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Edited Transcript of PRSP.N earnings conference call or presentation 10-Nov-20 10:00pm GMT

·36 min read

Q2 2021 Perspecta Inc Earnings Call Nov 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Perspecta Inc earnings conference call or presentation Tuesday, November 10, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * John McNamara Curtis Perspecta Inc. - Chairman, CEO & President * John P. Kavanaugh Perspecta Inc. - CFO & Senior VP * Michael Pici Perspecta Inc. - VP of IR ================================================================================ Conference Call Participants ================================================================================ * Gautam J. Khanna Cowen and Company, LLC, Research Division - MD & Senior Analyst * Gavin Eric Parsons Goldman Sachs Group, Inc., Research Division - Associate * Joseph William DeNardi Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst * Louie DiPalma William Blair & Company L.L.C., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Perspecta Q2 Fiscal Year 2021 Earnings Call. (Operator Instructions) Please note, this event is being recorded. I would like now to turn the conference over to Michael Pici, Vice President, Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Michael Pici, Perspecta Inc. - VP of IR [2] -------------------------------------------------------------------------------- Thank you, and welcome, everyone, to our second quarter fiscal year 2021 earnings conference call. Participating on the call today are Mac Curtis, our Chairman and CEO; and John Kavanaugh, our CFO. This call is being webcast on the Investor Relations portion of our website at perspecta.com, where we also have posted the earnings release and financial presentation slides, which supplements our comments today. Turning to Slide 2 of the presentation. Before we begin, please note that during this call, we'll make several 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 risk factors and uncertainties, please refer to our SEC filings under our latest Form 10-K. In addition, these statements represent our views as of today, and subsequent events may cause our views to change. Though we may elect to update the forward-looking statements, we specifically disclaim any obligation to do so. Finally, as shown on Slide 3, we'll discuss some non-GAAP financial measures that we believe provide useful information for investors. The slide presentation for today's call includes reconciliations to the most closely comparable GAAP measures. At this time, it's my pleasure to turn the call over to Mac, who will begin on Slide 4. -------------------------------------------------------------------------------- John McNamara Curtis, Perspecta Inc. - Chairman, CEO & President [3] -------------------------------------------------------------------------------- Thank you, Mike, and thank you all for joining us this afternoon. I'm very pleased with Perspecta's performance in the second quarter of fiscal year 2021, which exceeded expectations on all our key financial metrics. Today, I want to focus on 4 key messages. First, I'll provide a brief update on our transition back to the new normal as a result of COVID-19. Second, we'll review the continued strong execution as demonstrated by our Q2 results. Third, we'll provide an update on the terrific progress our business development team continues to make. And fourth, I'll provide commentary on some of the enduring macro trends in the market and how Perspecta is well positioned to leverage those trends. Now turning to Slide 4. Let me begin once again by expressing our heartfelt sympathy for everyone who's been affected by COVID-19. Our first priority continues to be the health and safety of our employees and extended workforce. The work we perform has been deemed critical infrastructure and essential to national security, and we've effectively managed through the disruptions to our business. We have implemented extra precautions to ensure our offices remain open to support mission and business-critical operations. The impacts were felt mainly in our Defense and Intelligence business. Now we continue to see program starts and deal flow delays, primarily within the intelligence business, in addition to revenue and profit impacts. We continue to monitor the situation and the potential impact on our business, and John will address these in his prepared remarks. We've transitioned back to the new normal, what we call T2 M2. Our dedicated team has developed a framework to transition safely, and over 70% of our sites are now approaching 50% occupancy. We remain dedicated to ensuring the safety of our employees while continuing to meet our commitments to support our customers' mission. To that end, in early October, we opened our new offices in the Georgia Cyber Center in Augusta, which is strategically located close to the U.S. Army Cyber Command or our cyber customer, headquartered nearby Fort Gordon. The Georgia Cyber Center offers a perfect environment to attract the highly skilled cyber professionals needed to solve mission-critical, complex cyber challenges. We're excited to make the move to Fort Gordon alongside our cyber customer and we're honored to support them as they defend our nation in this critical domain. Moving to our second key message for today. We continue to consistently deliver on our growth, margin, earnings and cash commitments. Revenue year-over-year was up 4%, excluding the $60 million onetime NASA asset sale in the prior year and the impact of COVID. Adjusted EBITDA was $179 million and adjusted diluted EPS was $0.53, which does include the impact of COVID in the quarter. Free cash flow conversion for the quarter was 156%, adjusted net income, again, exceeding our full year