Science Applications International Corporation

the risk factors section of our annual report on Form 10-K and our quarterly reports on Form 10-Q. 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 interim CEO, Jim Reagan.

Thank you, Joe, and thank you to everyone for joining our call. Before I begin, I want to take a moment and welcome SilverEdge to SAIC. Having personally spent time with leaders at SilverEdge, I'm excited about the value we can create by combining their differentiated technology and commercial go-to-market approach with the breadth of SAIC. Building upon their success at bringing sought-after AI capabilities to life for the intelligence community, I expect strong continued growth as we deploy their incredibly talented people and solutions across the broader SAIC portfolio. This acquisition represents a good example of our ability to invest in differentiated IP capable of solving customer problems. I will begin with a brief review of our third quarter results and updated outlook, but we'll leave the more detailed walkthrough to Prabhu. I will then discuss my top priorities as interim CEO and the compelling potential to create value for our shareholders while investing to better serve our customers and create opportunities for our employees. Third quarter revenue of $1.87 billion declined 5.6% year-over-year and included a roughly one-point headwind related to the government shutdown. Adjusting for this impact, revenue results were modestly ahead of our prior guidance as we've seen encouraging signs of stability across the market in recent months. Adjusted EBITDA of $185 million for a margin of 9.9% was driven by strong program execution. As I highlighted in the earnings release, and as I will discuss in more detail, I see meaningful opportunities to further improve margins in the coming years while increasing internal investments to drive profitable growth. Adjusted diluted EPS was $2.58, reflecting our strong margin performance and a favorable tax rate in the quarter. Third quarter free cash flow of $135 million was strong despite being impacted by the government shutdown, which resulted in certain collections moving into our fourth fiscal quarter. Overall, the financial results we reported in the quarter were ahead of our prior guidance, but I firmly believe that we can deliver stronger revenue performance over the long term. Since being appointed interim CEO by our board on October 23rd, my top priority has been to drive increased focus across the company and take decisive action that will position SAIC for long-term shareholder value creation. My prior industry experience and time on the board have allowed me to hit the ground running, and I believe the actions we're taking will produce demonstrable results in the coming quarters. Let me provide greater detail and examples around what we're doing and how we're measuring impact. SAIC's legacy of innovation and commitment to U.S. national security is undeniable and represents an incredibly valuable asset for the company. However, in recent years, we've struggled to convert this into revenue and EBITDA growth in line with the market due primarily to below average business development and capture performance. The changes we have implemented over the past 24 months across business development are steps in the right direction and have contributed to our improved book-to-bill year-to-date. We're committed to building on this progress in three ways. First, sharpening our focus on execution to increase capacity for investment in the business. Second, more efficiently deploying our financial resources to drive growth. across our business development function. We have discussed in the past that SAIC spends several hundred million dollars annually on indirect functions, including shared services, finance, human resources, marketing, communications, and others. We're implementing efficiencies across this category of spending, including our recent organizational restructuring, and we'll redeploy savings to fuel growth and improve profitability. We have identified over $100 million in annual spend that we're actively working to reinvest into higher ROI areas across our business and increase margins. This should result in a more efficient SAIC with increased investment directly driving growth and margins approaching 10% in the near term with additional potential upside in FY27 as we drive further efficiency across the business. In addition, I see opportunities to refocus our attention on nearer-term execution and the aspects of our performance which we control. While there's value in aligning to a long-term corporate strategy, this needs to be balanced with a keen focus on executing to and delivering on our near-term commitments. My impression during my first several weeks as interim CEO is that our leaders want and will embrace this shift in priorities. I'm challenging leaders across SAIC to focus on execution, make an impact on the business, and deliver results. And I'm confident in their ability to step up. Lastly, we have shared with you our focus on increasing business development throughput and have shown strong progress against this, having increased submit volumes from 17 billion in FY24 to 28 billion in FY25. While I believe this is an appropriate level for a business our size, we must now focus our shift from targeting throughput to prioritizing quality and alignment with the markets where we have the strongest right to win. This will drive improved decision-making, more efficient resource allocation, and a stronger SAIC in the long run. As I look at some of the larger business development pursuits that have not gone our way in recent years and the lessons learned, There's substantial value to be created from turning up the focus and attention on the core fundamentals of this business. Before turning the call over to Prabhu, I want to take a moment to thank Tony Tails Whitley, David Ray, Josh Jackson, and Lauren Knousenberger for their contributions and service to SAIC. The recent changes we made were necessary to position the company for longer term success, but required difficult decisions impacting some very high-quality individuals. I also want to acknowledge the tremendous honor it is to lead SAIC, a company with a deep legacy of supporting our country. I look forward to serving in this interim capacity, working with the leadership team to implement the priorities I just outlined, and assisting the board in its search for a permanent CEO. We have begun that process, which is being led by a search committee comprised of board members working in conjunction with a leading external search firm. Our ideal candidate will be someone who shares this company's commitment to serving our nation and our customers and has a proven track record of operating excellence and value creation. I can speak for our board in saying that we see significant opportunity to drive value for our shareholders, greater opportunities for our employees, and improved outcomes for our customers, our nation, and its allies. With that, I'll now turn the call over to Prabhu.

