Science Applications International Corporation Common Stock

Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the SAIC first quarter fiscal year 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Joseph DiNardi, Vice President of Investor Relations and Strategic Ventures. Please go ahead.

Good morning, and thank you for joining SEIC's first quarter fiscal year 2024 earnings call. My name is Joe DiNardi, Vice President of Investor Relations and Strategic Ventures, and joining me today to discuss our business and financial results are Nazik Keen, our Chief Executive Officer, and Prabhu Natarajan, our Chief Financial Officer. Today, we will discuss our results for the first quarter of fiscal year 2024 that ended May 5th, 2023. Earlier this morning, we issued our earnings release, which can be found at investors.saic.com where you will also find supplemental financial presentation slides to be utilized in conjunction with today's call and a copy of management's prepared remarks. These documents, in addition to our Form 10Q to be filed later today, should be utilized in evaluating our results and outlook along with information provided on today's call. 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 and quarterly reports on Form 10-Q. 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 results 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, Nozick Keen.

Thank you, Joe, and good morning to those joining our call. Earlier today, we reported strong results for the first quarter and increased our guidance for revenue and EPS for fiscal year 24. Our performance represents a strong start to the year, and we remain on track to deliver on the financial targets we provided to you at our Investor Day on April 11th. Before discussing our results in more detail, I want to continue my tradition of highlighting colleagues at SAIC for their contribution to our success. Though this quarter, there will be a slight twist, which I'll get to shortly. As many of you know, May is Military Appreciation Month, which is an especially meaningful time for SAIC given how foundational military personnel and their families are to our culture and our values. Over 30% of SAIC employees are military service members and veterans, and our Military and Veterans Employee Resource Group is SAIC's largest ERG. During the month of May, we recognize several important days for our country and our employees. VE Day on May 8th, Military Spouse Appreciation Day on May 12th, Armed Forces Day on May 20th, and of course, Memorial Day on May 29th. In addition, on May 10th, SAIC gifted its 14th home through its partnership with Building Homes for Heroes. For over 10 years, SAIC and Building Homes for Heroes have partnered to provide homes to deserving veterans and raised over $600,000 in the process. Here's where the twist comes in. We've included links in these prepared remarks and our earnings presentation slides where you can donate to support this outstanding cause and help fund future homes for our veterans. I want to recognize Mike Bramble, Stephanie Wall, and David Robinson for their leadership on this important program. Now on to a review of our financial results and outlook. As I mentioned, our performance in the first quarter positions us well to meet our goals for the year and is a solid first step towards achieving the long-term financial targets we provided in April. Our revenue of $2 billion represented pro forma growth of 3.5%. I remain encouraged by the performance we've delivered and expect revenue growth rates to further improve in both our second and third quarters. We delivered strong operating performance as reflected by our 9.3% adjusted EBITDA margin in the quarter. We remain on track to deliver at least 50 basis points of margin improvement in fiscal year 24 through a combination of our portfolio shaping and our organic initiatives. Our net bookings include $766 million from the DCSA One IT program, which was re-awarded to us in the quarter and on which we've begun to ramp up. However, our bookings do not include any contribution from the T-Cloud contract, which remains in the protest process. Looking ahead, our pipeline and backlog of submitted proposals remain strong, with solid growth overall and within our GTAs specifically. At the end of our first quarter, the value of our submitted proposals was $26 billion, an increase of 10% year over year, while our total qualified pipeline was up approximately 8% year over year. Importantly, our pipeline continues to skew favorably towards the higher margin areas of our portfolio, with approximately 50% of the contract award portion of our qualified pipeline aligning with our GTAs. Before turning the call over to Prabhu, I want to highlight some encouraging trends we have seen of late in both talent retention and acquisition. While we attribute some of this to an industry-wide improvement in labor metrics, we believe SAIC is performing well against the industry benchmark for turnover, and we are tracking ahead of our plan year-to-date on new hires and headcount. Obviously, there are a number of factors contributing to this, including some of the employee well-being initiatives we've discussed previously. I also believe that the leadership SAIC has shown in fostering a culture based on diversity, equity, and inclusion is a factor. It will continue to be a top priority for the company, as we believe it best serves all of our stakeholders. I will now turn the call over to Prabhu to discuss our results and improved outlook in greater detail.