target. With a focus on execution during these challenging times, we've delivered a solid first half of fiscal year '21, and we are raising our full year guidance. John will provide more on this in a moment. Third, bookings were strong, was $1.8 billion, representing a book-to-bill ratio in the second quarter of 1.6x. Now I want to point out that we recorded our third highest book-to-bill ratio since becoming a public company and especially notable result given the challenges over the past several months. And I'm also pleased that 42% of our bookings this quarter represent new business for Perspecta. Excluding NGEN SMIT, our book-to-bill ratio was 1.9x, and our trailing 12-month book-to-bill is 1.6x, with new business of 57%. At the end of the second quarter, our total backlog was $13.9 billion, and our funded backlog was $1.8 billion. Excluding NGEN SMIT, our total backlog is up approximately $500 million, and our funded backlog is up approximately $100 million versus the prior quarter. Now on the award side, our combination of customer insight, delivery excellence in contract vehicles allow us to maximize results during the government's end of year buying season. We saw significant sole source awards in our classified mission space, a number of midsized new awards, robust add-ons to existing contracts and a great quarter from our Perspecta Labs team, who continue to lead the way and solving some of our government's hardest problems. And specifically, during the quarter, we received multiple awards on classified systems engineering, integration and cloud migration programs, supporting various U.S. government customers. The total potential contract value of these awards is $519 million. These awards once again demonstrate our close alignment to our customers' critical mission needs. Perspecta Labs had a solid quarter, signing a number of new business awards focused on developing unique approaches to solve tomorrow's problems. A great example of this is the new work we were awarded by DARPA to develop technologies for improving security of 5G networks, which is a key enabler for our customer. We know that 5G is one of the highest priorities within DoD and will fundamentally transform telecommunication networks. However, the unexpected deployment of 5G networks poses a significant security risk due to the proliferation of foreign and untrusted hardware devices. Perspecta Labs is helping to address 5G security issues due to creation of an architecture that decouples hardware and software ecosystems. Now this allows for a secure operation over untrusted hardware and reduces the risk of supply chain attacks and other vulnerabilities. Our work helping to secure these next-generation networks to allow our customers to realize the full potential of 5G. This strategic work and other programs continue to position Perspecta Labs as a leader in the development of innovative solutions for DOD, supporting commercial wireless technologies and 5G, which is a significant growth area in this market. In our Civilian and Health segment, we were awarded a cloud migration contract supporting the California State Teachers' Retirement System. Under this program, we will be using agile teams to move critical applications to cloud platform. In addition, we will provide a cloud operations, security and overall program management services. The award, which represents new work for the company, has a total potential contract value of $43 million. We recorded $119 million in additional new business awards across smaller programs during the quarter. And our team focus on the end of government fiscal year drove significant add-on business, by leveraging our existing contracts and programs. We benefited from our close customer relationships and discriminating capabilities and received odd contract growth and extension awards on multiple programs totaling $657 million during the quarter. Now early in the third quarter, we were awarded the initial contract with the Space Development Agency to provide mission systems engineering and integration support. Perspecta will provide overall technical leadership for integrating tranche 0 elements and existing on-orbit tested experiments, culminating in a Capstone event, which demonstrates potential warp capabilities to the warfighter. This sole source IDIQ has a ceiling value of $112 million, and we're extremely pleased to been selective for this critical mission. Looking ahead, our 3-year qualified pipeline remains robust at $82 billion, which is heavily weighted towards new business. Now fourth, I want to address our strategic positioning and lay out how we think about the outlook for our business. You heard me say that a key focus area for us is staying closer to customers' mission and ensuring our strategic priorities align with that commitment. This is true than ever. The customer today is laser-focused on driving improvements in their technical infrastructure while looking for value. Those decisions are being driven by several critical factors, including cloud migration, cybersecurity, artificial intelligence, machine learning, DevSecOps solutions and the overall drive toward modernizing our nation's most critical IT infrastructure. COVID-19 has accelerated many of these trends as our customers are focused on safeguarding supply chains, mitigating risks and securing broadband solutions as telework becomes a larger and, in some cases, permanent part of workplace conditions. These dynamics provide real opportunities for us to leverage our deep customer intimacy and relationships to provide innovative solutions to drive mission value, improve the customer experience and fuel our future growth. Forecasted customer spend in these areas aligns tightly with our strategic priorities and investment strategy. Strong spending is expected