Leidos Holdings Inc (LDOS) — Q2 2019 Earnings Call Transcript

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 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 two 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 ten-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 fighters' 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'm proud to see us hitting our stride and winning important work with key customers. During the quarter, we continue 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, effective with the September payment, 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 have 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 headcount to more than 33,000. The takeaway wins, in particular, are helping our hiring efforts with the clear domain being able to transfer cleared personnel directly into the Leidos family helping 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 Investigative Bureau in reducing the clearance backlog. While there's still room for improvement, we're 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 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, and the rapid and secure delivery of mission-critical software. He will also lead the effort to leverage the cutting-edge capabilities incubated in the Leidos innovation center, the Link, 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 in Senate is positive for our business. The bill allows for stable predictable and large defense and discretionary budgets for two more years; government fiscal year 2020 and 2021. Although appropriations are still outstanding, the overall budget growth of 3% in defense and 4.5% in non-defense provides 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 their most critical missions. As we look ahead, the strength of our results through the halfway point in the year, combined with continued tailwinds we see in the market landscape, give us confidence to raise both our revenue and earnings expectations for the full year. Jim will provide details of the revised guidance in a moment. Before I hand the call over to Jim, 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 experienced 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 addiction prevention and recovery. I'm 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. 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've 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 the strong growth while maintaining adjusted EBITDA margins of 10.0% in line with our long-term targets. Lower profit write-ups 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 buybacks 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 contributions 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 two 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 submitted pending decisions 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 completion. Non-GAAP operating margins of 8.6% declined 20 basis points from the prior year, largely related to the result of newer programs which carry lower margin 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 our 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 write-ups 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, in our health segment; results here again showed strong growth with DHMSM deployments and expansions 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 more normalized levels that we have previously previewed with you. And from a bookings perspective, our health segment generated a little over $100 million in net bookings, and while this level is lower than 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're pleased with the performance across our entire business and as Roger mentioned, we are updating our 2019 revenue and EPS guidance to reflect our strong results through 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 expectations for adjusted EBITDA margins and cash flow from operations remain unchanged. With that, I'll turn the call over to Rob, so we can take some questions.

Good morning and thank you. 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 sizing or is the consolidation resulting in more bids per program?

I can't comment on what's happening with other companies. We've long expressed our intention to pursue larger programs, and as we grow and increase our scale, we now target fewer but larger programs. This is a trend we anticipate will continue at Leidos. To understand what other companies are doing, you need to look at them individually. Regarding whether customers are aggregating or disaggregating, it's interesting to note that these patterns tend to fluctuate. We see some customers aggregating, while others may split programs apart. For instance, NextGen is evolving from the former NCMI, which was a single contract, into two separate contracts. These trends come and go, but our focus remains on pursuing larger programs.

Make 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, so I think $3 billion number and just a profit impact?

Well, this is Jim, Shelia. Thanks for your question. I think 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 for 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 it's fair to say that you can think of the NASA NEST program as being relatively consistent.

Thank you. Thanks for the color.

Thank you.

Hi. Good morning.

Hey, good morning, Rob.

So, Roger, I wanted to hone 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 an FYDP that's kind of flattish, especially when we look at this 2021 budget flat with 2020?

Yes. 3% for defense, 4.5% for non-defense and of course, we have to do the analysis underneath that and you have to look at two components. How long does it take budgets 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 2020 and 2021, it gives you momentum for a couple of years. And then you then you have to dissect both the defense and the civil budget 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, and back office efficiencies, consolidation really across federal government with large. So – and we've always said there, the budget overall is going to be kind of bounded by that three, four percentages which just can't go up forever. But we're very pleased by the strength that we've had over the last couple of years and the strength going forward. And then where we see increases is obviously 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 maybe NextGen just came up but of course with the change in structure and the bit of a lag we talk about that one little bit?

Okay. I'll start with Navy NextGen which is NMCI. We are bidding on a portion of that called SMI TTY which really is more of the architecture in the network as opposed to buying the equipment where we had hoped that that would be up for 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 to 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 two other large bids outstanding, I'll just touch on those. A 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 two behind that. And then our large infrastructure program at DISA, that we call the Global Support Management Organization or GSMO. And that is probably four weeks, six 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 protests 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.

Okay. Thank you very much.

Thank you.

