NGEN aside, Perspecta reports strong results

Investors often will look at the market or a specific company through the lens of bull case versus bear case, or in other words the best possible scenario versus the worst.

Both are happening at the same time for Perspecta, which earlier this month lost the recompete of its largest program in the $7.7 billion Navy NGEN network services contract to Leidos. That work represents 18-19 percent of revenue for Perspecta’s current fiscal year.

During Perspecta’s fiscal third quarter earnings call Wednesday, CEO Mac Curtis told investors the debrief from the Navy to explain the source selection decision is scheduled for Feb. 24.

Chantilly, Virginia-based Perspecta will have five days after that debrief to decide on a potential protest. Either way, Curtis acknowledged the loss is “a setback to our plans, no question,” but added that the company “will weather the storm” and consider its options.

“You go into a debrief to learn exactly what happened, why it happened and where you are right, where you are wrong, and then you hopefully come out knowing more than you went in with and then you make a decision accordingly,” Curtis said.

NGEN was broken up into two contracts for this recompete with the one Perspecta sought to defend its role on dubbed SMIT for Service, Management, Integration and Transport. This portion has a $7.7 billion ceiling over eight years and was also pursued by General Dynamics IT.

A second NGEN award for end-user hardware was awarded in April of last year to HP Inc.’s federal subsidiary. It has a $1.4 billion ceiling over up to nine years. The current contract schedule takes Perspecta potentially through December of this year through a six-month extension through September and then a three one-month options after that.

Perspecta expects a $250 million revenue headwind from losing the NGEN SMIT work in its fiscal year 2021 that starts in April, along with a 1-percent hit to its adjusted EBITDA margin (earnings before interest, taxes, depreciation and amortization). That would be followed by no sales or profit contribution in the company’s fiscal 2022 -- assuming the contract ends in December.

Back to the bull case-bear case metaphor. While awaiting the NGEN decision, Perspecta has at the has successfully played offense on several large opportunities.

The company booked $1.6 billion in third quarter awards and its trailing 12-month book-to-bill ratio stands at 1.4 times to indicate the backlog is growing faster than revenue is being realized from it. Curtis said that ratio stands at around 1.6 times when excluding NGEN.

Key to that has been the reboot of Perspecta’s civilian and health business that has since notched three large wins with new customers, most notably the State Department’s $810 million consular IT services contract. Perspecta also secured a $277 million Labor Department IT operations contract and before that a $166 million Senate IT support win.

The company is also awaiting the outcome of the second try at an award of the Defense Department’s $7.6 billion DEOS contract for cloud-based email and collaboration tools. A win of the Defense Enterprise Office Solutions contract would also more than help to cushion the blow of losing NGEN.

Perspecta also sees a bull case in its “Trusted Workforce 2.0” portfolio to support background investigations as part of the security clearance process. The Defense Counter Intelligence and Security Agency took responsibility for that process on Oct. 1 from the Office of Personnel Management.

Curtis said the company’s work there is “kind of back to steady state” now that the backlog of those awaiting clearances at nearly 200,000 versus the 720,000 figure widely reported two years ago.

But Perspecta wants to be right there with DCSA as it pushes for more technology as part of a larger continuous evaluation effort that includes insider threat monitoring.

“They're building new systems to deal with artificial intelligence and machine learning, we are building that system and we're looking at how this industry's going to morph itself into more electronic-based, as well as leveraging the workforce in the field to deal with issues associated with continuous evaluation, continuous vetting,” Curtis said. “It's not the way was 50 years ago and I think we're riding along with that.”

Perspecta nudged up the low end of its fiscal 2020 revenue guidance range to $4.45 billion from $4.425 billion, while the top end was left at $4.5 billion. The company still sees itself hitting a 17-18 percent adjusted EBITDA margin.