Q4 2019 Earnings Call
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This time it turn the call over to Kelly Hernandez with Investor Relations. Please go ahead.
Thank you, Rob and good morning, everyone I'd like to welcome you to our fourth quarter 2019 earnings Conference call.
Joining me today are Roger Krone, our chairman and CEO, Jim Reagan, our Chief Financial Officer, and other members of the lightest management team.
Today, we will discuss our results for the quarter ending January 3rd 2020, Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment and our company strategy.
Jim will follow with a discussion of our financial performance and our guidance expectations.
After these remarks from Roger in Jan will open in call for your question.
Today's discussion will 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 to differ materially.
Finally during the call, we will discuss GAAP and non-GAAP financial measures reconciliations 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 and presentation as well as supplementary financial information are provided on the Investor Relations section of our website at <unk> Dot lightest dot com.
I'll turn the call over to Roger Krone.
Thank you Kelly and thank you all for joining US this morning for fourth quarter and full year 2019 earnings conference call.
We delivered strong fourth quarter results, including a record organic revenue growth, increasing margins and significant year over year non-GAAP earnings growth.
Our growth and execution momentum accelerated throughout 2019.
Has continued into 2020 with significant new program wins and the opportunity to create value from our two recently announced acquisitions.
I am confident that we are growing that company with the right challenge the right capabilities and the right strategy to continue to drive value for our customers employees and shareholders.
Revenues for the quarter were 2.95 billion up 11.6% from the prior year and 14% organically, reflecting broad based strength with all of our segments growing double digits.
Our topline growth was accompanied by an increase in our adjusted EBITDA margins, which grew to 11% in the quarter up 130 basis points compared to the prior year period.
Together these drove our non-GAAP E P S to a dollar and 51 cents for the quarter.
For the full year, we generated revenues of $11.1 billion up 11% organically and we expanded margins to tenant a half percent well growing non-GAAP earnings per share 18% to $5.17.
Yes.
Growing revenues, while also increasing margins and thoughtfully deploying our cash enable why those two achieved total shareholder return of 89% in 2019.
Which was the highest among our peers.
Jim will go through more detail on the results in a moment, but I would like to take this time to acknowledge our talented employees who enabled these significant financial success is through their operational execution.
Their commitment to our customers into our strategy was instrumental in our success is what makes slightest a great company. We are today, a great place to work and I wanted to thank all of them for their hard work during the year.
With regard to organic growth in operations, we have achieved significant success over the last few months, we won our two largest recompetes Gs demo too and Hanford as well as our largest take away program to date in the award of the Navy.
The next Gen program, which carries a ceiling value of 7.7 billion.
These wins truly demonstrates the power of the scale of the organization, we have built as well as the breadth of our innovation innovative capabilities.
She has some low two and nexgen are both incredibly complex digital transformation programs for two of our nation's most importantly networks the Geo D and the Navy respectively.
We are proud to have been entrusted with this responsibility and are confident we will provide the D.O.G.R. sailors and marines around the world with the tools they need to gain a war fighting edge in a modern digital landscape.
Combined these programs alone.
Hanford Gizmo too and Nexgen have provided us with more than $18 billion in single award I'd like you ceiling value and eight to 10 years of visibility further strengthening our business.
With two of these wild two of these programs have been protested we expect those protests to be resolved in the second quarter.
We have a good track record on winning defensive protests and if we are able to extend that track record and successfully defend these wins work would begin by the start of the third quarter.
Due to the protests and the idea I Q structure. These wins have not benefited our bookings at all yet.
That said beyond these notable wins our business development engine continues to extend its period of strong performance with $3 billion up net bookings in the fourth quarter, bringing the total full year net bookings to 14 and a half a billion.
We actually did the year with more than 24 billion of total backlog a record level and more than twice our annualized revenue run rate.
Beyond our organic operational execution, we have also been successful on the M&A front.
In the recent months, we entered into agreements for two acquisitions that will help us to accelerate the execution of our strategy.
First was dianetics, which we announced in December and closed at the end of January and the second was L. Three Harris is security detection and automation business, which we announced in early February.
This builds on our acquisition the acquisition of IMAX and 2019, which is now part of our health care business.