in IT modernization as the move to the cloud and application modernization accelerates. Likewise, there's an expectation that the focus on cybersecurity and trusted environment will give -- continue given the increased threats around networks, infrastructure and supply chains. And finally, we expect there will be a heavy emphasis on artificial intelligence, machine learning and 5G as our nation strives to be a global leader in these key technologies. These areas, which have increasing importance to our customers, have near, mid and long-term staying power and Perspecta is well positioned to address their needs. Let me share a few examples with you to emphasize the point. Perspecta Labs, our innovation engine and leader in applied cyber research at DARPA continues to develop innovative solutions such as Bus Defender, SecureIO, as I mentioned earlier, solutions to support secure 5G cyber initiatives. The Bus Defender protects complex war fighting systems and networks from cyber attack. Our portfolio of offerings are further enhanced by the electronic warfare capabilities from our recent acquisition of DHPC Technologies, allowing Perspecta to pursue the emerging opportunity of cyber and electronic warfare convergence. So SecureIO, our Commercial Solutions for Classified, or CSfC, offering helps government customers obtain NSA approval for safely using wireless networks to handle classified communication on commodity hardware and protecting the data at rest. If you recall last quarter, I've provided a deeper dive on our ATIS win for the U.S. Army. That's a prime example of a consolidation of 20 disparate systems into a single entry cloud-based solution, which enhances end-user experience and provides more actionable data for the customer. And this quarter, we received the CalSTRS award, which is another cloud migration program. Additionally, we received authority to operate the cloud solution portion of the Department of Education's next-generation data center program. All of these demonstrate our commitment to cloud migration. Lastly, through the first half of fiscal year 2021, we've recorded multiple awards in our intel business with a total contract value of $889 million, focused on providing mission support, through delivery of high-end systems engineering integration, data analytics, cybersecurity, cloud IT services and software development. Our 3-year pipeline, a key enabler to continue our future growth is full of opportunities and map against large and emerging trends and are aligned with key customer objectives. Approximately 54% is aligned to cloud enterprise managed services, 13% is pure cybersecurity programs, 21% for high-end systems engineering and integration and 12% for artificial intelligence, machine learning, including our market-leading work in the trusted environment. As you can see, the business is performing well. And we're confident that we are properly positioned around the right capabilities, customers and spending priorities to continue to drive growth over the long term. Having said that, as you can imagine, we are disappointed that our share price does not appropriately reflects our performance and the strength of our outlook. And I can tell you that this management team is incredibly focused on driving shareholder value, and we continue to focus on ways to ensure that the stock price reflects the true value of our business and outlook. Our portfolio is resilient. Our team continues to execute through this pandemic, and we're executing on what we can control. With that, I'll turn the call over to John. -------------------------------------------------------------------------------- John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [4] -------------------------------------------------------------------------------- Thanks, Mac, and good afternoon, everyone. I am very pleased with our second quarter performance as we continue our quarterly trend of solid execution. Turning to Slide 5. Revenue for the quarter was $1.14 billion. The results this quarter include an $18 million COVID impact. Revenue growth excluding COVID and the onetime $60 million NASA asset sale recorded in the prior year was up 4% year-over-year and 3% sequentially. Consistent with our disclosures in the last 2 quarters, we are also providing our results, excluding the impact of NGEN SMIT. Revenue, excluding NGEN SMIT, was $925 million. Excluding the COVID impact and NASA asset sale, revenue was up 5% year-over-year and 3% sequentially. The Defense and Intelligence segment revenue increased 2% year-over-year, primarily driven by continued on-contract growth and new program contributions, partially offset by COVID impacts and higher prior year surge volumes related to background investigations. Civilian and Health Care segment revenue decreased 12% year-over-year due to the onetime NASA asset sale, partially offset by continued ramp-ups on key new programs. Excluding the asset sale, revenue grew 3% versus prior year. As a result of the momentum from new business wins over the past several quarters, we anticipate continued segment growth during the second half of FY '21. Contract mix as a percentage of total revenue this quarter was 52% fixed price, 34% cost-plus and 14% time and materials. Q2 adjusted EBITDA was $179 million and adjusted EBITDA margin was 15.7%. As previously discussed, the anticipated year-over-year decline in adjusted EBITDA margin is primarily due to lower asset intensity and increased mix of cost-plus programs and a $5 million COVID impact. Excluding NGEN SMIT, adjusted EBITDA was $149 million and adjusted EBITDA margin was 16.1%. COVID impacted margins 20 basis points in the quarter. Depreciation for the quarter declined $4 million from the prior year to $36 million, again, reflecting the decreasing asset intensity