Q2 2022 Science Applications International Corp Earnings Call
<unk> 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 a discussion of these risks, including the risk factors 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 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.
It is now my pleasure to introduce our CEO <unk> Keene.
Thank you Shane and good afternoon. Thank you all for joining us today.
Before I begin our quarterly update I would like to take a moment to share some great news on our leadership transition of an exceptional individual that many of you know very well there.
Those of you in the investment community have worked closely with Shane can extra over the past several years.
<unk> will be transitioning into a new assignment within the company, leading our corporate social responsibility and public relations function.
Im excited for <unk> continued growth and SAIC. This as a real time example of our focus and investment and talent development.
Joe de Nardi, who many of you also know will be joining us to lead our investor relations function, bringing a wealth of experience from his prior role as a sell side analyst.
Joe and Shane will work closely over the next few weeks to ensure a smooth and seamless transition with our investment community.
Now on to the business at hand, we are excited to discuss our quarterly results and updated outlook for the rest of fiscal year 2022.
CIC performed very well in the second quarter delivering strong financial results, while continuing to execute on our strategy for long term shareholder value creation.
During our second quarter the team delivered strong revenue increased organic growth and outstanding profitability.
Organic growth for the quarter was approximately 4% our third consecutive quarter of organic revenue growth.
Adjusted EBITDA margin was 10, 1% another all time high after producing record margins last quarter.
Free cash flow generation continued to be strong and in line with normal second quarter seasonality.
We continue to allocate capital for long term value creation through a balanced mix of accretive M&A share repurchases and dividends.
We are proud of our accomplishment, while remaining ever vigilant in driving performance into the future.
<unk> in a strong position as we focus on our tomorrow, we are strategically positioned with a balanced portfolio of business and capabilities.
We've accelerated our investment in technology talent and solution development in critical areas, including digital transformation artificial intelligence and engineering innovation, while also enabling our customers to procure these solutions and services and newer acquisition and delivery models.
For example last quarter, we discussed our acquisition of <unk>, a key step in creating the artificial intelligence platform for our solutions.
Our efforts with <unk> are off to a great start as we have seen an encouraging number of important new business opportunities.
We are excited about the differentiation, we can bring to our customers through the combination of our deep mission understanding and co versus unique technology platform utilizing artificial intelligence and machine learning on complex sensitive data.
This quarter, we launched another suite of technology solutions, and cloud and our end to end suite of integrated cloud and digital tools with.
With cloud and we are able to systematically modernize customers legacy systems with proven and repeatable processes and tools immediately unlocking the value of the cloud.
We're already seeing success in cloud and our work with an army customer where SAIC assessed modernized and migrated 90 applications to a cloud environment by leveraging cloud <unk>.
By migrating and rebuilding application components in the cloud and for the cloud we strengthened cyber security improved application performance and delivered a lower total cost of ownership to our customer.
Combined with our continued investments in areas such as Zero Trust and digital innovation, we are delivering significant value to our customers.
Our solutions focused investments in tools continued to accelerate secure and deliver our customers' mission needs through greater adoption of emerging technology.
We've also made significant strides in the second quarter by expanding our presence in growing markets, specifically federal health our.
A half acre and associates is off to a good start performing well and providing immediate access to strategic health sector customers.
Early successes are being driven by the strategic intersection of the customer and contract vehicle access.
By half acre combined with market, leading offerings and capabilities leveraged from the entire enterprise.
With the full scale and breadth of SAIC now available to half acre. We are investing in further accelerating new business opportunities as one fully integrated team in the federal health market.
It is also important to note the accomplishments we have made in our commitment to cultivating and attracting industry, leading talent one of our strategic priorities.
We recently announced the hiring of a chief climate scientists to advanced Saic's leadership capabilities and solutions in support of our customers as they address climate related missions, a critically important priority for this administration.
We remain committed to a culture that promotes the hiring retention and development of our largest asset our exceptional talent.
