Perspecta Inc. (PRSP) Q4 2019 Earnings Call Transcript

Perspecta Inc. (NYSE: PRSP)Q4 2019 Earnings CallJun 6, 2019, 5:00 p.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Perspecta Incorporated Fourth Quarter Fiscal Year 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Stuart Davis, Vice President, Investor Relations and Strategy. Please go ahead.

Stuart Davis -- Perspecta Inc.

Thank you. Welcome everyone to today's quarterly and full fiscal year earnings conference call. Presenting on the call today or Mac Curtis, our CEO and John Kavanaugh, our CFO. Today's call is being webcast on the Investor Relations portion of our website, where you'll also find the earnings release and financial presentation slides that we'll use for today's call.

Turning to Slide 2 of the presentation. Please note that during this call we'll make forward-looking statements that are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from anticipated results. For a full discussion of these risks and uncertainties, please refer to our SEC filings, including our latest Form 10K.

In addition, the statements represent our views as of today and subsequent events may cause our views to change. Though we may elect to update the forward-looking statements, we specifically disclaim any obligation to do so. Finally, as shown on Slide 3, we'll discuss some non-GAAP financial measures that we believe provide useful information for investors. The slide deck for today's call includes reconciliations to the most closely comparable GAAP measures.

At this time, it's my pleasure to turn the call over to Mac to begin on Slide 4.

Mac Curtis -- Perspecta Inc.

Thank you, Stuart. And thank you all for joining us on this afternoon's call. I'm pleased to report that was strong operational performance in the fourth quarter, we completed a very successful and (inaudible) year. I continue to be amazed at the efforts of the entire Perspecta team. We join together to become one Perspecta and have delivered both outstanding financial results, the customer mission success. We have accomplished a lot in our first year. We still have work to do, but as I look at our report card for the year and where we expect to land next year, we're ahead of the aggressive plan that we laid out to the investment community at our Investor Day a year ago.

I'll provide an overview of our financial performance in the quarter and then turn to a discussion of the government marketplace, business development, our strengthening cyber presence and a key addition to our leadership team. First, we once again exceeded consensus estimates on all of our key financial metrics. Our results from the fourth quarter demonstrated the fundamental tenets supporting the creation of Perspecta or sound and our business model is on track.

Revenue was up 3% year-over-year on a pro forma basis and up 2% sequentially. As a result of revenue growth and margin expansion, adjusted EBITDA was up 10% year-over-year and adjusted diluted EPS was up 15% year-over-year. Our strong performance in the quarter also enabled us to exceed the top end of our fiscal year guidance for all measures, a truly outstanding result given the demands of a complex integration effort. And FY20 we will keep the momentum going. The guidance ranges that we're introducing today toward accelerating revenue growth and robust margins. Our guides is above current consensus and in line with a long term targets that we laid out at our May 2018 Investor Day.

Second, our financial performance is benefiting from a strong market backdrop. When the early stages of a long term uptick in government spending. Since our last call, there have been many positive signs on the budget front. The president submitted his budget request with significant increases in national security spending and an emphasis on priority areas like R&D and cyber that line up well for Perspecta. All the House Appropriations subcommittees have passed budgets, perhaps most importantly negotiations involving the house and senate majority and minority leaders to reach a two-year budget agreement have begun. That said much still needs to be done. In addition to averting the Budget Control Act caps, Congress will have to deal with the debt ceiling this summer. Like most observers, we expect to begin the year with a continuing resolution.

We also expect that Congress will ultimately agree on a deal with budget growth in the 2% to 4% range, which is consistent with our investor day outlook. There is bipartisan support for higher defense and intelligence spending in the world that isn't getting any safer, given the current threat environment funding for our programs will be secure. For example, when much of the government was shut down for more than a month this past winter only 28 or more than 14,000 employees were affected.

Third, we had another excellent business development quarter, bookings totaled 1.4 billion for a book-to-bill ratio of 1.2 times. 93% of the quarter's awards were new work for Perspecta. We see it a one-times book-to-bill ratio in every quarter of the fiscal 2019 and posted a book-to-bill ratio of 1.6 times for the year. We're well positioned for growth as we enter fiscal year 2020.

The largest award in the quarter is a five-year $905 million contract to support the Army Cyber Command. ARCYBER is a landmark win for us, creating excitement both internally and externally because it was bid as Perspecta and none of the legacy companies would have bid it before the merger. We'll provide comprehensive cyberspace operations support to ARCYBER headquarters and its partners, as we outstand of a new command as it moves from Fort Belvoir to Fort Gordon. This award is a major revenue synergy proof point, bringing together leading edge cyber R&D for Perspecta labs, capabilities and past performance from Vencore support for the U.S. Cyber Command and scale around enterprise IT and networked defense from USPS.

With good bookings, we were able to grow our total backlog. At the end of the fourth quarter, total backlog was $10.7 billion, which was up 2% compared to the third quarter of fiscal year 2019. Funded backlog at the end of the fourth quarter was $2.2 billion, which was unchanged sequentially. Our robust $68 billion pipeline of qualified opportunities includes $17 billion with the proposals already submitted and awaiting decision.

The submitted total includes our NGEN recompete, which is always a topic of key investor interest. There has been no real change since last call, but let me clue and reiterate, where we stand. Dates were submitted in January and we expect to see an award late in calendar year 2019. We're currently under contract in May of 2020. We absolutely expect to win this program.

But we believe the Navy and Marine Corps customers see Perspecta as the best value, low risk option to execute this critical mission. John and I've been deeply and personally involved in this pursuit and we're excited for the award decision. Our performance on the program has been solid, it will be part of the advantage that we have over our competitors. A move to best value allows our key differentiators to be scored and enables the Navy to get solution they want. The Navy is looking forward to modernizing the network, which fits directly with our focus on digital transformation and the innovations that are coming out of Perspecta labs and a world class technology partners like AT&T.

We've also notched some important wins so far in the first quarter. I'll describe one in particular because it is such a true power in the pyramid of war. We received $75 million other transaction agreement, or OTA to help modernize the IT systems that support the Defense Security Service, vetting processes, including adjudications, background checks and insider threat programs.

