Perspecta's 'new normal' taking shape amid COVID-19 as outlook remains bullish

Perspecta's own transition to the "new normal" is very much the same across the entire market and neither is their outlook for what many believe is a flattening budget landscape, while another major catalyst awaits when a judge rules on Perspecta's NGEN protest.

Good news for Perspecta and pretty much the entire government market -- contractor employees are evidently getting closer to a more normal pace and cadence of work than at the coronavirus pandemic’s early phases.

During Perspecta’s second quarter earnings call Tuesday, CEO Mac Curtis told investors that “over 70 percent of our sites are now approaching 50 percent occupancy.”

The share of sites operating at half-occupancy was 50 percent in the first quarter by comparison as Perspecta rolls out what Curtis called “T2N2,” short for Transition to The New Normal.

T2N2 also involves protocols such as mandatory mask wearing, temperature taking upon entry and ramped-up cleaning procedures. Shift work and alternate day scheduling continues as well to reduce the numbers of people in close proximity.

What could be characterized as a normal for now also means continued delays in program starts and procurement activity at intelligence agencies. Little-to-no change on that front as Curtis indicated to analysts.

But Perspecta like its peers has evidently worked through the hiccups, which means the company is not shifting away from its expectation of COVID-19’s financial impacts -- a $75 million hit to revenue and $20 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

Chantilly, Virginia-based Perspecta also lifted its full-year guidance to $4.41 billion-$4.56 billion in revenue with an adjusted EBITDA margin of 15.3-16 percent, numbers that include sales from its Navy NGEN network services contract.

Take out NGEN (more on that later) and those numbers become $3.66 billion-$3.81 billion in revenue and 15.8-16.5 percent adjusted EBITDA margin.

Second quarter revenue of $1.14 billion was 3 percent lower than the prior year period with an $18 million COVID-19 impact and an asset sale from a transitioned NASA IT contract.

From a future growth perspective, Perspecta is also touting a $13.9 billion backlog with $1.8 billion of it funded and a 1.6 book-to-bill ratio over the past 12 months excluding NGEN.

Perspecta sees that as a preview of life without NGEN, but one of growth in a likely flattening budget environment and one where the national defense strategy gets re-examined.

“When we look at what we do in digital transformation, cloud migration, application modernization cyber security, the tools we've talked about for 5G and analytics, we feel pretty good about where we are,” Curtis said.

Add Curtis to the group of those who see calendar year 2021 looking a lot like 2020 with a continuing resolution that seems apparently inevitable to continue.

Then there is the bad news Perspecta received in late October from the General Services Administration, which after a corrective action again chose General Dynamics IT for the $7.6 billion DEOS contract to roll out Microsoft Office 365 across the Defense Department.

But there will be no new protest from Perspecta this time around after two prior challenges. That means DEOS “is in the rear view mirror,” albeit an experience Curtis conceded was a “really frustrating acquisition process” to go through.

Perspecta is also waiting to see if its other major loss -- that being the NGEN contract to Leidos -- can at least be turned into a second chance at keeping the work held for two decades. A summary judgment from the Court of Federal Claims could happen in late November or early December, Curtis said.

In the meantime, the Navy is still ironing out the details of an extension for between six and nine more months.

We also have to mention this item heard on the call that is a rarity. A public company CEO -- in this case Curtis -- directly commented in his opening remarks on the stock price and how it may, or in his view may not, be a fair reading on how things are going.

Usually the stock price is what it is and they leave it at that, with the exception of discussions over repurchases to return cash to investors and avoid what is called “share creep.”

Not this time, given that Perspecta's stock is trading at a valuation roughly two times EBITDA lower than other publicly-held government services companies.

“We are disappointed that our share price does not appropriately reflect our performance and the strength of our outlook,” Curtis said.

“This management team is incredibly focused on driving shareholder value, and we continue to focus on ways to ensure that the stock price reflects the true value of our business and outlook. Our portfolio is resilient. Our team continues to execute to this pandemic and we’re executing what we can control.”

Which led one analyst to ask just what he meant by it and whether that had in mind a Bloomberg report posted Monday that says a strategic review is ongoing.

“I can't comment on market speculation… as a public company, we're always evaluating ways to drive shareholder value,” Curtis said. “Our principal focus is to run the business, deliver on the customer mission, take care of employees and in meantime driving shareholder value, so that's all I can comment on that.”