of our business. Acquisition-related intangibles amortization, which is backed out of adjusted net income and adjusted diluted EPS, was $60 million. Q2 adjusted net income was $86 million, resulting in adjusted diluted earnings per share of $0.53 against a diluted share count of 161.9 million. Adjusted diluted EPS includes a $0.02 impact from COVID. Excluding NGEN SMIT, adjusted diluted earnings per share was $0.40. Turning to Slide 6. I'm extremely pleased with our free cash flow generation this quarter. During the second quarter, we generated $164 million of cash flow from operating activities and $134 million of adjusted free cash flow or 156% of adjusted net income. The difference between the cash metrics is $50 million of capital expenditures, which includes finance lease payments and $20 million of separation, integration and restructuring payments. During the second quarter, we paid down $26 million of debt and returned $11 million to shareholders in the form of quarterly dividends. As previously communicated, given the COVID environment, we have temporarily halted our share repurchase program. We exited the quarter with $966 million of total liquidity, including $216 million of cash and 100% of our $750 million of available revolver capacity. We ended the quarter with $2.5 billion of debt, of which $2.3 billion is flexible, prepayable, with no refinancing and limited repayment requirements over the next several years. Our ending net leverage ratio was 3.2x per our credit agreement compared to our financial covenant maximum of 4.25x. In summary, we maintain a solid balance sheet, substantial liquidity and strong financial flexibility. Turning to Slide 7. We're off to a strong start to FY '21. As a result, we are raising our FY '21 guidance metrics. We now expect revenue in the range of $4.41 billion to $4.56 billion, up from our original $4.26 billion to $4.41 billion. This reflects an estimated $150 million of fourth quarter revenue associated with NGEN SMIT contract extension, which we are still in the process of finalizing with the Navy. Once definitized, we will update as required. Although the COVID-19 pandemic has not lessened and there is uncertainty regarding the duration of the continuing resolution, we are maintaining our revenue guidance range, excluding NGEN SMIT. Driven by strong performance in our business excluding NGEN SMIT, we are increasing the low end of our adjusted EBITDA margin guidance 30 basis points to 15.3% to 16%, up from 15% to 16%. We now expect adjusted diluted EPS guidance of $2.03 to $2.11, up from $1.90 to $2.03. Finally, we are raising our free cash flow conversion from 100% plus to 115% plus due to the strong performance of the underlying business and our continued focus on driving free cash flow. Excluding the estimated impact of NGEN SMIT, we expect revenue for the year to be $3 66 billion to $3.81 billion, adjusted EBITDA margin of 15.8% to 16.5%, adjusted diluted earnings per share of $1.65 to $1.73, and adjusted free cash flow conversion of 115% plus. While the pandemic remains a fluid situation that we continually evaluate from a business perspective, we are maintaining our original assumption for COVID in our guidance of $75 million in revenue and $20 million in adjusted EBITDA. Lastly, we assume an effective tax rate of 25% as we continue to drive tax planning initiatives. Excluding NGEN SMIT, we continue to anticipate year-over-year revenue growth in the second half of FY '21. While we expect Q3 seasonal headwinds, we anticipate second half revenue to accelerate as we exit the year, benefiting from new business ramp-ups and fewer headwinds moving forward. In conclusion, we delivered a strong first half of FY '21 and remain confident that our robust pipeline, new program wins and solid book-to-bill have us well positioned to achieve both our short- and long-term targets. Operator, we are now ready to take any questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Joseph DeNardi with Stifel. -------------------------------------------------------------------------------- Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [2] -------------------------------------------------------------------------------- Mac, you guys are sitting on a 1.6x book-to-bill ex NGEN. The revenue guidance, excluding NGEN, implies, call it, 4% organic growth in the back half of the year. I know you don't like to talk about quarterly revenue, but I'm hoping you can address this because I think it's important for investors. Should we assume growth in the third quarter is more subdued and then you see stronger growth in the fourth quarter, and that should be a good run rate into next year? Is that a fair way to think about it? -------------------------------------------------------------------------------- John McNamara Curtis, Perspecta Inc. - Chairman, CEO & President [3] -------------------------------------------------------------------------------- I think that's exactly right, Joe. That's a fair way to think about it. So I'm not sure I can give you any other comment because you've nailed. That's exactly right. John, any comment? -------------------------------------------------------------------------------- John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [4] -------------------------------------------------------------------------------- No, it's -- Joe, you're reading it right. Again, very, very pleased with the business development performance in the trailing 12-month book-to-bill. You're going to see, as I said in my prepared remarks, obviously, as we're exiting the year, we're going to be on that course and speed. So that's spot on. -------------------------------------------------------------------------------- Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [5] -------------------------------------------------------------------------------- Okay. Great. And