Talent is a critical element of our strategy and I am pleased with our ability to differentiate ourselves in a tight labor market, allowing SAIC to deliver the strongest teams to the most pressing customer challenges.
Our continued investment in talent is a key differentiator and enabler of profitable growth in the market.
The actions taken in the second quarter underscores our commitment to investing in mission critical emerging technologies, expanding our customer base and securing key talent. We will continue to share important technology and mission updates as we make progress in these areas.
Let me now turn to what we're seeing in the market as we enter the last month of government fiscal year 'twenty one.
Our customers continue planning for the future and making award decisions.
While it is very likely that the government fiscal year 'twenty two we'll start under a continuing resolution our country's leaders are working through the budgeting process with indications that appropriations could be in place by the end of the calendar year.
Not optimal it is also not unusual and SAIC knows how to successfully navigate this environment.
We believe that federal budgets are shaping largely in line with the President's request.
And perhaps a bit more favorable but initially requested for the department of defense.
While the process is still unfolding we are encouraged by the recognition from our country's leaders on the importance of continued technological investment.
Of course, the pandemic continues to be at the forefront of everyone's thoughts.
The emergence of the Delta variant and a surge in cases as a result of the continued caution.
And CIC continues to operate well navigating the environment, but also looking forward to an eventual return to a new normal.
Our plan is to continue in a hybrid work environment, recognizing some employees are required to be at SAIC or customer site, while others can work partially or fully remote.
This approach aligns well with our objective to attract and retain high quality talent by providing flexibility for our workforce.
This will continue to open our aperture for talent as we recruit from a wider geographical area.
<unk> will now discuss the details of our second quarter results and financial outlook for the rest of the year.
Thank you and answer Ken good afternoon, everyone.
<unk> delivered another quarter of strong performance across a variety of financial measures. We've continued to deliver in the near term for our shareholders, while continuing to make the necessary investments to align to our long term future.
Let me start with our business development results net bookings for the second quarter were approximately $7.0 billion translating.
Translating to a quarterly book to Bill of <unk>, nine and a trailing 12 month book to Bill of one six.
The larger contributions to our quarterly bookings are disclosed in our press release today.
At the end of the second quarter Saic's total contract backlog stood at over $24 billion.
Up 25% from a year ago.
At the end of the second quarter the value of submitted proposals was nearly $20 billion.
Up from last quarter by $8.0 billion.
Reflecting a continued healthy pipeline and strong demand for our solutions.
Just over half of the value of submitted proposals is for new business opportunities.
Let me now turn to financial results for the quarter our.
Our second quarter revenues of approximately 184 billion.
Reflect growth of four 1% as compared to the second quarter of last fiscal year due to ramp up on new and existing contracts net favorable changes in contract estimates and partially offset by contract completions Halfacre and associates, which closed early in July contributed a modest amount of revenues for the quarter.
Excluding the impact of the acquisition and divested revenues second quarter revenues grew organically by three 8%.
Second quarter, adjusted EBITDA was $185 million and $18 million increase from the prior year.
Adjusted EBITDA margin was 10, 1% after adjusting for $14 million of acquisition and integration costs SEC.
Quarter margin performance was very strong across the business and the quarter favorably benefited from solid profitability across the portfolio net favorable changes in contract estimates and the accelerated amortization on certain off market liability contracts the acceleration of amortization of off market liability contracts in other car.
Tract adjustments totaled $17 million for the quarter or about 80 basis points of profitability.
Diluted earnings per share was $42.0 for the quarter inclusive of the second quarter acquisition and integration costs of $14 million.
Excluding these costs as well as amortization of intangibles and net of a tax rate of approximately 24% in the quarter. Our adjusted diluted earnings per share was $98.0
Second quarter free cash flow was $85 million a.
A quarter of solid cash generation and days sales outstanding at the end of the quarter were approximately 60 days.
Second quarter generation was modestly below the prior year quarter. However, last year's generation benefited from about $40 million of payroll tax deferral as afforded by the cares Act.