Leading a team of several non-traditional partners will enable the DoD to achieve bold transformational change by combining commercial-off-the-shelf solutions with our capabilities and expertise in emerging technology areas, such as data ingest, brokering and analytics enabled by artificial intelligence, machine learning and natural language processing and enterprise-level dev setups with continuous authority to operate processes in a secure government cloud environment.

Fourth, we continue to strengthen our leadership position on cyber security. Our deep expertise in researching, developing and implementing adaptive and innovative solutions for a constantly evolving cyber landscape is unparalleled. From resource perspective, we are a leading provider of a cyber research for DARPA. Perspecta labs is the key driver of technical differentiation for us and cyber is one of its core sweet spots. Our demonstrating leadership in cyber research was absolutely essential to recent competitive wins that are cyber in this quarter in the Air Force Enterprise Logging win in Q3.

Among the cyber commands, we now hold franchise positions a U.S. Cyber Command and Army Cyber Command. The operating organization cyber can range from defense of massive enterprise wide networks like an NGEN to integrate cyber and electronic warfare. We've recently bolstered our position in the field by winning prime positions on two large multiple award indefinite delivery, indefinite quantity cyber operations contracts.

The first is a fourth quarter award of the R4 contract for Army Program Executive Officer, PEO for intelligence, electronic warfare, sensors or IEW&S, which has a potential ceiling value of $982 million over 10 years.Using our deep signals intelligence, wireless and big data expertise, we will compete to develop and deploy a comprehensive suite of cyber electronic warfare capabilities in support of the Army's cyber-electromagnetic activities mission. This is brand new work for us and it is integral to the army's strategy. We won't be able to talk much about this contract, but we see good potential for growth in late FY20 and FY21. The second is potential seven-year $740 million contract with the Space and Naval Warfare Systems Command or SPAWAR in San Diego to establish and maintain cyberspace operations with a focus on interoperability at the tactical, operational and strategic levels. This first quarter award offers a great opportunity to expand our presence with the full power of the pyramid behind us.

And fifth, I'm pleased to welcome Rocky Thurston to the leadership team as head of our Civilian and state and Local business. Rocky comes to us after successfully running large P&L units in AT&T, Accenture and growing up at Lockheed Martin. Rocky is a hands on leader with a strong growth focus. He's financially astute, he is comfortable with fixed price execution. I am excited about the future of our civilian agency and state and local business.

In conclusion, we're excited for the future and grateful for the support of our people, customer, technology partners and shareholders. By working with integration so aggressively in our first year, we can now focus our efforts on one Perspecta to implement our strategy, which is all about growth. Growth by pursuing large new business opportunities by investing in our innovation engine and technical differentiators that partnering with leading technology companies to drive the transformation agenda for our customers and by acquiring companies and enhance customer access or specific capabilities all while keeping our commitment to serving our federal government customers, as we implement critical IT and mission solutions for our nation.

Before handing off to John, I want to call your attention to a filing that will cross the wire during this call. With one year anniversary of our initial listing on New York Stock Exchange, we're filing a shelf registration on form S3 to register 23 million shares owned by Veritas Capital. The S3 replaces the existing S1, we filed in November and eliminates the requirement to file any more Perspecta supplements to incorporate updated financial statements going forward. Veritas Capital isn't required to sell any of its shares and Perspecta isn't issuing any new shares related to the shelf registration.

With that, let me turn the call over to John.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Thanks Mac, and good afternoon everyone. I'm extremely pleased with our performance in the fourth quarter and the fiscal year. In our first year as a public company, we've had four quarters of solid execution. I'll walk through the results for the quarter, quickly review our report card for the full year, and then turn to our forward outlook for fiscal year 2020 and the longer term.

Turning to Slide 5. Revenue for the quarter was $1.09 billion, which was up 3% from the fourth quarter fiscal year 2018 on pro forma basis and up 2% in the third quarter fiscal year 2019. Q4 was our fourth straight quarter of year-over-year growth and our most rapid growth quarter yet. The growth driver in the quarter was our Defense and Intelligence segment, which increased 8% year over year with strong performance in our federal background investigation support business and solid, balanced performance across our remaining Defense and Intelligence customers. This growth came despite a $16 million Grover (ph) challenge in the Q1 contract divestiture.

Civilian and Healthcare segment revenue decreased 5% year-over-year, $6 million of the $19 million revenue decrease was from the final payments in the fourth quarter of fiscal year 2018 on the Kennedy Space Center engineering contract to remind us spread across multiple programs that are ramping down. The government shutdown, which included the first three weeks of the quarter had no material impact on our operational results.

Q4 adjusted EBITDA was $207 million, which was up 10% compared to a year ago pro forma adjusted EBITDA. As margin improved from 17.8% to 18.9%. The year-over-year increase in profit reflects three primary factors. Number one, strong program execution on fixed price programs. Number two, the merger costs synergies and operational efficiencies we committed to at our Investor Day. In fact we were able to achieve our three-year cost takeout targets in the first year. And number three, received a one-time $8 million gain from a subcontractor negotiation. Excluding the one-time gain, adjusted EBITDA margin was 18.2%, which was up 130 basis points sequentially and well above our previous long term target range. Contract mix which is a key driver of our industry leading adjusted EBITDA margin was basically in line with last quarter. As a percentage of total revenue, our contracts were 54% fixed price, 21% time and materials and 25% cost plus.

Moving down the income statement. Depreciation and amortization totaled $116 million in the quarter, which was higher than its normal level. Depreciation of $48 million was about $8 million above its run rate this year resulting from additional asset acquisitions in support of customer requirements. Acquisition related intangibles amortization, which is backed out of adjusted net income and adjusted diluted EPS was $68 million, which included about $30 million of amortization related to adjustments we made to the intangible assets identified in our purchase price allocation coupled with software acquired in support of the business. Expect both items to return to their normal levels in fiscal year 2020.