then, Mac, maybe you do want to talk about this. I was going to say, I imagine you don't. But given your -- the end of your prepared remarks, maybe you do. The Bloomberg headlines yesterday, as a public company, I think the business is always technically for sale. But has anything changed of late in terms of you all starting a more formal process in that regard. Can you just provide us kind of your perspective on that? -------------------------------------------------------------------------------- John McNamara Curtis, Perspecta Inc. - Chairman, CEO & President [6] -------------------------------------------------------------------------------- Yes, Joe. Listen, I can't comment on market speculation, like you got from Bloomberg. As a public company, we're always evaluating ways to drive shareholder value. Now our principal focus is to run the business, deliver on the customer mission, take care of employees and in meantime, driving shareholder value. So that's all I can comment on that. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question comes from Gautam Khanna with Cowen. -------------------------------------------------------------------------------- Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [8] -------------------------------------------------------------------------------- I was wondering if you could comment on where we are on the NGEN-R protest -- process? When we expect a definitive answer and when you expect that extension award? -------------------------------------------------------------------------------- John McNamara Curtis, Perspecta Inc. - Chairman, CEO & President [9] -------------------------------------------------------------------------------- So Gautam, this is Mac. That's a good question. So here's where we are. Just a little color, a little background. We took our protest to the Court of Federal Claims because we didn't feel we quite got the answer we needed to understand exactly what happened, why we lost. So we went to that process. And so here's where we are. The -- and everybody's filed all the papers, it's still in a protective order, so I can't go into any detail, but the oral arguments are scheduled for November 13. And again, everything is under protective order. And the expectation is that by the end of November, early December, you'll have a summary judgment of what, if any, corrective action, the Court of Federal Claims recommends, okay? So that's part one, Gautam. Second part is, as you know, we went the contract through the end of December. And the Navy has come back to us and said, okay, here's what we'd like for you, sole source extension in a couple of parts. One, it would go from the 1st of January through June, and then it would provide them with 3 1-month options. So it would be obviously, July, August and September. So that's about where we are. In the meantime, Gautam, we're supporting the customer every day and doing what we need to do. So does that give you what you're looking for? -------------------------------------------------------------------------------- Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [10] -------------------------------------------------------------------------------- Absolutely. And just to be clear, is the transition still going to be about 9 months or do you think it will be expedited for like 6 months. -------------------------------------------------------------------------------- John McNamara Curtis, Perspecta Inc. - Chairman, CEO & President [11] -------------------------------------------------------------------------------- Yes. I can't comment on that. I think that -- yes, I don't know the answer to that, Gautam, to be candid with you. I think that's kind of what the Navy is thinking about. I suspect that will become clearer as we get into the new year, once this extension is codified and signed, we'll get a better idea. I suspect we'll have a better idea next time we speak to you on a quarterly call. But I have no idea. -------------------------------------------------------------------------------- Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [12] -------------------------------------------------------------------------------- Okay. Okay. Another question I had was if you could just -- it looked like a big bookings quarter, and I know the DEOS thing was reawarded to GD. So did you guys maybe disclose the outstanding bids as of now or maybe adjusted for DEOS as of the end of the quarter? Where that... -------------------------------------------------------------------------------- John McNamara Curtis, Perspecta Inc. - Chairman, CEO & President [13] -------------------------------------------------------------------------------- Yes. Let me address DEOS first, okay, because I think that's a reasonable question. And then I'm not going to go into too much detail on the pipeline. But let me just kind of tell you what's, kind of, what's going on with that. So the DEOS as you know, was the bid we put in, I guess, probably 3 or 4 months as Perspecta. It was certainly -- we came out, as you know, 1st of June, and I think we -- that bid was done before the end of the calendar year, I believe. So it's been a long time in the making. And so we're certainly disappointed with the original decision. It was a really frustrating acquisition process. I certainly won't go into any details. Very frustrating. So we ended up having the protest because we didn't understand, again, that's our right and due process. And so this last protest has gone through what we thought would be corrective action. Gautam, it came out, the corrective action, it's been decided. And so here's where we are. We're not going to protest again. We're moving forward. DEOS is in the