Leidos Holdings Inc (LDOS) 2019 Q2 法說會逐字稿

Greetings.

Welcome to the Leidos second quarter earnings conference call.

(Operator Instructions) Please note this conference is being recorded.

At this time, I will turn the conference over to Kelly Hernandez with Investor Relations.

Ms. Hernandez, you may begin.

Thank you, Rob, and good morning, everyone.

I'd like to welcome you to our second quarter 2019 earnings conference call.

Joining me today are Roger Krone, our Chairman and CEO; Jim Reagan, our Chief Financial Officer; and other members of the Leidos management team.

Today, we will discuss our results for the quarter ending June 28, 2019.

Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment and our company's strategy.

Jim will follow with a discussion of our financial performance and our guidance expectations.

After these remarks from Roger and Jim, we'll open the call for your questions.

Today's discussion contains forward-looking statements based on the environment as we currently see it and, as such, does include risks and uncertainties.

Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

Finally, during the call, we will discuss GAAP and non-GAAP financial measures.

A reconciliation between the 2 is included in the press release that we issued this morning and is also available in the presentation slides.

The press release and presentation as well as the supplementary financial information file are provided on the Investor Relations section of our website at ir.leidos.com.

With that, I'll turn the call over to Roger Krone.

Thank you, Kelly, and thank you all for joining us this morning for our second quarter 2019 earnings conference call.

Our growth momentum continues to accelerate through the second quarter with nearly 9% organic revenue growth, a record backlog position and strong win rates.

Our success in executing against our pipeline and driving growth across all segments of our business enables us to raise our full year guidance for both revenue and earnings.

In addition, our recently announced dividend increase demonstrates the confidence of the Board of Directors and the management team in the strength of the company's cash flow generation and ability to sustainably generate value for our shareholders.

Importantly, we achieved key wins during the quarter that increased our backlog to $21.7 billion, reaching a record level that also serves as a leading indicator of our future growth potential.

These successes resulted from our strategic focus on delivering innovative solutions to our customers and leveraging the scale of our organization.

A couple of highlights from the quarter's awards.

We successfully defended a protest on our takeaway win with NASA's End-user Services & Technologies program or NEST.

Under this contract, Leidos will provide, manage, secure and maintain essential IT services that support the agency's core business, scientific, research and computational abilities.

The single-award contract has a total potential value of over $2.9 billion over the 10-year period of performance.

We also successfully defended a protest on another takeaway win with the Air Force Air Combat Command to support the war fighter's intelligence, surveillance and reconnaissance mission through intelligence gathering, analysis, distribution and training across the ACC enterprise.

This single-award task order has a total ceiling value of approximately $900 million if all options are exercised.

Business development remains a key priority of the company's strategy, and we have transformed it into a cross-functional and collaborative effort.

I am proud to see us hitting our stride and winning the important work with key customers.

During the quarter, we continued to focus on leveraging the strong revenue growth to generate more cash.

We successfully converted 100% of non-GAAP net income to free cash flow and exited the quarter with $660 million in cash and equivalents on hand.

As we continue to evaluate options for deploying our excess capital in line with our stated capital deployment philosophy, we announced yesterday the company's first-ever dividend increase.

The 6% increase to the dividend is effective with the September payment and raises our quarterly dividend from $0.32 to $0.34 per share.

This increase reflects confidence in our long-term performance and reinforces our commitment to delivering strong returns to shareholders.

We remain committed to thoughtfully deploying our excess capital in line with our stated capital deployment philosophy, which balances our investments for growth, including organic and M&A, with returning capital to shareholders through dividends and share repurchases.

The strong revenue growth and positive momentum in our business has driven a positive impact on our hiring and retention efforts.

During the quarter, we added a net 1,200 new employees to our organization, increasing our total head count to more than 33,000.

The takeaway wins, in particular, are helping our hiring efforts into the cleared domain, being able to transfer cleared personnel directly into the Leidos family helps alleviate some of the tightness in the cleared labor market.