Net interest expense totaled $37 million in Q4, which includes the interest on our term loans and capital leases. We also incurred $28 million of transaction, integration and restructuring expense, which is excluded from all adjusted metrics. With an effective tax rate of 27%, Q4 adjusted net income was $89 million, which was up 14% year-over-year on a pro forma basis. As a result, adjusted diluted earnings per share were $0.54 against a diluted share count of $163.8 million. Adjusted diluted EPS for the quarter were up 15% year-over-year and also up 15% sequentially.

Turning to Slide 6, during the fourth quarter we generated $168 million of cash flow from operating activities and a $136 million of adjusted free cash flow, or 153% of adjusted net income. The difference between the cash metrics is the $62 million of capital expenditures, which includes capital lease payments and the $30 million of restructuring integration payments. The strong cash flow in the quarter was reflected in our days sales outstanding metric of 54 days, which is below our target DSL range of the mid-to-high 50s and a sequential improvement of five days.

During the quarter, we benefited from the reversal of Q3 collection delays stemming from the government shutdown as well as about $70 million from an accelerated customer payment and the subcontracting negotiation I mentioned earlier. We continued to execute our balanced capital deployment plan with a mix of debt paid down, share repurchases and dividends.

During the fourth quarter, we paid down $88 million of debt and returned $24 million to shareholders, $8 million in quarterly dividends and $16 million in share repurchases. We ended the quarter with $88 million of cash, $2.7 billion of debt, including $305 million of capital leases. With the $600 million of undrawn revolver capacity, our $688 million of total liquidity affords a substantial financial flexibility to manage the business and we are comfortably below our debt covenants.

Slide 7 summarizes our performance for the fiscal year. Pro forma revenue was $4.27 billion, which was up 2% pro forma revenue for fiscal year 2018 despite the $108 million headwind from the Kennedy Space Center contract and the $37 million headwind from the Q1 contract divestiture. Revenue for the year was $14 million above the upper end of guidance, given on our last call and $74 million above the midpoint of the original guidance given at Investor Day.

Pro forma adjusted EBITDA was $760 million, up 16% compared to pro forma adjusted EBITDA for fiscal year 2018. Pro forma adjusted EBITDA margin was 17.8% compared to our most recent guidance of 17.1% to 17.3%. Excluding the one-time Q1 divestiture and Q4 subcontractor negotiation gains, adjusted EBITDA margin was 17.1%.

Pro forma adjusted diluted EPS was $2, up 20% compared to pro forma adjusted diluted EPS for fiscal year 2018. EPS was $0.05 above the upper end of guidance given on the last call and $0.12 above the midpoint of the Investor Day guidance. For fiscal year 2019, we generated $420 million of pro forma adjusted free cash flow or 128% of pro forma adjusted net income of $329 million.

Our elevated free cash conversion rate increased adjusted free cash flow by $91 million compared to our most recent guidance of 100% plus of adjusted net income and $124 million compared to the Investor Day guidance. Excluding the one-time $70 million of benefits in Q4 cash flow from the items I previously mentioned, adjusted free cash flow would have been 106% of adjusted net income for the year, still above our most recent guidance.

Looking ahead, our initial fiscal year 2020 guidance on Slide 8 reflects the strong foundation that we've built this year. We expect revenue for the year to be $4.35 billion to $4.45 billion, adjusted EBITDA margin of 17% to 18%, adjusted diluted earnings per share of $2.5 to $2.16 and adjusted free cash flow conversion of 95% plus of adjusted net income. This guidance puts us ahead of the plan that we laid out as we launched the company.

We'll start the year with strong year-over-year organic growth, although likely down slightly on a sequential basis, as a few civilian and healthcare segment programs ramp down. We return to sequential growth in the back half of the year as recent and expected new business wins ramp up. Adjusted EBITDA margin will likely be in the lower half of the guidance range for the year. Implicit in our guidance is the assumption of an effective tax rate of 26%, which will achieve through concerted efforts around R&D credits and state tax planning. Although not included in the adjusted metrics, we're expecting to spend roughly $60 million in integration and restructuring costs.

In fiscal Year 2020, we'll continue to allocate capital in a balanced manner. We'll still be paying down debt, but because our financial covenant net leverage ratio was down to about 3.3 times, we're more open to acquisitions and capital returns. With integration activities well under control, we'll consider strategic tuck-in acquisitions that strengthen our competitive position and financial outlook.

In May, we announced that we took the quarterly dividend up a $0.01 per share, which translates to an additional $6 million in annual dividend payments. And we'll be opportunistic with our share repurchase program against our remaining $340 million authorization.

Looking longer term, we're comfortable with the revenue and EPS growth targets that we've given to FY22. Specifically, we've targeted 3% to 5% revenue CAGR and an 8% to 12% adjusted diluted EPS CAGR. We're upwardly revising our adjusted free cash flow conversion to 95% plus. We expect to sustain margins over that period, which will now be in the 17% to 18% range for adjusted EBITDA. Although our forecast anticipates stable margins, I want to clearly understood that we won't sacrifice growth for margins, strategic alignment, sustainable EPS growth and shareholder value will be the primary filters as we evaluate new business opportunities or acquisitions.

Operator, we are now ready to take any questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Edward Caso with Wells Fargo. Please go ahead.

Edward Caso -- Wells Fargo -- Analyst

Hi, good evening. Congrats on the solid numbers here. I talked to the gentleman, who runs the clearance for the government and he said that he expects the use of vendors to do the clearances to go down. Now that they got over the original the initial hump of backlog. Are you starting to see a tail off in the key point business at this point and what's the outlook?

Mac Curtis -- Perspecta Inc.

Yes. No we haven't. This is Mac and thank you for joining the call. No we haven't seen that yet. I know we do as we talked about the backlog. I think we'll see when that starts to when that happens. I think one of the things we look at Ed is, we talk about the suitability business and I think we've talked about it over the calls is how we really look at this as from the kind of the trusted workforce perspective, the trusted workforce market.