Thank you, Nazik, and good morning, everyone. We reported strong fiscal first quarter results with revenue of $2.03 billion, up 3.5% year-over-year pro forma, or roughly 2% when excluding supply chain sales. Revenue in the quarter benefited from the timing of certain material sales previously planned for later in the fiscal year, along with improved performance. Given some of the potential macro risks facing the industry, we're encouraged by the strong start to the year. The company's first quarter adjusted EBITDA margin of 9.3% was also strong, benefiting from solid execution and the impact of ongoing margin improvement initiatives. Adjusted diluted earnings per share of $2.14 benefited from the stronger operating performance in the quarter and a lower effective tax rate. First quarter free cash flow was $76 million ahead of our plan as the momentum we demonstrated at the end of fiscal year 2023 on cash collections has continued into fiscal year 2024. As we highlight in our earnings presentation, quarterly free cash flow in FY24 will be impacted by the timing of payroll cycles with one additional payroll cycle in our first quarter representing a roughly $100 million headwind. We expect this to reverse in our second quarter, be a headwind again in our third quarter, and then reverse to a tailwind in our fourth quarter. I'll now discuss our updated outlook for fiscal year 2024. We now expect revenues in a range of $7.125 billion to $7.225 billion, a $50 million increase at the midpoint from our prior guidance, which now represents approximately 4% year-over-year growth. This increase is driven primarily by two factors, roughly $35 million of outperformance from our supply chain business in one Q and roughly $15 million from net improvements elsewhere. In terms of the expected quarterly cadence of growth through the year, we continue to see low to mid single-digit growth rate in every remaining quarter of our fiscal year after adjusting for Q for the five fewer working days this year. we have provided additional detail in our slides to assist with modeling. We are maintaining our adjusted EBITDA margin of 9.2% to 9.4%, though, as I mentioned, I'm encouraged by our strong start to the year and continue to see a multi-year path to further margin improvements. We are increasing our adjusted diluted earnings per share guidance to $7 to $7.20 as a result of the improved operating performance and the expectation for lower interest expense going forward. We are maintaining our free cash flow guidance of $460 to $480 million and continue to expect roughly $350 to $400 million in share repurchases. We deployed about $70 million of cash to repurchase our shares in Q1, and have picked up the pace here in the second quarter. Note that our free cash flow guidance excludes roughly 82 million of cash taxes, transaction fees, and other costs we expect to pay related to our supply chain sale. While we expect to recognize the bulk of these costs in our 3Q and 4Q cash flow from operations, we're excluding these payments from our free cash flow guidance to provide investors with a clearer understanding of the businesses underlying cash flow performance. In addition, we expect to record a gain as a result of the transaction in 2Q, which we will exclude from our adjusted results. As Nazik mentioned, results in the first quarter position us well to deliver upon the multi-year financial targets we provided at our investor day. This outlook will result in solid top-line growth, adjusted EBITDA margins greater than 9.5%, and free cash flow per share of approximately $11 by fiscal year 2026. We intend to accomplish this while remaining true to our asset-like business model, which we believe will result in SAIC driving an industry-leading improvement in ROIC over the next few years, while we recognize that driving sustained profitable growth and increasing margins is a key priority, we believe that doing so while also being disciplined stewards of capital is in the best interest of our long-term shareholders. As a leadership team and as a company, we remain focused on maximizing long-term shareholder value. With that, I'll now turn the call back over to Nazik.

Thank you, Prabhu. As we announced on May 18th, I will be retiring from my role as CEO effective October 2nd. The board has appointed Tony Towns Whitley to serve as SAIC's next CEO, and I couldn't be more supportive of their decision. Identifying the very best candidate and putting in place a smooth and orderly transition have been key priorities for the SAIC board, and we are confident that we have achieved both. The plan we announced allows for an eight-month transition to ensure this is a successful process for Toni, our employees, our customers, and our shareholders. I can say with confidence that the SAIC leadership team and I are incredibly excited to welcome Toni to the team and to further accelerate our strategy under her leadership. As I still have one more call with you all in September, let's leave our goodbyes until then. With that, I will now turn the call over to the operator to begin Q&A.

