Science Applications International Corporation

Good day and welcome to SAIC's third quarter fiscal year 2025 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Joseph DiNardi, Senior Vice President, Investor Relations, Treasurer. Please go ahead.

Good morning, and thank you for joining SEIC's third quarter fiscal year 2025 earnings call. My name is Joe Donardi, Senior Vice President of Investor Relations and Treasurer. And joining me today to discuss our business and financial results are Tony Towns-Whitley, our Chief Executive Officer, and Prabhu Natarajan, our Chief Financial Officer. Today we will discuss our results for the third quarter of fiscal year 2025 that ended November 1, 2024. Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call. I refer you to our SEC filings for discussion of these risks, including the risk factor section of our annual report on Form 10-K. In addition, the statements represent our views as of today, and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures. The non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP. It is now my pleasure to introduce our CEO, Toni Towns-Whitley.

Toni Towns- Thank you, Joe, and good morning to everyone on our call. My remarks will focus on three areas. First, a review of our operating performance in the third quarter. Second, an update on the execution of our enterprise growth strategy. And third, our perspective on the potential risks and opportunities from the incoming administration's focus on driving greater efficiency across the federal government. Our third quarter results reflect solid performance across the business and continued progress against our long-term strategy. We reported third quarter organic revenue growth of 4.3% as increases from new business and on-contract growth offset an approximately five-point headwind from contract transitions. Adjusted EBITDA of $197 million and margin of 10% reflect solid program performance across our portfolio. Adjusted diluted earnings per share of $2.61 benefited from strong profitability and an approximately 16% effective tax rate in the quarter. Free cash flow of $9 million was somewhat softer than what we typically produce in third quarter due in part to an additional payroll cycle and very strong collections in our second quarter. Overall, I'm pleased with the financial performance we delivered in the quarter, which allowed us to de-risk the revenue challenge we highlighted last quarter, and we now expect full-year revenue growth of 3%, which is slightly ahead of the midpoint of our prior guidance. Prabhu will discuss our updated guidance in greater detail in his prepared remarks. On our enterprise growth strategy to bid more, bid better, and win more, we're seeing improved progress on the first phase. With $22 billion in submitted bids through the third quarter, we now expect to submit more than $25 billion for the full year compared to our prior target of $22 billion. We expect this momentum to continue in fiscal year 26 and 27 and are increasing our targets for submits in both years. We now, in fact, see a pipeline to over $30 billion of submits in fiscal year 27. Our backlog of submitted bids increased to nearly $19 billion on a trailing 12-month basis in the third quarter, and increased from $17 billion in the second quarter. While our bookings in the quarter of $1.5 billion resulted in our trailing 12 months book-to-bill moderating to 0.9, we continue to have good visibility into reaching our target of 1.2 by the first half of fiscal year 26. Importantly, as you can see on slide 9, The quality of our pipeline and plan submits is improving as well and becoming more aligned with our growth vectors, most notably mission IT and enterprise IT. Now, regarding the recent emergence of plans from the incoming administration and the Department of Government Efficiency, let me first acknowledge the uncertainty this has created within the investment community. Given recent commentary from the incoming administration, we expect a renewed emphasis on increasing government efficiency focused on deregulation, privatization of governmental functions, emphasizing fixed and incentive-based contracts over cost plus, and certain program eliminations. While our current revenue with agencies under particular scrutiny by DOGE is immaterial, we are preparing for a broader push for efficiency across the government, which could result in lower funding in certain of our markets. However, we believe that it's important to differentiate this environment from prior downturns in spending, such as those caused by the Budget Control Act and sequestration, which resulted in arbitrary across-the-board cuts to agency budgets. We expect the incoming administration's focus to be on driving efficiency through the deployment of technology a very different approach than what drove sequestration. We believe we're well positioned for the government transition because we have invested in technology differentiation and commercial offerings that are deployed currently and available to our customers at scale via a wide variety of channels and commercial marketplaces. As I mentioned previously, our current strategy and pipeline will drive an acceleration in this portfolio shift. and we expect mission IT and enterprise IT to represent a greater portion of our revenue in the coming years. We believe this is relevant from a financial standpoint, given the improved margin profile of mission and enterprise IT, but also from a strategic perspective. In an environment where doing more with less is a priority, having scale and capabilities in mission and enterprise IT position us well to better weather potential budgetary pressures while enabling efficiency with as-a-service and fixed-price solutions. As shown on slide six, we believe our strategy and business model position us well to respond with agility to new priorities from the incoming administration and a potentially softer revenue environment. The enterprise operating model we've implemented over the past year will allow us to adjust and reallocate our investment budget to key focus areas and respond more quickly to changes in the market. We intend to manage our cost structure and investments to maximize long-term value while delivering earnings and cash flow durability, which our business model affords. We absolutely believe that our capabilities, expertise, and value proposition position us well to partner with our government customers to drive transformation through the adoption of technology. Our strategy and the investments we're making this year are focused on capabilities and solutions that enable our customers to perform their missions better, faster, and more efficiently. For example, SAIC is the prime mission integrator for the Air Force on a program called Cloud-Based Command and Control, or CBC2, where we partner with commercial companies and cloud services providers to deliver the best possible technology to our customers. The CBC-2 system distills data from over 750 sensors into a single user interface to drive a more efficient and effective C-2 kill chain. This program is viewed as one of the Air Force's most successful C-2 modernization programs in decades. Similarly, SAIC has partnered with the Office of the Secretary of Defense as the lead integrator on the Joint Fires Network program. which is transitioning from a rapid development program as INDOPAC's long-range kill chain command and control capability to a formal program of record based on its proven field success. This program is also an example where SAIC leverages the best available commercial technology and quickly integrates that technology into an effective mission solution. Most recently, this capability was integrated in record time to support Valiant Shield, an annual multinational, multi-domain war game exercise conducted this past June. We have many other examples such as this across the enterprise where our value proposition to the customer is clear and the capability we enable is impactful. This is particularly so in our civilian business, where, as you can see on slide seven, the majority of our revenue comes from five agencies which support some of our country's most essential functions, including secure borders, safe airspace, support for our veterans, financial operations, and diplomacy. As a result, under an administration prioritizing efficiency, we would expect customer adoption of these types of programs to accelerate and help offset potential funding pressures elsewhere. Prabhu will provide some details on how we are scenario planning from a cost standpoint, but I wanted to be very clear that SAIC's purpose is to enable our customers to operate more efficiently and effectively through the use of technology. We believe that demand for this value proposition is significant and enduring. In closing, I want to thank the team at SAIC for their dedication and commitment to executing our strategy and delivering for our customers. The work we have done this year positions us well to both navigate the nearer term uncertainty and strengthen our place in the market longer term. I'll now turn the call over to Prabhu.