Q3 2019 Earnings Call
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Welcome to the lightest third quarter 2019 earnings conference call.
All operate assistance during the conference.
How come from thing.
And for zero on your telephone keypad.
We'll be well see momentarily.
Just being recorded.
I'll turn the conference over to Kelly Hernandez with Investor Relations.
Our Chief Financial Officer.
There are members of the lightest management team.
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That's our results for the quarter ending September 27, 2019, Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment in our company strategy.
Jim will follow with a discussion of our financial performance and our guidance expectations.
After these remarks from Roger and Jim will open the call for your questions. Today's discussion contain forward looking statements based on the environment as we currently see it and as such does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results could differ materially.
Finally during the call, we will discuss GAAP and non-GAAP financial measures a reconciliation between the two is included in the press release that we issued this morning and is also available in the presentation slides the press release in presentation as well as a supplementary financial information file are provided on the Investor Relations section.
One of our website at IR dot lightest dot com with that I'll turn the call over to Roger Krone.
Thank you Kelly and thank you all for joining US this morning for third quarter 2019 earnings Conference call.
We're pleased with the continued momentum in or business reflected in our third quarter results, which set new records for revenue backlog and bookings.
Our results underscore our success in growing all segments of our business and demonstrate our ability to deliver our broad capabilities across our diverse customer base.
Starting first with the growth engine of the company our business development efforts resulted in the quarter were strong even beyond typical seasonal levels, we booked a record amount over 5 billion of net new awards in the quarter, resulting in a book to Bill of 1.8.
Times. These results reflect several notable awards, including a 400 million dollar contract in our defense business for the provision of aircraft intelligence surveillance and reconnaissance support services in support of the Army's program Executive Office intelligence electronic warfare inch.
Sensors.
We're also awarded a 900 million dollar contract in our civil business by the Transportation Security administration to continue to provide integrated logistics support services to sustain TSA passenger screening equipment at hundreds of airports and other designated facilities across the.
US and its territories.
During the quarter, we run we won roughly 1.3 billion of awards from our classified customers reflecting growth across each of our customers in the intelligence community.
Our success reflects mission enabled solutions across transformational software development analytics and digital transformation.
Our success in executing against our pipeline allowed us to increase our backlog to a record level of $23.9 billion, a leading indicator of our future growth potential.
John that we also have a nearly 35 billion of submitted proposals awaiting decision.
This still includes several large programs GM remote to Hanford and Navy Nexgen all of which we expect will be awarded in the next couple quarters.
Revenue growth continued to accelerate in the third quarter with year over year organic growth of 12%. This.
This growth was broad based across all of our businesses and reflects the success of the scale and diversity of our portfolio.
Underpinning our growth was another strong quarter for hiring as we added another 2500 people, bringing our year to date total to over 7500, new hires while the market for talent continues to be tight.
Our success in hiring in our key growth areas reflect the investments we have made in our organization our employees in our culture in making like those are great place to work. We are proud that everyday nearly 34000 people choose to work in light of this and we take very.
Seriously our responsibility to make their work life more rewarding in order to maximize our ability to retain them and to attract more top performing challenge.
Strong margins and a continued resolute focus on cash conversion allowed us to generate nearly $350 million of cash from operations in the quarter.
Resulting in a quarter and cash and equivalents balance of 635 million.
During the quarter, we deployed our excess capital consistent with our stated capital deployment philosophy, which balances investments for growth, including organic and M&A with returning capital to shareholders through dividends and share repurchases.
We executed a 200 million dollar accelerated share repurchase during the quarter, which resulted in the retirement of 2.4 million shares outstanding.
Beyond this our M&A pipeline continues to be very robust and we have been evaluating opportunities across all of our big Nick business segments for acquisition targets, both big and small.
While we routinely retreat route.
Routinely assess the market landscape for potential targets, we run a disciplined process for evaluating opportunities to ensure transactions that transactions enable us to improve our strategic position and drive shareholder value.
Many of the opportunities we have evaluated did not meet our criteria in these areas. However, we were pleased that one target did.
We announced and closed the acquisition of IMAX metal Medical management services during the quarter and we're pleased to welcome IMAX into the lightest team.
Our combined experience footprint and commitment to customer service positions us to be a significant player of independent medical evaluations in the commercial market as we archon day in the federal space.
In the quarter, we also divested our health staff augmentation services business in a sale to Alvarez and Marsal capital.
The business that was divested was a small immaterial piece of our overall portfolio, which delivered staff augmentation services to commercial healthcare providers.
This divestiture helps slide shows focus on what it does best providing solutions that meet the complex needs of our government or other highly regulated and complex industries.
