Q4 2020 Earnings Call
Perspective fourth quarter.
School year 2020 earnings call.
All participants will be in listen only mode.
Should you need assistance, please signal way conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
Please note. This event is being recorded I.
I would now like to turn the conference over to Michael PC, Vice President Investor Relations. Please go ahead.
Thank you welcome everyone today's fourth quarter.
Full fiscal year earnings conference call.
Because I think on the call today, our Matt Curtis our CEO, John Crabbing <unk> our CFO.
Today's call is being webcast on the Investor Relations portion of our website, where are you also find the earnings release and financial presentation slides that will use for today's call.
Turning to slide two of the presentation. Please note. During this call will make forward looking statements that are subject to known and unknown risks and uncertainties I can cause actual results to differ materially from anticipated results.
For a full discussion of these risks and uncertainties. Please refer to our FCC filings, including our latest form 10-K.
In addition, the statements represent our views as of today.
Subsequent events may cause our views to change so we may elect to update the forward looking statements, we specifically disclaim any obligation to do so.
Finally, as shown on slide three well discuss some non-GAAP financial measures that we believe provide useful information for investors.
Slide deck for today's call includes reconciliations to the most closely comparable GAAP measure.
This time, it's my pleasure to turn the call over to Matt will begin on slide four.
Thank you Mike and thank you all for joining us on this afternoons call.
I'm pleased to report that what strong operational performance in the fourth quarter. We completed another successful year I'm extremely proud the entire perspective team.
He joined together to become one perspective and have delivered both outstanding financial results.
Customer mission success.
Now, let me start by saying, we hope you in your families are all healthy unsafe during these challenging times.
We would like to thank all of the health care professionals first responders in frontline workers. It continued to work tirelessly to fight this disease.
We're incredibly proud of the way our team is bonded together in response to this crisis and our performance reinforces my view.
He has the most talented and dedicated employees in the industry.
We remain committed to the health and safety our employees that have taken steps to ensure that out.
Not today I want to share for key messages first.
I'll discuss the actions we have undertaken in response to dealing with the cobot 19 pandemic and the impact on our business.
Second our excellent operational performance during the fourth quarter and fiscal year.
Third our continued strong business development results in force I'll provide you with a long term target and business update.
Turning to slide four let me begin by expressing our heart valve sympathy for everyone, who has been affected by overnight team.
As a company our first priority just the health and safety our employees and extend their workforce.
We've taken a number of actions to help mitigate the restaurant bar employees, including social destined saying.
Onsite temperature screenings heightened sanitation procedures teleworking and virtual meeting.
We have a robust business continuity plan.
Which has allowed us to maintain our regular corporate and management cadence.
The most or somebody cross section of leaders for executive functional operational and business groups that can be regularly.
<unk> growing wires response efforts and it was daily Madrilena meetings throughout the organization across our company.
So these actions less than 5% of a workforce has been disrupted or delayed by covert 19.
These areas, where we're seeing the primary embarked or any intelligence agencies, where employees, you're unable to work because secured and classified government facilities are not accessible.
In these situations under section 36, 10 of the cares Act, we're able to recover our cost associated with this race day workforce, but cannot build movie.
During this pandemic work, we perform has been deemed critical infrastructure and essential to national security and thus far we have seen minimal disruptions to our business.
We have implemented extra precautions to ensure our offices remain open to support mission and this is critical operations.
Importantly, we continue to support our customers missions through these challenging times now let me share a few compelling examples with you.
In March we are assisted our navy customer to repair both U.S.N.S. Mercy and comfort hospital ships for deployment.
Well equipped the comfort with redundancy options to allow them rapid I.T. conductivity upon arrival in New York.
And we expedited disturbs request for the Mercy, while providing members of our team to assist onsite in California. Upon the ships arrival in Los Angeles.
We also sister Navy customer to dramatically improve their capability and capacity to work mostly in the highly extreme numbers required during the covert 19 crisis.
While the Navy teammates Perspecta incremental increased our broad band on classified remote access service from 25002 125000 seats.
Network bandwidth by factor 10.
Online web access actually capacity from 200002 300000 in 24 days.
Additionally, we implemented a new scalable state of the our enterprise service desk capability and supported the Navy and implementing Microsoft Office 365 collaboration tools.
Now for another customer over the course or just 10 days, we managed to seamlessly equipped and convert 360 employees and one of our de customer support centers to 100% Telework.
I wouldn't call routing capabilities.
We are continuing to provide background investigative services, a critical component to government operations.
Our investigators have been fully engage while teleworking, well that reduced hours in order to maintain on a real uninterrupted service to our nation.
We successfully implemented remote pilot programs with select customers during his pandemic and we continue to develop other innovative solutions that will preserve the coblentz integrity and investigative process when business as usual it's not possible.
We have developed programs to assist our boys, who are facing hardships and disruption as a result of the many repercussions caused by this pandemic.
We established an employee paid time off donation program a company watched I'd been for mass and where possible. We've identified temporary reassign Mitchell employees, whose regular war has been disrupted to all the programs within a company where discount maybe a match.