During the second quarter, we deployed $310 million of capital towards the closing of the culberson half incur acquisitions share repurchases dividends and capital expenditures. In addition, we continued to delever, making mandatory debt repayments and ending the quarter with a net leverage ratio of just under three.
Five times, we are running modestly ahead of our internal targets on this front due to our favorable performance, we continue to prioritize share repurchases over voluntary debt repayment in the quarter.
As announced in our press release today, our board of Directors has approved a quarterly cash dividend of 37, a share payable on October 29 to shareholders of record on October 15th.
Now turning to our forward outlook as noted in our press release today and slide eight of the presentation slides.
Based on performance through the second quarter. The addition of half acre and associates to the portfolio and our outlook for the rest of the year, we've updated our guidance to the following.
Revenue between seven 3% and seven $4 billion raising the lower end of our previous range by $50 million and adding approximately $100 million of anticipated contribution from Pathic associates.
This reflects lower estimated full year COVID-19 impacts of approximately $125 million down from $150 million and achieving ramp on new programs somewhat earlier than previously anticipated.
Given recent Covid trends, we expect to see continued pressure in our supply chain portfolio over the next few quarters. However, we are challenging our team to focus on growing the portfolio with or without any recovery in this business.
Adjusted EBITDA margins between eight 999% raising the top and bottom end of our previous range, reflecting our strong year to date performance, but continued anticipation of higher indirect costs and increased investments in the second half of the year on EBITDA dollars. We continue to expect Covid to have.
Up to $10 million of impact in fiscal 'twenty, two unchanged from our prior estimate.
Adjusted diluted earnings per share between $56.0, and.
$76.0
Raising both the top and bottom end of our previous range, reflecting increased profitability from half acre and our strong first half performance free cash flow unchanged at between $900 million summing up we are pleased with our strong performance of Q2 and look forward to <unk>.
<unk> execution over the remainder of the year Nasik back to you.
Before taking your questions I would like to highlight Saic's recently published 2021 corporate responsibility report.
As you've heard from us in multiple venues SAIC is very focused on creating a better tomorrow from.
From climate change strong corporate governance to diversity equity and inclusion we are committed to making a difference for our stakeholders environment and communities.
It is core to who we are and as reflected in our purpose statement to advance the power of technology and innovation to serve and protect our world.
Operator, we're now ready to take questions.
Okay and at this time I would like to ask any questions. Please press star one on your telephone keypad Covid.
To your question this breath accounts phosphate.
Forget that moment to compile the Q&A Rob.
Andrew.
And it comes from the line of Cai von <unk> from Cowen Your line is open.
Yes. Thank you very much so first.
Your guide looks like it's essentially unchanged, if we take out the COVID-19 and we take out.
Aker.
And your numbers imply.
It looks like organic growth decelerates in the second half.
Is that correct and if so why.
Hi, guys.
Thanks for the question.
In terms of the guidance, maybe I'll just jump right into it.
Very pleased with our performance.
Six months.
I think second quarter all of them really good first quarter on both topline as well as bottom line.
You are that loses balanced disappointed.
What I would call it.
In line with six months of the year.
And that led us to increase the bottom end of the guidance range in.
In addition on the top and we do have land ahead of us in the form.
One was the MSCI world.
In the second half of the year.
And to also continue to ensure we get the right talent.
District.
So I would say on balance given maybe a little more muted COVID-19 impacts in the second quarter and adding haptics.
We sort of up the lower end by 50, and then added 100.
In terms of that sort of the second part of the question around the deceleration in the second half.
And on the seasonality of this business and to see.
If you actually run the math on the number of productive days in the first half versus the second half we actually have more for you.
We're working days in the second half the first half.
You sort of took the first half revenue number is sweet.
Sort of annualize that get to about 70.
And the reality is that extra four days that we don't have.
Tactically about $120 million to $130 million.