At this time, if you'd like to ask a question, simply press star 1 on your telephone keypad. Our first question will come from the line of Seth Seifman with JP Morgan. Apologies. Our first question will come from the line of Toby Summer with Truist Securities. Please go ahead.

Hi. Good morning. Thank you very much for the question. I was wondering if you could talk to us about the opportunities that you're seeing develop in the space arena, something that we talk about periodically on these earnings calls. And if you could talk about them in terms of all the exposures, military intel and the civil agency. Thanks.

Yeah, this is Nathick. Hi, Toby. I'll start off and then certainly Prabhu can add some color. I think consistent with the way we've been describing this market, we see the opportunity across the broad space domain, including DoD, obviously civilian and Intel, to really leverage some of the key areas of GTA. So as an example, in IT modernization and being able to drive IT modernization across the space domain. In our SID strategy, being able to do systems integration and delivery in a very, you know, capital light manner, as the nation looks to expand and further strengthen the space domain. So I would say it's a key part of our strategy. We see key areas of continued opportunity as it relates to the GTA. And then, of course, we do some work in the CETA space as well in the space domain, and that's a key part of certainly our core business and allows us to have the skills and the competencies and past performance to further accelerate. Probably anything you want to add?

That was great, Nozick. Thank you for the question, Toby. In a really big picture, about a fifth of the portfolio has space exposure. And as Nozick pointed out, that's a combination of civil space, military space, and intel space. And, you know, the portfolio is pretty well balanced across the GTA areas as well as sort of the core mission engineering side of the portfolio. There's a fair amount of CETA inside our space business. And so there's that's predominantly in the Intel space area so good exposure on the space side we flagged over the last couple of years or so some things we are taking on to the development side of our space business. not impacted by the OCI that you'll typically see on the CETA side. So the teams had some success, you know, building out a portfolio that is, I would say, a little more biased towards the development side. And as Nazik pointed out, there are a couple of neat things that are happening on the development side that hopefully we'll be able to update you all in future calls.

Thank you. For a follow-up question, I'd like to talk to you about your plans to improve returns, ROIC plans, What do you see as the biggest risks to achieving that goal? And are you talking about growth or sort of change in ROIC being industry-leading or absolute percentage industry-leading? Thank you.

Yeah, so I'll take that one. So really big picture, I think we recognize that in order to you know, build ROIC over the long term, we've got to consistently be able to grow the business profitably. And we believe we are demonstrating the capacity for this business to organically grow quarter over quarter. And I believe we've done that pretty well over the last couple of years. But there's more here to do, and we're going to continue to do that. In addition to that, we recognize that there is a multi-year path for margin improvement inside this portfolio. So we have provided multi-year targets on the margin side at our investor day, and we are firmly committed to ensuring that this portfolio continues to do well on operating margin adjusted EBITDA. And finally, we have been biased towards our share buyback program, which is clearly adding value here. As I think about the buybacks over the last couple of years, on a total share count basis, we've retired over 10% of our total share count. net of the equity issuances, I would say, in the high single-digit area in just two short years. So we believe the combination of growing the business, improving margins, and favorably deploying capital to the long-term interest of our shareholders is going to allow us to be a leading generator of ROIC over the next couple of years relative to the peer set. And we actually have a chart in the earnings presentation that demonstrates the progress we're going to make over the next couple of years. So to me, that's sort of how we think about ROIC. When we talk to our shareholders, they communicate to us how important this metric is for them. And this is sort of our homage to it to make sure that we are profitably growing the business and creating real economic value over the long term.

Thank you.

Our next question will come from the line of Matt Akers with Wells Fargo. Please go ahead.

Yeah, hey, thanks very much. Good morning. I wonder if you could just comment your thoughts on the debt ceiling deal and how that sort of fits with the long-term assumptions and your long-term guidance.