rearview mirror. We had nothing in our guidance, nothing in any of our P&L. It was a greenfield opportunity for us to go after as a new company. Frustrating as it may be, frustrating as it was, it's basically done, and we are moving forward. So it's in the rearview. We've got an $82 billion pipeline to prosecute. We're 2.5 years older than we were then. And so we're excited about the prospects of driving the business forward. So that's kind of where we are, Gautam. So we're excited about this big pipeline. Excited about the fact that we've got very little in recompete over the next 2, 3 years. So the big pipeline is all about new business. So that's kind of where we are. -------------------------------------------------------------------------------- Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [14] -------------------------------------------------------------------------------- One last one, if I may. Could you guys remind us of the headwinds that we faced either sequentially or year-over-year from some of the items you've called out? For example, NASA NEST, what the year-over-year impact is as we enter the third quarter, what it was in the second quarter? You mentioned the $60 million onetime sale, but was there other sales there? And then maybe on background investigations and whatever else, that are sort of the known headwinds. How those change as we move into Q3 versus what they were at Q2? -------------------------------------------------------------------------------- John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [15] -------------------------------------------------------------------------------- Gautam, John, I'm happy to address that. So as we have previously messaged, when I take a look at year-over-year, when you're kind of looking at Q3, again, the prior year, we very successfully had been addressing the BI volume surge. We've talked about -- we hit a steady, steady state in Q4. So we've got 1 more quarter to overcome on that. And then obviously, with the COVID environment, right, and the fluidness there. I would say those are the kind of remaining headwinds as you take a look at the next quarter. When you think about it sequentially, we've got a couple of additional holidays in our Q3. You typically see a little bit of an uptick with PTO usage around those holidays. But again, we've got a lot of really good tailwinds, too, right? We talked about the trailing 12-month 1.6x book-to-bill, excluding NGEN SMIT or by -- by the way, 57% is new. We continue to ramp up some of those very solid new business wins, specifically ATIS, and some of the classified wins. So again, big picture here. There's certainly more tailwinds and headwinds, but I wanted to give you a little bit of flavor of some of those headwinds as we're going through this year. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question comes from Louie DiPalma with William Blair. -------------------------------------------------------------------------------- Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [17] -------------------------------------------------------------------------------- Space missile defense is considered one of the highest strategic priorities. Can you elaborate upon what services you are providing for the Space Development Agency for that missile tracking layer program that you referenced in the prepared remarks? And it seems to be a pretty landmark program with SpaceX and L3Harris. And so related to this, are there many similar types of these space engineering, like systems integration contracts in your the $82 billion pipeline that you also referenced? -------------------------------------------------------------------------------- John McNamara Curtis, Perspecta Inc. - Chairman, CEO & President [18] -------------------------------------------------------------------------------- Yes. That's a good question, Louie. Let me first address the first part of your question. So yes, we're excited about it. And you know I don't go over all the gory details, but you know part of the pedigree award is now Perspecta is all GE Aerospace and Valley Forge. And they were kind of the leader in through Lockheed Martin help design the first national space system. So it is on our DNA. It is in the legacy. And like that, we're really excited about the Space Development Agency really embracing model-based systems engineering, systems engineering, agile DevOps and those kinds of things. And that's really what this is. Some of it's a little -- get a little gray to black. So I can't go a whole lot of detail, Louie, but it is really about providing mission systems engineering and integration support as they talk about some of the on-orbit testing and experiment. So I mean, this is real systems engineering, real platforms, real stuff. So we targeted that because it is in the legacy, it is in the heritage of this company. And so we're building this pipeline. And frankly, Louie, we talked about the whole notion of systems integration and engineering. You think about this big pipeline, what we've talked about is, it's about 20% of these opportunities are in that vein of it's not C&I so much anymore, it's really model-based systems engineering, which is important. But we're also seeing that across government. Louie, it's not just in the intelligence community or in kind of the space business, we're seeing the advent of that across agencies like homeland security, where they've got very complex programs and multiple programs. And this is a good way to help them get the data visualization they need to make decision to see where they are. So they start to go to IOC, initial operating capabilities. So it's been a good business. We're seeing it leverage itself across. We like being in the space business. We like being one of the first programs in SDA. And so there's a burgeoning pipeline as an organization gets stood up. And so excited about being there first and excited about continuing to grow there. