What happened

Shares of Perspecta (PRSP) gained 10.5% on Thursday after the government IT specialist posted quarterly results that beat analyst expectations and raised its guidance for the year. The company is performing well but is yet to resolve the biggest worries hanging over the stock.

So what

After markets closed Wednesday, Perspecta reported fiscal first-quarter earnings of $0.52 per share on revenue of $1.11 billion, surpassing Wall Street expectations for $0.50 per share in earnings on revenue of $1.08 billion. Revenue was up 7% year over year on an adjusted basis.

Aerial view of the Pentagon.

Image source: Getty Images.

The company also raised its forecast for full-year fiscal 2020 earnings to $2.08 to $2.18 per share, up from $2.05 to $2.16, and raised revenue guidance by $50 million, to $4.4 billion to $4.45 billion. Analysts were expecting earnings of $2.11 per share on revenue of $4.4 billion.

Part of the raised guidance is due to Perspecta's acquisition of Knight Point Systems, though management, on a post-earnings call with analysts, said they had baked an unspecified expected contribution from mergers and acquisitions (M&A) into their original forecast.

Perspecta ended the quarter with a book-to-bill ratio slightly under 1, but more than three-quarters of the total was new work. On the call, CEO Mac Curtis said that Perspecta has about $24 billion worth of bids out right now, which, if successful, could fuel future growth for the company.

Now what

Perspecta was created in June 2018 via a three-way merger among Vencore, KeyPoint Government Solutions, and the public sector business DXC Technology. As part of the deal, private equity (PE) firm Veritas Capital Management, owner of both Vencore and KeyPoint, received a 14% stake in the resulting company.

Investors remain concerned that Veritas could liquidate its position, a move that could put pressure on Perspecta shares, though the PE firm has given no indication it's in need of liquidity or anxious to exit its position.

A bigger worry hanging over the company is the rebid on a massive U.S. Navy and Marine Corps IT contract that accounts for nearly one-fifth of Perspecta's current revenue. Should the company lose that work, known as NGEN, it would have a massive revenue gap to fill.

On the call, Curtis remained optimistic that Perspecta will keep the business.

The Navy now has a schedule they can execute to. We are on track for an award in the first quarter of calendar year 2020. So, they will extend our contract for up to seven months, which could be to December of 2020. This is an acknowledgement of what we have been saying since Investor Day. NGEN is a very complex procurement. The underlying workers complex and it has made even more difficult by splitting the work into the end-user hardware and SMIT components. We believe that complexity strengthens our incumbency advantage.

I share his optimism, but investors are likely to take a cautious approach until more is known. Until the NGEN contract is resolved, there are likely limits to how much higher Perspecta shares can climb.