Perspecta Inc. (PRSP) Q2 2021 Earnings Call Transcript

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Perspecta Inc. (NYSE:PRSP)
Q2 2021 Earnings Call
Nov 10, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Perspecta Q2 Fiscal Year 2021 Earnings Call. [Operator Instructions]

I would like now turn the conference over to Michael Pici, Vice President, Investor Relations. Please go ahead.

Michael PiciVice President, Investor Relations

Thank you and welcome everyone to our second quarter fiscal year 2021 earnings conference call. Participating on the call today are Mac Curtis, our Chairman and CEO; and John Kavanaugh, our CFO. This call is being webcast on the Investor Relations portion of our website at perspecta.com, where we also have posted the earnings release and financial presentation slides with supplements to our comments today.

Turning to Slide 2 of the presentation. Before we begin, please note that during this call we will make several 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 risk factors and uncertainties, please refer to our SEC filings under our latest Form 10-K. In addition, these 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 will discuss some non-GAAP financial measures that we believe provide useful information for investors. The slide presentation 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, who will begin on Slide 4.

Mac CurtisChairman and Chief Executive Officer

Thank you, Mike. Thank you all for joining us this afternoon. I’m very pleased with Perspecta’s performance in the second quarter of fiscal year 2021, which exceeded expectations on all our key financial metrics. Today, I want to focus on four key messages. First, I’ll provide a brief update on our transition back to the new normal as a result of COVID-19. Second, we’ll review the continued strong execution as demonstrated by our Q2 results. Third, we will provide an update on the terrific progress our business development team continues to make. And fourth, I’ll provide commentary on some of the enduring macro trends in the market and how Perspecta is well positioned to leverage those trends.

Now turning to Slide 4. Let me begin once again by expressing our heartfelt sympathy for everyone who has been affected by COVID-19. Our first priority continues to be the health and safety of our employees and extended workforce. The work we perform has been deemed critical infrastructure and essential to national security and we’ve effectively managed through the disruptions to our business. We have implemented extra precautions to ensure our offices remain open to support mission and business-critical operations. The impacts were felt mainly in our Defense and Intelligence business. Now, we continue to see program starts and deal flow delays primarily within the Intelligence business in addition to revenue and profit impacts. We continue to monitor the situation and the potential impact on our business and John will address these in his prepared remarks.

We’ve transitioned back to the new normal or what we call T2N2. Our dedicated team has developed a framework to transition safely and over 70% of our sites are now approaching 50% occupancy. We remain dedicated to ensuring the safety of our employees, while continuing to meet our commitments to support our customers mission. To that end, in early October, we opened our new offices in the Georgia, Cyber Center in Augusta, which is strategically located close to the US Army Cyber Command or our cyber customer, headquartered nearby Fort Gordon. With the Georgia Cyber Center offer is a perfect environment to attract highly skilled cyber professionals needed to solve mission critical, complex cyber challenges. We’re excited to make the move to Fort Gordon alongside our ARCYBER customer and we’re honored to support them as to defend our nation in this critical domain.

Moving to our second key message for today. We continue to consistently deliver on our growth margin earnings and cash commitments. Revenue year-over-year was up 4% excluding the $60 million one-time NASA asset sale in the prior year and the impact of COVID. Adjusted EBITDA was $179 million and adjusted diluted EPS was $0.53 which does include the impact of COVID in the quarter. Free cash flow conversion for the quarter is a 156%, adjusted net income again exceeding our full year target. With a focus on execution during these challenging times, we’ve delivered a solid first half of fiscal year ’21 and we are raising our full year guidance. John will provide more on this in a moment.

Third, bookings were strong with $1.8 billion representing a book-to-bill ratio in the second quarter of 1.6 times. Now I want to point out that we reported our third highest book-to-bill ratio, since becoming a public company and especially notable result given the challenges of the past several months. And I’m also pleased that 42% of our bookings this quarter represent new business for Perspecta. Excluding NGEN SMIT, our book-to-bill ratio was 1.9 times and our trailing 12-month book-to-bill is 1.6 times, with new business of 57%. At the end of the second quarter, our total backlog was $13.9 billion and our funded backlog was $1.8 billion. Excluding NGEN SMIT, our total backlog is up approximately $500 million and our funded backlog is up approximately $100 million versus the prior quarter.