Yes. Thanks so much and good quarter. So NASA NEST and the ISR program, both are big but they both are 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 two of them.

Got it. Okay. And then could you give us some color if we exclude GSMO, what's the booking environment that you're seeing kind of over the last couple of weeks in your anticipation of the third quarter which normally is a seasonal peak?

We were pleased to have a strong second quarter, despite the recent protest activity. We still have the remainder of the week left in this month, which is actually part of the third quarter, and so far, July has been positive, although we are waiting to see how it concludes. You're correct that the third quarter has consistently been a peak period, and we have no reason to think this will change. We are encouraged by the budget actions and it seems many federal agencies are eager to finalize decisions before the end of the fiscal year. With budget certainty now in place, we do not expect any slowdowns. Therefore, we anticipate most of these developments will proceed, although it appears the Navy NextGen program will undergo some revisions, which may not align with the current fiscal year.

Thank you very much.

Hi. Good morning. 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? Thanks.

Yes. We don't provide specific details on win rates. However, we can say that this year, there has been only one significant disappointment regarding recompete. Overall, the recompete win rates have generally met our expectations, typically in the high 80s to around 90%, excluding that one instance. What stands out is our success in acquiring new business and gaining market share, which has contributed to our current revenue growth surpassing what you might expect solely from regular budget increases. Typically, companies consider a good takeaway rate to be between 20% and 30%. Our takeaway win rates have significantly exceeded this range, and our new business win rates have also gone beyond the 30% to 40% target that many companies aim for. I'll stop there.

Great. My other question is, you mentioned strong net headcount 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? Thanks.

I believe both Jim and I will address that. Our attrition is currently lower than before, but it is still not at the level we desire. We are actively focusing on this issue. We categorize attrition into voluntary and involuntary, and we have been making significant efforts to manage involuntary attrition, which occurs when contracts end and we face challenges in redeploying employees due to geographical or skill set constraints. We are working diligently with our team, leaders, and employees to enhance redeployment efforts. Voluntary attrition has decreased as well, but it's not at the level we would all prefer. In the national capital region, which is probably the most competitive market for the skills we seek, we have been encouraged by our ability to attract and retain talent. Certain groups with high-level security clearances, particularly in the Maryland area, are highly sought after. This situation is likely to persist. Our strategy involves moving work beyond the 25-mile radius when contracts allow, enabling us to relocate projects to sites where retention rates are higher. This has proven effective for us. We have locations in Morgantown, West Virginia, Charlottesville, and also in St. Louis and Eagan, Minnesota, where employees tend to stay longer and enjoy the work we provide.

Great. Thank you.

Good morning, gentlemen, a nice quarter.

Thank you.

I just wanted to touch on the budget here for a moment, obviously going into 2019 it looked like a CR was likely 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 the pay-off between revenue and the budget dynamics at this point?

Yes. Matt, I wouldn't say it's significant. I'm unsure that you would need to adjust your model. I’ll explain the behavior. If you're a government program manager operating under a continuing resolution, you're really limited in your ability to expand your work. With an authorization bill and hopefully appropriations on the way – and I believe we will see most of the bills passed, although the DHS Bill may take a bit longer – it encourages what we call a normal order, which has been far from normal. People will now spend the money they have been obligated to, and I think this stabilizes our situation and gives us a slight boost. It adds confidence and certainty to our revenue in the third and fourth quarters, allowing us to approach the election season with increased assurance. There's going to be a lot happening, including another debate tonight. Elections tend to be a major focus in the U.S., and the good news is we’ve removed budget battles from the equation, which is great for our customers and their ability to fulfill their missions and conduct national work.

Got it. Thanks. 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 of 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 which is the world that we live in. In the five years that I've been here, it's always very, very difficult, and you really have to put your best foot forward. I would say, because of consolidation, we have seen maybe the number of bidders, where it might have been five, now they are four, right, or maybe it goes down to three especially for some bids, but that doesn't reduce the amount of competition. As I learned in my prior career, sometimes you only need two 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.

Got it. Thank you.

Hey. Good morning. On capital allocation, so you've got the dividend increase, but share repurchase was a bit late 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 on those, how are you evaluating organic versus inorganic versus share repurchase at this point?