We have disciplined acquisition criteria that we've talked about before and we're pleased to acquire these strategically important properties that Phil fit well within the company and were acquired at prices that made sense.
These acquisitions helped to broaden our portfolio of products and services in high growth high margin areas further expanding the scale of the business.
We believe these transactions will position the company on a higher growth curve and yield significant positive value for our customers and shareholders over the long term.
I am proud of all those at the company, who collectively helped to drive successful agreements for all of these acquisitions.
This momentum in both organic and inorganic growth is due to calculated strategic initiatives, we have undertaken throughout the organization.
Throughout 2019, we elevated our business development organization and processes to successfully leveraged to scale the organization and the innovation embodied in our technical capabilities, allowing us to repeatedly and efficiently right successful proposals and when.
New contracts.
We deepened our collaboration and partnership with our customers by engaging them early and providing them with innovative solutions to solve their mission challenges.
We invested in our people through improved benefits more training and development opportunities and increased flexibility, which enabled us to beat our hiring targets and cultivate a deep bench of highly talented leaders to advance our organization.
As a company we have rallied around driving growth without sacrificing margin converting profits to cash and then thoughtfully deploying that capital in a balanced manner to drive shareholder value.
To that and we deployed nearly a billion dollars of capital in 2019.
Roughly 70% of which was returned to shareholders through share repurchases and dividends with about 10% used for M&A and the remainder for capex and mandatory debt payments.
This balanced approach is consistent with the capital allocation plan, we laid out at our May Investor day.
Also in accordance with what we've said in the past with our net leverage ratio estimated to be at about 3.7 times post closing of the security detection and automation transaction, we will pivot our capital deployment initiatives to focus on debt reduction.
Until this net leverage ratio again approaches our target level of 3.0.
We anticipate reaching that level in the first quarter of 2021.
As we looked at 2020, we're focused on successfully executing all the opportunities we have captured in 2019.
From an organic perspective, we have significant wins in each of our businesses that we are committed to executing well.
Well some are recompetes all of them will require us to continue to bring innovation to our customers and a fresh perspective focused on affectively and securely delivering their missions.
On the take away work, we're focused on starting off.
On a great foundation ramping our recruiting efforts to ensure we have the talent to commit to the contracts and successfully executing those programs to deliver on all of our commitments.
With respect to our inorganic initiatives there are two sets of activities underway.
First on the dynamics acquisition, we are pleased to welcome the 2300 employees from Dianetics to the light owes family gave king the CEO of Dianetics, we'll continue to lead the business, which is now the fifth business group within the company.
Diagnostics business will be consolidated into our defense solutions segment for external reporting purposes, Dave will serve as group President and he has been appointed as the newest member of the executive leadership team.
Additionally, we have appointed a leader for the integration management office or I am though for this transaction, who will be supported by representatives from each of the functional areas. This cross functional team will ensure that lightest business processes are followed and that dianetics business.
Systems are properly connected with the light OWS corporate systems, leveraging the strengths of both businesses in these efforts.
Our integration activities will largely focus on knowledge sharing between dynamics in light of those in order to support new opportunity development.
Second regarding the recently announced pending acquisition of L. Three Harris's security that direction and automation businesses.
Once the acquisition has closed these businesses will be combined with our existing security products business, which resides within our civil group.
We anticipate the integration activities for this transaction will be more extensive than those of either dianetics or I amex. However, they will be significantly less than our prior I S. Ngs transaction, where we demonstrated our ability to integrate successfully.
We have already identified a preliminary set of activities and key leaders that would drive the cost and revenue efficiencies. We previously discussed as being a key aspect of the transaction.
We have a great playbook from the I.S. Ngs transaction, the light owes business framework that will drive the actions and activities needed to fully integrate the business.
From a macro perspective, we see 2020 as an extension of the strength we saw in 2019.
Outlays are projected to continue to rise at least through physical year 2000, 2022, given the large prior year on obligated balances.
Do you use investment accounts procurement in R&D continue at historically high levels.
The top technology priorities are consistent with last years with strong emphasis on space, Hypersonics, cyber and electronic warfare, and our directly aligned with our growth initiatives and technical capabilities.