I mean look, there's a lot of -- there's the lot moving parts here from OPM, to DSS, as DSS now goes from main Defense Security Service to Defense Counterintelligence Security Agency. There a lot of moving parts there from the suitability, the continuous evaluation, continuous management. We just it was published the whole OTA about building the system for DSS and we look at the trusted workforce not only in that vein, but also when you start to look at the counter -- counterintelligence the HSPD-12 next generation.

So, a lot of moving parts to say and take a little while to sort out. I think what happens, if you do talk to certainly OPM -- more people coming in the queue, we have noticed frankly that the crossover has gotten a little bit quicker. We still haven't seen a downtick, when you start to look at the different levels of clearance as when you start to look at TS/SCI and some of the more complex cases. But now we really haven't seen the so-called downturn with regard to the cases that we're getting. John, do you have any other comment?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yes, I would just add on. I think, we still believe there is even opportunity to get further market share. We're very, very pleased with the performance of that business. And as Mac said, as we continue to evolve into continuous evaluation and continuous monitoring, we're excited about that business.

Mac Curtis -- Perspecta Inc.

Yeah. I mean it's a rapidly changing market and we're right up front, so what will -- the time will tell.

Edward Caso -- Wells Fargo -- Analyst

My other question is around access to talent. You're obviously have to do a lot of sort of higher end IT work. Can you talk sort of access within the D.C., greater D.C. area and then maybe access outside the D.C. area. What are you seeing?

Mac Curtis -- Perspecta Inc.

Yes, I think, you know, as we've talked about like 74% percent of our workforce are not in the D.C. area. We are at San Diego, where in the Idaho and spaces you'd expect Montgomery, Alabama, Huntsville et cetera. So, we don't have that, that kind of bell weight pressure, which it is tough. So, 25%, 26% of our workforce is in the D.C. area and it's always been challenging Ed, because a lot of that workforce are the work in the intelligence community. So, we're dealing with the TS/SCI with CI full-scale poly, and that's very, very competitive, there's no question about that. It's not so much -- and again when we look at how we hire, it's not just the dollar compensation, it's the benefits piece, it's the -- it's all the 401(k), all these things are part of this competitive package. And frankly, with the generation we're hiring a social conscience and social programs are also important. I'll tell you that about north of 80% of our offers are accepted and about 45% of the new hire about -- I think it's about -- I think about 30% of the new hires this year have come from employee referrals.

In the legacy Vencore business witnessed about 42%. And so, when we talk about that, that makes us feel pretty good at because we're doing something right. When you think about north of 40% of your employees in this area, in the legacy Vencore business are referred to one friends and family to another. I do think Ed to kind of close out your -- the answer that the Amazon is going to put some stress on the system I don't think anything about it. I think just in general, in Northern Virginia, when you look at the technology play, it's a tough recruit, it's tough recruit, no question about it. A lot -- a little less pressure when you kind of get outside in the D.C. area. Does that answer your question?

Edward Caso -- Wells Fargo -- Analyst

Yes, great. Thank you. Keep the good news coming.

Mac Curtis -- Perspecta Inc.

Yeah, thank you.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Thank you, Ed.

Operator

The next question comes from Joseph Vafi with Loop Capital. Please go ahead.

Joseph Vafi -- Loop Capital -- Analyst

Hey, guys. Good afternoon. Good results. I was wondering if we could just focus on the book-to-bill on the quarter. Real nice to see a 1.2 on almost new business. It's a big number for just new business. I just want to drill down on the recompete characteristics of the quarter, was there -- was this just a really light renewal quarter? Was there a win rate issue, or something like that? And then I have a follow-up.

Mac Curtis -- Perspecta Inc.

Yeah. Now I'll start and John I'll turn it over. It was a 93% win rate as the new business, which is 7%. (ph) It was a low kind of award period, but we talked about, Joe, we've got the big NGEN recompete, right. And we've talked about NASA, NEST, where that is. In the queue, they're just not that many other recompetes. I mean we start to look at the recompetes going forward, what's in play right now. There's one classified recompete, that's about 3% of the NEST after that is pretty substantial follow up in the back end of '20 and '21. There's one in the healthcare space, but that's about it. I know it's just that cycle, Joe where we didn't see a lot of awards and we didn't lose anything, but we -- there also we didn't have any big recompetes that were awarded. Does that answer your question?

Joseph Vafi -- Loop Capital -- Analyst

Yes, sure. That's helpful.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Just to put a point on that. We have less than $100 million of recompeted adjudications in the quarter, so it was really a volume issue. And we're glad with the new business.

Joseph Vafi -- Loop Capital -- Analyst

Great. Okay. That's helpful. And then, John, I think you mentioned at the end of your remarks something about some further capital deployed to some from further restructuring. Is that, should we expect to see more cost synergies from that? Or what's going on with that?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yes. So, I try to give you some feel for what we would be doing. As we talked about our integration has gone very well this year, but there's still work to be done. Right, we have chosen our IT platforms specifically, we're migrating to one financial system FOR the next year. So again, as I had also mentioned in my prepared remarks, we did a very good job this year. As I had kind of commented on all along through the year in terms of driving both our cost synergies and operational efficiencies.

As a matter of fact again, we did accelerate what we had said over three years into this year. So, I do expect us relative to again the fixed price nature of our work to continue to drive operating leverage and drive efficiencies, we will continue to drive automation, we will continue to drive against supply chain efficiencies and we're continuing to work facilities rationalization. So, we'll continue to focus on that, again we're driving good profitability and good ROI on those investments, Joe.

Joseph Vafi -- Loop Capital -- Analyst

Great. And then maybe if I could just sneak one more in. We're sitting here already in June, few weeks away from the end of the quarter, anything that you want to add to your commentary about how the June quarter is going and P&L and bookings? Thanks a lot.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Sure. So, obviously we're pleased with the guidance we've just provided for our fiscal year '20. Again, we will be obviously reporting out in the August time frame. So, there's really nothing to add right now. Again, I think we've set a very good foundation in FY '19, you're seeing the power of the pyramid right. Obviously, we're very pleased with the $6.8 billion of overall bookings, 1.6 book-to-bill. We've got a very robust pipeline, right $68 billion, $17 billion under adjudication. So, we're excited about obviously FY20.