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- Our next question comes from Gavin Parsons with Goldman Sachs. -------------------------------------------------------------------------------- Gavin Eric Parsons, Goldman Sachs Group, Inc., Research Division - Associate [20] -------------------------------------------------------------------------------- On the fiscal '22 to '24 kind of 4% to 6% organic growth rate targets. Obviously, a lot of moving pieces right now with the new administration and the COVID impact driving up a fiscal deficit. But just curious if you had an underlying assumption for budget or addressable market growth rate? And if you have any initial thoughts on how that might be evolving? -------------------------------------------------------------------------------- John McNamara Curtis, Perspecta Inc. - Chairman, CEO & President [21] -------------------------------------------------------------------------------- Yes. Let me talk about at least what we can see today, which is November 10, with regards to what budgets may do. And you kind of gave the preamble, Gavin, there are a lot of moving parts. But I think we've spent a fair amount of time looking at the what if situation scenarios because that's John and I and Michael, that's our responsibility. So I think when -- if you look at the new administration and other kind of handicap that at least a little bit. There's a lot -- we've not sure of a lot, but I think what we have seen in our research is it doesn't -- from the DoD kind of slash intel budgets, we haven't seen a lot of anything that's going to be draconian. I think even if had been the existing administration, it has been somewhat flat and that's a pretty big budget, right? And you may see it vacillate a little. I think civilian budgets, we're kind of seeing that kind of staying where they are. So it's hard to tell. I think this Senate runoff is going to have a bit of an impact. I don't think they question about that. So we're kind of looking at all of that. But here's the point. We're not a platform company. I do believe when you get out, I think there's going to be kind of a national defense kind of relook, particularly where Congressman Adam Smith in Washington who's got some strong opinion about what it may or may not be. Fundamentally, we're kind of -- and we've talked about this before. If the budget goes from $700 billion to $740 billion, the $40 billion is whether you're going to buy F-35s or a few more carriers or whatever. We're kind of below that and, if you will. And so when we look at kind of where we are, doing what we do, and in the digital transformation, cloud migration, application modernization, cybersecurity, the tools we've talked about for 5G with analytics, we feel pretty good about where we are. So we've got the right capabilities, the right customer set, and we're close to that mission. We've talked about that being involved with outcome, whether it's delivering student financial aid or making sure the government doesn't spend billions in unwarranted Medicare/Medicaid claims. So we're kind of close to the -- very close to the flagpole, obviously, in the intelligence and DoD as well. So it's hard to predict. I'm probably not answering your question, but it's the way we view it. Our business is about 55-45. 55, defense and intel, maybe a little bit more; 40 to 45 in civilian. So we got a nice spread, right customers, right capability. So time will tell, I guess, is really the simple answer with regards to -- look, I think it's going to take that the likelihood of the new administration getting their FY '21 budget out in February and March, not likely to happen, right? We'll be on to see or at least through the first calendar year, I think, but then you'll start to see the flavor of what's going to happen with the appropriation bills going into the government fiscal year '21. So that's kind of a rambling dissertation of a lot of points, some nonspecific, but that's the best we can do. John, anything you want to add to that? -------------------------------------------------------------------------------- John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [22] -------------------------------------------------------------------------------- No. The only thing I would add is, as evidenced by our results, excluding NGEN SMIT, we have an underlying strong, healthy, growing business that is supported by the trailing 12-month book-to-bill that we've talked about a number of times on this call, which is 1.6x and 57% new. So we feel very good about the momentum. We feel very good about we're positioned in the marketplace. We're excited about the future. -------------------------------------------------------------------------------- Gavin Eric Parsons, Goldman Sachs Group, Inc., Research Division - Associate [23] -------------------------------------------------------------------------------- Yes. That's really helpful insight. So if I could tie that back to the 4% to 6%, then it's safe to say, you believe you could achieve that kind of almost no matter what the budget does? -------------------------------------------------------------------------------- John McNamara Curtis, Perspecta Inc. - Chairman, CEO & President [24] -------------------------------------------------------------------------------- I think as far as we can see today, Gavin, the optics based on what I said, what we believe and things change, we know that. But to answer your question, what we see today, when I stated what we believe, yes, the answer is yes. -------------------------------------------------------------------------------- Gavin Eric Parsons, Goldman