We recently completed a major milestone in one of our marquee programs in this area. The Giotti healthcare management systems modernization program or dim sum the largest it transformation in the history of the military health system.
The lightest partnership for Defense Health successfully deployed and Hs Genesis to a new wave of military treatment facilities on September 720 19.
Following the release our approach our customer program Executive officer of the Defense Health care management systems lauded us for what he called a very successful release at wave Travis.
As I've said before patient safety is our number one priority we added six new technical capabilities to NHS Genesis in advance of this wave, including CV packs a system that can be used to treat various hard conditions within the first 48 hours of go lives at Travis.
Air Force base, our heart attack patient was successfully treated using CV packs a capability that did not exist at this hospital before NHS Genesis.
We also also introduced enhanced training curriculum during this wave and noticed a significant increase in the speed of adoption at each site.
We continue to make substantial progress on this program and with this wave behind US. We're looking ahead to the next two waves, which had just kicked off pre deployment activities right on schedule.
These are waived analysis, which includes Nilesh Air Force base in Las Vegas, Nevada, and wave Pendleton, which includes camp Pendleton in San Diego, California.
Wave Nellix is on track to go live in June 2020.
Finally, turning now to the macro environment conditions continue to remain favorable.
The two year budget agreement, which provides topline spending amounts for both defense and non defense spending accounts creates a supportive foundation for the continued growth of our business.
While we are starting the government physical year with the continuing resolution as we have for 19 of the last 20 years, we see no material impact from a CR that last potentially through the end of the first quarter and could even last through the full government fiscal year 2020.
While we are optimistic that we will have Bert a government shutdown. We are also prepared for this scenario should it occur.
As we look ahead the strength of our results thus far in year and the continued acceleration in revenue growth gives us confidence to raise our expectations for the year across all guidance metrics.
Ill now hand, the call over to Jim Reagan, our Chief Financial Officer for more details on third quarter results in our revised guidance.
Thanks, Roger and thanks to everyone for joining us on the call today.
And the interest of getting your questions I'm going to focus my comments on providing some context to the result is disclosed in our press release and summarize by Roger.
Revenue grew 10% and 12% organically when you normalize the effects of the commercial cyber and health staff augmentation divestitures.
Organic growth was broad based and driven by high levels of on contract growth and increased contribution from new programs, which ramped during the quarter.
Adjusted EBITDA margins were 10.7%, reflecting strong margins in the core business as well as the following first the payment of an arbitration award relating to work performed for the a Greek Olympics back in 2004, a big thanks to the significant effort by our legal team that resulted in.
The long overdue receipt on this work.
We collected $59 million in cash from the Green government and recognized a net $54 million reduction of operating expenses on this item.
Now this was partially offset by a $19 million provision for certain other international receivables and this was reflected in the civil segment results. The net effect of these two items was a $35 million benefit.
The second revenues in the second quarter reflect a higher mix of material volumes, which put downward pressure on margins and lastly, we incurred significant startup expenses on certain large new program wins, most notably in our civil business, where we expect margins to revert back to normal levels in the four.
Fourth quarter.
These items, along with a lower share count helped to drive non-GAAP diluted EPS of $1.36, an increase of 22 cents over the prior year.
Operating cash flows of 349 million in the quarter reflects the seasonally strong government fiscal year end as well as higher advance payments, which reduced our accounts receivable and contributed to the reduction in day save days sales outstanding to 57 days.
We expect much of these advances to reverse in the fourth quarter getting us back to more typical DSL level in the high fiftys to low sixtys.
Bookings of 5.2 billion were strong across all segments and resulted in a 1.8 consolidated book to Bill with ending backlog of 23.9 billion.
This is once again, an all time high for the company and reflects an 18% increase over the prior year.
Now for an overview of our segment results defense solutions grew 8.3% over the prior year quarter, driven by elevated levels of on contract growth on our mature programs plus new program revenues.
non-GAAP operating margins of 8% declined 60 basis points sequentially and 50 basis points from the prior year, primarily on higher materials revenues and lower write offs and despite.
Elevated protest activity during the quarter, our defense solutions business booked over 2.7 billion of net awards, resulting in a book to Bill of 2.0 X for the quarter and 1.3 X on a trailing 12 month basis.
In our civil segment revenues grew 10.4% sequentially and year over year.
Organic revenues grew 13.4% when adjusting for the sale of the commercial cyber business, which closed in the first quarter.
The primary driver civil revenue growth, both sequentially and compared to the prior year with an increase in new program revenues.
non-GAAP operating margins in our civil segment of 7.8% were uncharacteristically low declining 210 basis points sequentially and 540 basis points from the prior year quarter.
Margins reflects two unusual items in the period, which combined resulted in 220 basis points of negative margin impact.