Mac Curtis -- Perspecta Inc.

I think I will comment, and it's out there, and I think we're at the $75 million OTA, Joe, is again we talked about our cyber being kind of the first push back to kind of unified bid. This OTA, I can't to say enough about how important that is to the company from leveraging, the research we've done, a lot of research and artificial intelligence, machine learning, all these things that we're talking about, about building the next-generation system for the new agency, which will be Defense Counterintelligence and Security Agency. That goes for DSS, goes for me -- kind of medium sized agency to having all the counterintelligence responsibilities for clearances and other things in the government.

So, that really feels good. We're looking forward to 18 months, $75 million, a lot of technology play and this is the second OTA, we want from that organization. So, it gets to where we're headed. It's not just suitability and background investigators, it gets to the next-generation trusted workforce, which involves background investigation, which involve continuous evaluation, continuous monitoring, but also the next-generation FPIF card, HSPD-12. We see this as the grander scheme. So, right a lot of focus on the background investigation, it should be, but that's just a platform to baseline for us to get started. So, again that's come -- the other two come out of that one in the first quarter.

Joseph Vafi -- Loop Capital -- Analyst

Sure great. Thanks for that color Mac.

Mac Curtis -- Perspecta Inc.

Right.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Thanks, Joe.

Operator

The next question comes from Gavin Parsons with Goldman Sachs. Please go ahead.

Gavin Parsons -- Goldman Sachs -- Analyst

Hi, good afternoon everyone.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

HI, Gavin.

Mac Curtis -- Perspecta Inc.

Good afternoon.

Gavin Parsons -- Goldman Sachs -- Analyst

John, you gave pretty helpful color on the 4Q '19 margin strength. And then I thought I heard you say for the 17% to 18% going forward in fiscal '20, maybe expected to be at the low end of that range. So, maybe if you can help us bridge from the 17.1 adjusted in fiscal '19 into fiscal '20. And then what might get you to kind of the high end of that 17% to 18% over the next few years.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Sure, yes. So, as I said we are guiding 17% to 8%, as you pointed out. Again we ended up FY '19 in 17.8%, but when you adjust for again the gain we had in the first quarter and then the $8 million against subcontractor we're about 17.1%. So, what you're really seeing again is solid execution and strong performance in both the reporting segments. We were able accelerate again some of the cost takeout and synergies. So, we've got a pop in the quarter and for the full year and that'll give us a running start as we go into next year.

And then it's really about obviously with our fixed price contract mix of 54%. And when I look at the pipeline right, that pipeline has north of 60% fixed price. We're going to continue to drive operational efficiencies as we manage the business. We're very disciplined. We're pretty maniacal (ph) about the cost tax. So, again as I said in my prepared remarks, we feel good about the guidance, we are looking at lower end of that adjusted EBITDA right now.

Gavin Parsons -- Goldman Sachs -- Analyst

Okay, thanks. And then on background investigations, could you help us size how much a percentage of business that was in fiscal '19? And what that looks like in fiscal '20 roughly?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yeah. We certainly don't provide any specific contract or business obviously data. We report at a segment level. What I would say echoing what Mac talked about, obviously, we've been a solid performer in the business a good contributor. We're excited about the future and I'll leave it at that.

Gavin Parsons -- Goldman Sachs -- Analyst

Okay, thanks.

Operator

The next question comes from Gautam Khanna with Cowen and Company. Please go ahead.

Gautam Khanna -- Cowen and Company. -- Analyst

Thanks. Good afternoon, guys.

Mac Curtis -- Perspecta Inc.

Good afternoon.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Good afternoon.

Gautam Khanna -- Cowen and Company. -- Analyst

So, a couple of questions. First I was wondering if you could just again enunciate, articulate, quantify the known headwinds in fiscal '20 to revenue relative to fiscal '19. The NEST, as well as that one contract, et cetera, what have you got?

Mac Curtis -- Perspecta Inc.

Yeah, I think that is -- and Gautam this is Mac. You know, NEST is on a annual basis is about $100 million. You've got the residual from the contract debentures, about $10 million. And I think that's kind of the large numbers, John mentioned a little bit about some of the contract ramp down. I'm not sure exactly what that number is it. It's additive to that, but it's not -- it's not a huge number. So, that's kind of that headwind that we're thinking about in the revenue category. Does that answer your question?

Gautam Khanna -- Cowen and Company. -- Analyst

It does. I guess what's the phase down of NEST? I mean I imagine it takes a while to --

Mac Curtis -- Perspecta Inc.

Well, let me tell you we are at. Let me -- so where we are on that and it's under -- it's like been there is a protest about the million (ph). We talked about it on this call, let me I kind of give you a little background. That was a contract, that was awarded several years ago to HPE and it was -- it's really kind of the desktop managed services, so it supports the headquarters at NASA and the centers. So, yeah people on sighted Marshall and Kennedy and Johnson, where they're working on peripherals at the printer side of the work and the printers and mouse and all kinds of success, kind of managed services business about $100 million, $110 million a year.

It was very low margin business for us. I think the challenge that we had at Perspecta is about 7 year -- 10 year contract, 7 years in and the HPE customer assured the government and that somebody's bad taste in your mouth. We kind of -- so that's kind of in the bag. I'm not sure if you have a color on it or not.

So, it was protested. We protested it. And just to give you up current speed back from GAO, the protest was dismissed and I can't go into much more detail in that. The next step is as you know, we go to the Court of Federal, the CFC, the Court of Federal Claims. We've got options. Well, look, I can't go any more than that, but that's kind of where we are in this process. So, we'll do what we think is best for the company, the customer coming up short, I can't go into more detail because where it is in the protest. Is that helpful?

Gautam Khanna -- Cowen and Company. -- Analyst

Got it. That is helpful. And then in the outstanding bits number that you gave $17 billion. Is GSMO 2 in that number because I saw that was protested by you guys of the late. And I'm just curious if that's you know that $6.5 billion, we should take out of that number? Or, how should we view the $17 billion?