But we do have sort of the ramp on spi occurring so that causes our top end guidance range to be applied.
So that's sort of the math.
As you know.
Oh in the business on a consistent basis is really important to us.
Our incentive comp metrics and therefore, we know what the team has in front of us over the next six months. We're obviously pleased with the performance versus once a year, where we've got six months ago get the remainder of what we need to go accomplish here.
I would hope that we can achieve.
To be able to take a positive view.
While one quarter timing.
Right. So I mean, if I look.
If I look at the.
One just last one if I look at the <unk>.
Organic growth last year. It was negative so it's not like you have a very difficult comp and COVID-19 is down.
Year over year, so I still am a little bit mystified.
Why given with a basically a one five plus trailing 12 month book to Bill.
Organic growth in the second half would not at least equal the second quarter or is there something else happening.
Right.
The question I think I think as I walk through the math, we're always seeking to offer a balanced sort of transparent view annoying.
In the business.
We know what we have to go through in the next six months and I wouldn't quarrel with the math on what the implied run rate might be but with COVID-19 still being a dynamic out there in the second half of the year. There are still there's still a fair amount left in the year and again as I said, we hope to come back and have another conversation in December here.
Q3, but we've got some ways to go here, but the trend lines are positive and I want to acknowledge that because we're really pleased with the performance of the team.
Got some work to do there.
Yes, Hi, this is not the extent.
Let's start with a couple of things that profit. So obviously, we are pleased that.
Mentioned with the accomplishments for the first half of the year.
<unk>.
Got it fit trajectory going and feel confident in our ability to deliver on the business, but as we look at that.
Probably mentioned there is still half a year ago and so we believe this is a very balanced risk adjusted.
Set of metrics and guidance.
That provides visibility derisked the topline as Tom had mentioned incorporated Halfacre, but again, there is still half a year ago.
Really how we think about it and two others point.
We are optimistic we feel good about the business, but there's always elements of risk.
Come into play and we want to make sure that we look at it holistically.
Great. Thank you very much.
Thanks Scott.
And your next question comes from Greg Konrad from Jefferies. Your line is open.
Good evening, and just wanted to congratulate scene.
A pleasure to work with.
But just looking at kind of following up on the last question just looking at guidance the implied EBITDA at the mid point goes down to 8%, maybe you kind of called out higher investments can you maybe help.
Where the opportunities are on the profit side, given some of the one timers in each one and even adjusted for those I mean, I think you were still above 9% in Q2.
Got it thanks for the question Greg.
I mentioned in my prepared remarks, there were some favorable I call them materially favorable items in the second quarter the impact of profit.
Okay.
And as you recall, we also had a significant number of adjustments in the first quarter.
Back half math would imply a low to mid 8% EBITDA margin rate.
We expect a couple of things that one that we will continue to spend and invest in the business to sustain the growth rates, we're starting to see in the business.
And two I think we also have indirect costs under one in the first half of the year relative to the second half.
Are you expecting some ramp up in the indirect spend.
In the second half of the year relative to the first half so.
Again, I'd, probably go back to the notion that if you sort of took the.
Large adjustments as I mentioned in the script that drove second quarter.
Moving profitability up from 10, one so we offered a bridge of about let's call. It 80% 80 basis points to get us to I would call. It sort of 90.91 in the second quarter. So really good performance in the second quarter, but it gets you to about sort of a little over 90% and then if you then add a couple of elements that I just pointed out in the form of additional.
The investments.
And then it sort of implies back half margin drain a sort of a low to mid 8%.
I'm going to go back.
And the way I would respond to the prior question would you guys look we know what we have to do to profitably grow the business.
Going to takes us one quarter at a time and make sure we're executing a quarter out while we're planning three years out those business. So we understand the back half map, we know what the piece needs to go through it is an important part of the incentive metric for us to ensure the group profitably growing the business. So.
Going forward to having that conversation again, but those are the specific drivers and sort of broadly how we're thinking about EBITDA performance.