Yeah, thanks, Matt. So I think as with everybody, probably in the nation and certainly in our industry, we're really, really pleased that they were able to get a bipartisan bill passed and get it passed ahead of schedule. So very, very happy to hear that. This, we were having discussions around, you know, this, we happen to be doing our call on the day of when it was supposed to expire. So we're pleased that that's behind us. At a high level, you know, we continue to see a very large addressable market. And we don't expect that to change materially as a result of this particular bill or any, you know, kind of near-term things that we're hearing about. You know, the, our position is we're very well diversified across defense, non-defense, and intel. And so we believe that positions us well as we go into whatever the next few months might bring, and certainly well positioned in both modernization as well as sustainment. So very pleased it got passed, very pleased it got passed in a bipartisan way. I think it showed some encouraging trends. But we don't see any short-term hiccups or challenges with it, and we'll continue to monitor it just as everybody else does across the industry. I'm going to let Prabhu provide a little color as well.

Sure. Hey, Matt, thank you for the question. You know, we've been messaging for probably three quarters now that we expect the long-term budget prognosis to reflect, you know, sort of this gridlock and potentially defense budgets growing in that low single-digit range. And I think this latest deal sort of memorializes that view, I think. In terms of the direct impact of this particular budget deal relative to the guidance we've provided on a multi-year basis, I would say it's fairly in line with what we've assumed. We have been communicating that that 2% to 4% long-term revenue guide at the mid-point three reflects some modest element of market share capture, which is sort of reinforced by the deal that we have in place. The reality is we're going to have to watch the specific line items inside of the budget, what the supplemental bills potentially could include. and potentially what it means for modernization versus legacy systems. As Nazik said, I think we are balanced in terms of our exposure to both legacy systems, as well as modernization. So to the extent you see dollars flowing back into legacy systems and away from modernization inside of FedSiv in particular, um, I think where portfolio is actually rather well placed, um, on, um, on that front as well. So again, you know, I think we'll learn a lot. Uh, we'll discover even more things I think over the next six months and, uh, We're just going to have to see how this plays out, but I'd say no real big change or impacts on the long-term revenue guide we provided.

Okay, great. No, I think that's helpful color. And then I guess can you talk about how do you see book-to-bill coming in for the year? I see you've been pretty steady at one-time level. It sounds like the pipeline is pretty healthy. Should we expect book-to-bill to come in above one for the year, do you think?

Yeah, so this question actually coincidentally came up on the last earnings call. Look, I think at a midpoint of that 2% to 4% revenue guide on a multi-year basis, we would expect book-to-bill over time to be comfortably over $1.0. And I think obviously we don't guide to book-to-bill on a quarterly basis, and you all recognize how lumpy it can be and how inherent practices are different across the different registrants. And therefore, I would just say comfortably over one is the long-term objective, and I think we're doing a nice job right now to delivering a backlog that is going to help us continue to grow this business.

Okay, great. Thank you.

Your next question will come from the line of Bert Subin with Stiefel. Please go ahead.

Hey, good morning.

Good morning.

Morning, Bert. I hate not to get real good. Maybe following up to Toby's question, what are you expecting on the civil side of space, just following a couple NASA contract headwinds? And then more broadly, Prabhu, it sounds like your view towards Fed Civ is that it's pretty in line with what you were previously thinking. Where do you expect some of that pressure will show up in Fed Civ? Because it looks like those budgets are going to be the ones that are going to experience the most pressure when we look to next year.

Sure. Maybe I'll take the second part first, Bert. So on the on the Fed side, as I said, you know, there's good balance between legacy systems and modernization to the extent we see budget dollars move away from modernization. You could see some impacts on programs that are starting to ramp potentially. And again, we do have a fair amount of legacy systems that will actually be the beneficiary of any impacts on on the modernization accounts, if you will. Now, the caveat to all of this is this presumes that all 12 appropriation bills will actually get passed by early January. And the reality is we all know that if that does not happen, oddly enough, FedSiv is likely to see more money than they would in sort of the standard deal, if you will. That's in place right now. So I think that's why I think it's important to be methodical and a little careful about how this plays out over the next six months. But we do see some impact to potential modernization if the priority becomes maintaining legacy systems. And the reality is we are well exposed to the legacy systems as well. And therefore, we think we can manage and navigate our way through any potential shifts in funding that we see over the next six or eight months.