Mac Curtis -- Perspecta Inc.

Yeah, what I would tell you, given at MCO, given where we are the GSMO is in the number, the late breaking news it was protested. And so it was written that we were out of the competitive range, we protested it. Because we thought there were some things that maybe the government didn't see. As of last night, we are -- just have sent the GAO formal notice taking corrective action. So, we're hit back in the competitive range, we're in play. We have filed. And so the short answer to your question is that numbers in there.

Gautam Khanna -- Cowen and Company. -- Analyst

It's in there and it should be because you're back in the competitive range.

Mac Curtis -- Perspecta Inc.

That's correct. Exactly. That's correct.

Gautam Khanna -- Cowen and Company. -- Analyst

That's helpful. And then just, I know NGEN, bids were in, we're all waiting on, it, NGEN-R. But is there -- what is your expectation for the margin transition from the current contract to the new contract. Recognizing you're not willing to sacrifice growth for margin just. Is there something we should worry about -- just kind of the year one of the new terms being substantially less profitable than a year, whatever '18 or whatever year five of the old?

Mac Curtis -- Perspecta Inc.

Yes, just to give -- just-a little backdrop as you know the NGEN contract the percentage of revenue it is. What we said all along and I can't give too much data because we're in a competitive state here is that -- it's not in the highest, it's not the lowest. And so, when you look at how to operate this contract is a lot of fixed price business in it. Yes it's competitive. We're not -- I'm not going to go into a lot of detail. But again, it's not given the size of the revenue, you have to careful here, Gautam.

In the size of the revenue again the margin is somewhere in between. So, I can't really talk too much about because the bids have been submitted. There hasn't been any questions, clarifications yet. So, I'm a little -- I'm a little hesitant to get in a lot of detail about it. But you got to kind of lead from, where we've talked about, where the margin is currently. We can't kind of talked about that a little bit. I'm just hesitant, really. I'm trying to dancing around it. I don't want to go in too much detail because I don't think, well, we'll see when he get some more. I'm a little hesitant to talk too much about it. I'm sorry about that.

Gautam Khanna -- Cowen and Company. -- Analyst

I understand. I think reading between the lines it appears it's probably at the corporate average, not above it. But I guess I'm just curious about when you bid on these new things, in the past when NMCI moved to next-gen, was there a flip if you? Was there -- I mean there I guess because it went to LPTA. But is there any --

Mac Curtis -- Perspecta Inc.

Correct. (Multiple Speakers) So, that was a new call.

Gautam Khanna -- Cowen and Company. -- Analyst

Yeah.

Mac Curtis -- Perspecta Inc.

That was 12 years operating the contract as a co-contractor or contractor operator from 2000, 2000 to 2012. 2013 was LPTA. We know that and I think the Navy early on, very early on decided. The Navy decided that, that LPTA would not work. It did not allow them the flexibility to do the network modernization that they needed to do. Hence, the Navy decided that this would be best value and put that out on both EUH and the SMIT. And this is the one -- the SMITs that we're talking.

So, having said that there is a complex bit. There are a lot of plans, fixed price some TNM et cetera et cetera. So, it's the operational side, it's the ability to inject the technology as you go forward for modernization. So, it's a very complex bid with a lot of contract on as clearance as you go forward. So yes, it's hard and again I've got to be careful, where we aren't competitive in this competitive nature where the contract is to provide anymore details about the margin.

Gautam Khanna -- Cowen and Company. -- Analyst

Understood. Last one for me and I apologize for asking all these questions, but--

Mac Curtis -- Perspecta Inc.

No, it's fine, it's great.

Gautam Khanna -- Cowen and Company. -- Analyst

In the opening remarks, I think there was a comment about opening up the cash redeployment aperture to look at acquisitions. But I just wondered given where the stock trades on an EBITDA multiple and kind of what the other companies out there trade at? How do you balance kind of valuation with opportune? I mean are you seeing anything a promise that would be economically accretive given, where a Perspecta stock trades today.

Mac Curtis -- Perspecta Inc.

Yeah, well, look, we have to be opportunistic and Gautam, you hit the nail on the head. And as we talked about, John has talked about, and I have talked about it, we're looking at opportunities that helping hands, the capability set. We're not into buying just yet. That's not our mission, it's not what we do. So, we're actively looking the way we see the book since we see a lot of deals and we're looking that those things can help drive the business and the valuation survey or something that have to play into it,. because that's part the (inaudible) responsibility.

But we are to looking into things drive the capability set across either indifferent of customer set, from a lot research into the program executive offices or even deeper into some of the customer sets, where that governments customers mission is so critical to moving forward.

So, John, any?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yeah. And I would just say, we have always had M&A as a part of our capital allocation plan from day one Investor Day. Okay, so we've always talked about again being selective and strategic would be more tuck-in versus transformative, but it would be directed toward enhancing capabilities and more access to customers. So, overall we feel good about the balanced capital allocation plan, we put together.

Gautam Khanna -- Cowen and Company. -- Analyst

Thank you, guys.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Thank you.

Operator

The next question comes from Joe DeNardi with Stifel. Please go ahead.

Jon Ladewig -- Stifel Financial Corp -- Analyst

Hey, guys, this is Jon Ladewig, on for Joe. You guys have been giving some good color on the fiscal fourth quarter '19 margins and '20 guidance. How should we think of your guidance? Is that still in the 16% to 17% and what's kind of driving this your guidance?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yes. So, as we -- I said in my prepared remarks, OK, we're basically reaffirming our long term targets through FY'22. So, that has been Ben again 17%,18% CAGR that we're going to basically be able to sustain here. So, what's driving it OK it's really again number one, our continued good strong performance and execution, right. And then our contract mix right were 54% fixed price. We do have a lot of operating leverage and we drive those efficiencies.

When we look out over the horizon, over the next three years, when I look at the pipeline we're north of 60% fixed price. So, again we feel good based on visibility right now in the composition of portfolio of sustaining those markets.