Finally, we remain dedicated to helping our boys navigate these unique and challenging situations in a safe manner, well executing our object to support our customers mission.
We are developing state by state.
Side by side plans to address the transition to a new normal process.
What we call teacher went too.
So our employees can return any safe and efficient manner.
We are implementing a phased approach coordinated with an approved by our government program managers.
I'm extremely proud of the way our team across all levels on the entire organization responded promptly and handle the optigrid obstacles created by the spend on it.
From a financial perspective, we did not have immaterial impact what fourth quarter results.
Our best estimate or the potential impact in F 121, based on information and circumstances in play this time, a reflected and therefore 21 guidance, which John will address shortly.
Now turning to slide five second I want to comment on our financial performance once again exceeded expectations on all our chief financial metrics, we are delivering on our gross margin earnings and cash commitment. This marks the eighth straight quarter of surpassing our targets. They clearly demonstrates our ability to actually actually.
Acute against our strategy.
Our performance in the quarter also enabled us to exceed the top and I'm a fiscal year guidance for revenue and free cash flow conversion right well also meeting our expectations for EBITDA margins and achieving the high end of our adjusted earnings per share range.
For the full year revenue was up 5% year over year compared to pro forma that's why 19.
Adjusted EBITDA was up 2% year over year, and adjusted diluted EPS was up 8% year over year.
We generated $542 million, a free cash flow an increase of 29% over prior year and a conversion right. Once again exceeded our full target at 154% of adjusted net income.
And that's what 21, we'll keep the momentum going.
Building on our commitment to provide more detail insight into the drivers and performance of our business.
We are providing additional information on the estimate the impact on the network portion of engine or summit in fiscal year 21.
We believe this additional detail provide more insight into the strength of our business, including our ability to drive sustained revenue growth and generate strong free cash flow.
Third our business development results, we had another excellent quarter of winning business.
Bookings totaled 1.2 billion for a book to Bill ratio of 1.1 times, 56% on a quarter's awards, where new work for perspective.
This builds on a momentum we saw Q3 was 77% of our awards were new business and continues to give us confidence and our ability to win and drive growth.
We recorded a book to Bill ratio of 1.4 times 40 year <unk>.
<unk>, new business percentage of 57%.
Over the last day quarters, our quarterly book to Bill average is 1.5 times.
We achieved total bookings in fiscal year 2020 of 6.1 billion.
Excluding Amgen Smith.
Our book to Bill ratio for the years 1.5 times and new business represented approximately 64% of that number.
These new business wins are key to fueling our organic growth moving forward and demonstrated the strength in our ability to grow our customer base.
At the end of the fourth quarter total backlog was 13.3 billion, which was flat compared to the third quarter fiscal year 2020.
Funded backlog at the end of the fourth quarter was 2 billion would increase sequentially.
Excluding Amgen total backlog was 12.7 billion under funded backlog was 1.7 day.
Our three year 70 billion dollar pipeline of qualified opportunities includes 13 billion of proposal already submitted and awaiting decision, which 90 plus percent is new business.
Over the same three year timeframe, we only have about 8% of our revenue up for Recompete. So we remain focused on winning new business and have put the resources and team in place to continue to do so.
This strong visits develop a poor performance has us well position for F 121, with less than 5% revenue as new business. We are very confident with our F 121 guidance.
Now I want to touch on a new addition, or business development team Orlando Figueiredo Orlando left the actually technology, just before perspective was created and has rejoined the organization as Vice President business development for Intelligence group.
Orlando joins us from FDIC, we're thrilled to welcome him back.
The powerful combination of its enemy customer knowledge and strategic thinking will further strengthen our position to support the evolving digital and cloud transformations, taking place across the Intel humanity.
For two his leadership in involvement and mapping opportunities for organic growth.
Fourth and finally.
We are introducing RF, what 21, Guidances evening and have also update or through your targets for business.
I want to spend some time discussing our strategy and some key developments at support those targets.
We remain focused on six strategic priorities, which serve as the foundation for every decision we make in every action we take number one be our customers cloud and I see application transformation partner of choice number two.
Accelerate cyber security dominance in the marketplace.
Number three enable critical mission success through intelligent tools, utilizing artificial intelligence and machine learning analytics.
Before shape and lead the trusted workforce Mark.
Number five solve our customers' emerging challenges with innovative mission I T solutions.
Finally number six infuse perspective labs innovation and applied research driven solutions across our portfolio.
Now this strategy is working well and we continue to execute against that plan.
Susan I point acquisition enough what 20, we now franchise positions at Department of Homeland Security and the defense information system agency and with new capabilities are strong emphasis enhancing intellectual property around digital transformation.
Cloud in cyber further complement the existing prospective portfolio.
Specifically, the patent and trademark cloud technologies, Zeus and cloud seat.
They differentiate us in the market and significantly enhance our position and our top three strategic priorities.
Our innovation engine perspective lab continues.
To win and develop solutions that we leverage across our portfolio to further enhance our service offerings and added 10, new patterns and that's why 20.
Earlier this month, we announced the tuck in strategic acquisition of de HPC.
In this developer of enhanced innovator electronic warfare or E. W technology with market, leading technical solutions and rapid prototyping capability.