While it still takes significant time to move our new employees through the clearance process, we are encouraged by the progress made by the National Background Investigations Bureau in reducing the clearance backlog.

While there's still room for improvement, we are seeing early results of the targeted effort by the bureau to reduce the backlog awaiting clearance.

We are excited to welcome all of our new employees and look forward to continuing to grow our organization to build on our customers' trust and support them with their most critical missions.

Continuing with the people theme, I want to highlight a couple of refinements we have made to our executive leadership team during the quarter.

I am pleased to announce the promotion of Jim Carlini to the position of Chief Technology Officer for the company.

Prior to joining the company in 2018, Jim spent decades in technical leadership roles throughout government, academia and industry, including having served as the Director of the Special Programs Office (sic) [Special Projects Office] at the Defense Advanced Research Projects Agency or DARPA.

Jim is also a member of the Defense Science Board and was previously Vice President of Advanced Development Programs at Northrop Grumman Electronic Systems.

Jim will continue to drive technical excellence throughout the enterprise, ensuring differentiated solutions in critical technology areas, ranging from artificial intelligence and machine learning to cyber defense to rapid and secure delivery of mission-critical software.

He will also lead the effort to leverage the cutting-edge capabilities incubated in the Leidos Innovations Center, the LInC, throughout the business to deliver solutions to customers in all of our served markets.

Jim takes over the role from Jim Cantor who has moved into a newly created position of Chief of Performance Excellence and Strategic Partnerships.

In this role, Jim will be responsible for enhancing our strategic supplier framework and driving the Leidos business framework principles throughout all program operations.

Turning now to the macro environment, conditions continue to remain quite favorable.

The recent passage in the House of the Bipartisan Budget Act and the expected approval by the Administration and Senate is positive for our business.

The bill allows for stable, predictable and large defense and discretionary budgets for 2 more years, government fiscal year '20 and '21.

Although appropriations are still outstanding, the overall budget growth of 3% in defense and 4.5% in nondefense provide a supportive foundation for the continued growth of our business.

The key priorities embedded in the National Defense strategy remain unchanged and continue to tightly align with our core capabilities and our ability to provide innovative solutions to help our customers execute on their most critical missions.

As we look ahead and as previously mentioned, the strength of our results through the halfway point in the year, combined with the continued tailwinds we see in the market landscape, give us confidence to raise both our revenue and earning expectations for the full year.

Jim will provide details of the revised guidance in a moment.

Before I hand the call over to Jim, as we did last quarter, we again want to spotlight some of the social and community initiatives we engage in as a company.

This quarter, I want to highlight the progress that we have made in our efforts to help resolve the nationwide opioid epidemic, the scale of which is alarming.

In response to difficult times, some of our own employees have experience with family members affected by this epidemic.

Leidos launched the CEO pledge, which encourages business leaders to create and nurture work environments that are safe for conversations about addictions, to educate employees about the potential dangers of opioids and to support nonprofit organizations focused on additional prevention and recovery.

I am pleased to report that to date, more than 60 CEOs from organizations across the country have demonstrated their commitment to ending the epidemic by signing the CEO pledge and making changes in their organizations to support employees throughout this crisis.

There is still much work to be done, and our goal is to have at least 100 signatories.

But I'm proud to share this initiative with you as we recognize that all of us can share in helping to navigate this growing health concern in the communities where we live and work.

In conclusion, we remain focused on delivering innovative solutions to our customers by leveraging the strength of our scale.

We continue to focus on leveraging our success with customers to generate cash in the business.

With that, I'll turn the call over to Jim Reagan, our Chief Financial Officer, for more details on our second quarter results and guidance.

Thanks, Roger, and thanks to everyone for joining us on the call today.

In summary, we have achieved continuing strong execution across all of our segments.

Our revenue growth of 8.8% over the prior year is the highest organic growth we've seen in several years driven by new program wins and accelerated on contract growth.

We were able to deliver this strong growth while maintaining adjusted EBITDA margins of 10.0%, in line with our long-term targets.