I mean just to be clear what we're talking about is that, that same 3% to 5% revenue growth that we talked about Investor Day that same 8% to 12% EPS growth. And we've always talked about sustaining margins obviously we have taken that kind of a step function and we will continue to stay in the methods now higher level of 17% to 18%.

Jon Ladewig -- Stifel Financial Corp -- Analyst

All right. Thanks for that color. So, then kind of pivoting to your customer sets, when you're talking with your -- you have space, the defense group, and to a lesser extent the civilian what are they kind of telling you about their FY '20 plans? Are they comfortable? Are they optimistic? What kinds of the vibe that they're putting off and telling your employees?

Mac Curtis -- Perspecta Inc.

Well, we're clearly Joe, we are driving pretty hard. But I think to tell you, I think with the business wins we've had -- it's strictly defense and intel, there's a lot of opportunity, ARCYBER is an example the one in the fourth quarter that's going to be a big revenue driver. I think that they are confidently confident about their market, confident about the pipeline, the wins we've had. I think we feel good. But there always -- we always push them a little bit for sure.

I think on the surveillance side of the house that the pipeline is getting better. I think we know we're kind of moving that -- moving forward that forward, we got Rocky Thurston is a new business leader in there, he is experienced and really focused on the civilian market. Really focused on the civilian market because that's where we look at it, that's critical to us given this (inaudible) old agencies and that's a greenfield for us. The ability to look at doing some of IT cloud modernization, additional modernization in housing urban development and looking at things at HHS and certainly Department of Labor et cetera. So, we're really kind of focused on driving that business forward. And I think that they feel good about the market, they feel good about our perspectives when we can bring to the party. But yeah, we really we make the going forward, push it pretty good. I think they're confident and the business are confident and what they can deliver. That's answer to your question Joe.

Jon Ladewig -- Stifel Financial Corp -- Analyst

Yes, thanks guys.

Mac Curtis -- Perspecta Inc.

Very good.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Thanks Joe

Operator

(Operator Instructions) The next question comes from Matthew Sharpe with Morgan Stanley. Please go ahead.

Matthew Sharpe -- Morgan Stanley -- Analyst

Good afternoon gentlemen and thanks for taking my question. I'm just curious if you guys could give us a sense of maybe how the fiscal year builds in terms of revenue and earnings. What the cadence looks like through the quarters?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Well, first of all, we guide on an annual basis, OK. So again, as we've laid out, we're looking at revenue of $4,350 to $4,450 OK. So, we're bracketing 3% growth and really that's an effective growth rate fly by the FY'20 guidance of really 4% to 6%, right, adjusted diluted earnings per share. We're guiding 3% to 8%. Again, we're growing over the $32 million one-time items in FY'19. So, that's an effective growth rate employed in FY '20 guidance of about 9% to 15% based on the plan we laid out in Investor Day. So again, we guide annually and we feel good about what we've put out there right now.

Mac Curtis -- Perspecta Inc.

Yes, so Matt this is Mac Curtis, looking forward to meeting you face to face if we get chance. One of the things that we look at is, and I think we've kind of said is -- the contract like give you some color on this. The contract is Army Cyber, we call ARCYBER now that we're just getting started maybe 90 days into it. That's a big pot $900 million ceiling over five years. We've got to make that work and it takes six to 12 months to really kind of get that online.

Matthew when you think about the complexity of helping stand up a new command right is somewhat of a nation command at Fort Belvoir and moving that -- there's construction mill-con (ph) going on in Augusta Georgia, we're fully aboard it to build that. Absolutely nonetheless that's a military occupational specialty now, cyber -- cyber security. So, it just takes about 6 to 12 months to get those online. We had another good win in the fourth quarter with a classified customer, that's called Due (ph). I can't put both of them together. It's about $130 million over five years, which is high analytics work and again it just takes about 6 to 12 months to really get that run rate if you do the division of 5 into $900 million.

That's our expectation. It is a ceiling. I'll remind you, but you can count on probably pretty big 6 by the close of the 12 months to get really get these things running, just because of the complexity, just because these are kind of driven by past quarters and kind of get lame. So that's what we see if you do the math on our cyber, you'll kind of see this thing really kind of driving forward kind of the back end of the year. And I might give you new guidance on a quarter of what I'm saying is this is kind of the way these things kind of line up. Is that helpful?

Matthew Sharpe -- Morgan Stanley -- Analyst

Sure. Yes, absolutely. That helps, thanks sort of get a sense of what the cadence might be. Just as a follow-up question on the revenue guidance, I was wondering if there were any discrete factors or potential drivers that would push you to the upside or the downside, what variability is there in that growth rate?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yes, so as we've discussed when you kind of take a look at headwinds, we've talked about NASA and NEST. We've talked about again the civilian in healthcare some ramp downs really due to some prior legacy here's underinvestment. But big picture is more tailwinds and headwinds right. So, we're excited about the ramp up opportunities on our Cyber Air Force Logging various classified wins. Some work obviously in a civilian segment with on contract growth opportunities, again the pending awards that we have out there right now. So, big picture, more tailwinds and headwinds as we move through the year.

Matthew Sharpe -- Morgan Stanley -- Analyst

Got it. Thanks. I'll get back in the queue.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Okay, thank you.

Operator

The next question is a follow up from Gavin Parsons with Goldman Sachs. Please go ahead

Gavin Parsons -- Goldman Sachs -- Analyst

Hey, thanks for taking the follow up. And I think you kind of addressed this with your ARCYBER answered just a second ago. But you look at the strong 1.6 times book-to-bill, 2% to 4% revenue growth in fiscal '20, 3% to 5% revenue growth over multi-year period, implies some acceleration into fiscal '21 or '22 to hit that. So, how much kind of visibility do you have into that acceleration in the out years? And it sounds like ARCYBER is a little bit of that, but if you could just give a little more color that would be great.

Mac Curtis -- Perspecta Inc.