The presence physical year 21 budget request was released last week the request sets discretionary spending levels at 741 billion, including overseas contingency operations for the for defense roughly flat with the prior year. Our initial review of the available.
No material shows budget increases directly aligned to our areas of strength cyber artificial intelligence hypersonics and space.
The budget request of 590 billion for Nondefense represents about a 10% decline from the prior year.
While the agencies, we have exposure to are far less impacted by their proposed cuts.
The Democratic led house is unlikely to accept significant decline in the non defense agencies.
We expect negotiations on an agency level on agency level appropriations to take place over the next few months and likely conclude by this summer.
Overall, we are encouraged by the visibility and priorities defined by the budgets and expect to benefit from that at least through the next couple of years.
With that.
I'll turn the call over to Jim Reagan, our Chief Financial Officer for more details on our results and our 2020 outlook.
Thank you Roger and thanks to everyone for joining us on the call today.
Leidos achieved record results in 2019, and this strong momentum has continued so far into the first couple of months of 2020.
Starting first with revenue.
We achieved 14% organic growth in the fourth quarter, which was driven broadly by the ramp up of new program wins in all of our businesses.
In addition to this during the quarter, we benefited from the impact of a couple of extra working days driven by the effect of the 53 week year.
The 11% adjusted EBITDA margins in the quarter a record for the company reflect a few key items I want to know.
First the primary driver is our strong program execution.
This is one of those items that doesn't typically get a lot of attention, but across the company our employees commitment to our customers and to the missions. We help them perform is at the heart of our strong program performance.
Consistency and delivering on our commitments and in many cases going at about going above and beyond to ensure our customers are successful is recognized and rewarded by our customers. Both through award fees, but also through New program Awards that we believe will help continue this momentum.
Second as we've alluded to on prior calls as new program wins mature margin increases.
Throughout the year many of the new programs that it impacted margins earlier in the year continue to mature, enabling us to improve margins in the fourth quarter to the highest margin level during the year and as I said in the company's history.
Non-GAAP diluted earnings per share of a dollar and 51 cents in the quarter drove the full year non-GAAP earnings to $5 in 17 cents exceeding the top end of our guidance range.
Fourth quarter non-GAAP EPS grew 37% from the prior period, reflecting the revenue growth and increased margins as well as a reduction in share count of 6 million shares, resulting from our share repurchase activity during the year, including 25 million in the fourth quarter.
Cash flow from operations in the quarter was $169 million.
Driving our full year number to 992 million again considerable considerably above our guidance.
After adjusting for Capex of 121 million in the year, we converted 116% of our non-GAAP net income to free cash flow.
As we've said in the past our target here is 100%.
And occasionally we will over or underperformed relative to that primarily driven by the timing of advance payments.
In 2019, as we've mentioned on prior calls we benefited from approximately 100 million of advance payments from customers.
We expect we used to reverse in 2020, and we will talk more about them when we get to guidance.
Business development results for the quarter and the year. We're also very strong.
At the consolidated level, we exit exited the year with a record backlog level of 24.1 billion and a trailing 12 month book to Bill of 1.3.
All of our segments generated book to bills for the year North of 1.0 with health being the strongest at 1.6 acts.
As Roger indicated these results do not reflect the recent wins that are under protest.
Now, let me share some comments on our segment results.
Revenues in the defense solutions segment accelerated throughout the year exiting at a 10.7% growth rate in the fourth quarter compared to the prior year.
This growth and acceleration primarily reflects the ramp of new takeaway programs, such as ADC, MSR and a great job of driving on contract growth on G.S. ammo and several other classified programs.
The business also benefited a bit from seasonally higher materials purchases in the fourth quarter.
Non-GAAP operating margins in our defense solutions segment increased to 9.9% up 220 basis points from the prior year quarter and hundred 90 basis points sequentially.
The increase was driven by program write ups that reflects strong program performance as I indicated earlier.
The margins also reflect an approximate 70 basis point benefit from a reserve release that was associated with the successful settlement of an outstanding legal matter.
As we looked at 2020 similar to what we saw in our civil segment in late 18 in early 19, the large volume of expected new program ramps, including GSM owed to and Navy Nexgen is likely to dampen margins in this segment temporarily.