That is acquisition will further enhance prospectus labs and ability to offer a bust comprehensive full lifecycle E.W.
And cyber solutions from designing prototyping to deployment integration and maintenance across multiple domains, including manned and unmanned air ground and Miss.
I want to emphasize several key certifications, we recently announced it further support our strategic direction.
First building upon our Amazon Web services government competency attained in the second quarter. We recently achieved eight I'd be asked that mobs competency status.
This certification validates perspectives ability to securely drive the delivery and efficiency of advanced cloud based technology using that SEC ops solutions across the federal government.
Second we achieve Amazon web services migration competency status.
Now this certification identifies our ability to move existing applications to the cloud to reduce cost increase agility and improve security the federal government.
These AAMC cloud competencies complement our existing designation as a Microsoft cloud solution provider pharmacy, SP and a Microsoft old competency partner, which is the upper most level within the Microsoft solutions ecosystem.
With cloud companies across Microsoft because Youre dynamics 365, and almost reached 65, we had the highest level of competence and expertise with Microsoft solutions.
Additionally, we are a service now premier technology and services partner with expertise in implementing enterprise wide cloud enabled services on the now platform.
Together, our attainment of these competencies differentiates us to our customers by showcasing our expertise in cloud based services, while enabling our customers to host their workloads on the optimal platform across hybrid multi cloud as well as legacy infrastructure environments.
We combine our deep government customer experience and perspectives full suite of cloud computing infrastructure services back my leading edge technology in research from perspective labs to gain the cloud benefits of agility mission performance cost savings innovation.
These strategic developments brought us a confidence in our business can continue to deliver organic revenue growth.
Industry, leading margins and generate strong free cash flow to.
The continued ramp of the new program wins, we secure enough what 20 unlimited recompete risk over the next three years, providing clear path toward strong organic growth and our business excluding.
And then submit and that's what 21 and over our three year planning horizon, we're excited for the future.
And grateful for the support of our people customers technology partners and shareholders. We remain committed to growth by pursuing large new business opportunities by investing in our innovation engine and technical Differentiators and by partnering with leading technology companies to drive the transformation agenda for our customers.
All while keeping our commitment to serving a federal government customers eight as they implement critical I see a mission solutions and delivering strong financial results.
With that let me turn the call over to John.
Thanks, Matt good afternoon, everyone.
Extremely pleased with our performance in the fourth quarter and the fiscal year.
Marks another year of solid performance in execution.
I'll walk through the results for the quarter quickly review, our full year, and then turn to our forward outlook, both for fiscal year 2021, and the longer term.
Turning to slide six.
Revenue for the quarter was 1.1 billion, which was up slightly from the fourth quarter of fiscal year 2019.
The growth driver in the quarter was our defense and intelligence segment, which increased 3% year over year driven by on contract growth and contributions from new programs ramping up in the quarter, partially offset by the expected moderation in background investigation volumes.
Civilian and healthcare segment revenue decreased 4% year over year with momentum from recent new business wins offset by NASA and other legacy program wind Downs.
Overall, our contract mix was similar to last quarter as a percentage of total revenue our contracts were 53% fixed price.
19% time and materials, 28% Cross plus.
Q4, adjusted EBITDA was 182 million, which was down 12% compared to year ago. Adjusted results year over year decrease in margin is related to a higher cost plus mix in the current year and prior year background investigation volume surge and a onetime 8 million gain from a subcontractor Nick.
Depreciation.
Acquisition related intangibles amortization, which is backed out of adjusted net income and adjusted diluted EPS was 54 million.
Net interest expense totaled 32 million in Q4, and our effective tax rate for the quarter was 21% as we benefited from our tax planning initiatives.
Our Q4 adjusted net income was 89 million, which was flat year over year, resulting in adjusted diluted earnings per share a 55 cents against a diluted share count of 162.3 million.
Adjusted diluted EPS for the quarter was up 2% year over year.
The impact of Cobot 19 was not material to our overall fourth quarter results.
Turning to slide seven.
For the fourth quarter, we generated 186 million of cash flow from operating activities and 179 million of adjusted free cash flow or 201% of adjusted net income the difference between the cash metrics is a 37 million of capital expenditures, which includes finance lease payments and $30 million.
Restructuring and integration payments the strong cash flow in the quarter was reflected in our operational days sales outstanding metric of 59 days.
We continue to execute our balanced capital deployment plan with a mix of debt pay down share repurchases and dividends.
During the fourth quarter, we paid down 24 million of dead and returned 30 million a shareholders 10 million in quarterly dividends and 20 million in share repurchases, we exited the quarter with 847 million of total liquidity, including 147 million of cash and 700 million of available revolver to pass.
[music].
We ended the quarter with 2.6 billion of total debt.
Which 2.4 billion is flexible pre payable with no refinancing and limited repayment requirements over the next several years.
Ending net leverage ratio was 3.1 times per our credit agreement compared to our financial Covenant maximum of 4.5 times in summary, we began f. why 21 with a solid balance sheet substantial liquidity and strong financial flexibility.
Turning to slide eight.