Adjusting for this the margins in the business were over 10.2% up slightly from the prior quarter and these two items were first the bad debt expense I referred to earlier is reflected within the civil results and drove a $16 million charge in the quarter in second startup expenses associated with a new ERP.
Program ramp.
For a new program involves a large materials by component.
Because the payment for these costs is made over time the related profits are recognized over the next five years of the program.
And this contributed to a margin headwind in the quarter.
Civil segment bookings of 1.1 billion were once again strong and drove a book to Bill of 1.2 for the quarter and 1.0 on a trailing 12 month basis.
At our health segment revenue growth bookings and margins were all the best performers in the company during the quarter.
Revenues, there grew 14.4% over the prior year period.
Growth was driven by a variety of factors strong levels of on contract growth increased revenue contribution for the ramp in the dim sum wave deployments and revenues from other new programs.
non-GAAP operating margins of 14.8% were 40 basis points higher sequentially, and 60 basis points higher than the previous year, driven by strong execution across a variety of mature programs in the portfolio.
Bookings were very strong in the quarter at 1.4 billion largely driven by mix of on contract growth and Recompete decisions.
This resulted in a book to Bill of 2.7 times for the quarter and 2.1 times on a trailing 12 month basis.
With the strength of our Q3 results and the continued large pipeline and submits outstanding we remain confident that we will continue along the growth past the growth path. We've been on now for over a year and as such we are revising or 29 guidance upwards as follows.
We expect revenue for the year between 10.9 billion in 11 billion.
$150 million increase from the midpoint of the previous guidance and about a 7.4% increase at the midpoint over the prior year.
Further our results thus far in the year and our visibility into fiscal 2020 has further increased our confidence in our continued growth momentum into 2020.
As always we will provide more information on our fiscal 2020 guidance in our fourth quarter earnings Conference call.
We expect adjusted EBITDA margins for the year between 10.2% and 10.4% a 30 basis point increase at the midpoint from the previous guidance.
We now expect non-GAAP diluted earnings per share between $4, a 90 cents to 5010 cents an increase of 38 cents from the midpoint of the prior guide.
This reflects the higher expected net income and lower share count, resulting from the ANSR completed in Q3.
Finally, we expect cash flow from operations to be at least 875 million up from the prior floor of 825 million, reflecting the Greek Arbitration Award.
One additional note related to free cash flow, we now expect capital expenditures for the year of approximately 125 million, which is 50 million lower than our prior guidance of $175 million, which is primarily driven by lower expected real estate spending and with that I'll turn the call over to Rob. So we can to.
Take some questions.
Thank you at this time will be conducting a question and answer session.
If you like to ask a question today. Please press star one on your telephone keypad.
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Participants using speaker equipment, maybe necessary to pick up your handset before pressing the star Keith.
One moment, please what we call for questions.
Thank you. Our first question comes from the line of Edward case with Wells Fargo. Please proceed with your question Couldnt Craig. Good morning. Congrats here I was curious about your cloud positioning, particularly in the wake up to shed I decision.
How does lie dose play in the whole.
What we're hearing us an accelerating transition by the defense Department to the cloud. Thank you.
Thanks, Ed and good morning.
We tend to utilize the cloud as purchased by our customer So think of our business is cloud transformation or moving applications from legacy to the cloud.
And in some contracts, we will contract with a ws azure or whomever for cloud services as a pass through but but typically the actual prove provisioning of the provider of the cloud is not in our contract. So we tend to do the value added.
Of converting legacy to cloud.
And that's true really across the board whether it be in DMD.
Or.
In our civil our health business. So we call this sort of digital transformation.
And it's one of the largest areas.
In our pipeline and the decision by the Department of Defense to go.
With Microsoft Azure versus a wses really immaterial Dutch we.
We won't be affected by that decision in any way.
My other question us around you talked a little bit about the CR, but.
It looks like we're heading to at least a second one at what point does the extension of CR start to impact the forward outlook. Thank you yeah, yeah for us.
Really.
Very little if at all we've looked at reverse flow through.
End of November and then we saw maybe end of the year and then we've done analysis through the first quarter now we've run it for the full fiscal year and we don't have a lot of 2020, new starts in our pipeline. So I would say it's minimal.
You never want to say, it's zero, but it's it's really immaterial for us.
Relative to what's in our pipeline of I think it's complicated and is complex for our customers who are trying to put together budgets and think long term, but because of the increase with that we've had with the two year budget, where we come off the prior year of budget process for the purpose of the CR.
Our we're actually in pretty good shape.
Thank you.
The next question comes from the line of Robert Spingarn with Credit Suisse. Please proceed with your questions.
Hi, good morning, good morning.