Now on the award side, our combination of customer insight deliver excellence and contract vehicles allow us to maximize results during the government’s end of year buying season. We saw a significant sole source awards in our classified mission space, a number of midsize new awards, robust add-ons to existing contracts and a great quarter from our Perspecta Labs team, who continue to lead the way in solving some of our governments hardest problems. Specifically during the quarter we received multiple awards on Classified systems engineering integration and cloud migration programs supporting various US government customers. The total potential contract value of these awards is $519 million. These awards, once again demonstrate our close alignment to our customers’ critical mission needs. Perspecta Labs had a solid quarter, signing a number of new business awards focused on developing unique approaches to solve tomorrow’s problems.

A great example of this is the new work we were awarded by DARPA to develop technologies for improving security of 5G networks, which is a key enabler for our customer. We know that 5G is one of the highest priorities within DoD and will fundamentally transform telecommunication networks. However, the unexpected deployment of 5G networks poses a significant security risk due to the proliferation of foreign and un-trusted hardware devices. Perspecta Labs is helping to address 5G security issues to the creation of an architecture that decouples hardware and software ecosystems. Now this allows for secure operation over untrusted hardware and reduces the risk of supply chain tax and other vulnerabilities. Our work helping to secure these next-generation networks for our customers, to realize the full potential of 5G. This strategic work and other programs continue to persist Perspecta Labs as a leader in the development of innovative solutions for DoD, supporting commercial wireless technologies and 5G, which is a significant growth area, in this market.

In our Civilian and Health segment, we were awarded a cloud migration contract supporting the California State Teachers’ Retirement System. Under this program, we will be using agile teams to move critical applications to cloud platform. In addition, we will provide a cloud operations security overall program management services. The award, which represents new work for the company has a total potential contract value of $43 million. We recorded $119 million in additional new business awards across smaller programs during the quarter, and our team focus on the end of government fiscal year drove significant add-on business by leveraging our existing contracts and programs. We benefited from our close customer relationships and discriminated capabilities and received on contract growth and extension awards on multiple programs totaling $657 million during the quarter.

Now early in the third quarter, we were awarded the initial contract with the Space Development Agency to provide mission systems engineering and integration support. Perspecta will provide overall technical leadership for integrating tranche zero elements and existing on orbit testing experiments, culminating in a capstone event which demonstrates potential work capabilities for the warfighter. This sole source IDIQ has a ceiling value of $112 million and we’re extremely pleased to been selected for this critical mission. Looking ahead our three-year qualified pipeline remains robust at $82 billion, which is heavily weighted toward new business.

Now fourth, I want to address our strategic positioning and lay out how we think about the outlook for our business. You heard me say that a key focus area for us is staying close to the customers mission and ensuring our strategic priorities align with that commitment. This is true ever. The customer today is laser-focused on driving improvements in their technical infrastructure while looking for value. Those decisions are being driven by several critical factors including cloud migration, cyber security, artificial intelligence machine learning, DevSecOp solutions and the overall drive to modernizing our nation’s most critical IT infrastructure. COVID-19 has accelerated many of these trends as our customers are focused on safeguarding supply chains, mitigating risks and securing broadband solutions, as telework becomes a larger and in some cases permanent part of workplace conditions. These dynamics provide real opportunities for us to leverage our deep customer intimacy and relationships provide innovative solutions that drive mission value, improve the customer experience and fuel our future growth. Forecasted customer spend in these areas aligns tightly with our strategic priorities and investment strategy. Strong spending is expected in IT modernization as the move to the cloud and application modernization accelerates. Likewise, there is an expectation as the focused on cyber security and trusted environment will give continue given the increased threats around networks, infrastructure and supply chains.