Revenue for the full year was 4.5 billion, which was up 5% from pro forma fiscal year 2019, and exceeded the high end of our guidance range.
Performance was mainly due to growth in our defense and intelligence segment, which increased 10% year over year, partially offset by declines in civilian and health due to program wind up.
Full year, adjusted EBITDA was 778 million, which was up 2% compared to year ago pro forma results adjusted EBITDA margin decreased from 17.8% to 17.3% inline with our guidance range.
Acquisition related intangibles amortization, which has backed out adjusted net income and adjusted diluted EPS was 206 million.
Net interest expense for the year was 137 million and our effective tax rate was 26%.
Our full year adjusted net income was 352 million, which was up 7% year over year, our pro forma basis, resulting in adjusted diluted earnings per share $2.16 against a diluted share count of 162.7 million.
Adjusted diluted EPS for the year was up 8% year over year and at the high end of our guidance range.
For fiscal year 2020, we generated 542 million of adjusted free cash flow or a 154% of adjusted net income well above our guidance of 110% plus conversion.
Fiscal 2020, adjusted free cash flow benefited from two discrete items totaling approximately 60 million.
He is items included a onetime benefit due to our switch from a fully insured medical plan to self funded medical plant and increased account receivables facility sales during the year.
I'm extremely proud of the entire organization with regards to this outstanding cash flow generation.
On slide nine we provided fiscal year 2021 guidance.
A better assist investors in understanding our performance we are providing information excluding the estimated impact of engine Smith.
We believe this additional detail will provide investors with more visibility into the underlying performance and the outlook for the business.
Our guidance includes an expected cobot 19 impact conservatively, we assume headwinds of 75 million in revenue and 20 million in operating income. This represents roughly a 2% revenue and 3% operating income impact on our business excluding engine Smith.
Also included in the guidance is our recently announced strategic tuck in acquisition of de HPC.
On May Onest, we acquired all the equity interest of DH PC for purchase price of 53 million subject to customary closing price adjustments.
The acquisition should contribute roughly 70 million, Jeff why 21 revenue as a cost plus margin profile will be slightly accretive to EPS EBITDA multiple paid is similar to our own.
We expect revenue for the year to be 4.26 to 4.41 billion adjusted EBITDA margin of 15% to 16% adjusted diluted earnings per share of $1.90 to $2.03 and adjusted free cash flow from version 100%.
Plus of adjusted net income.
Excluding the estimated impact of engine revenue for the year would be 3.66 to 3.81 billion.
Adjusted EBITDA margin of 15.5% to 16.5% adjusted diluted earnings per share of $1.60 to $1.73 and adjusted free cash flow conversion of 100% plus in our appendix you will find a slide bridging F. Why 20 as reported result.
Thanks to these figures.
Implicit in our guidance is the assumption of an effective tax rate of 25% as we continue to drive tax planning initiatives. Finally, the board of directors has approved a one penny increase per share for quarterly dividend, which translates to an additional 6 million an annual dividend payments.
On slide 10, we're providing updated three year targets for up why 22 through F. by 24 anchored off fight 21, excluding engine Smith.
We have targeted a 4% to 6% organic revenue CAGR.
15% to 16% margin ranges for adjusted EBITDA.
And 8% to 12% adjusted diluted EPS CAGR.
Adjusted free cash flow conversion of 100% plus these figures all exclude the impact of engine Smith and provide you more visibility into the strength and trajectory of our ongoing business.
We are confident that would our talented workforce robust pipeline suite of capabilities and strong foundation, we can deliver on our long term financial targets.
Operator, we're now ready to take any questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the Keith.
To withdraw your question. Please press Star then too.
We ask that you please limit yourself to one question and one follow up if you have further questions you may read into other question Q.
This time, we will pause momentarily to assemble our roster.
And our first question comes from Joseph Denardi of Stifel. Please go ahead.
Thanks, Good evening guys.
John I think the questions for you can you just provide a walk from 20 margins ex engine to for 21 margin X and can we get understanding of why that new run rate is sinovel over the three year.
Target and then is the pipeline consistent with that margin profile. So.
Yes, sure Joe be very happy to first off very very pleased with the continuing strong execution performance in both of our reporting segments. Okay. So in terms of providing a bridge as we've been as we've been talking about over the last year.
Obviously seeing lower asked an intensely level. So we're having less depreciation as we go into up why 21, it's associated with again the NASA lost you H. rolled out. Okay. Secondly, again, we've had a little bit shift to higher cost plus mix that's associated with some great new business wins that we had started to see those ramp up and thirdly.
Again at this point conservatively, we've taken a look at Cobiz 19, we try to put our arms around it and it's about $20 million. So that's kind of bridging so again feel very good about the performance relative to the pipeline when I look out over the horizon very strong pipeline again $13 billion in adjudication right now.
70 billion pipeline over the next three years north of 60% of that is fixed price. So we feel very good about obviously the guidance. We put forward for 21, we're very very good about long term profile.
That's great and then John can you just clarify with the the.
Disclosure around 8% of contracts up for re computer over the next three years or what does that mean exactly like how much revenue are we talking about per year or over that three year period.