Jon, we've been maybe mind numbingly consistent in how we've talked about capital deployment. We've mentioned it in the prepared remarks and we'll do the same. We spend 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 were able to deploy some of our balance sheet to support customers. We are, whatever active in M&A might mean, but just 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, that dividend is very, very important, couldn't be more pleased. We had to go back and check, but we found out we never actually increased the dividend. And so, it'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. Thank you. 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. Hi, Jon, this is Jim. We're continually assessing where we achieve the best returns. Over the last 18 months, we have increased our expenditure on investments in new business funds, which includes marketing and proposal costs. Additionally, part of this investment has enhanced the efficiency of our spending, allowing us to bid on more opportunities for the same amount of resources. We have seen positive returns on these investments. Regarding acquisitions, I want to emphasize that our pursuit of these opportunities is ongoing. We have a dedicated team evaluating prospects in a very disciplined manner. The absence of significant M&A announcements should not be interpreted as a sign that we aren't actively searching, and you shouldn't be surprised if we announce something strategic and financially sound in the next six months. As Roger mentioned, we will also keep share buybacks as part of our capital deployment strategy.

Thank you.

Good morning. 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 tactical offering, where are you seeing the best performance there? And please don't say all three in your answer.

Yes. Let's take a moment to reflect on our journey. When we successfully completed the IS&GS transaction, we emphasized the opportunity to reshape the cost structure of our traditional business. By integrating them into our cost framework and leveraging our combined scale, we've found that while price can be a factor, it is not the primary reason for any losses we experience. This integration gave us an immediate boost. However, the key to our success has been returning to our foundational values, investing in what we call IRAD, and securing CRAD from the SNC agencies that help us develop technology for larger programs. These initiatives have driven our growth. With each proposal we create, we ask what unique and differentiated value we are offering the customer. Our dedicated team consistently refreshes the technology we develop to enhance our offerings. Our goal is to excel with our technical approach, which is the essence of our company culture. We acknowledge that we don’t win every opportunity, and there are certainly defeats I wish we could have avoided, but we are optimistic about the improvements we've seen in our win rate due to our differentiated technology, which we believe has made a significant impact.

That's helpful. Thank you. And then, Jim, just from a recompete standpoint, is there anything to call out as unusual next year, or is it just the normal level? Thank you.

It will be back to the normal level for next year. This year, we've got some of those big ones. You've heard about Hanford and GSMO 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.

Thank you.

Hey. Good morning, everyone.

Hey. Good morning, Gavin.

Hey. 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 budget dollars that the government is able to get passed and how is that different than the last couple of years?

Well, it's not been win rate and it's not been 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 a 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, but 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. It's cross selling, so 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 have not traditionally sold them that kind of a solution. But people, new business funds, our ability to win, our scale, we're 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 the aspirations of non-traditional companies in the space, whether there the threat has increased or there is more opportunity in your view to partner with them on something like a JEDI roll out?

Yes, we are not participating in JEDI, and we believe that it will proceed with an award being made relatively soon. We have experience in digital transformation cloud hosting with all major cloud providers. Our team includes AWS and Azure certified professionals. We maintain strong relationships with all the providers and the eventual customers. We view this as an opportunity for our clients to lower their IT expenses and improve the balance of their spending on back office operations by offering effective programs that align with the goals of the agencies. We are excited about this. Additionally, all competitors have reached out, seeking mission partners like us to enhance the customers' cloud hosting capabilities.

Got it. Thank you.

Thanks. 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 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 four segments, do they also have scale and therefore, are free to bid on any size of contract that they may see in a customer space? And the answer is, absolutely. And I would further comment, 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 reach back and the scope and the scale that we can go after hundreds of millions and billions of equivalent U.S. dollar work. 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 Innovation Center, and they'll be able to pull that across. 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.

Thank you. 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 two wave deployments and by the way, they are no longer sequential. We've kind of changed the orders. So we're implementing a wave one and wave four. And so, we're fully involved and those wave four began the last week of June. We expect to add another wave about every three months. And that means for the next probably three years, maybe more than that, we will have two waves ongoing. That says that we should see a ramp in 2019 and the peak activity occurring probably late 2021, or early 2022. 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 program is really hitting its stride. On why people come to Leidos? We like everything we do, we do surveys, we talk to employees on the way in. We also talk to employees who leave. We think there are three reasons that people come. First is, they love the nature of the work that we do. 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 reeducation 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.

Thank you.

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.