Lower profit writeups were the primary driver of the year-over-year margin compression.

This is reflective of our revenue composition that is more heavily weighted to early phase programs, as we have discussed previously.

Non-GAAP diluted EPS increased $0.04 over the prior year to $1.16 primarily driven by the lower share count resulting from our share repurchases over the past year.

Operating cash flows were $186 million, reflecting 110% conversion of non-GAAP net income.

We had another great quarter on the business development front, booking over $3 billion in net awards into our backlog, including significant contribution from takeaway wins.

Takeaways in new business represented nearly 70% of the bookings for the quarter and more than 60% of bookings year-to-date.

Our ending backlog of $21.7 billion is up 18% over the past year and 27% over the past 2 years, highlighting the success of our business development strategy and our scale advantage.

In the quarter, we submitted $10.3 billion of proposals, which, after accounting for some large decisions adjudicated in the period, resulted in $30 billion in submits pending decision at quarter end.

Now for an overview of our segment results.

Defense Solutions grew 6.7% over the prior year quarter as new program revenues more than offset program completions.

Non-GAAP operating margins of 8.6% declined 20 basis points from the prior year, largely related to the results of newer programs which carried lower margins in the early phase.

Defense Solutions also booked over $1.7 billion of net awards, including a large takeaway win resulting in a book-to-bill of 1.3x for the quarter and on a trailing 12-month basis.

In our Civil segment, revenues grew 11% organically when adjusting for the sale of our commercial cyber business.

This growth largely reflects the ramp-up of recent takeaway wins.

Non-GAAP operating margins in our Civil segment declined 40 basis points from the prior year due to lower net profit writeups and a revenue composition that's more heavily weighted to early phase programs and materials.

Civil segment bookings were very strong at $1.2 billion, reflecting a large takeaway award.

The result was a book-to-bill of 1.3x for the quarter and 0.9x on a trailing 12-month basis.

And finally, our Health segment, results here again showed strong growth with DHMSM wave deployments and expansion on other programs contributing to 11% revenue growth over the prior year.

Non-GAAP operating margins of 14.4% in the Health group were again very strong but down from the prior year's level as the margin profile on certain recompete programs shifted to a more normalized level that we have previously previewed with you.

And from a booking's perspective, our Health segment generated a little over $100 million in net bookings.

And while this level is lower than in the past, it's driven primarily by delays in the procurement process rather than by any reflection of win rates.

Q2 decision volume was very low, and we continue to have a healthy pipeline of awards awaiting decision, which we expect to be resolved over the coming months.

On a trailing 12-month basis, Health has a book-to-bill of 2.0x and remains very well positioned in the market.

To summarize, we are pleased with the performance across our entire business.

And as Roger mentioned, we're updating our 2019 revenue and EPS guidance to reflect our strong results in the second quarter and increased second half visibility.

First, we are raising and narrowing our revenue guidance to a range of $10.65 billion to $10.95 billion, an increase of $100 million at the midpoint from the prior range.

Second, reflecting the higher revenue growth and slightly lower estimated net interest expenses, we're also raising and narrowing our earnings per share guidance.

We now expect non-GAAP diluted EPS for the year to be in the range of $4.50 to $4.75, representing a $0.15 increase at the midpoint over the prior range.

Our expectation for adjusted EBITDA margin and cash flow from operations remains unchanged.

With that, I'll turn the call over to Rob so we can take some questions.

(Operator Instructions) Our first question today is from the line of Sheila Kahyaoglu with Jefferies.

Just a big-picture question for you, Roger, first.

I think you mentioned the $30 billion pipeline this quarter.

You had $36 billion last quarter, very large numbers.

Maybe can you comment, is this an overall industry trend where you're seeing bigger award sizes?

Or is the consolidation resulting in more bids per program?

Yes.

I really can't speak to what's going on with other companies, but we have stated for a long time that we wanted to pursue larger programs.

And by growing and adding the scale that we have, we now go after fewer programs but larger in the amount.