Yes, Joe this is Matt so.
Yeah, what it means as when you look into $70 billion normally if you have five year run rate contracts at least 20% of your business would normally be up any given year. We've also a lot of large recompetes. We are seeing superior performance a little longer on some of these contracts. So as you look out from 21 to 23 70 billion dollar.
Are you have led by about 8% is new business. So that means 92% time Saturday, Dan is really new opportunities for us in some cases, it's new starts other cases its takeaway from from other People's business. So that's really the way that kind of think about one of the things that we've talked about we mentioned then that remarks.
Is that we really focused on and Sean mall and his team we've got Orlando Figaroa's coming back to the company helped drive the Intel business. So we're really investing and looking at that three or three your run rate were almost all of our business I was going to be focused on new business right.
Got a couple of Recompetes coming up in the next 12 18 months nothing the size of what we've been through so we're going to take advantage of this this run rate as we go forward to look at really focusing on the new business, where we show me not aware and so now we just got to expand the BD team get the REIT focused speeds.
I didn't close your opportunity and just continue to drive revenue, but that's what we're talking about two years into this business Joe that we're talking about focusing Amazon was fears of the day, we were in New York with the Investor Day, We fell two years from now in two years later, we should put up kind of the guidance going the out years, then and so weve focused on really.
On that on winning new business, we've got to do it and really focused on driving revenue growth EPS growth and generate cash flow.
That's great. Thank you.
Thanks, Joe.
Our next question comes from Gavin Parsons of Goldman Sachs. Please go ahead.
Hey, good evening gentlemen.
Kevin again.
Yeah, John I was hoping you could help us walks out of the free cash flow kind of similar to the margin bridge, which is really helpful. Just from fiscal 2000 into fiscal 21. You know you guys have exceeded your guidance on conversion pretty handily over the last few years I mean, even if I strip out the 60 million onetime benefit you called out this year.
Sure I think it was still better than the 130% conversion. So on and is that sustainable going forward. So im just trying to think about kind of what the right sustainable number is thanks, yeah sure Gavin So first off very very pleased as I said in my prepared remarks on our free cash flow generation as you know we have into.
Three leading day sales outstanding we've got industry, leading conversion and free cash flow yield so very very proud of the entire organization. There I did lay out about $60 million with Discretes that we did benefit from this year.
So when I'm looking forward, obviously, you know we've got the engine headwind, obviously, we've got coded but overall I think again, we're guiding probably conservatively right now it's a 100% plus I think we've got a solid track record and you've seen what we've been able do that over the last couple of years. So were maniacal about cash collections and we're gonna stay absolutely focused so.
I remain bullish in that area.
Got it and then on the 75 million revenue guidance headwind.
If we were to strip that out can you talk about kind of what the core underlying x. Amgen business or sorry X engine, what the businesses growing this year is that kind of still around that 4% to 6% you're talking about or does it take a little bit of time to accelerate up to that.
No have happy too and that's again why we've tried to provide that type of visibility. So what you see in terms of excluding the estimated engine impact we're growing effectively 4% again, the cobot impact the 75 million is roughly 2% again, it's a conservative estimate but that is showing you again you saw these leading into.
Caters on the book to bills, the new percentage work and we're really seeing that to start come to obviously the forefront. That's one of the reasons. We wanted to make sure you had this visibility because there is an underlying strong healthy business and we're going to continue to drive this organic growth.
And back with the 8% Recompete over the next few years sounds like you've got pretty high visibility into that I mean is or a certain book to bill that you need to achieve that or is that a lot of that in the backlog already.
Well I think what I think the way to think about it Gavin is if.
If you looked at.
In the 8% again this is not in Paris is rough order map I just want to make sure you know if you say, 8% to 10% that may data 70 million you've got somewhere between you know was 5.6 to 7 billion out of that total number would be up for Recompete and there's lets say you look the performance over five years, that's the way to think about that.
So so normally it's a lot higher than that all we want to show is is that we've got a real chance in three years, just spend our BNP very little recompete, probably 10% to 12% less than you normally have on a five year period forms to focus on new business. So the book to Bill I mean, as you know we've got no 1.5 kind of Pts.
So.
I'm not saying, we want to say certainly there.
But I think again, it's just to show that we've got it we focused on revenue growth focused on generating cash and really looking at having a huge opportunity. If you say, it's 8% and we've got roughly 60, plus may ussixty $5 million $60 million worth of new business opportunities gap is way to think about can't really project.
The book to Bill.
But I think thats kind of the way we think about.
Kind of comfort in the guidance in 21 comfort and the revenue growth guidance and 20 to 23 24, that's really the point.
That's helpful. Thank you.
Our next question comes from Edward CAISO of Wells Fargo. Please go ahead.
Hi, good evening.
I was curious about youve isolated and Gen smit, but what about engine hardware, which I believe you sort of been running above expectations on when does that sort of come out of the numbers.
Sort of contributor was it F 20, and what are you assuming at 21.
Let me give yet John who answered part of it but I can break all that out but one let me tell you where we are ahead you got Smith you edge. So we're running E U H probably through July what I can tell you as we just signed an agreement with HP Yahoos, you know when they split Amgen up Smit anyways HP.