So I wanted to ask a couple of things if I might Tom Roger I wanted to start with your.
Commercial strategy as it stands today is this a business you're seeking to expand in light of the IMAX acquisition or is that more specifically targeted for those assets.
So thanks, Rob we've been.
Successful in doing disability assessments for the VA and as such we have built what we think is a national capability to do medical exams and disability assessments.
We believe there is a parallel for corporations health care centers private employers of and that industry is starting to consolidate and we do see as an opportunity to take if you will sort of our our back end and the process work we've done.
For the government and to apply that in the commercial marketplace and the easiest way for us to get a foothold was through an acquisition and we were pleased to be able to come to terms with the team at IMAX.
Okay, and then data at a higher level I wanted to address the relationship between sales growth.
And and record backlogs, but also this idea that the duration.
Backlogs appears to be expanding across the industry, so meaning that.
If duration is extended you might expect growth to slow a little bit. So I wanted to ask you. How we think about those two factors or is this double digit type growth.
I would just supportable for awhile.
Let's see a couple of quick comments as we look at the duration in our backlog. It's approximately the same so for us I can't speak for the rest of the industry, we don't really see it.
Stretching or contracting and so therefore, if you follow the logic is sort of you laid out if we have.
Yes, hi, a large number of wins, we increase our backlog we see organic growth then that's sustainable through the duration of what's in our backlog.
And we've talked about this in prior calls.
It it just takes so long right in our business for backlog programs to start for that will flow through the PBS system and actually turn into revenue for US. This is like a two or three year forward looking.
Momentum and although we.
We can't predict the outcome of the election, and what will happen to budgets boasts that we feel.
Very very confident now for multiple years looking forward.
Okay excellent. Thank you Roger.
Thanks, Ron.
Your next question comes from the line of Cai von Rumohr with Cowen and company. Please proceed with your question.
Yes, thanks, how much so a number of your competitors have kind of noted.
Bookings have been slowed by lots of protests decisions happening late and certainly in your case, yes, ammo Hanford next job.
Have moved to the right two questions. One what do you think is causing this phenomenon and maybe with some specifics on your three outstanding bids and maybe update us on top of the status of protests either of things you've won or things you've lost thanks. So much.
Let's say, thanks Kai I would tell you that.
It's almost like a seasonal delay it just.
Momentum people staffing programs getting through peer reviews in the building and getting to award and.
I actually don't think these delays or atypical men sometimes approach we've actually had some that came out early but typically we always add 90 days or so too.
Award dates that are promulgated by customers because it just they take showing much time to get it right.
Because of the expected protest they want to sort of white glove. The decision so that they can sustain a protest.
In the protest front without going through everything mentioned protest or maybe a quarter or two ago, we were down to almost nothing either offense or defense and now with the summer of awards. Some that were awarded to US. Some that we lost we've seen the protest volume increase and I think thats very typical.
Will we sort of the awards seasonality that we have.
Government cycle that a lot of things are rewarded just at the end of the government fiscal year and then therefore, a lot of protests happened at that time and Thats what weve seen.
On our our major programs.
We expect.
Hanford and Geos and low in the fourth quarter, probably Navy nexgen first quarter or shortly thereafter.
But.
I'm sure you would remind me at one time I thought Hanford would be awarded in July and so we all.
We stay close to the customer we keep our our bids fresh and we hope that they get through their award process and as things get award before the end of the year.
Thank you very much and just last one Jim you mentioned.
The adjustments and civil and defense your margins looked a little lower.
You mentioned the materials being up and.
Maybe give us some how much yeah and the EPA cease being down can you give us a little more granularity on some of those issues.
We have one.
On our an army contract high where we had.
They had some.
I wouldn't even caught seasonal some who I'm not entirely predictable lumpiness in.
Some support related materials purchases that we make to carry lower margins in that.
Within a quarter or was a margin headwind.
And then I think as I mentioned, there were a higher level of write ups in the period a year ago.
So those are the two primary contributors to the defense margin change year over year.
Thank you very much.
Sure.
The next question comes from the line of assessed women with JP Morgan. Please proceed with your question.
Thanks, very much at all good morning.
I Wonder is there anymore additional detail you can give about.
The charge and several other sort of what what contract that is and what gives you confidence that.
Any any issues are behind you that 16 million bad debt.
Yes, Seth I want to get into the details around the specific contract I can tell you though that the.
The decision to take a provision on.
These receivables which relates to.
Overseas contracts that we hadn't the civil group were were based primarily on.
Conditions, we saw on the ground in and where the status was on our efforts to get some outstanding receivables collected.
Okay of course, as we mentioned earlier about the recovery of this arbitration award on Greece that was long outstanding.