And finally we expect there will be a heavy emphasis on artificial intelligence, machine learning and 5G as our nation strives to be a global leader in these key technologies. These areas which have increasing importance to our customers have near, mid and long-term staying power and Perspecta is well positioned to address their needs. Let me share a few examples with you to emphasize the point. Perspecta Labs are innovation engine and leader in applied cyber research at DARPA continues to develop innovative solutions such as bustor vendor, secure IO, as I mentioned earlier solutions to support secure 5G cyber initiatives. The bustor vendor protects complex war fighting systems and networks from cyber attacks. Our portfolio of offerings are further enhanced by the electronic warfare capabilities on our recent acquisition of DHPC Technologies allowing Perspecta pursue the emerging opportunity of cyber and electronic warfare convergence. To secure IO, our Commercial Solutions For Classified or CSFC offering helps government customers obtain NSA approval for safely using wireless networks to handle classified communication on commodity hardware and for protecting the data at rest.

If you recall last quarter, I provided a deeper dive on our ATS win for the US Army. That’s a prime example of a consolidation of 20 disparate systems into a single entry cloud-based solution, which should answer the end user experience and provides more actionable data for the customer. And this quarter we received the CalSTRS award, which is another cloud migration program. Additionally, we received the authority to operate the cloud solution portion of the Department of Education’s next-generation data center program. All of these demonstrate our commitment to cloud migration.

Lastly, through the first half of fiscal year 2021, we recorded multiple awards in our Intel business with a total contract value of $889 million. Focus on providing mission support through delivery of high-end systems engineering integration, data analytics, cyber security cloud IT services and software development. Our three-year pipeline, a key enabler to continue our future growth is full of opportunities and mapping us large in emerging trends and are aligned with key customer objectives. Approximately 54% is aligned to cloud enterprise managed services, 13% is pure cyber security programs, 21% for high-end systems engineering and integration and 12% for artificial intelligence machine learning including our market leading work in the trusted environment. As you can see the business is performing well and we are confident that we are properly positioned around the right capabilities, customers and spending priorities to continue to drive growth over the long-term.

Having said that, as you can imagine, we are disappointed that our share price does not appropriately reflect our performance and the strength of our outlook. And I can tell you that 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 through this pandemic and we’re executing what we can control.

With that, I’ll turn the call over to John.

John KavanaughSenior Vice President, Chief Financial Officer

Thanks, Mac, and good afternoon everyone. I’m very pleased with our second quarter performance as we continue our quarterly trend of solid execution.

Turning to Slide 5. Revenue for the quarter was $1.14 billion. The results this quarter include an $18 million COVID impact. Revenue growth excluding COVID and the one-time $60 million NASA asset sale recorded in the prior year was up 4% year-over-year and 3% sequentially. Consistent with our disclosures in the last two quarters, we are also providing our results, excluding the impact of NGEN SMIT. Revenue excluding NGEN SMIT was $925 million. Excluding the COVID impact and NASA asset sale, revenue was up 5% year-over-year and 3% sequentially. The Defense and Intelligence segment revenue increased 2% year-over-year, primarily driven by continued on contract growth and new program contributions, partially offset by COVID impacts and higher prior year surge volumes related to background investigations. Civilian and Health Care segment revenue decreased 12% year-over-year due to the one-time NASA asset sale, partially offset by continued ramp ups on key new programs. Including the asset sale revenue grew 3% versus prior year. As a result of the momentum from new business wins over the past several quarters, we anticipate continued segment growth during the second half of FY ’21.

Contract mix as a percentage of total revenue this quarter was 52% fixed price, 34% cost plus and 14% time and materials. Q2 adjusted EBITDA was $179 million and adjusted EBITDA margin was 15.7%. As previously discussed, the anticipated year-over-year decline in adjusted EBITDA margin is primarily due to lower asset intensity, an increased mix of cost plus programs and a $5 million COVID impact. Excluding NGEN SMIT, adjusted EBITDA was $149 million and adjusted EBITDA margin was 16.1%. COVID impacted margins 20 basis points in the quarter. Depreciation for the quarter declined $4 million from the prior year to $36 million, again reflecting the decreasing asset intensity of our business. Acquisition related intangibles amortization which is backed out of adjusted net income and adjusted diluted EPS was $60 million. Q2 adjusted net income was $86 million, resulting in adjusted diluted earnings per share of $0.53 against a diluted share count of 161.9 million. Adjusted diluted EPS includes a $0.02 impact from COVID. Excluding NGEN SMIT adjusted diluted earnings per share was $0.40.