Hi, Hewlett Packard H.B. I want you edge. So we have just signed a contract with them 420 530 million a solid over about two and a heavier to help in the services and and integration of the hardware. So that'll start ish probably in July and roughly.
I'll go for roughly two and a half years and we'll figure out the run rate, but that's really kind of the focus so we're not buying hardware and bar refer bet that help okay. John if you want to try to add some more color to that and I think thats. The way, we're going to run the hardware piece, yes, exactly right. So it is your where some more asset intensive we'll be running it.
Over the next couple of years I will start to see that depreciation coming down over the next couple of years.
Again, you know when just providing legacy support to the assets for the remaining useful life. So and we talked about this last couple of quarters and we've solidified our subcontract position.
The other question sort of related trying to understand yep to somewhat meaningful and one not meaningful acquisition, that's sort of working away into the numbers here. So.
What's the in organic contribution.
In F 21, and the related question, which is roughly what quarter do you think you will go.
Causative on year over year over year organic growth. Thank you.
Sure John to answer the numbers I much help me clarify the question a two we did acquisition in August and then this one that we've taken about isolation with ground. It was nine point in August and understands PC, just just recently and that those are the two.
Yes.
It did a little wanted it did a little wanted labs right.
No no.
No.
Two I'll just do August and why we just yet.
Okay, all right to acquisition to accident. So let me let me just noted out for you did so again nice point, which we did last August we'll see we'll see roughly as we've been always talking about about 50 million dollar contribution. This year and then our recent acquisition as I said in my prepared remarks was roughly about $70 million, if you're looking about a 120.
Inorganic which is roughly about 2%, okay. So again relative to the latter part of your question. We're seeing obviously a lot of good tailwinds associated with these contract ramp ups. We've had significant amount of new wins, new business wins Department of State Department of Labor right. The DHS.
Yes Senate a lot of classified so we're starting to see this right. So we will see certainly by the back half of the year, you're going to see good year over year growth, but we're going into right direction and we are driving organic growth is one of the reasons, we put the appendix and to really try to Peel back. The onion, everyone was aware of NASA the ones were Smith.
I wanted to bring to the forefront what is going on here relative to underlying strong healthy growth organic growth hopefully that helps you.
Great. Thank you.
Thanks.
Our next question comes from Louie Dipalma of William Blair. Please go ahead.
Matt John and Michael Good afternoon.
Okay all right.
Okay.
Matt you referenced years 62 billion dollar pipeline of new opportunities and Youve highlighted your expertise with kws in Azure migrations over the past year, you pursued that the Dios office cloud contract, which.
Believe is under protest I was wondering do you believe that you have the resources to win.
An integrator ROE for the next generation intelligence community called.
C E card and is that something that perspective investors should be on the look out for over the next several quarters. Yes. That's a good question. So yes, yes is under protest.
Or to the current contract which is so it was a single award since eight of yes. So the way they're living out of you who were saying, there's the cloud provider, which is kind of setting the table and then you've got all the applications and all that application transformation kind of come on her needed.
The way, if it's kind of slowed down axes coming to a halt now go the 19th but the waiter lining it out it's the cloud providers only isn't it but you know when you really think about this contract similar to what else is that now and what what what could be a multiple award contract with NATO vs Andorra could be Microsoft or even or group.
Somebody else, so that kind of contract you know none of the integrators, we'll be able to bid on that.
There's the services and applications transformation in general, that's where you would see.
Respected in some or other companies run the beltway bit. So some of answers your question, but it's pretty specific to just like the original contract that was been.
He tells a human it was just the cloud providers right. So that's that they they basically set the table.
We like his understanding the mission in these customers they will come and that's where you did affrication transformation right and and application migration, which were very adept at very good at so I'm sure. They look at the second piece, yeah, how that's exactly going to come out there's you've got a lot of kind of factions are thinking about it one talked why don't want.
We're sticking about it a different way than another but if it comes out with the integration of the transform the application transmission immigration has clearly an air play. It we'll just have to see how they do the acquisition strategy and I believe is still up in here.
Sounds good thanks.
Yep.
Our next question comes from God. Some <unk> I was calling please go ahead.
Yeah. Thanks, good afternoon guys.
<unk>.
Yeah I was wondering if you could first elaborate on the conservative 75 million of coded impact on revenues and.
Like specifically.
You actually see that impact some margin associated with it you know seems fairly high and.
Would we expect it to basically all be concentrated in the first.
Any sort of flavor you can give a phone.
True.
<unk> be happy to and.
But in common would be as obviously the situation school food, we we're monitoring it very closely.
You know right now as you stated and I said my compared remarks were conservatively sing about 75 million roughly about 2% of revenue and right now about 20 million a bit we'll see it most prevalent in the first half of the year we believe.
Obviously under the <unk> 36, 10, we can recover cost with no fee for our labor and also for our subcontractors. So we don't recover subcontractor feet.
So at this point in time again, it's our best estimate you know not just hopefully that answers that question for you.
Yeah, and it would it be more pronounced in the civil side or in the.
