some good opportunities, the Department of Transportation. Certainly, tomorrow, we'll announce, after Q2, the Senate IPO contract, which is about $170 million, so we won that. And so we see some of the pipeline, we seen some opportunity in the Department of State that are kind of in the proposal phase. We've seen some additional work in the VA, that's in -- that's pending award. So we're really focused. Department of Labor is another contract that was awarded subject to protest, we hope to have that cleared up in the next couple of weeks. So we don't control when these things are awarded. But we certainly see Q2, hopefully some of these things will come to fruition, Transportation, I think, certainly Department of Labor, get that cleared up. But further out, you see new proposals, the FDIC deal, some Department of State. So I think you'll really start to see, the back end of Q3, Q4, kind of a consistent flow of deals because we're writing the proposals now, and we're really focused on that. We don't do much in the Department of Justice at this point. So we see that as an opportunity, certainly several parts of the Department of Treasury. So it's a bit spotty in Q1, Q2, but we see a more steady flow, particularly coming from the Department of State and the Department of Justice kind of in the back end of Q3 and Q4. Is that helpful?

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Justin Micahel Donati, Wells Fargo Securities, LLC, Research Division - Associate Analyst [8]

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Yes. Very helpful. And then if I could just sneak one last one in here. What are your expectations for pro forma leverage with Knight Point?

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [9]

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Sure, Justin. This is John. So again we ended the quarter, net leverage was roughly 3.0. With the acquisition of Knight Point, we'd be roughly net leverage per our covenant agreement right around 3.4, and we'll continue to drive that down as we proceed through the year. Very comfortable where we're at.

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Operator [10]

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And our next question comes from Joseph DeNardi with Stifel.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [11]

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Mac, I appreciate your enthusiasm in your prepared remarks. You spoke bullishly about the bookings activity that you're seeing, the book-to-bill last 12 months has been strong. You talked about the pipeline and the big swings you've got out there. Is it safe to say that, if you can retain NGEN and hit on 1 or 2 of the bigger opportunities you are pursuing, that there's upside to your -- the revenue CAGR guidance that you guys have provided?

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John McNamara Curtis, Perspecta Inc. - CEO, President & Director [12]

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First of all, Joe, thanks. And there's a lot to be enthusiastic about. And I think, if you look at that, there's a lot to be awarded. We've got $24 billion that's in evaluation. I think we'll see maybe some of those larger ones awarded maybe before NGEN. So yes, we see that, and a lot of that we don't have in the forecast, quite frankly. So we see a couple large deals in NGEN, absolutely. We see some great growth opportunities going to the back end of our fiscal year '20, certainly into '21. So we've got to bring these contracts online. We don't want to get ahead of our skis. Some of the Army Cyber are coming online the way we hoped. We've got to learn to do a better job in some cases of those making sure we leverage all of the potential civilian contracts, we're getting better at that. But yes, we see some of these large contracts, Joe, and we see NGEN. Absolutely, in the back end of our fiscal '20, we would see some really, really strong growth.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [13]

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Got it. And then Mac, just on the NGEN process, you sounded more positive about it now than maybe you have. Is there something kind of in the process, what you've heard in terms of feedback from the customer, that makes you feel better about your standing there? Maybe help us understand that a little bit more?

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John McNamara Curtis, Perspecta Inc. - CEO, President & Director [14]

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Well, Joe, I think I've always felt positive about it. I've always felt very positive. It's a complex contract. I think where we are in the process now is -- no, so I've not done any ex parte effect, this is a very tightly controlled process, as you know. You get a lot of EMs or questions on the technical, the cost, and we'll go through the process. We've always been positive about it. We feel very good about how Knight Point can help given what they do in the world of the actual DevOps, and certainly looking at cloud-as-a-service, we feel good about being able to augment our solutions with that if given the opportunity. But no, we've always felt positive about it, and we're going through the process. I mean, they've given us an extension, we've talked, with a date of 2020, could be in December. I'm not sure it's going to go that far. I think the Navy's working really hard. They're doing a really good job from what we've seen of trying to evaluate this contract, which has finally stood up after almost 2 decades. It's a complicated program. It's a complicated technical program, it's a complicated business program with a lot of buyers across the Navy looking at buying network services, laptops and beyond. So I hope -- I've been even keeled very positive all along. I think part of my enthusiasm is certainly that the focus on the other 85% of this business, all right. NGEN is what it is, and we're going to feel confident about our success. I'm very enthusiastic about the other 400 contracts we've got, and 85% of the business that's growing, and we're focused on taking big swings that will change this company. So I've always been enthusiastic and passionate about this business, probably not more so than now.

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Operator [15]

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(Operator Instructions) And our next question comes from Gautam Khanna with Cowen.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [16]

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A couple of questions. First, I was wondering, on the guidance raise of $50 million on sales, I thought you guys say the deal is going to add $100 million to current fiscal year revenue? So is there something in the core business that's eroded? Or what's the signal there?