Turning to Slide 6. I’m extremely pleased with our free cash flow generation this quarter. During the second quarter, we generated $164 million of cash flow from operating activities and $134 million of adjusted free cash flow or 156% of adjusted net income. The difference between the cash metrics is $50 million of capital expenditures, which includes finance lease payments and $20 million of separation, integration and restructuring payments. During the second quarter, we paid down $26 million of debt and returned $11 million to shareholders in the form of quarterly dividends. As previously communicated, given the COVID environment, we have temporarily halted our share repurchase program. We exited the quarter with $966 million of total liquidity, including $216 million of cash and 100% of our $750 million of available revolver capacity. We ended the quarter with $2.5 billion of debt, of which $2.3 billion is flexible pre-payable with no refinancing and limited repayment requirements over the next several years. Our earning net leverage ratio was 3.2 times for our credit agreement compared to our financial covenant maximum of 4.25 times. In summary, we maintain a solid balance sheet, substantial liquidity and strong financial flexibility.

Turning to Slide 7. We’re off to a strong start to FY ’21. As a result, we are raising our FY ’21 guidance metrics. We now expect revenue in the range of $4.41 to $4.56 billion,up from our original $4.26 million to $4.41 billion. This reflects an estimated $150 million of fourth quarter revenue associated with NGEN SMIT contract extension, which we are still in the process of finalizing with the Navy. Once definitized, we will update as required. Although the COVID-19 pandemic has not lessened and there is uncertainty regarding the duration of the continuing resolution, we are maintaining our revenue guidance range, excluding NGEN SMIT. Driven by strong performance in our business excluding NGEN SMIT, we are increasing the low end of our adjusted EBITDA margin guidance 30 basis points to 15.3% to 16%, up from 15% to 16%. We now expect adjusted diluted EPS guidance of $2.03 to $2.11, up from $1.90 to $2.03. Finally, we are raising our free cash flow conversion from a 100% plus to 115% plus due to the strong performance of the underlying business and our continued focus on driving free cash flow. Excluding the estimated impact of NGEN SMIT, we expect revenue for the year to be $3.66 billion to $3.81 billion. Adjusted EBITDA margin of 15.8% to 16.5%, adjusted diluted earnings per share of $1.65 to $1.73 and adjusted free cash flow conversion of 115% plus.

While the pandemic remains a fluid situation that we continually evaluate from a business perspective, we are maintaining our original assumption for COVID in our guidance of $75 million in revenue and $20 million in adjusted EBITDA. Lastly, we assume an effective tax rate of 25% as we continue to drive tax planning initiatives. Excluding NGEN SMIT, we continue to anticipate year-over-year revenue growth in the second half of FY ’21. While we expect Q3 seasonal headwinds, we anticipate second half revenue to accelerate as we exit the year benefiting from new business ramp ups and fewer headwinds moving forward.

In conclusion, we delivered a strong first half of FY ’21 and remain confident that our robust pipeline, new program wins and solid book-to-bill have us well positioned to achieve both our short and long-term targets.

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 Joseph DeNardi with Stifel. Please go ahead.

Joseph DeNardiStifel — Analyst

Thanks. Good evening everybody. Mac you guys are sitting on a 1.6 times book-to-bill ex-NGEN. The revenue guidance excluding NGEN implies, call it 4% organic growth in the back half of the year. I know you don’t like to talk about quarterly revenue, but I’m hoping you can address this, because I think it’s important for investors. Should we assume growth in the third quarter is more subdued and then you see stronger growth in the fourth quarter and that should be a good run rate into — in the next year, is that a fair way to think about it?

Mac CurtisChairman and Chief Executive Officer

I think that’s exactly right, Joe. That’s a fair way to think about it. So I’m not sure I can give you any other comment [Technical Issues]. John, any comment.

John KavanaughSenior Vice President, Chief Financial Officer

No. Joe you’re reading it right. Again, very, very pleased with the business development performance and the trailing 12-month book-to-bill. You’re going to see, as I said in my prepared remarks, obviously, as we’re exiting the year, we’re going to be on that course and speed so that spot on.