And our civil segment revenues in the fourth quarter grew 16.2% over the prior year.
This reflects the continued ramp of program wins from late 2018, and beyond including NASA nest deal, we any TL and the Epay future flight service program for FSP.
At a high level of security product shipments.
We also benefited from higher volumes in our Hanford and Arctic support programs, reflecting typical seasonality.
Volumes in these programs are more weighted in the second half of the year and we expect the same pattern in 2020.
Civil segment, non-GAAP operating margins of 11.4% in the quarter reflect a significant nearly 400 basis point improvement sequentially and a 160 basis point improvement over the prior year.
As you may recall from the third quarter margins reflected a write down on some receivables on an overseas program.
And that we anticipated a recovery to more normal programs that we now see in the fourth quarter.
The fourth quarters also when the majority of our Gainshare is recognized on or LCST program in the UK and this drove an incremental benefit in the quarter as well.
Turning now to our health segment fourth quarter results were strong here across all metrics.
Revenue grew near nearly 14% organically adjusting for the divestiture of the commercial health business, which closed in the third quarter.
Revenue growth was driven by higher volumes in our disability exam business. The ramp up of a recent award with CMS for end user centric I T support or.
Yes, as well the continued ramp of dim sum deployment activity.
Non-GAAP operating margins remained well north of our target at 16% driven by strong operational performance across the segment, including increased contributions from one of our more nascent businesses digital health solutions.
Where we're having increased success selling the broader companies suite of digital transformation capabilities into the commercial health market.
We continue to expect normalized margins in this business in the mid or the low to mid teens and and as we've said there will be some quarters that deviate from that driven by program mix and volume.
Overall 2019 was a great year not just for the operational and financial success is that our team has delivered but for the 14.5 billion of net new bookings and more than 18 billion of New single Award IDQ ceiling awarded to the company.
These successes as well as the M&A transactions that we've highlighted will position us for continued growth and success in 2020 and beyond.
Now onto our guidance for 2020.
We recognize that there are a lot of moving parts between the acquisitions and the recent large program wins. So we will try to be a little bit more descriptive in our commentary.
First we expect revenue in the range of 12.6 billion to 13.0 billion, reflecting growth of 13% to 17% from the prior year.
We have conclude we've included approximately 900 million of Dianetics revenue and in this guidance range for the prior year inline with our prior expectation what Weve pro rated it for the effective closing date of January 30 Onest.
We've also embedded an expectation that our run rate on Hanford Ngs IMO will continue at their historic run rates.
Despite these awards being in protest we've included a minimal level contribution from engine, allowing for some potential downside risk, reflecting the potential for future protests.
We expect adjusted EBITDA margins of 10.0% to 10.2% for the year.
After adjusting for the 54 million dollar benefit realized in 2019 from the payment from degree government. This reflects up to 20 basis points of improvement in 2020.
We expect non-GAAP EPS between 5030 cents and $5.65 on the basis of 144 million shares outstanding flat with fourth quarter levels.
As we've indicated we're pivoting our capital deployment initiatives to debt reduction rather than share repurchase until we get our target net leverage ratio close to 3.0 tax.
Our non-GAAP EPS guidance includes approximately 20 cents of accretion from our Dianetics acquisition.
We expect operating cash flow of at least $1 billion.
This includes a minor contribution from the Dianetics acquisition as the earnings benefit in the first year will be partially offset by transaction and integration costs.
These costs, which we disclosed previously are expected to be approximately $40 million in 2020.
As I indicated earlier operating cash flow for 2020 reflects the impact of an approximately 100 million dollar reversal of advance payments received in 2019.
We've also implemented an accounts receivable monetization program for approximately 200 million of our receivables.
This further progress is our balance sheet optimization goals.
We remain committed to operating with a lean balance sheet, and where appropriate monetizing underperforming assets.
Now a couple of other comments to help you with modeling 2020.
We expect interest expense of approximately $170 million, excluding transaction related expenses.
We're also expecting a slightly higher non-GAAP tax rate in 2020 of 23%.
We expect to incur a 170 million of capital expenditures in 2020. Now. This includes 30 million a real estate related investment associated with the Buildout of our new headquarters and other real estate optimization activities.