Thank you, Jim, and good morning to those joining our call. I will discuss our business development results in the quarter, followed by a review of our updated outlook, including some additional detail regarding the margin improvement efforts that Jim discussed. As you can see on slide four, we delivered 3Q net bookings of 2.2 billion, resulting in a book to bill in the quarter and on a trailing 12 month basis of 1.2X. Our 3Q awards included a five year re-compete with the Air Force with a total contract value of 1.4 billion And on the new business side, a five-year $413 million contract with the U.S. Army for its Open Source Intelligence Enterprise, or OSINT, program. In the third quarter, we submitted proposals with a total contract value of approximately $3 billion, bringing our year-to-date submissions to approximately $21 billion. While the government shutdown has slowed our pace of proposal submissions, we expect this to normalize in the near term and continue to target submitting bids totaling over $30 billion in FY27. The incremental investments we expect to fund out of our cost efficiency efforts will go towards strengthening our solutions and overall bid quality. I'll now turn to our updated outlook for FY26 and FY27. We are increasing our FY26 total revenue guidance to reflect the acquisition of Silver Edge and reaffirming our organic revenue growth guidance despite the roughly one-point impact to 3Q revenues from the government shutdown. Our guidance continues to assume a roughly four-point contraction in organic revenue growth in the fourth quarter. We are increasing our guidance for FY26 adjusted EBITDA margin by 10 basis points due primarily to our strong program performance year-to-date. We are increasing our FY26 adjusted diluted earnings per share guidance by 40 cents, largely due to the increased earnings and a lower tax rate, as we now assume a roughly 10% effective tax rate for the year. We are maintaining our FY26 free cash flow guidance of greater than $550 million, For FY27, we are increasing our revenue guidance by approximately one point to include the acquisition of Silver Edge and are reaffirming our organic revenue growth guidance of 0% to 3%. This outlook reflects an assumed contribution from recent new business wins, including 10 Cap Hope and OSINT, partially offset by known recompete headwinds of approximately 1% to 2%. As we've discussed, we are in the re-compete phase for one of our largest programs, which represents just over 3% of annual revenue with an expected award in the next few months. A favorable outcome on this would position us well in the 0% to 3% range, while a loss would likely make the lower end of the range more likely based on what we know today. We are increasing FY27 margin guidance by 20 basis points at the midpoint to a range of 9.7% to 9.9%. The key drivers behind this are the acquisition of SilverEdge, which adds roughly 10 basis points, and the initial 10 basis points impact from cost actions taken to date. Our bias for adjusted EBITDA margins in FY27 and beyond remains to the upside as we see meaningful opportunities to drive efficiency and improve performance, which are not reflected in our updated guidance. As we return to revenue growth in the coming quarters, we anticipate that the efficiency efforts being implemented now will strengthen our ability to increase EBITDA faster than revenue. We are increasing our FY27 adjusted EPS guidance by 50 cents, reflecting the addition of Silver Edge, increased operating margins, and a lower share count. We are maintaining our guidance for FY27 free cash flow of greater than $600 million, or approximately $13.50 per share. As a reminder, FY26 and FY27 free cash flow benefits from changes related to Section 174 under the One Big Beautiful Bill Act, which results in minimal cash taxes this year and next. Given our strong free cash flow, clear visibility into margin improvement, and a return to revenue growth, we see returning cash to shareholders via our repurchase program as a compelling investment. and now expect to repurchase approximately 500 million in each of FY26 and FY27. This 1 billion of total share repurchases represents approximately 25% of our market value. As Jim indicated, we see opportunities to create significant value for shareholders and are acting decisively to execute on our plans. While we appreciate the market's weariness with some of the uncertainty facing our end market, our FY26 revenue performance, and our leadership transition, we have conviction in our ability to further improve execution, deliver sustained profitable growth, and create long-term shareholder value. Realizing the potential of SAIC requires focus and a commitment to delivering on what we say. I am confident that we can accomplish this and demonstrate clear progress against this in the coming quarters. I will now turn the call over for Q&A.