Joseph DeNardiStifel — Analyst

Okay, great. And then Mac, maybe you do want to talk about this, I was going to say, I imagine if you don’t, but given you’re the end of your prepared remarks. Maybe you do the Bloomberg headlines yesterday as a public company, I think the business is always technically for sale. But has anything changed of late in terms of you all starting a more formal process in that regard. Can you just provide us kind of your perspective on that? Thank you.

Mac CurtisChairman and Chief Executive Officer

Yes, Joe, I can’t comment on market speculation what we got from Bloomberg. As a public company, we’re always evaluating ways to drive shareholder value. Now 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.

Joseph DeNardiStifel — Analyst

Okay, thank you.

John KavanaughSenior Vice President, Chief Financial Officer

Thanks, Joe.

Operator

Our next question comes from Gautam Khanna with Cowen. Please go ahead.

Gautam KhannaCowen and Company — Analyst

Yes, thank you. I was wondering if you could comment on where we are on the NGEN-R protest — process, when we expect a definitive answer and when you expect that extension award?

Mac CurtisChairman and Chief Executive Officer

So Gautam, this is Mac. That’s a good question. So here’s where we are, just a little color, little background. We took our protest to the Court of Federal Claims because we didn’t feel we quite got the answer, we need to understand exactly what happened, why we lost. So if I do that process and so here’s where we are, the — and everybody’s filed all the papers that are still in a protective orders, so I can’t go into any detail, but the oral arguments are scheduled for November 13. And again, everything is under protective order and the expectation is that by the end of November, early December, you will have a summary judgment of what if any corrective action the Court of Federal Claims recommends. Okay, so that’s point one Gautam.

Second point is, as you know, we got the contract through the end of December and the Navy has come back to us and said, OK, here’s what we like for you sole source extension in a couple of parts. One it will go from the 1st of January through June and then they would provide them with three one month option. So it would be obviously July, August and September. So that’s about where we are. In the meantime Gautam, we’re supporting the customer every day and doing what we need to do. So, does that give you, what you’re looking for?

Gautam KhannaCowen and Company — Analyst

Absolutely. And just to be clear. Is the transition still going to be about nine months or do you think it will be expedited to like six months?

Mac CurtisChairman and Chief Executive Officer

Yeah. I can’t comment on that. I think that’s — I don’t know the answer to that, Gautam, candid with you. I think that’s kind of what the Navy is thinking about. I suspect that will become clear as we get into the New Year once this extension is codified inside, we’ll get a better idea. I suspect we’ll have a better idea next time we speak to you all in the quarterly call. But I have no idea.

Gautam KhannaCowen and Company — Analyst

Okay. Okay. Another question I had was if you could just, it looked like a big bookings quarter and I know the deals thing was reawarded to JD. So did you guys maybe disclose the outstanding bids as of now, or maybe adjusted for DEOS as of the end of the quarter, where that…

Mac CurtisChairman and Chief Executive Officer

Yes, let me address DEOS first, OK, because I think that’s a reasonable question and then I’m not going to go into too much detail on the pipeline. But let me just kind of tell you what’s — kind of what’s going on with that. So the DEOS as you know, was a bid we put in, I guess probably three or four months as Perspecta that was certainly, we came out as you know, 1st of June and I think we — that this was done before the end of the calendar year. So it’s been a long time in the making. And so we’re certainly disappointed with the original decision. It was a really frustrating acquisition process. I certainly won’t go into details, very frustrating. So we ended up having the protest because we didn’t understand again, that’s our right and due process.

And so this last protest has gone through what we thought would be corrective action. Gautam we came out with the corrective action. It’s been decided and so here’s where we are. We are not going to protest again, we’re moving forward. DEOS is in the rearview mirror. We had nothing in our guidance. Nothing in any of our P&L. It was a greenfield opportunity for us to go after as a new company. Frustrating as it may be, frustrating as it was, is basically done, and we are moving forward. So it’s in the rearview, we’ve got an $82 billion pipeline to prosecute. We are 2.5 years older than we were then. And so we’re excited about the prospects of driving the business forward. So that’s kind of where we are Gautam. So we’re excited about this big pipeline, excited about the fact that we’ve got very low in recompete over the next two, three years. So the big pipeline is all about new business. So that’s kind of where we are.