This is the last year, where we expect material real estate related investment.
Our normalized go forward run rate for Capex should be about 1.0% of revenue, including the impact from the dianetics business.
To wrap up we exited the year with strong momentum and Tailwinds and a group of 36000 employees committing committed to delivering innovative solutions to our customers driving value for our shareholders and executing on our commitments.
And with that ill turn the call over to Rob to take some questions.
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Thank you and our first question is from the line of Matt acres with Barclays. Please proceed with your question.
Hey, good morning, guys. Thanks.
Hey, good morning format.
Thanks for the color on margin.
Some of the program mix between mature and new stuff.
Thank you talked about how you sort of thing in the long term.
10% plus EBITDA margin that I was thinking of it are these new acquisitions are a little bit increase area that will definitely be a little bit higher.
Well you that that thanks for the question I think that this year, the particularly as we close out 2019 were seeing the benefit of strong program performance and that's put some nice upward pressure on margins and clearly the two businesses that we've acquired or in the process of acquiring in the case of.
The security products and automation businesses. They will also be accretive to our margin profile. So I think that overtime as we combine.
Yes, the strong operational execution getting some revenue and operating synergies out of the acquired businesses I think that you're going to see us moving the margin expectation upward.
Got it makes sense and then I guess can you touch on.
The long term cash from operations guidance, you've talked about 2.7 billion 2019 to 21, I think you're you're already at about 2 billion through 2020 with the right way to think about that going forward.
Well you are that three year.
Horizon that we talked about before we certainly we're pleased with our progress on that I think that you know because of the advance payment that we mentioned that will be reversing in 2020.
That's a bit of.
A short term.
Cash flow headwind, that's going to be offset by the fact that we're monetizing about $200 million of our receivables with a very low cost facility that.
We will allow us to show some offsetting uplift in operating cash flow for the year.
Got it.
Thanks.
Our next question comes from the line of Sheila I agree with Jefferies. Please proceed with your question.
Good morning. This is actually Allen on for Sheila. Thank you for taking the question.
So.
Contract such as Jeff demo and Navy next Gen, which points year capability is there anyway to frame, but the advantages are in this market and any other opportunities. There are just deploy this capability for the army amplifiers or other customers.
Yeah, Hey, Ellen and and thanks for joining us.
I think our position in that digital landscape is close to the customer and helping the customer utilize the capabilities of the cloud and digital transformation things like software defined networks and virtualization.
And there is opportunity to bring that those digital transformation capabilities to other customers Army Air Force frankly, some of the other federal agencies as well and as we've said before you know, we're really cloud provider agnostic.
And where that value added layer that allows our customers to really modernize and drive efficiency into their day to day operations and so.
It's been a great growth market for us and we see it rolling into our health care business, our commercial energy business, that's been part of our growth engine.
Great. Thanks question.
Our next question is from the line of Cai von Rumohr with Cowen and company. Please proceed with your question.
Yes, thanks, so much and good quarter.
So.
If we look at the margins you mentioned lower initial margins on next Gen and Gs ammo.
Two questions one when do you expect the I mean do you still expect those to reach the corporate average in a couple of years as they mature and secondly, given those will be below average margins are there any other areas well what are the other areas that maybe are.
A little bit stronger to get your home to the 10% plus.
Adjusted EBITDA total thanks.
Hi, Thanks for the question you know when when we think of.
How we want how we manage the business.
Internally, we manage the thousands of of contracts and programs that we have as a portfolio and we bid things like Navy Nexgen, GSM, though with a view that.
As we begin the process of innovating for new contract, we're going to make those investments with a view that they would get at or above the company average.
As they continue to mature beyond the first or second you are the program. So if you think about and I'll just give you. Some examples you know the margin on a program like NASA NAS switch.
Was it takeaway win for US last year that that is already beginning to move upward from that early phase of where we're investing.
And so the larger programs like that typically do have lower margins early on and some of the reserve releases that we've talked about some of the write ups that we've had in the fourth quarter are in fact from programs that are maturing and give us the capability to to tick up on the profit recognition ratios, we have there and again.
It's a function of of a lot of programs and I gave you. One example, and NASA, where the the margins escalate overtime.
Thank you.
Thank you.