Yeah, I think one thing I would add to that, Prabhu, is I think you hit the nail on the head. There certainly could be some short-term pressures but the requirement and the necessity for the federal government across all of its, you know, kind of whether it's defense, intel, civil, to modernize is absolutely critical. So, although we might see some short-term headwinds if, you know, if your scenario plays out, we still believe that modernization is key. It's required for the federal government to stay current in systems, to deal, you know, to deal with cyber pressures and all those things. So, but I think Prabhu put it well. We can navigate either way. We can support either way, and we're well positioned across the portfolio. On NASA in particular, you know, certainly the, you know, the OMS contract is in going through the protest process, so I'm not going to discuss that in too much detail, but we do see continued opportunities in civil space. We see, obviously, from an IT modernization, the continued need to do that. We see, you know, the ability to pivot in some of the other GTA areas And for us, it's just focusing on those areas in which we can bring differentiation, where we can set ourselves apart from the competition through solutions, through innovation. And of course, we tend to see more pressure when it's labor only and when it's price and labor combined. And so it's really pivoting to those areas where we can bring differentiation, leverage the competency that we're seeing maybe in some of the other areas of the space domain to drive pipeline and opportunity in the civil side.

okay okay great um maybe just as a follow-up uh you know really strong first quarter performance um and now i think you had some some positive commentary there on the hiring front and it sounds like that's going well so you maybe just help us bridge the gap thinking about on contract growth because i imagine that that's a pretty solid tailwind and then just putting that into the context of sort of a pretty modest revenue increase after a pretty strong first quarter

So, hey, Bert, I'll take that one. So, you know, I think we signaled on the Q4 earnings call that we are seeing attrition start to flatten out. And I think we're pleased to report that that trend has continued. So attrition is certainly trending better than where it has been over the last couple of years. Our hiring has been pretty good as well. And especially with DCSA-1 IT starting to ramp, we think there's potentially continued upward bias, if you will, on the labor generation side. Now, The flip side of having good labor generation is that it actually makes us a little more affordable because we have a broader labor base against which to spread our fixed costs, if you will. Therefore, that is certainly starting to come through on the margin side, which is certainly part of the reason why we delivered the 9.3% margin rate in spite of a good portion of that beat coming from our supply chain business, which we all know and we've communicated historically that is a lower margin business for us. I mean, I think when we talk about the mix here and the fact that labor is trending well, it bodes well for on-contract growth on a full-year basis. But having said that, in spite of the good, strong first quarter, there's three quarters left in the year, and we've got to go do our share of the work. And, you know, we'll keep you all posted. As I said, our commitment is to keep you calibrated on what we're seeing internally and the updates we provide it. on the Q1 call is our first attempt to do that this year. And hopefully we'll have some good things to report on labor and margin and hopefully growth. But we have to go see how this plays out over the nine months and we've got to go execute. And we're really proud of what we've done, but one quarter does not make a year.

Yeah, a couple of things I'll just add. So on the labor side and the people side, that has been a core part of our strategy these last few years. Obviously, COVID gave us a little bit of hiccup and we've all pivoted post-COVID to adjusting to what the new normal is. But the ability to hire, attract, and retain talent is fundamental to our overarching growth strategy. And so very pleased to see the positive momentum. But as Prabhu stated, we watch it very closely. And, you know, we're really as good as our last quarter. So very pleased with what we're seeing relative to our industry peers, relative to the broader industry. But we also recognize that that's common.

if it's not taken back, and what kind of a ramp. And OMS, you lost it. It's in protest. When is the protest date? And, you know, when would it transition? And then Vanguard, maybe an update there. Thanks.

Okay. I'll let Prabhu do the run through of the few, and then I'll add whatever color.

Sure. Hey, Kai, I appreciate the question. So DCSA-1 IT has begun to ramp. and that we're still in the early stages of that ramp and continuing to work with the incumbent there as we transition away from them and onto our labor base. And it's certainly helping the labor