Defense side any flavor.
Yeah, <unk>, primarily in the intelligence business, which is part of our defense and intelligent segment. So it's pretty much you know focus there.
Talked about the 13 billion about standing bids I was wondering if you could give us some flavor on.
How.
<unk> pace.
Then in the second calendar quarter, we saw the army when a week ago that 270.
So look like new business and maybe.
Also just comment on like just the general pace of activity and how big deals is in that 13 billion does it seven 8 billion up to 13.
That's a good question. So it it yeah I will tell you that is in there, but I I mean, it's under protest I can't give me wanting a bit but it's in there it isn't it it is in there, but it you know in in over the last two months <unk> in the intelligence community, it's kind of slowed down. So we have some big deal then that.
Teen billions that we're we're very excited about no one's good work, that's kind of come to crawl back from now on the deal then Sunday inside you know, we we booked for over $400 million with a new business last week you saw the easiest thing and I just mentioned D.D. you know you age. So so and that's all fixed price work by the way so so again.
Caught up to the margin page Yeah. We just time, we go off on it. It's just a slight tangent here two three we add roughly 1.2 billion between Senate I was sent it labor and state those real costs plus now he took you know into this corner right, although the Q1 and they've already been a now so.
It's really all fixed price so I think that that that speaks wives to the the the pipeline and we've talked about Joe's question about sustaining 15% to 16% margin on the civilian signed the sense that it's moving I mean, we're saying, we're saying you know our fees drum arafat's drop we've probably got a a you know just in the last three.
Maybe another hmm billion ban a half a deals that are in swapping. So it's always slow caught almost to a qual everything associated with it but then the fence signs to me inside it's movement. I mean, you know they made the army worn and you know that was an old T.A. and you know and so we've seen some other awards that we'll talk about next.
<unk>, Yeah, it's kinda catches guys can't but outside of the until things are moving along I mean, there's all over the customers and so we were pretty bullish about about about that what's inside of that that 13 data.
Okay, well, that's really helpful. Yeah, and then.
I was wondering if you could speak a little bit about.
Engine Debrief that you guys did receive you know after the or anything.
Can you share any sort of.
Take a ways or lessons learned right I mean is there anything you can you can.
Relate to the Investor community, just kind of on what you know about how that one.
I know it still yeah.
Just to kind of <unk>. That's a good question. So you know there were to protest the I think the earlier, we protest someone like the March and there was a <unk> protest prior to that so there to protest on Indiana or I don't know anybody other protests do know about ours. We found the protests to G.A.L. and and you know again, we're not the changes company we feel.
That Oh, we always say that if you come out of it <unk> you don't quite get everything you're joking again, while then you've got the of course. The alternative course is to find a protest yeah. So so I really can't go into much detail about what we learn because it is still under protest. There's a decision do from from G.A.L. on the 17th.
June whether it's you know whether just stand or they've they've you know already they they they decide to provide some sort of corrective action request.
Oh recommendation to the Navy. So we're still in that period golf and I can't give me more detail than that just given a sensitivity of it but you know we'll we'll have an idea you know within an x. men in the next month them. How this will move forward.
Do you expect it to still require a nine month transition once it's you know.
Completely adjudicated and behind Us or do you still think I mean in other words.
I would just do the math.
March if it takes the jail.
<unk>.
As opposed to just December.
Extra quarter, so but.
Yeah, well, so what I'll tell you and and it's a good question what I'll tell you we are under contract through December of of 2020.
And I can't Oh Fine Camp project Prognosticate on once a customer will do a with regard to any time after that I mean, what they've asked for is a nine month transition. We don't know anything any different than that so you know and then that map doesn't work to your point or <unk> contractor December 2020, and.
So you know, we'll we'll see what happens I when I will day, and I think I talked about in the script, we're working as hard as we capture that custom and and to cope with 19. When you talk about more from 200000 for 300000 people that can use what was his Microsoft teams as a virtual a V.C.C. technology shows. So we're we're going as hard as the camping a customer we'll see what.
Happens with the with the protests you know we're we're under contract now to continue working and usual hardware piece of it as a subcontractor the H.P. and again.
Were were lined up through the end of the end of the counter and by the way that is in the Guy and say John that's a footnote in the Guy and so that's what we've got is going through the the the end of the the contract which is December 31st.
Thank you very much guys.
Pretty good <unk>.
Hi next question as a follow up from <unk> <unk>. Please go ahead.
Yeah. Thank you <unk> just want to revisit the the per cent <unk>, just just to understand how you're looking at it.
This is the idea that in a normal scenario over three year period.
Oh at 45% to 60% of business <unk>, it's 15% to 20% a year and you're only same 8% over three year period is that right I.
I would compare it this way when I would compare Joe is is under N.A. is just a straight line calculation. If you've got all your business starts on the same day and all five year contract you know or every so every every year, 20% of your <unk> Your business would recompete, what we're saying, it's not 20% for us it's really 8%.
Because we've gone through a lot of the Recompetes in the last two or three years. One most of them do an engine. That's on a protest one most of them. So it's just an anomaly that we have an AD. These three years and normally you would have you know 15% to 20% what we've got is 8% because we've gone through a lot of Rican beach in the last two to three years. That's it has no more than that.