Our next question is coming from the line of Edward Caso with Wells Fargo. Please proceed with your questions.
Good morning, Congrats on the numbers here curious.
Roger you see more positive on the budget process. This year, if I heard right.
Is there some reason for that particularly as we go into an election year and also if you could talk about.
Your expectation for any cyclical.
Activity and award announcements plus or minus the election. Thank you.
Hey, Thanks, Ed and thanks for joining us.
I, Yeah, we've looked back in history and.
The.
End of first term and.
In the.
White House and there is a.
As a reason it kind of get the budget done before we enter the election.
Cycle in the fall and you know as we are up on the hill and talk into Authorizers inappropriate or certainly it's a staff level. They are working hard.
To get the rest of the budgets complete I think the president has now set the top level there seems to be broad agreement.
The top level and now the staffs have to do the work you get the budget is done and I just.
I don't see a lot of appetite for having the budget process roll through the election season, but where there are people who there are other people, who think will be an SCR through the end of the year, but I'm I'm more optimistic than that.
We do know that we are.
In what I think is 100 and thirtyth months of economic expansion in the United States I, just think the largest period of expansion since the great depression.
And I think all of us in business look at that.
With a careful eye and thinking okay, what could be out out in front of US we look at their Corona virus, we keep an eye on interest rates and but the economy is is running well and we continue see economic growth.
But I think we're all being thoughtful and that's why Clarient Leidos, we are more conservative in our balance sheet and we'd like to stay away from the high leverage in that way if we worse just see interest rates increase.
We would be we'd be protected in insulated.
Since then.
Thank you.
Thank you. Our next question is from the line of Tobey Sommer Suntrust. Please proceed with your question.
Thank you as you look at managing the business beyond just the kind of current horizon, maybe think about several years from now what are the risks associated with higher margin future acquisitions that margins continue to March higher from this relatively high place here in the fourth quarter over the next two or three years.
Yeah.
But.
Well, we had and it's an interesting question I think that there.
If I understand your question rate is what does the risk that.
There could be some interruption in what we view as as a an environment, where we have opportunity to gradually increase margin and I think that that for us. It is more an issue of continued execution and by continued to continuing to execute well on the existing programs that we have.
And combine that with realizing the opportunity from the acquisitions that were making where we think that there's some margin expansion opportunity.
You know that it's accretive to the overall company I think that that we simply have to execute on to the acquisitions that we've made consistent with the playbook that we used when we acquired the is ngs business and drove 200 basis points of margin expansion out of that now I don't want is I don't want to make it sound like.
We are setting the bar for that on the deals that weve that we're doing now, but we certainly believe that there's some opportunity that we can execute on there yeah. He tobey I would I would add to that.
Because of our success and how we've grown there may be people who feel like.
We have to bid on a broad array of of programs, even if they don't meet our expectations for.
For return and I would I would simply point out is that even at the size we are today.
We we have the opportunity to pick and choose what we go after and as we've said in prior calls were being really thoughtful about which businesses we bid on and if we don't see the potential for kind of our corporate average return on a program.
We have the strength and the will to not bid those programs and.
And therefore, we were feel pretty confident that we can maintain the margins at the current level and then maybe hopefully improve those with some performance.
Thank you.
Our next question is from the line of Seth Seifman with Jpmorgan. Please proceed with your question.
Thanks, very much on good morning.
Quarter.
Just looking at the guidance midpoint on the on the organic side.
It looks like.
Maybe it's six to seven ish.
In terms of whats baked in there.
If you could give us a little help maybe not the exact guidance, but just kind of Bob.
Slotting the segments of relative to that midpoint and.
Talking about what might be.
Pencil areas for upside.
If you were to outperform.
Yes at the this is Jim Reagan I think that first of all we as you know we don't issue guidance by segment, but to your first question.
You can think about the organic growth implied by our guidance range being about 7%.
And that we feel good about the growth that we've experienced across all the segments of our business in 2019, and because we've had book to bills North of 1.0 for all of our segments all of our businesses, where we remain confident that will have.
Strong goes across that all of our business segments in 2020.
Great. Okay, and then I guess when you look at you know award opportunities.
2020, I guess what what.