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [17]

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No. Gautam, it's John. So as you know, M&A was always part of our capital allocation plan, right? So from the get go, the original guidance we had built in a modest amount, about $50 million, into our guidance, okay? So I mentioned in my prepared remarks, Knight Point's roughly $150 million. On an annual basis, we'll see about $100-ish million. So we have raised the guidance and aligned with that $50 million on the lower and upper range. So again, we feel really good about the performance. We're now guiding 3% or 5%, we're bracketing 4%, we feel really good, again, about the pipeline, as Mac talked about. That's the answer there.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [18]

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And likewise for the $0.02 to $0.03? What was the...

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [19]

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Yes, correct.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [20]

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So you're raising it by the full amount.

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [21]

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Correct.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [22]

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Okay. So on the NASA NEST comments or question, was there erosion sequentially in the quarter? And if so, how much and how much still can drop off sequentially?

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [23]

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We're still performing on NASA NEST roughly through the August timeframe. Obviously, we're still in discussions with both NASA and a new awardee. So we will see the start of that a little bit in Q2, but then more pronounced obviously in Q3. And as we talked about roughly about $100 million on an annual basis, but very low margin.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [24]

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Got it. So it didn't actually sequentially decline in the quarter?

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [25]

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That's correct. Not in Q1.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [26]

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The early prepared remarks on the SMIT evaluation notices, what is the significance of that? What does that mean?

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John McNamara Curtis, Perspecta Inc. - CEO, President & Director [27]

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Yes. This is Mac. It's just standard fare in government proposals. They used to call them Q&A, now they're calling them evaluation notices because it's an evaluation. And they vary. I don't think the number of what you get is significant, whether it's split between technical volume, management volume and a call sign. These are clarifications, and the government says, we've got a question about what did you mean in your transition plan here? Or we've gone over your evaluation model and there is a disconnect for this contract line item and what you said at the bottom. So they're really kind of clarifications and notices of making sure they can understand what you're saying in your proposal. Your technical proposal to your management proposal to your cost proposal, that it all ties together cleanly so they can do an evaluation. So nothing happened. You shouldn't read anything into it, it's just typical of government evaluation process.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [28]

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Got it. It is moving along, I guess?

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [29]

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It is moving along. That's a good way to say it. It is moving along, which is great. It is moving along. It is moving along.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [30]

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Excellent. And in the quarter, margins came in pretty good. Could you talk a little bit about was there any -- I think you mentioned an award fee or something. What was the size of the contract adjustment in the quarter, the cum catch up or what have you, if there was one?

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [31]

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So there wasn't, but let me give you a little bit more color. So first off, we're very, very pleased with the continued strong execution and performance in both the segments. So as I'd mentioned in my prepared remarks, we have seen a little bit of increase in depreciation resulting from some customer required procurements of assets, okay? So that was roughly, if you think about the quarter, that was roughly about $13 million. So I would look at the quarter running more like $17.3 million. But as I've read indicated, good performance, and as I stated my prepared remarks, now trending more toward the middle of the range on adjusted EBITDA. So we feel good of where we are.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [32]

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Got it. So it did not relate to a one-off contract adjustment? It was just the heightened depreciation in the quarter?

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John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [33]

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Yes. That's correct.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [34]

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And just last one, so you've already started off this -- the third calendar quarter with strong bookings, it looks like. Any -- I mean, can you speak to anything that -- can you quantify what you anticipate is yet to be adjudicated in the September quarter in terms of size? Stuff that -- a couple billion. Or how should we think about the potential?

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John McNamara Curtis, Perspecta Inc. - CEO, President & Director [35]

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Yes, it's kind of just in rough numbers. Again, we've got a total of $24 billion in evaluation. There's some large wins in there, we think, but we don't control that, Gautam, as you well know. But there's some large as we expect the (inaudible) to adjudicate. And we think -- GSMO, we think those are contracts, which I'm not going to give you a specific number. They have a beat behind them. And I think as we talk about -- we're certainly expect to see, hopefully, the Department of Labor, which is a contract where we were awarded that was protested, and that could clear. We think we'll see the VA contract clear, which is pretty sizable. And the Department of Transportation, it was about $700 million. We expect to see that clear. Again, we don't control that. We're coming to the end of the government fiscal year, but certainly, as they're in evaluation now, we should see some of those clear as we get through the back end of the fourth quarter of the government fiscal year. Hard to project, hard to predict, but that's kind of what we see.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [36]

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Got it. And just so I'm clear, (inaudible) mentioned the Labor Department one is the one that you were awarded but it's being protested. The other one are just how they haven't yet been adjudicated.

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John McNamara Curtis, Perspecta Inc. - CEO, President & Director [37]

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That's correct.

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M. Stuart Davis, Perspecta Inc. - VP of IR [38]

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[Cole], As I'm looking at the queue here, it looks like that there are no other questions. So I think we'll bring this call to a close. Obviously, as is our practice, if you have follow-up questions, please feel free to give me a shout. But Cole , I want to thank you for your assistance on the call today, and thank everybody for their interest in Perspecta.

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Operator [39]

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Thank you, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time and have a wonderful day.