And I will tell you for Leidos, it is a trend that we expect to continue.

I think you have to go company by company to see what everybody else is doing.

But -- and I think you had a second point, which is what I like is, do we see the customer aggregating or disaggregating?

And it's interesting, they kind of -- they go in waves and we see them aggregate.

And then we have another program that we've had for a long time, which they're going to break into a couple of pieces.

Navy NextGen is an example where you will then see MMI where there's 1 contract and they're essentially going to break it into 2. So it just comes and goes.

But for us, our strategy has been to go after larger programs.

Makes sense.

And then maybe a follow-up to that.

On NASA NEST, now that the protest is over, can you give us any color on how we think about the ramp of the program, the potential to go to the high end of that, I think, $3 billion number and just the profit impact?

Well, I -- this is Jim, Sheila.

Thanks for your question.

I think that the best way to think about the ramp of NASA NEST is, first of all, we take that into the bookings number by task order and that, that will be something that is going to ramp over the next 12 to 18 months.

The profit profile on that program is pretty consistent with what our overall average is.

We don't normally comment with very specific numbers on the profit margins on a program-by-program basis.

But I think that it's fair to say that you can think of the NASA NEST program as being relatively consistent.

The next question is from the line of Rob Spingarn with Crédit Suisse.

So Roger, I wanted to home in on the growth here.

It's obviously a theme in the sector.

It's come on quite strong.

You guys talked about it earlier.

And at the same time, I don't want to pour any water on this, but I wanted to reconcile your 3% to 4% type numbers that you referred to earlier with the fact that the budgets are beginning to flatten.

I understand there's going to be some lag, but could you talk about your growth projections and your assessment of the market in the context of a FYDP that's kind of flattish, especially when we look at this '21 budget flat with '20.

Yes.

So I had 3% for defense, 4.5% for nondefense.

And first, you have to do the analysis underneath that and you have to look at 2 components: how long does it take budget to roll through the PBS system to become outlays, and that can often be 18 to 24 months.

So when you get a strong budget in '20 and '21, it gives you momentum for a couple of years.

And then you have to dissect both the defense and the civil budgets and look at where the spend is and what kind of accounts are growing and what accounts are shrinking.

And we're seeing a lot of favorable movement for us.

Modernization, digital transformation, move to the cloud, back-office efficiencies, consolidation really across federal government at large.

So -- and we've always said, there, the budget overall is going to be kind of bounded by that 3%, 4%.

It just can't go up forever.

But we're very, very pleased by the strength that we've had over the last couple of years, the strength going forward and then where we see increases, honestly, agency by agency and then accounts within those agencies.

Okay.

And then on that, could you maybe delve into some of the larger program opportunities and any roll-offs?

And perhaps you can comment -- I think Navy NextGen just came up, but of course, with the change in structure and a bit of the lag, can we talk about that one a little bit?

Yes.

Well, okay.

I'll start with Navy NextGen, which is the old NMCI.

And we are bidding on a portion of that called SMI TTY, which really is more of the architecture and the network as opposed to buying the equipment where we had hoped that, that would be a fall award.

I think the Navy has gone back and looked at their procurement and is making some adjustments to the solicitation.

And we expect that now probably will go until next year and that we won't see an award on Navy NextGen until 2020.

That's my best guess at this time.

Rob, we have 2 other large bids outstanding.

I'll just touch on those.

The Hanford Department of Energy recompete, and we're hopeful that's within a couple of weeks.

Maybe one time it was supposed to be on the 29th.

I actually think it's going to be a week or 2 behind that.

And then our large infrastructure program at DISA that we call the global support management organization or GSM-O, and that is probably 4 weeks, 6 weeks-ish.

We are still hopeful that there will be an award made probably in the third quarter and then you just have to think about protest and things from there when that actually might enter into someone's backlog.

Okay.

Anything going the other way?

Anything rolling off?

Well, of course, NASA NEST came off, and so that hurt our submits, right, because it went from submits to award.