Going back to you guys kind of the nature of the major opportunities for this year.
Well you know that.
The the lion share the growth that we're expecting to experience in 2020 is going to be on the recent program wins.
In particularly you know in the back ended the year, we've indicated there's going to be the beginning of the ramp up of the the engine program and in the on contract growth that we've experienced in 2019, which was a significant part of our ability to grow the business.
Mission to you know wins from 2018, you know things like NASA nest or.
The Army Corps of Engineers IP modernization program.
We've we've had strong growth in health off of the digital health solutions business. Those are the kinds of programs that we think are going to continue to be growth drivers into 2020.
Great. Thanks very much.
Our next question is from the line of Joe Denardi with Stifel. Please proceed with your question.
Hey, guys. This is John on for Joe.
Yes. The first question I have is around dems on can you kind of update us on on its contribution to organic growth in the quarter and your expectations for the program going into 2022 excuse me 2020.
Yes.
Again, it detailed program performance and growth rates by quarter were not accustomed to doing that but look I think it's fair to say that you can think of the growth rate that we've experienced in 2019.
About one point to that has been because of the uptick in.
Revenues on our dim sum program for the Defense Health Health agency the growth rate there in the coming years going to be not quite as as strong but still the program is continuing on an upward trajectory.
I was just had one or the point on the program, where we're essentially have four waves and process. So we're starting one and completing one.
Today, we're going from wave Travis all the way to the coast Guard pilot and so we expect to keep that pace now for considerable.
Period of time, while we rollout the program and.
Put the new electronic health care record system, and all of the DHL installations.
Thanks, guys and you also talked a lot about scale in the advantages of scale for lighthouse, especially with some of these new wins can you just kind of touched on on what exactly is the scale advantage that you're enjoying today and why it's different today versus in the past say when you look at.
And we'll see I see.
What do you guys doing differently now that couldn't be down on wasn't being done back that.
We've always talked about scaling a couple buckets.
We're we're still very people oriented very much of people company and our size and scale allows us to recruit a more colleges to have more job fairs to spread more more more more broadly and.
That is really really important and.
Attracting people at college level mid level and at the senior levels has really allowed us to to fuel our growth.
The the scale and you are we talked about this is a major reason why we did the lucky deal three and half years ago is it brought a whole a set of new customers, which broaden and diversify our portfolio.
And we see that happened again and again every time, we do some.
We when a new program or we have the inorganic growth.
We're thrilled with the broadening of our technical differentiation and the capabilities that we have enough what scale allows us to dues to spend our internal R&D money to.
Invest and differentiate those capabilities and done something kind of unique to the government contracting business that maybe commercial customers don't quite understand but to bid on opportunities in our space you need to have what we call past performance qualifications, which means you do have already done.
That kind of work either for the same customer or for a similar customer and if you don't have that in your portfolio oftentimes you're not even allowed to submit a proposal and with our broader portfolio. We have past performance calls and something called I'd like you contract vehicles, which is a nuance in our industry I won't go into.
We have a lot more of the qualifications that allow us to participate in these these broader markets and we've seen since the ice Ngs acquisition that all of these have contributed to our topline growth.
Our next question is from the line of Kevin Parsons with Goldman Sachs. Please proceed with your question.
Thanks, Good morning.
Yeah Yeah.
Given you come off 10% organic last year that you've said seven next year, obviously, you de risked with a lot of Recompete wins, you've got some takeaways.
You've got these acquisitions that should be accretive to organic growth. It wasn't too long ago that you kind of guided a 5% organic cagar going forward on the 2019 to 21. So just curious if you have any updated thoughts there what's led to such strong outperformance Justin 19 alone anything going forward there.
Yes, there's a couple of things Gavin one of them is that we've done a great job this year of hiring and.
We were thing when we were setting our guidance out to a year ago, we were thinking of the ability to hire as being a governor and we've we've made that a new core competency of the business. The second is on contract growth.
We've done a lot to train our teams to help customers by selling into existing vehicles.
Helped them broaden the kind of mission areas that we address and then that the other thing is that.
The the we have a couple of businesses and I'm really a couple large contracts that are winding down.