And then just a quick follow up to that.
You raised topline and EBITDA is there an offset for why the cash is unchanged or any kind of changes. The fact, given some of the acquisition.
So yes on cash look we're proud of our execution year to date on top line as well.
On cash.
Some of the EBITDA adjustments, we saw in the second quarter.
Primarily term noncash earnings pickups without a corresponding cash element this year.
So that's in part why our cash diet Hasnt changed I think the second more important factor is a lot of cash gets collected in this business in the second half.
And therefore, if you think about the seasonality of cash flow.
We know what we have to go do in the back half of the year on cash.
And if you think about cash on a year to date basis, comparing the first half of 'twenty two versus the first half of 'twenty one.
Actually adjusted for the payroll deferrals that we got in the first half of last year were actually about 20% higher on an operating cash basis on an apples to apples if you've just adjusted for the payroll.
So I think we're off to a good start on cash when we have a lot of cash we will collect over the rest of the year.
And we're going to keep working really hard on cash because I've always said.
It's important to convert net income to cash on a really strong basis and on a longer term basis. We really do believe that there is opportunity on converting EBITDA into cash year again in the form of DSO. So we're going to work this structurally over the long term and for the moment I'd say we're comfortable.
The guidance with some opportunity in the back half as long as we continue to do essentially is to collect the cash gen.
Generate good uptake.
Thank you.
Thanks.
And your next question comes from.
Five men from JP Morgan Your line is open.
Thanks, very much and good afternoon.
Okay.
I was wondering.
If you could talk about the.
The <unk>.
<unk>.
H contract is that how that factored into the view on the topline and and also whether or not to the extent that it's a factor that was accretive.
To the margin rate.
Hi, good afternoon. It is in Opex, though as you are likely aware, we did file a protest earlier this year and as a result of that that protest naphtha has decided to take corrective action.
Which which drove the jal to dismiss the protest.
The status of where we are today as it relates to and of course, we continue to perform that work for our government customer continue to support their mission.
<unk>.
We'll continue to do everything in our power to.
To maintain that that abilities DSO as it relates to our forecast and guidance.
With any contract that we take a holistic view, we risk adjust the.
Top line and the bottom line based on the knowledge that we have to date and so there is an element of that but it's factored in.
Just on the information that we have at this point.
Okay. Okay. Okay.
And then as you look at <unk>.
So the fixed business.
I guess, if you could talk about how things have played out in the <unk>.
And thus far this year and then it sounded like there were maybe some challenges in that business. So as a result of COVID-19 and yet we.
Expected impact of Covid on the top line fall.
So maybe what the.
The puts and takes are at in that business and where it sort of had a good expectation.
So with respect to the supply chain business back in March which signals that business tends to operate in a range of $10 million to $15 million.
Where we're seeing volumes in that business is sort of squarely in the midpoint of.
That range between.
$15 million a week.
I think when we start to see that business recover to closer to 15.
We look back and say, we'll probably see the last waiting effects of Covid, but at this point I'd say, we're still sort of in the midpoint of that range. The business is not any better than it was in Q1, certainly not any worse than it was in Q1, it's sort of maintaining the run rate here I think we're sort of estimating what the COVID-19 impacts.
For the year and as you can tell from from some of the data. We've provided we're running at about 30% to $35 million of Covid impacts given.
A given quarter and that sort of annualized is about 125 net operating.
In the script, so I'd say, that's where we are and obviously, it's a watch item for US we spend a lot of time watching weekly volume here in that business.
I'd say, it's fairly stable at this time.
Okay, great. Thanks very much.
Thank you.
And your next question comes from Matthew eight curious from Wells Fargo. Your line is open.
Hi, yes, good afternoon.
Hey, Matt Congrats congrats Shane.
All your help.
I Wonder if you guys.
I Wonder if you could touch on the hiring environment.
Countless kind of flat.