Gautam KhannaCowen and Company — Analyst

Thank you. One last one if I may. Could you guys remind us of the headwinds that we faced either sequentially or year-over-year from some of the items, you’ve called out. For example NASA, NEST, what the year-over-year impact is, as we enter the third quarter, what it was in the second quarter? You mentioned the $60 million one-time sale was there other sales there. And then maybe on background investigations and whatever else that are sort of the known headwinds how those change as we move into Q3 versus what they were at Q2?

John KavanaughSenior Vice President, Chief Financial Officer

Hey, Gautam, John here. I’m happy to address that. So as we have previously messaged, when I take a look at year-over-year, when you’re kind of looking at Q3 again, the prior year, we very successfully had been addressing the BI volume surge, we’ve talked about, we hit a steady state in Q4. So we got one more quarter to overcome on that. And then obviously with the COVID environment right and the fluidness there. So I would say those are the kind of remaining headwinds as you take a look at the next quarter.

When you think about it sequentially, we’ve got a couple additional holidays in our Q3. You typically see a little bit of an uptick with PTO usage around those holidays. But again, we’ve got a lot of really good tailwinds too, right, we talked about the trailing 12 month 1.6 times book-to-bill excluding NGEN SMIT or by the way, 57% is new. We continue to ramp up some of those very solid new business wins, specifically ATS and some of the classified wins. So again, big picture here, there is certainly more tailwinds and headwinds, but I wanted to give you a little bit of flavor of some of those headwinds as we’re going through this year.

Gautam KhannaCowen and Company — Analyst

Thank you very much guys.

John KavanaughSenior Vice President, Chief Financial Officer

Sure.

Operator

Our next question comes from Louie DiPalma with William Blair. Please go ahead.

Louie DiPalmaWilliam Blair — Analyst

Mac, John and Michael, good evening.

John KavanaughSenior Vice President, Chief Financial Officer

Good evening.

Mac CurtisChairman and Chief Executive Officer

Good evening Louie.

Louie DiPalmaWilliam Blair — Analyst

On space missile defense is considered one of the highest strategic priorities. Can you elaborate upon what services you’re providing for those Space Development Agency for that missile tracking layer program that you referenced in the prepared remarks. And it seems to be a pretty landmark program with SpaceX and L3 Harris and so related to this are there many similar types of these Space Engineering and Systems Integration contracts in your, the $82 billion pipeline that you also referenced?

Mac CurtisChairman and Chief Executive Officer

Yeah, that’s a good question. Let me first address the first part of your question. So yes, we’re excited with that and you know I’m not going to go all the glory details which you know, part of the pedigree award of what is now Perspecta is all aerospace and Valley Forge. And they were kind of the leader in through Lockheed Martin helped design the first National Space Systems. So it is on our DNA. It is in the legacy and we’re really excited about the Space Development Agency really embracing model based systems engineering, systems engineering agile DevOps and those kinds of things, and that’s really what this is. Some of it’s a little — get a little gray to black. So I can go a whole lot of detail Louie, but it is really about providing mission systems engineering and integration support as I talk about some of the on orbit testing and experiment. So I mean this is real systems engineering, real platforms with real stuff. So we targeted that because it is in the legacy. It is in the heritage of this company. And so we’re building this pipeline and frankly Louie, we talked about the whole notion of systems integration and engineering.

If you think about this big pipeline, what we’ve talked about it is about 20%. These opportunities are in that vein of it’s not C&I so much and it was really model based systems engineering, which is important, but we’re also seeing that across government, Louie, it’s not just in the intelligence community or in kind of the space. We’re seeing the advent of that across agencies like Homeland Security where they need — they’ve got very complex programs and multiple programs and this is a good way to help them get the data visualization they need to make the decision to see where they are. So they start to go to IOC, Initial Operating Capability. So it’s been a good business. We are seeing it leverage itself of course. We like being in the space business, we like being one of the first programs in SDA, and so there is a burgeoning pipeline as the organization gets stood up and so we’re excited about being there first and excited about continuing to grow there.