Sachs Group, Inc., Research Division - Associate [25] -------------------------------------------------------------------------------- Great. And then, John, just a question on the free cash flow conversion and just bridging kind of the strength of this year and last year to guidance. It just implies a big step down to the back half and then implies another step down to get to the longer term 100% conversion. So I was just hoping you could help bridge that and comment on whether or not that's more conservative than anything? -------------------------------------------------------------------------------- John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [26] -------------------------------------------------------------------------------- Yes. So sure. Happy to do so. As I again said in my prepared remarks, we are very pleased with the free cash flow generation. When you take a look at us, we're industry-leading relative to yield, conversion, DSO, just absolute solid working capital management every single quarter, all right? So again, right now, as a result of that, we did increase it to 115% plus, okay? We feel good about what we're doing. We're about maniac about cash collections and we're going to continue to drive this. So again, feel good about what we performed and feel good about how we've guided at this point in time, and we're going to continue to drive this hard. -------------------------------------------------------------------------------- Gavin Eric Parsons, Goldman Sachs Group, Inc., Research Division - Associate [27] -------------------------------------------------------------------------------- Can you grow your absolute free cash flow dollars this year versus last year? -------------------------------------------------------------------------------- John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [28] -------------------------------------------------------------------------------- We've given you the projection right now. It's 115% plus of A&I, okay? So that suggests in the area of about $400-ish million, plus or minus of adjusted free cash flow. So again, what you should take away is, again, we're a cash machine. We're very focused here. Doing a nice job with solid working capital management, and we're going to continue to drive this. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Joseph DeNardi with Stifel. -------------------------------------------------------------------------------- Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [30] -------------------------------------------------------------------------------- So just 2 quick ones maybe for me. John, just on the indirect cost benefit from -- as a result of COVID, just given the nature of your contract mix, you may be able to retain more of that than some of your peers. So do you see a benefit going forward from work from home and some of the other cost savings that you're seeing from this? Or is that more a round error? -------------------------------------------------------------------------------- John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [31] -------------------------------------------------------------------------------- Yes. It's really more of the rounding error. Obviously, we've benefited a little bit from, obviously, lower amount of travel, entertainment, discretionary type of expenses. But at the end of the day, when you take a look at our contract mix, we've done, obviously, a very good job with returning people to work, doing it very responsibly. We've done a very good job relative to continuing to execute and perform on our programs as evidenced again by the margin improvement. We've done a very nice job on facilities rationalization, which we've talked about. We've effectively reduced our square footage by about 700,000 square feet in this fiscal year. It's a result of us being able to obviously better work virtually. So that's going to pay some good dividends for us moving forward. So it's really in the rounding, but we're very pleased with the progress we've made and the results that we're delivering right now, Joe. -------------------------------------------------------------------------------- Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [32] -------------------------------------------------------------------------------- Okay. And then you have your capital leases running off pretty sharply over the next few years. Is that a function of the contracts that have not been retained over the past couple of years? Or will that naturally be kind of filled back in as you win additional work? I mean do you expect finance lease payments to actually come down as they're disclosed? Or will that start to be backfilled as you win new business? -------------------------------------------------------------------------------- John P. Kavanaugh, Perspecta Inc. - CFO & Senior VP [33] -------------------------------------------------------------------------------- Yes. Good question. Right now, we do expect it to come down. We continue to successfully shift to the cloud, okay, in some of our, again, more legacy asset-intensive jobs are starting the waterfall down. So we'll probably be 3% to 3.5% of revenue -- CapEx of revenue this year, and it'll continue to come down over the next 12 to 24 months, Joe. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Michael Pici for any closing remarks. -------------------------------------------------------------------------------- Michael Pici, Perspecta Inc. - VP of IR [35] -------------------------------------------------------------------------------- Thank you for joining us today and for your interest in Perspecta, and we look forward to speaking to you -- with you again next quarter. Stay safe. Thank you. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.