Similarly, the receivables that we've taken a provision for.
In a different geography in the world, we're not going to stop our collection efforts there simply because we've taken a charge on it.
You can easily I could I could see a scenario where sometime in the future several quarters or maybe even a couple of years, we'd see recovery on that but for right. Now we thought the prudent thing to do is to take reserve for it.
And that was set that was.
A $19 million charge when you boil it all down between the recovery on the Greek Arbitration award and the provision we took on those other overseas receivables, it's a net of about $35 million.
Right and then just a follow up looking through the through the year, thus far it looks like to to reach the EBIT.
Margin guidance you know, we're looking at something in the 10 three ish range for the for the fourth quarter.
The last two years, we've seen the margin ticked down in the in the fourth quarter, what kind of gives you the caught confidence in that fourth quarter margin yeah.
I appreciate your questions actually that I think that the implied margins in Q4, a little bit higher than that but it really has to do with.
We've got good visibility on with the revenue mix is for Q4 and.
As I mentioned during this you know the prepared remarks, we're expecting the civil margins to recover back to what we normally see we'll see that in the fourth quarter actually could be even stronger there and again Q4. It looks like some strong revenue mix of fixed price and unit price related work that way.
Generate some.
Some stronger than normal Q4 margins.
Great. Thank you very much.
Thank you.
The next question is from the line of Sheila Kylo with Jefferies. Please proceed with your question Hi, Good morning matter, Jim Thank take away.
Just expanding maybe on the last question with regards to all three segments you had a bunch of new wins and strong revenue growth. How do you think about the margin Max where it's been impacted knows how you think about that bridging into 2020.
That makes it allows I shall I appreciate the question and we think about this all the time the.
As we've said before ramp up of new programs, and we're certainly seeing a little bit of this.
It will certainly some of it in Q3.
In the early phases of a program ramp the margins tend to be lower than they are for the normal life of the program. We had some new program ramps in the civil group that.
We had to take some upfront provision on and you see that in the Q3 results, we don't expect that to recur.
And as as revenue growth is higher than what we might have guided to previously one might think that that would that would put some additional pressure on margins going forward and in fact, we haven't seen as much of that pressure as we.
Had previously discussed in and that that I think speaks well to.
Strong program execution and you see that.
Across the program ramps that we haven't civil where as I mentioned.
That dip we had in margin in the first quarter gets recovered in future periods and that's an artifact of of the accounting for some leased equipment on a couple of programs, particularly in.
The is if you're thinking about the health margins. We are now we and we continue to believe that the health margins, which were very strong.
In the quarter continue to be sustainable and we're very pleased with.
Execution on some of our newer and more even more mature programs in the health group.
And then maybe just a question on how to expand on that.
Roger Thanks for the color on IMAX earlier, how do you think about that portfolio at the margins have been quite strong you're adding IMAX divesting the help obligation business kind of.
How do you think about expanding matter or what that does this looks like over the next two years well of course for.
Sure as you implied we're we're investing in the part of the business that's doing well.
So that should give us confidence in our margin we were able.
To sell part of a business it really wasn't in our portfolio clearly I would have been lower margin for US ticket, we'll do better in the hands of someone who's more focused on that business.
We continue to be be very confident about the performance in the health group.
But we're we obviously, we don't guide by.
By our segment, we're not going to do it here, but.
You would expect us to double down on parts of the health business that are doing well and to exit those that don't fit our strategy in our portfolio going forward that's exactly what we did.
Great. Thank you.
The next question is from the line of met acres with Barclays. Please proceed with your question.
Hey, good morning, guys. Thanks for the question.
I wanted to ask if you could elaborate I guess, a little bit on the M&A market and what you're seeing there you met you mentioned a little bit account opening remarks, but sort of what have been the.
The deals that you looked out so far wherever they fall short of valuation or just kind of lack of something thats the cuts that were lighter.
Oh Aon that is it runs the gamut and you know some.
We just can't or net were net present value kind of people as opposed to multiple people. So we're looking we look at M&A. We're looking we do like a five year off in a 10 year set of forecasts. So and then we discount that back so that drives value I think other people are buying off a multiple and that's not where we.
We're really looking for the long term value in the company. So there are some deals that have been priced away from us.
I'm sure you from over the process you often get.
Offering memorandum or a management presentation and of course when that happens everything looks great and then you get into do due diligence and knew what was going to be a high value added company looks more like a training company or something and so.
We want to look at a lot.
Because I.
I think there is continued defense and civil consolidation and we want to we want to be part of that.
But we want to make sure that it tracks well with our strategies and so we will again will be involved in the front end of a lot of transactions.
We don't expect to be there at the end on very many.