Louie DiPalmaWilliam Blair — Analyst

Thanks, Mac. That’s all I have. Very helpful.

Operator

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

Gavin ParsonsGoldman Sachs — Analyst

Good evening.

Mac CurtisChairman and Chief Executive Officer

Good evening.

John KavanaughSenior Vice President, Chief Financial Officer

Hi Gavin.

Gavin ParsonsGoldman Sachs — Analyst

Hey, guys. On the fiscal ’22 to ’24 can afford us 6% organic growth rate targets. Obviously a lot of moving pieces right now with the new administration and the COVID impact, driving up a fiscal deficit, but just curious if you had an underlying assumption for the budget or addressable market growth rate and if you have any initial thoughts on how that might be evolving?

Mac CurtisChairman and Chief Executive Officer

Yes, let me, let me talk about at least what we can see today which is November 10 with regards to what budgets may do. And you kind of gave the preamble Gavin, there are a lot of moving parts, but I think we spent a fair amount of time looking at what is situation scenarios because that’s John and I and Michael that’s our responsibility. So I think when, if you look at the new administration and other kind of handicap that at least a little bit. There’s a lot — we’ve had sure of a lot. But I think what we have seen in our research is it doesn’t from the DoD/Intel budget, we haven’t seen a lot of anything that’s going to be draconian.

I think even if it had been the existing administration, it would have been somewhat flat. And that’s a pretty big budget right, and you may see it that’s like the little I think Civilian budgets, we’re kind of seeing that kind of staying where they are. So it’s hard to tell. I think this Senate run-off is going to have a bit of an impact. I think the question about that. So we’re kind of looking at all of that, but here is the point. We’re not platform — we’re not a platform company. I do believe when you get out. I think there’s going to be kind of a national defense to kind of relook particularly with where Congressman Adam Smith at Washington. He has got some strong opinion about what it may or may not be.

Fundamentally we are kind of — we’ve talked about this before. If the budget goes from $700 billion to $740 billion, the 40 billion is where you’re going to Bob F-35s or a few more carriers left. We’re kind of below that, if you will, and so when we look at kind of where we are doing what we do and in the digital transformation cloud migration, application modernization cyber security, the tools we’ve talked about for 5G analytics, we feel pretty good about where we are. So we got the right capabilities, the right customer set and we’re close to that mission. We’ve talked about that being involved without whether it’s student financial aid or making sure the government doesn’t spend billions in — on unwarranted Medicare-Medicaid claims. So kind of close to the very close to the flag fall obviously in the intelligence in DoD as well.

So it’s hard to predict. I probably not answering your question, but it’s the way we view it. Our business is about 55-45. 55 defense until maybe a little bit more 40 to 45 in surveying. So we got a nice spread right customers right capability. So time will tell, I guess is really a simple answer with regards to look, I think it’s going to take the likelihood of the new administration getting FY ’21 budget out in February, March, not likely to happen right. We’ll be on a CR at least through the first calendar year, I think. But then you’ll start to see the flavor of what’s going to happen with their appropriation bills going into the government fiscal year ’21. So that’s now a rambling dissertation of a lot of point some non-specific, but that’s the best thing. John anything you want to add to that.

John KavanaughSenior Vice President, Chief Financial Officer

No, the only thing I would add is, as evidenced by our results excluding NGEN SMIT, we have a underlying strong healthy growing business that is supported by the trailing 12-month book-to-bill that we’ve talked about a number of times on this call, which is 1.6 times and 57%. So we feel very good about the momentum. We feel very good about we’re positioned in the marketplace. We’re excited about the future.

Gavin ParsonsGoldman Sachs — Analyst

That’s really helpful insight. So if I could tie that back to the 4% to 6% then safe to say you believe you could achieve that kind of almost no matter what the budget does?

Mac CurtisChairman and Chief Executive Officer

I think as far as we could see today Gavin, the optics based on what I said, what we believe and things change, we know that, but to answer your question, what we see today, what I stated what we believe, yes, the answer is yes.