We talked about ACC ISR.

Those are the big ones in the period.

The next question is from the line of Cai von Rumohr with Cowen and Company.

So NASA NEST and the ISR program, both are big, but they both are quasi-IDIQ structure.

How much did they actually contribute to your $3 billion of awards in the quarter?

Cai, this is Jim.

You can think of those contributing to the additional backlog as a little bit under $1 billion between the 2 of them.

Got it.

Okay.

And then could you give us some color, if we exclude GSM-O, what's the booking environment that you're seeing kind of over the last couple of weeks and your anticipation of the third quarter, which normally is a seasonal peak?

Well, Cai, we were pleased that -- really related more to protest activity that we had a nice second quarter.

And in fact, we still have the rest of the week to go in the month, which is really third quarter.

But work in July has been a good quarter, although we're still waiting to see how it ends.

But you're absolutely right, third quarter has always been a cyclical high and we -- I have no reason to believe that, that would be any different.

Again, we're pleased by the budget action.

And you just get a sense that a lot of the federal agencies really want to get decisions made before the end of the fiscal year.

And now with budget certainty, there is no reason for them to slow down.

So we expect most of these things to happen, albeit Navy NextGen has got to go through some revisions, and I don't think that's going to be able to happen in the fiscal year.

The next question comes from the line of Edward Caso with Wells Fargo.

Congrats on another set of good numbers here.

You mentioned good win rates.

Could you frame that a little bit more, sort of what levels and how much improvement?

Yes.

Ed, as we've said before, we don't give specifics on -- or details on win rates.

But qualitatively, the way we think about them is that there's only been really one significant disappointment this year-to-date on recompetes.

Other than that, the recompete win rates have been kind of what we would really like in the main -- roughly -- with the exception of one thing if you carve that out, it's roughly high 80s, around 90%.

But the thing that's been most notable and the thing that I think can help contribute to both the current revenue growth being above what you would think of coming from normal budget increases as well as our prospect for the rest of the year and into the future, it really has been our success in new business and takeaways in helping to get a little bit of -- or some nice share growth.

And so normally, you think of takeaways as being kind of the converse of recompetes, right?

So if you think of a lot of companies think of a good number for takeaways as being somewhere between 20% and 30%, our takeaway win rates have been well in excess of that, and our new business win rates have also been well in excess of 30% to 40% that I know a lot of companies target.

So I'll leave it at that.

Great.

My other question is you mentioned strong net head count adds.

Can you tell us a little bit more about your attrition and then split it sort of capital region and outside of the capital region?

I think both Jim and I will comment on that.

Our attrition is cyclically down, okay?

It's still not as low as we would like it to be.

We've -- and it's a real focused effort for us.

We have broken it into what we call voluntary and involuntary, and we have fought really, really hard on what we call involuntary.

And that's when a contract comes to an end and we have trouble redeploying because of geography or skill set.

And we're really, really working hard with our team, our leaders and our employees to more aggressively redeploy the employees.

And then voluntary is down and not where, I think, any of us would like it to be.

And I would say in the national capital region probably the hottest market for the type of skills that we hire.

But we have been pleased with our ability to hire people and to retain people.

And there are clearly isolated groups that do have a high level of security clearance.

When you live in the Maryland area, that's probably the hottest commodity, and I think it just is going to remain that.

And we've had a strategy that we've talked about in the past of when the contract permits us to do the work beyond the 25-mile radius, that we move that work to other sites where our retention is higher.

And that has been successful for us.

We have places in Morgantown, West Virginia and Charlottesville and, frankly, St.

Louis and Eagan, Minnesota, where people tend to stay longer and enjoy the kind of work that we do.

The next question comes from the line of Matt Sharpe with Morgan Stanley.

Just wanted to touch on the budget here for a moment.

Obviously, going into 2019, it looks like a CR was likely going to play out in 4Q.

But at this point, where negotiations are with Congress and the President, that might no longer be in the cards.

If we do get a deal prior to October 1, how does that impact 4Q revenue?