Yeah. So, I think you're right, and that's a pretty good example, Gavin when you think about ARCYBER kind of growth when you do the division. Now again, it is a task order and when you think about standing up command there are lot of unknowns. But I think that's a pretty good example, where -- the real question is where we are going to be 12 months from where we really get started really matter of 12 months from now.

Now that's a pretty good -- it's pretty good predictor of how these things work because Deuce (ph) contract is the same way. And in the third quarter a contract called Arcadia another classified contract that's a pretty good night -- so that again, say, 6 to 12 probably any closer to 12 before you're fully up and running. Particularly on complex contracts like that, where it's in disparate locations, you have the kind of clearances picture. I think that's the best way to think about it, when you look at new wins. Is that helpful?

Gavin Parsons -- Goldman Sachs -- Analyst

Yeah, absolutely. So, the 1.6 times book-to-bill that's got multi years of kind of growth behind it?

Mac Curtis -- Perspecta Inc.

Yes, it does. And again, if you think about the denominator, we haven't gone back and done and do it and what it is an average. But the ARCYBER contract is five years. The Deuce contract is five years. We have some better seven years. So, it really depends on the periodicity of that particular contract award, when you look at it. So, everyone is a little different. It used to be expanded with five. Now these contracts get a little bit lower and so I mean that's -- it's hard to predict exactly, what the denominator is, but you're thinking about it in the right way.

Gavin Parsons -- Goldman Sachs -- Analyst

Got it. Thanks. Appreciate it.

Mac Curtis -- Perspecta Inc.

Yeah.

Operator

The next question is a follow-up from Gautam Khanna with Cowen and Company. Please go ahead.

Gautam Khanna -- Cowen and Company. -- Analyst

Yes, I just wanted a quick point of clarification in the -- in one of the responses, I think you talked about how some of the background investigations are incrementally more complex. I was just curious does that actually have a negative margin consequence because (Multiple Speakers)--

Mac Curtis -- Perspecta Inc.

No, it does not. No, it does not. It does not. It does not. It's more complex. Think about it this way, Gautam. If you think about from a cold started (ph) secret clearance has gone a certain procedure you have to follow, then you have a top-secret clearance, which has a much more complex and longer -- the longer background of investigation in multiple places. And then you start to look at some of the polygraph things, but it's a case by case that you have been. So, one -- let me put this way. One price per case does not fit all, I guess, is probably the best way to put it. Is that helpful?

Gautam Khanna -- Cowen and Company. -- Analyst

Okay. Interesting. Yes, that is. And then as a follow up, the discussion about potential opportunity to pick up some share from some of the other clearance providers. Is there anything like what gives you that confidence? Or what should give investors that confidence, I guess that you could share with us why that would be?

Mac Curtis -- Perspecta Inc.

Well, I think simply put, I think it's right to care for. I think simply put it's process, it's completeness, it's quality I guess, is probably the best way to put it, right. I think it is -- I think that's probably the differentiator.

Gautam Khanna -- Cowen and Company. -- Analyst

Okay. And then just in the near-term big pipeline, just curious do you have any sort of larger contracts that you anticipate being adjudicated in the June quarter? And do you have like a whole lot of them in the September quarter? If you could just give us a flavor for how many -- $100 million plus annual revenue type jobs (Multiple Speakers) in the next couple of quarters?

Mac Curtis -- Perspecta Inc.

Yes, well I just to kind of give you a sense, right. We talked about -- 68 billion being in the pipeline, 70 billion adjudication and so about now 60% of that 17 is new. And I think -- you look at we will certainly -- if you think about NGEN is certainly in play. GSMO certainly in play, those had Bs behind them. DIA is certainly in play. You've got -- we have a Department of Labor that's being kind of adjudicated now and most of these are all 100 million, 200 million. Some deals in the FBI that are 100 million plus.

And so, what we really look at those larger deals, we've got a couple of other DIA deals that are $300 million plus. I mean it's -- there are a lot of deals in there, but it's a pretty robust pipeline. And Gautam, I would tell you as Perspecta they known these large deals that we if we want to go after, we can go after. We've got the resources. We've got the capabilities. We've got certainly of those -- all these deals when you the past performance in the C part that allow us to be competitive. So, it's a very robust pipeline. There is probably not too many big deals that are digital transformation as inside the Federal Government that we're not focused on and those are really big -- they're big deals. These are well over $100 million.

Gautam Khanna -- Cowen and Company. -- Analyst

And do you anticipate it, it will be in the normal skew toward the September quarter in terms of the provided these deals basis? How does that --

Mac Curtis -- Perspecta Inc.

Yes, I think you're looking at it, I mean I think it's having $17 billion in adjudication. When you think about the size of the pipeline that's pretty substantial. I mean normally you're sitting in about 10 to 11. I think as I kind of look across, it's kind of hard. We haven't kind of look across the pipeline, it looks pretty even right. It always looks pretty even until it does it. But it looks pretty even as we kind of look at the quarters, but again that's the one thing that a lot of things we can control as you well know. But that's the one we can't control, right. I mean we were awarded a contract, almost a $30 million of contract, it's submitted in the press already. And in March and it was protested. So, that we can end up having a resolution that in June, it could be September. It's hard to predict. I mean we just can't control that.

Gautam Khanna -- Cowen and Company. -- Analyst

Understood. I appreciate the color. Thank you, guys.

Mac Curtis -- Perspecta Inc.

Yeah, very good. Thank you.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Thank you, Gautam.

Stuart Davis -- Perspecta Inc.

And Gary, it looks like we're kind of at the top of the hour. So, I think we'll call it there. I want to thank you for your support on the call. And thank all those that called in and listened for their interest in Perspecta.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 60 minutes

Call participants:

Stuart Davis -- Perspecta Inc.

Mac Curtis -- Perspecta Inc.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Edward Caso -- Wells Fargo -- Analyst

Joseph Vafi -- Loop Capital -- Analyst

Gavin Parsons -- Goldman Sachs -- Analyst

Gautam Khanna -- Cowen and Company. -- Analyst

Jon Ladewig -- Stifel Financial Corp -- Analyst

Matthew Sharpe -- Morgan Stanley -- Analyst

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