Sequentially based on the number and Youre releasing is that okay, and do you guys need to grow head count and then just sort of what are you seeing out there in the labor market.
Yes.
Yes, thanks for the question.
So we have about 25.26500 employees right now and that includes the acquisition of catheter and <unk>.
You're right there is certainly some conversation around.
Tighter labor market for a couple of reasons, one obviously coming out of the pandemic, we're seeing attrition slightly tick up and that's across our industry certainly probably most illustrates.
As well as the opportunity to grow now with that being said.
We performed very well during the height of the pandemic, we had as we went into the pandemic situation, we had already mobilized the ability to to interview hire recruit.
In an offline manner and enable to do something about Lee and that served us exceptionally well during that time. So we continue to use that we also as a result of our own flexibility as well as increased government customer flexibility have the opportunity to hire talent from.
What's a geography and so that has opened the aperture for us.
And then we continue to focus on.
Inside the company to drive ourselves.
<unk>, an employer of choice and to differentiate ourselves in the market.
Doing levered.
Leveraging.
Whether it's flexibility obviously comp benefit to the traditional methods and so all of those things certainly go into play we believe we can hold our own and have held our own as it relates to hiring and retention of staff, but theres certainly is a tighter market and we're very cognizant of that and and reacting as well as baked proactive.
To ensure that we can set ourselves apart that labor market.
Okay.
Thank you.
Thank you and again.
Have any questions. Please press star one on your telephone keypad. Your next question comes from Gavin Parsons from Goldman Sachs. Your line is open.
Good afternoon.
Kevin.
Congrats on the new rules.
Thank you very much.
Hey, guys on the implied deceleration in growth in the back half just wanted to touch on the elements of risk that you're talking about is that you actually have visibility into headwinds in the back half and the risk is on how fast you can ramp up offsetting wins or offsetting revenue to grow.
Or is the risk that you don't necessarily have visible headwinds you have visible growth, but you're being cautious about unknown headwinds if that makes sense.
So you Havent Purdue here I'll take the question, we have visibility into the growth in the back half.
We said at the start of the year that army risks will ramp starting.
Starting in the second half, we actually saw some good growth.
In the second quarter.
He said the income Sci portfolio will ramp in the second half and all indications are we're well on track to wrapping up on us.
So certainly from the standpoint of visibility I think we have good visibility.
What we don't have and most people don't.
The dynamics around Covid and specifically the impacts that you can see on a near term basis within the portfolio that could potentially be higher than what we're contemplating. So I'd say there is a cautious element to the guide we do see the ramp but it is also a tight labor market, where we have to go get the head count in place for us to start.
This program. So it's probably a combination of those things that causes us at Q2 to be perhaps.
Haps cautious along the way, we're thinking about the back half of the year, given what we experienced which was severe deceleration in Q4 of last year. So having lived that painful lesson, we want to make sure. We're cautious about how we think about the back half of the year and again as I said.
At the top of the call. We are hoping to have better results on top line growth at the Q3 call, but that means we have to actually go get some of these things.
Okay that makes sense for us on smaller contracts specific detail as well.
This may be difficult to do but if you were to just strip out the COVID-19 impact entirely from this year and last year.
Whats the business growing.
The right near term run rates or you can get you still have.
Yes.
Impact of areas trailing bookings to accelerate that or how do we think about that going forward yes.
Got it there are a couple of ways to think about this question I think one you could certainly add COVID-19 impacts in the second quarter of this year.
Fair way to think about this which is you think about the COVID-19 impacts from Q2 of last year, and then sort of eliminate that in the comparison to say organically apples to apples what is it.
This business growing and I would say that math will get you to a number that's been.
Low 2% range.
Here's where I think there's an important lesson that percent is before the Sci programs start to ramp and that's inherently I'd encourage you to.
Way to think about this business.
As we build momentum into the second half of the year.
Cash flow, obviously again COVID-19 created a lot of Lumpiness there too.
$1 billion target.
'twenty one 'twenty two.