Is there upside there?

Or just what's applied off between revenue and the budget dynamics at this point?

Yes.

Matt, I wouldn't say it's significant.

I'm not even sure that you would adjust your model.

I'll just talk about the behavior.

If you're a government program manager and you have to operate under a CR, you're really restricted in what you're going to do relative to expanding your statement of work.

And with an authorization going hopefully to appropriations -- and by the way, I think we will get most of the bills done.

The DHS bill may languish and may take a little longer, but I think they will spike that out.

So it encourages what we call normal order, which obviously has been anything but normal.

And people will now spend the money that they had been obligated.

I think it stabilizes.

It gives us a slight lift.

But I think it adds confidence and certainty to our third quarter, fourth quarter revenue.

And it really lets us look at the election season with a lot more confidence.

There is going to be -- again, I think there's another debate tonight.

There is just going to be a lot going on.

And the elections tend to be the sport in the U.S., and the good news is we've taken sort of budget dollars off the table.

And that's great for our customers and their ability to do their mission and conduct the work of the nation.

Got it.

And then just a quick one on competition.

Over the last couple of years, obviously, some of your peers have been playing catch-up in terms of scaling their businesses.

But at this point, there are some other notable names with substantial size.

I was wondering if you're beginning to see elevated competition for some of the larger opportunities that they may now be able to pursue.

Has there been a change in behavior or more names bidding on the same programs at this point?

Let's see.

First of all, I would tell you that it's always been a very, very competitive marketplace.

I mean it's just unbelievable and -- but it's the world that we live in.

And the 5 years that I've been here, we've -- it's always very, very difficult, and you really have to put your best foot forward.

You have to be really, really good at presenting your technical story.

I would say because of consolidation, we have seen maybe the number of bidders where it might have been 5, now there are 4, right?

Or maybe it goes down to 3 and especially for some bids, but that doesn't reduce the amount of competition.

And then as I learned in my prior career, sometimes you only need 2 competitors to have really robust competition, and we have found it here.

But I wouldn't say it's gotten worse.

I think it is about where it has always been, and it motivates us to come up with great solutions that are differentiated from our peers and to be able to articulate those well in the proposals that we write and present to customers.

Our next question comes from the line of Jon Raviv with Citigroup.

On capital allocation, so you've got the dividend increase, but repo was a bit light in the quarter with your stock being at all-time highs.

And also, you've previously highlighted M&A opportunities now that IS&GS is integrated.

So I guess big-picture question almost, how are you evaluating organic versus inorganic versus repo at this point?

Well, Jon, we've been maybe mind-numbingly consistent in how we talked about capital deployment.

We've mentioned it in the prepared remarks, and we'll do the same.

We first -- we've spent our first dollar internally on organic growth, and we try to use that to support customer mission, and we're always thinking about creative ways that we can do that.

You saw a little increase in capital because we're able to deploy some of our balance sheet to support customers.

We are -- whatever active in M&A might mean, but you said, as we look at a lot of opportunities, we think that's a prudent thing for us to do.

We're always thoughtful about how we spend your money.

We want to make sure that we create long-term value that is sustainable not just over a couple of years because with interest rates today, almost every deal is going to be accretive in the short term.

We want to make sure from like a DCS standpoint that we see true value.

And we hope that there'll be some deals out there that will align for us.

But if there isn't, then just -- we will return the capital in efficient ways to our owners.

And as we've always said, the dividend is very, very important, couldn't be more pleased.

We had to go back and check, but we found out that we've never actually increased the dividend.

And so that's kind of a remarkable thing.

And hopefully, everybody will enjoy that.

And then we have obviously been committed to share repurchases, and that's in our toolbox as well.

Okay.

And then as you see growth opportunities really pick up here, how does that change the way you consider where else you can spend the cash, specifically on investments in working capital, CapEx or some more internally funded R&D?

Yes.

Jon, this is Jim.

What we're -- we're always analyzing where we get the best return.