Got it thanks, and then I guess I think you mentioned 2500 headcount adds in the quarter was that the growth number and if so could you give us with the attrition.
Yes, thats the gross number and we don't really were account the net number but obviously the net number is going to be going to be less than that and I think we actually put the headcount in our release. So you can track our headcount quarter to quarter.
But we are.
Continue to.
To be.
I'm confident in our ability to attract people also people with the appropriate security clearances and the right experienced an educational background and.
We have a great team.
That does talent acquisition for us, but I think Theres also something about some changes that we've made in the image that light us has out there and the workforce and and.
How we treat our employees and how we've made this a great place to come to work.
Great. Thank you thinking pigment.
Our next question is from the line of Jon Raviv with Citigroup. Please proceed with your question.
Hey, good morning.
Just back to the margin question for a moment guys.
Slide four Q and then the 10, so I think you called the health result, somewhat sustainable.
Assuming double down on higher margin stuff I'm not sure is in a row nicely above 10% adjusted EBITDA. So it's 10% still than over there right normative rate to think about going forward here.
Yeah. John This is Jim what we've said in the past is that we're looking for.
Longer term adjusted EBITDA margins 10 are north of 10, and you're right and how you're thinking about Q4. It is continued sustainment of strong margins in health, but also what we think is what we know is going to be a nice recovery in the margin profile, the civil group, which.
For some time has been set up for a nice Q4 margin with based on orders that are currently in the pipeline for certain things and so.
Yeah.
That speaks to the confidence that we have both in Q4 and full year margins.
Okay. Thanks, and then bigger picture question on the M&A strategy and Roger you mentioned interested in things both small and the big.
But the big screen to you and deal with the company in a place where growth is strong with medium machine is running nicely what is missing a lot.
How do you have the way kind of getting or no.
Adding of all new big thing to machine that seems to running quite nicely.
Okay. So.
Small tends to be is a 50 to 100.
In revenue.
But we big tends to be over 1 billion in revenue so of and I will share we're not looking at an eye SGS size big.
Just we just don't see anything on the landscape that would be like the deal that that we did in 16 and.
Our strategy on M&A really is to look at and two things is.
Capability and customer so.
Is there.
An aspect of our business that we think.
We need that we don't have.
To complete a portfolio for a customer or is there some customer access.
Past performance calls scale.
That we don't have to be able to appropriately address segment of the marketplace that we're not we're not in today and I know you may seem like where everywhere, we're actually not there's a significant amount of our customer base.
That we would call non addressable at this time and so we look at those at those areas of and again, we're we've got.
Hi, Jerry that we use we talked about our in divestment day back in May and those the criteria that we used to filter our M&A and John when we think about investments in M&A week in many ways you can think about our investments in internal and or organic growth the same way.
Way and we've been making some significant investments over the last couple of years that you're seeing reflected in our topline organic growth for Q3 and and for the full year and and you know as long as we're.
As long as were getting nice dividends on those investments you're going to continue to see us focus on that as much as we are looking for the right.
Accretive both strategic and financially the right accretive kinds of acquisitions.
Thank you.
Thank you.
The next question comes from the line of Tobey Sommer Suntrust. Please proceed with your question.
Thanks, I was wondering if we could start Roger can you talk about constraints to growth what are the.
The.
Sort of limits to the company's ability to grow organically.
Thanks.
Well, okay. So we haven't found those yet.
And.
You are kind of break it into a couple of categories access to capital markets, probably has never been is good for us as it is today a cost of borrowing is low.
Because we're a people business.
All of our strategies revolve around our people in our talent and I would put that in two categories our business development team.
And our ability to develop those relationships with customers and to pursue.
Procurements, which is a multi year.
Campaign for Us and so you have to have the customer relations people to business development people to proposal people.
And those those are probably the most.
A rare commodity in our air market today, and then on the backside. Yeah, you don't want to bid on a program. If you cannot staff Post award and so we're really really thoughtful about what we what we bid on in our ability to attract people of as we all know it varies.
Very difficult to higher in the National capital region, and so as we look at things going forward. We're excited about opportunities, where we can staff for the program in places other than the.
Virginia, Warrington, Maryland, Delaware. So if there was a program in Colorado Springs, or Denver, or Saint Louis than that would be a great place for us to look simply because of all the economic growth that has already occurred here in the DC area.
Yes.
Our next question comes from the line of Kevin Parsed with Goldman Sachs. Please proceed with your question.
Hey, good morning, everyone.
Thank you Evan.
On the revenue guidance to second raise this year. So just curious if you could talk a little bit more about what's surprising you relative to your initial initial plan if it so better new business wins higher rate could be win rate more on contract growth faster movement by the customer just any color would be good.