If you were to roll that forward to include 2023.
Realizing there's still some COVID-19 impact there I think a lot of the repayment of the.
Payroll taxes.
Should we think of as the.
The two year period, including 23 is higher lower or similar.
So I've always said that this business that there is opportunity and DSO that will allow us to get better if we make some structural changes to the way.
Guidance too.
Right.
Price it to say that it is a.
Really important metric for us.
Given a higher weighting in our long term.
We are going to solve the generation of cash.
Actually we're going to keep doing that.
The next few years.
Got it thanks Bob.
This is an area where properties.
Probably hear the passionate as voya.
I guess when he talks about it but it's an area that is.
As he noted.
Critically important to us from an overall metrics and compensation and one in which a lot of attention focus and I know that we will see the benefits of that.
Thanks, guys.
And your next question comes.
Tobey Sommer from <unk> Securities. Your line is open.
Thank you.
Shane congratulations.
<unk> performed in a superior fashion I'm sure continue to virtual.
I wanted to ask a question about COVID-19, but from a longer longer term perspective, and maybe stepping back.
Are there material changes that you are seeing now that we've been.
So dealing with us from a long term long term perspective.
It looks like we will be for.
Your foreseeable future.
<unk>.
Where customers are.
Kind of really studying making different changes in the way they.
Procure services in the way they allow work to be done and then internally from your perspective.
Your ability to staff projects and.
Fulfill your clients.
Needs in a more.
More diverse fashion that perhaps isn't as DC centric.
Thanks Tobey.
Absolutely I think we are we are seeing a pretty substantial change in a few areas and let me touch on the.
You talked about one of them are you asked about one of them as it relates to our customers' willingness and ability to either work differently themselves are certainly engage with us and how they work and we're seeing that across the board.
It has been probably more common in some of the commercial industry to have.
Workforce working in different fashion, whether it's remote whether it's offshore but for the federal government and its been its certainly been part of the way they do business, but nothing like we're seeing now so I do believe that we are seeing a.
I will say permanent I don't know what permanent past this particular pandemic stage and.
Many of our customers are allowing for geographic flexibility.
It's an office in entering and will continue will be.
We will be able to continue to operate that way.
There are some positives that come with that as I mentioned earlier, it does allow more flexibility and our ability to hire and recruit hire and retain.
To reduce the cost of labor.
Being able to higher income areas.
Lower labor cost and so.
So allows many cases in some geographical areas, where the labor market tends to be tighter.
Greater access to talent and so I think thats enduring we're seeing Edison.
Alright, I think will create this opportunity of the permanent way to do business now together. The other part of that is obviously and you've heard some of our competitors talk about the ability.
Due to potentially reduce the real estate footprint and certainly that's something we're looking at and provide guidance and insight.
As we make decisions there.
That will also allow for a lower cost structure now obviously, 50% of our portfolio.
Portfolio being cost plus the government benefits from that as well and and then just gives us different opportunities from a from an investment standpoint. So we believe that that will be something that is enduring as well as we look forward.
My follow up.
On a night.
We're not looking at real estate in isolation.
Are you able to discern at this point whether the.
These changes both at the customer level and within the company.
There are accretive to profitability or dilutive.
Okay.
I'll take that one.
Given the predominance.
Plus mix in this quarter.
The ability to take some cost out and we invest in parts of the business that means that investment is a really important.
The way to think about this so well.
On balance we will see some cost reduction.
We are likely going to want to invest that in the business to continue to grow the business. So I'd say from a margin rate perspective, I would say it probably will not be a significant driver to profitability over the long term, but you should think about this financial flexibility for the company to invest in the areas that need additional investment.
Understood. Thank you very much thank you very much.
And there are no further questions at this time I will now turn back the call to Shane Gannon for closing remarks.
Thank you very much for your participation and SAIC.
Second quarter fiscal year 2022 earnings call. This concludes the call and we thank you for your continued interest in SAIC.
And this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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