And we -- over the past 18 months, we've increased the run rate on how much we spend on investments in new business funds, meaning marketing and bid and proposal costs.

And in addition to that, part of that investment has made the deployment of that money much more efficient, so we're able to bid on more for the same amount of money.

So we've had some nice returns on those investments.

Getting to the inorganic side, I want to underscore what you, I think, you just should have heard from what Roger said, which is that our process to look at those opportunities is ongoing.

We've got a team of people that's evaluating opportunities and it is in a very disciplined fashion.

And so don't mistake the lack of meaningful M&A announcements from the company would mean that we're not actively looking and that you should not be surprised if you hear something from us in the coming 6 months on something that's strategic, it's meaningful and meets the financial criteria that we're going to continue to stick to before we undertake anything, any big transaction.

And as Roger said, we will continue to keep share buybacks in our toolbox for capital deployment.

Our next question comes from the line of Joseph DeNardi with Stifel.

Jim and Roger, you guys have sounded pretty bullish for the past several quarters, it seems like, on your takeaway win success.

I'm just wondering if you could probe a little bit deeper in terms of what's driving that, is it past performance, price, kind of the technical offering?

Where are you seeing the best performance there?

And please don't say all 3 in your answer.

Yes.

Okay.

Let's just kind of go back and look at the journey that we've been on.

When we were fortunate enough to close the IS&GS transaction, we talked a lot about being able to reset the cost structure of that traditional business.

And so we would tell you that price, we were able, by bringing them into our cost structure and then taking advantage of the combined scale, we've been able -- not that we never lose on price, but it is not the #1 reason that we lose.

And that helped that we saw a kind of immediate shot.

But what has really helped us is kind of going back to our roots, investing in what we call IRAD, winning cred from the S&P agencies that help to develop technology that we then deploy against the larger programs, what we call the programs of record, which have fueled our growth.

And every time we write a proposal, we kind of ask ourselves the question, what are we offering the customer that is unique and differentiated to our offering?

And then we've got a great team behind that, that continues to refresh the technology that we generate to help us create that differentiated offering.

So we want to win on our technical approach.

That's the company.

That's the core and the culture that we have here.

And we're now in a position where -- and by the way, obviously, we don't win everything.

There's always losses, and there are losses I wish that we had won, but we are pleased with the improvements that we've made in our win rate based upon differentiated technology.

And I think that has been the difference for us.

That's helpful.

And then, Jim, just from a recompete standpoint, is there anything to call out as unusual next year?

Or is it kind of the normal level?

It will be kind of back to the normal level for next year.

This year, we've got some of those big ones.

You've heard about Hanford and GSM-O earlier in the call, but we're not going to have nearly as many big lumpy recompetes that are going to be submitted next year like we do this year.

Our next question comes from the line of Gavin Parsons with Goldman Sachs.

Guys, if you look out over the next few years, what would you say is the gating factor for your growth?

Is it the amount of work you can win?

Is it the rate at which you can hire?

Is it the kind of budget dollars that the government is able to get passed?

And how is that different than kind of the last couple of years?

Well, it's not been win rate and it's not been the ability to hire.

What has been a great journey for all of us is our ability to address new markets, and we've been able to do that with the addition of the IS&GS organization.

They brought long history and long relationships with customers that Leidos didn't have, so that expanded our addressable market.

And I think to maintain the clip, we have to continue to think about how do we continue to expand that addressable market?

By the way, not just to new customers, like new federal agencies, but within a federal agency that we've had a long relationship with to expand our offering across their directorships.

And it's cross-selling, so it's -- we've sold a capability to one agency.

And then how do we take the lessons learned from the work that we've done for that agency and use that to expand our offering at a second agency for which we have a relationship with, but we had not traditionally sold them that kind of a solution.

So -- but people, new business funds, our ability to win, our scale, we are nowhere near being constrained in those regards.

Got it.

That's helpful.

And I think we haven't talked about JEDI in a while.