Right, Okay, <unk> <unk> <unk>, yeah, exactly that's exactly right and aggregate 8% over the next three as per year right. So you know if you're 20% it is 8% compared to 15% to 20%.
That's that's all it it's it's just goes to show you that again with confidence in our <unk> <unk>, because we've got a very little recompete revenue in place. We can focus on new business period, I don't Wanna that'll make it more than any more complicated than that.
Yeah very clear.
And when can you can you talk a little bit about maybe the opportunities that you're seeing kind of <unk> within the customer.
Whether they're your customers are not within the government to be an enabler for a remote capabilities or other opportunities that until the 19 or didn't create I mean or their lessons learned in the background investigations business that more the more that can be done remotely just.
What's what's structurally opportunities it created for you all that resulted this if any thank you.
Yeah. So dry it's a very good question and I think you know we kind of recall. This this new world order kind of remote Revolution. If you will and you know so again if you've got.
14000 employees and you got 750, <unk> better either working shift work can't get into a building we've done a lot right and goes to show this credit college in business and the critical infrastructure and so we've told some stories I'm getting people to Telework you know right now what kind of looking at plans coming back, but I think we have learned a lot and I.
Think you know we started to think about the the fidelity of our network solutions to tell the work, particularly when you look at background investigations right I mean, all their old Telework sprite all of them work from home you know every day and we've got a very robust secure network to deal with with with that kind of work. That's a lesson learned that we think.
We can apply to do other kinds of work you know even to the point of looking at you know <unk> encrypted day in and those kinds of things. So yeah. We're leveraging experience there were leveraging what we've done with Russia, even working with the Navy looking at how we have basic increase the size of the pipes was very little increased cost you know one.
Of the things, we're seeing out of covert 19 is there some real estate than we may not need.
When you when you when you think about it. So so I think that's part of it I think it is that we're also looking at some of the the the lessons learned that technology in one customer will deliver student financial aid Montgomery, Alabama. So a lot of these <unk>, yeah, I think frankly as an editorial comment if it was difficult going out.
Because of code it I think for all of US in this market, it's gonna be even more difficult kind of it's going to be hard to go back I. Just got all this guy federal state local mayors and you know and then there's the customer dollar you need to have so it's a more complicated process for the maybe the rest and I think the eat less but we have learned and it's really.
Network solutions, I think Joe where you can do more robust higher speed work and I were classified environment to to to be able to do from from from home. So I think that's a lesson learned kinda mortar calm as we look at after action. So yeah and I think that then background investigation team is not phenomena that had lost out.
Why they're all working at work of a mom being very creative working with the customer that these yesterday on better ways to try to do this given the pandemic environment. So pretty excited about that postcode, where we're excited about you know what's in the workforce will look like and where they'll be.
Alright, Thanks Mac.
Hi next question will come from Gavin Parsons from Goldman Sachs. Please go ahead.
Hey, Thanks for most of the <unk> I just wanted to ask on the engine free cash contribution and just kind of maybe how the dynamic works I know less <unk> less quarter. You guys size that is around 70 to 80 million contribution, but Ah join you mentioned lower acid intensity. So it is the way that that works mechanically.
Lower merging the program, but your payment on these liability also goes down so the net impact to cash flow is negated how do we think about them.
Yeah. So let me let me just try to give you some color there. So again, what we saw on the Smith component as you can you correctly said it contributed roughly.
A million dollars to adjusted free cash flow similar this year, we've tried to provide the visibility it would be roughly about a 50 million dollar contribution. So it's about a 30 million dollar headwind. Okay. I remember the Smith isn't as an intensive right. So those are the numbers you can work with guns.
Great and then is there any opportunity for you too can I have one time benefit on knows sale of assets or anything like that.
No or you know right now are we doing real good job, obviously generating cash we're going to continue to lean forward, but there was not per se any any aspect sales are included in that we're going to continue to dry part in generate the kind of casual you've seen before.
Got it and then just won lots going on background investigations are you mentioned moderating volume and fiscal 21, and I was it looks like you're you're going through that but can you give us some idea of qualification of that and when you think that stabilizes. Thanks.
Yeah, I think you know we've talked about this before cabin I mean, we yeah. We back end of 19 Q1 Q2 to three at 20, we were just kind of finishing the digestion and remember 760000 case backlog rights. We were one of the leaders have any work that off.
Two 419 Q. Once you do you think we already normal pace now it kind of a cue for how to got down to a regular inventory is is the word we use a lot of 260000 cases. So we're on a normal run rate and you know we went through that and Jones talked about that all that isn't our guidance in so it would kind of move forward that's all kinds.
Back then so we feel very good about where we are we're moving to D.C.S.A.T. and you know, we're just kind of risk because because it's part it's another one for contractors running the business.
Thanks, again Mmm Thanksgiving.
It's going Clinton question and answer session I would not like during the conference back over to the management team for any closing remarks.
Oh, Thank you everyone for joining us today and appreciate your ongoing support in perspective look forward to speaking with you again soon.
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