Well again, I think you just hit on all of them.
Just to put a little bit more color around it.
You know Roger just alluded to being able to attract the talent that we need to be able to convert backlog into revenue we're pleased with.
How we're doing in terms of the the the processing capabilities, we haven't in our HR in recruiting department and they're doing a fantastic job of helping us meet the customer needs. The second one is theres been a.
When we look at the additions to backlog in the components of book to Bill this quarter.
About a third of the additions to backlog, our new work and takeaway and then about a third of it is growing existing programs either through addition of option years or on contract growth much of which is actually sold by the people that are working everyday with.
Customers.
And we've had a lot of focus across the business in on contract growth and then another third of that comes from.
Successful acquisition, we compete business so it feels it and if it sounds like it's a kind of a balanced way to look at it certainly is and so.
So the I think that.
The way that we're getting to a better than previously expected revenue is just strong execution, both on the program sides and.
Great people in process and return on the investments that we've made in our business development teams.
Got it and then you mentioned no extension and kind of Backload duration. The total book to bills and great, but funded books, maybe a little bit soft on a trailing 12 month basis does that have any implications for next 12 months growth relative to kind of a longer period that supported by total backlog or is that just lumpiness or added that really is.
It speaks to some lumpiness in how the backlog gets funded we're not worried about.
About the downtick in the funded piece of the backlog Alan and I think that the the other point relative to.
The the duration of backlog.
Which is is not materially changed.
It is the it speaks to the comment I made during their prepared remarks that it gives us more confidence coming out of 2020 in the growth rate that we've been putting out there for.
Post 19, and we'll have more comment on what our expected growth is looking like beyond 2019, when we put our guidance out there and we'll do that into Q4 coal.
Okay, if I could sneak a quick last one and just as you mentioned the.
Great job hiring.
Are you able to get people on contract more quickly or get them cleared faster or is there any sort of kind of.
Operating leverage that still is to flow through the margin as you get those people on contract. Thanks, Gavin it's it's a little bit better I'm.
I think anyone in the industry is just out celebrating yet I mean, there's hope maybe six months or year. The process will continue to be streamlined.
One of.
One of.
One of our business models is.
You may have a mental image that we have 2500 college hires and our approach really.
We have a maybe only 10% of that Number's College hires we tend to try to recruit more mid career people and that means they often already have a clearance or maybe they have what we call secret and then it's a little easier for us to get them the higher security clearance if they come into us.
With the secret so our time typically from higher to getting them cleared and getting.
Onto a contract in January revenue tends to be shorter than the mental picture. You may have of you get somebody out of a college and University and they start their paperwork and it's often you know an eight month 12 month journey. So it's part of our strategy on attracting a workforce where they've already been through the adjudicate.
In process, but there the clearance process in of itself has gotten better but in the backlog is significantly reduced both by way on the contractor side or on the government side, but the.
The work flow through the process is still wait too long and probably a minimum of six months and some people depending upon if you've lived overseas could be as long as 18 months.
Thank you.
Your next question is a follow up from the line assess seasonal with JP Morgan. Please proceed with your question.
Hi, Thanks, Sam.
Turning again provider I was just wondering what we hear a fair amount from D. These days about fourth estate reform and I was wondering if that's something here kind of focused on at all and whether you think theres any potential impact on on Leidos and on the services space.
Yeah, obviously, a lot going on in that area, we know that the new secretary of defense in the head of acquisition are doing reviews on.
The fourth estate, maybe for everybody else on the call the fourth estate tends to refer to non combat agencies and department of defense.
Organizations like just deal a maybe some of the three digit until organizations that are viewed not as a direct.
Combat organization and there.
When sector Shanahan was there and certainly sanctuary asper view this as an opportunity to apply technology to create more efficiencies and therefore to maybe harvest some budget there to be able to spend.
Directly on on.
The combat organizations.
We we have a great balance between the services and the support organizations, we work closely with them.
Our business tends to be around driving efficiencies into these organizations image really what we do.
In some of the contracts we've had we've taken out numbers like 20% of topline cost. So we actually view the activity. This.
Going on right now as an opportunity for us both in the contracts that we already have with these agencies and opportunity for new contracts in organizations like de la.
As as you all know we were fortunate enough to win a program in the United Kingdom called LCST, where we have done essentially a digital transformation of commodity purchase and distribution in the United Kingdom and.
Are we get rewarded their based upon driving efficiency into their procurement system.
We have learned a lot about how to run a procurement organization.
How to modernize.
Processes, we think those lessons learned our directly applicable to some of what the secretary, we'd like to do and defense logistics.
Agency here in the U.S. and we look forward to the opportunity of to respond to RF buys an RFP season and help our customers think about how they can transform.