Gavin ParsonsGoldman Sachs — Analyst

Great. And then John, just a question on the free cash flow conversion and just bridging kind of the strength of this year and last year to guidance. It just implies a big step down in the back half and then implies another step down to get to the longer term 100% conversion. So just hoping you could help us bridge that and comment on whether or not, that’s just more conservative than anything?

John KavanaughSenior Vice President, Chief Financial Officer

Yes, so sure. Happy to do so. As I again said in my prepared remarks, we are very pleased with the free cash flow generation. When you take a look at us, industry-leading relative to yield conversion, DSO just absolute solid working capital management every single quarter. All right. So again right now as a result of that, we did increase it to 115% plus. Okay. We feel good about what we’re doing, we’re maniacal about cash collections and we’re going to continue to drive this. So again, feel good about what we performed and feel good about how we’ve guided at this point in time and are going to continue to drive this hard.

Gavin ParsonsGoldman Sachs — Analyst

Can you grow your absolute free cash flow dollars this year versus last year?

John KavanaughSenior Vice President, Chief Financial Officer

We’ve given you the projection right now 115% plus of ANI, OK? So that suggest in the area of about $400-ish million plus or minus of adjusted free cash flow. So again, what you should take away is again what we’re cash machine. We’re very focused here. Doing a nice job with solid working capital management and we’re going to continue to drive this.

Gavin ParsonsGoldman Sachs — Analyst

Okay. Great, thanks for all that.

John KavanaughSenior Vice President, Chief Financial Officer

Sure.

Operator

[Operator Instructions] Our next question comes from Joseph DeNardi with Stifel. Please go ahead.

Joseph DeNardiStifel — Analyst

Thanks. So just two quick ones maybe for me. John, just on the indirect cost benefit from — as a result of COVID, just given the nature of your contract mix. You may be able to retain more of that than some of your peers. So do you see a benefit going forward from work from home and some of the other cost savings that you’re seeing from this, or is that more rounding error?

John KavanaughSenior Vice President, Chief Financial Officer

Yes, it’s really more of a rounding error. Obviously we’ve benefited a little bit from obviously lower amount of travel, entertainment, discretionary type of expenses, but at the end of the day when you take a look at our contract mix, we’ve done obviously very good job with returning people to work doing it very responsibly. We’ve done a very good job relative to continue to execute and perform on our programs as evidenced again by the margin improvement. We’ve done a very nice job on facilities rationalization, which we’ve talked about. We’ve effectively reduced our square footage by about 700,000 square feet in this fiscal year. It’s a result of us being able to obviously better work virtually. So that’s going to pay some good dividends for us moving forward. So it’s really in the rounding, but we’re very pleased with the progress we’ve made in the results that we are delivering right now Joe.

Joseph DeNardiStifel — Analyst

Okay. And then you have your capital leases running off pretty sharply over the next few years. Is that a function of the contracts that have not been retained over the past couple of years or will that naturally be kind of filled back in as you win additional work. I mean, do you expect finance lease payments to actually come down as they are disclosed or will that start to be backfilled as you win new business? Thank you.

John KavanaughSenior Vice President, Chief Financial Officer

Yes, good question. Right now, we do expect it to come down. We continue to successfully shift to the cloud in some of our again more legacy asset intensive jobs are starting to waterfall down. So we’ll probably be 3% to 3.5% of revenue — capex of revenue this year, and they’ll continue to come down over the next 12 to 24 months, Joe.

Joseph DeNardiStifel — Analyst

Great, thank you very much.

John KavanaughSenior Vice President, Chief Financial Officer

Sure.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Pici for any closing remarks.

Michael PiciVice President, Investor Relations

Thank you for joining us today and for your interest in Perspecta, and we look forward to speaking to you — with you again next quarter. Stay safe. Thank you.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Michael PiciVice President, Investor Relations

Mac CurtisChairman and Chief Executive Officer

John KavanaughSenior Vice President, Chief Financial Officer

Joseph DeNardiStifel — Analyst

Gautam KhannaCowen and Company — Analyst

Louie DiPalmaWilliam Blair — Analyst

Gavin ParsonsGoldman Sachs — Analyst

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