In the coming year, which are going to be a bit of a headwind in the backdrop of some really strong business development performance in acquiring new and takeaway wins. This year. So I think that it's fair to say that.
At the midpoint of seven organic growth a were being pretty careful in how we measure our ability to continue that string of success and.
And ramp up the new program wins really fast.
That's helpful color.
And then maybe just trying scale from.
I have a different angle I mean are you seeing the customer structurally shifts so larger contracts whether it be put more in let's say just say or large I'd accuses at a structural so you stand to benefit from.
Yeah, Kevin Yes, I I think we've seen that in some customers and then we've seen other customers who take a large program like the old and M.C. I.
In the Navy they actually broke that contract into.
A hardware and a software services and architecture program in the Navy. So you know we won the so called SM I T Y engine program, which is a non hardware report part of the old and M.C. I and another contractor one the hardware and I think each agency.
See looks at their portfolio and although I think there is a tendency to aggregate there also.
We'll be times when they say, okay, maybe we've reached a level of scale and we want to have more players and they just aggregate. So yeah I think into lifecycle, we see both and not necessarily a trend one way or the other what you do see in the way we behave.
Because of what we've done with a company.
We tend to look for larger opportunities and.
It's it's interesting.
In all those costs as much money to right you know say a $250 million proposal as it does to write a billion dollar proposal and if we can take the same resources and.
Pursue larger opportunities, we can be more efficient in the dollars that we spend we caught our new business funds spend and so we have been doing that over the last couple of years.
Got it and then just quickly off and do you have your 2020 or 2021 Recompete.
Thank you.
Yeah, we don't issue or we don't disclose the recompete win rates.
Or for that matter for new business or takeaways, what we what we have said in the past and it continues to be true is that our win rates.
On all those categories are well above or above 50%.
This year the Recompetes.
We're going to contribute about 20% of our.
The things that are being bid in the coming year will be responsible for about 20% of our overall revenue.
Okay. Thank you sure.
The next question comes from the line of Jon Raviv with Citi. Please proceed with your question.
Hey, guys its con canceled on for John Appreciate you taking your question.
Just going back that account for new programs versus segment average cars Loren can you just discuss a little bit the.
Assumptions that you guys have with respect to the geography of labor.
How you guys are able to offset some of the cost of that by distributing the labor to kind of non core areas.
Let's see I think you asked let me.
The answer the question I want to answer, but you, although we have a customer concentration in the national capital region and there are some contracts that require us to perform work within a certain geographical radio so those customers.
We have had success in moving work outside of these sort of dense economic areas to places where.
The job market is better and we have been doing that over the past couple of years and we continue to do that in 19, and 20 and we have built new facilities, we call them centers of excellence and software development.
Kind of refer to them as software factories, but.
Open planned new buildings.
In places around the country near major research colleges and universities that have outstanding computer science programs, and we have enjoyed success and capturing.
Students and graduates students and.
Allowing them to participate in are secured devops process and our agile software development I think that has been really really successful for us and.
We have seen some signs open up down the street with some of our competitors names on them. So I think it is a trend that we're seeing within the Gov government contracting space.
Got it. Thank you for the color and then in terms of the larger contracts right, where you guys are doing both software and hardware can you just talk a little bit about you know say for example engine right and get and getting to the company average margin by year. Two could you just talk a little bit about the like risks.
With regards to hardware implementation that might affect that comment on that.
Well in in the Navy Nexgen are they actually split the contract into two pieces.
There is a hardware.
Contract, which we didnt participate in I think it was one by HP.
And they will provide the hardware and unlike our NASA nest program, where we did both and we actually brought the hardware anyway to buy some existing hardware and do a technology refresh on the the Navy Nexgen program, we don't.
We don't have that hardware component in our contract ours is around architecture, and and transforming the network and so there's really there's no pass through there's really no hardware implementation.
Risk and oftentimes in government contracting if you're simply passing through hardware, sometimes you're not allowed to put fee on that sometimes the fee rages lesson that is not the case on our Navy next gen contract.
Got it thanks, thanks for confirming that appreciate the color.
Thank you at this time I'll turn the floor back to Kelly Hernandez for closing remarks.
Thank you Rob. Thank you all for your time this morning and for your interest in light as we look forward to updating you again soon have great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.