If you will some of these for the state.
Organizations.
Great. Thank you very much.
Next question from the line of Joe Denardi with Stifel. Please proceed with your question.
Hey, guys. This is John on for Joe.
Can you kind of update us on what's driving the success in your new wins and takeaways and how this kind of plays into your Recompete win.
Well boy that's a.
Gosh, if I if I knew exactly what was working I, probably wouldn't I might have even a higher rate.
Let's say are you all have been on this call four quarters and you know a couple of years ago. We felt we were not.
Winning.
As much as we had hoped or we expected in and we really went back through in thought through our whole a relationship with customers how do we qualify our pipeline.
Our bid no bids or pursue new pursues and then the whole business development process around how do we create an offering and how do we do pricing and then how do we write proposals and.
It really was sort of a top to bottom overhaul of the processes that we inherited both from from from Leidos and from is Ngs and really what we think was took the best of all the process is out there and rebuild our business development processes and to some way.
Our organization.
What you're seeing now is the what I call. The time constant of when do you addressed the issue then how long does it takes to flow through sort of the PBS proposal process you know if I.
Implemented a new proposal process you don't see it and you know when until 18 months later, because that's how long it takes to go pursue an opportunity you work with the customer on their their.
Program work statement on the procurement actually get an RFP writer proposal and go through the evaluation cycle and.
The good story that we have today is really based upon a lot of hard work that was done 18 months or 24 months ago.
And that was cores in response to a couple of losses, we had two or three three years ago. So John I hope that answers your question.
That's great. Thanks.
Thank you will follow question coming from line of Robert Spingarn with Credit Suisse.
Hey, there just wanted to ask me one more thing kind of specific but I thought it was interesting what you're doing with.
With the army and in the is our world.
And.
This business that you that you have which I guess as a company owned company operated cocoa structure.
Sort of a big Safari, where you all the assets I wanted to ask you. If you know how you're thinking at this kind of opportunity the risk there and what other opportunities as a business you want to grow this sort of co approach.
The let's see Rob as is as you know we have been in.
Mission support business.
For ever and then going back to go.
Back when we had a significant amount of OCO work, we all recall.
Five six years ago, you all used to ask how much OCO work, we had and that was specifically related to aircraft in theater that we're doing collection missions. What we have said is.
We want to be in a mission support role with a host of customers and that we were comfortable with multiple business models from Gogo cocoa in our employee AOL program, we simply we'll be providing an airplane.
To the army for the Army reconnaissance.
Low enhanced program, we actually modern airplane and we DD to 50 that airplane in provided to the customer we have seen some opportunities as of late to invest in in aircraft in capital.
And then to provide those as more of a cocoa model and those have allowed us to be a little bit more responsive.
To get.
Capability to the field faster because it's entirely within our control.
But it is not.
It is not going to be over weighted as part of our portfolio and our mission support business.
And were again pleased with the opportunity we've had to provide that capability at the same time. If you were to go to our hangers and look at our stable of of programs you would find other aircraft in the other models and then of course, we have our our Afghan.
Support program, where through an army contract, we actually support the Afghan Air Force the EMI Seventeens in theater and that's on a direct support program. So again, we have a broad portfolio of of contracts in our army and multi service is our business.
Would you say you've turned down opportunities for cocoa work, where the risk profile was just too high.
Well.
Yes, Rob I think that we've been able to shape the risk profile to.
Collectively with our customer so that it's acceptable with the right kind of return in what is what we're able to do for our customer is two at a predictable cost given they pay us for availability and.
That delivers what the customer wants and it gives us the right kind of return on our co investment.
Hi, good I mean that we do have some preliminary conversations with customers and.
There are clearly our edge.
Opportunities that we're not we don't do.
And we're not going to do and and.
You know us we're we're always thinking of being very capital light. We are we're not a.
LSC were not of aircraft lessors are we don't want to be in that business, we tend to invest or go where the cocoa model, where it's a customer we have a long history with where its emission. It's understandable that we think we can execute and we can make.
Return on our our capital investment.
So I don't need to walk away from this conversation thinking that our capex is going to go up and we're going to be a heavy investor in aircraft or surface ships or whatever that it's really not where we're going this is a nice add to a business that we already had and allowed us to access a customer that we might not have otherwise.
He has been able to access but our typical model is should have a standard.
Government contract, where they asset is really owned by the customer.
Great. Thank you for the answer I appreciate that.
Thank you.
And our question and answer session for today, and I will turn the call back to Kelly Hernandez for closing remarks.
Great. Thank you Rob and thank you all for your time this morning and for your interest in light as we look forward to updating you again next quarter have great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.