Just maybe any updated thoughts on kind of the aspirations of nontraditional companies in the space, whether the threat has increased or there's more opportunity in your view to partner with them on something like a JEDI rollout.

Yes.

Well, of course, we're not a bidder on JEDI.

And our prediction is that JEDI will go forward and there'll be award made relatively soon.

We have done digital transformation cloud hosting with all of the cloud providers.

We work with AWS-certified people.

We have Azure-certified people.

I would say that we have great relationships with all of the offerers and with the eventual customer.

And we just see this as a way for our customers to reduce the cost of IT spend and be able to change the tail ratio of the amount of money that the customer spends to operate their back offices by providing mission-capable programs that further the goals and objectives of the agency.

So we're thrilled.

And again, all the competitors have reached out.

They look for mission partners like us to come in and help the customer better utilize their cloud-hosting capability.

Our next question is from the line of Tobey Sommer with SunTrust Robinson.

You commented a couple of times on questions about the size of contracts and competition.

I was wondering, at the segment level, if there is an echelon of contracts beyond the company's easy reach now or you can attain kind of everything you want at the scale you are in those segments.

Let me answer the question, I think, you asked, and if not, follow up.

So although you might view Leidos at the corporate level as having scale, the question is in the 4 segments, are they large enough for which they also have scale and, therefore, are free to bid on any size of contract that they may see in the customer space?

And the answer is absolutely.

And I would further comment, though that's true in the U.S., it is also true in the United Kingdom and Australia where we have significant operations, and in a few other select countries where we feel we have reached back in the scope and the scale that we can go after hundreds of millions and billions of equivalent U.S. dollar work.

And what we have really strived to do at the company is to create an environment where collaboration is natural.

And so if the Health group feels like maybe in machine learning, they don't quite have the depth that they need, they talk to the CTO and we have a CTO council across the company, and they will seek out machine learning capability in the other groups and in the LInC, our Leidos Innovations Center, and they'll be able to pull that across.

And that has really contributed to some of our success as of late is the ability to leverage what all of Leidos knows in going after competitions.

Could you comment on the ramp and expected contour of GENESIS?

And then, Roger, I was curious, could you also maybe tell us what is the pitch to prospective employees as to why they should choose Leidos as an employer?

Yes.

Okay.

Great.

And we're near the end, I'll try to go quick.

First of all, on the GENESIS program, we are now actively involved in 2 wave deployments.

And by the way, they're no longer sequential.

We've kind of changed the order, so we're implementing wave 1 and wave 4. And so we're fully involved in those.

Wave 4 began last week of June.

We expect to add another wave about every 3 months.

And that means for the next probably 3 years, maybe more than that, we will have 2 waves ongoing.

And so that says that we should see a ramp in '19 and the peak activity occurring probably late '21, early, early, early '22.

We have agreed with the customer on the deployment schedule.

That has been locked down.

We've got a great team.

Our DHA customer has been really, really supportive.

We're making terrific progress so that our program is really hitting its stride.

On why people come to Leidos.

We -- like everyone, we do surveys.

We talk to employees on the way in.

We also talk to employees who leave.

We think there are 3 reasons that people come.

First is they love the nature of the work that we do.

They -- we have a mission.

We support very, very important customers, most of which are at the national level.

Whether it be social security payments, national security, intel organizations, transforming health in the United States, our employees love that.

Second is they love the professional environment and the people that they work with.

So great people attract great people.

It is a cycle that we just love.

And then the third is they come here for professional development, the opportunity, our continuing education programs, our certificate programs, the ability to grow their skill set to be lifelong learners and to be rewarded for their performance and, frankly, to see the growth of the company which creates opportunities to do more, to work on larger programs, to have more responsibility and eventually to move up the organization and be a leader at Leidos.

We have reached the end of our question-and-answer session, and I'll now turn the call over to Kelly Hernandez for closing remarks.

Thank you, Rob.

Thank you all for your time this morning and for your interest in Leidos.

We look forward to updating you again next quarter.

Have a great day.

This concludes today's conference.

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