Q3 2022 Science Applications International Corp Earnings Call

December 6, 2021

Speaker 1: Hello and welcome to the SAIC Fiscal Year 2022 Q3 earnings 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.

Hello, and welcome to the SAIC fiscal year 2022, Q3 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. At this time I would like to turn the call over to Mr. Joseph DeNardi. Please go ahead, Sir.

After the Speakers' remarks, there will be a question and answer session. If you would.

Speaker 1: If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the

Like to ask a question during this time simply press Star then the number one on your telephone keypad.

She would like to withdraw your question first the pound key.

Speaker 1: Thank you. At this time, I would like to turn the call over to Mr. Joseph Dinardi. Please go ahead, sir.

At this time I would like to turn the call over to Mr. Joseph DeNardi. Please go ahead, Sir.

Speaker 2: Good morning and thank you for joining SEIC's third quarter fiscal year 2022 earnings call. My name is Joe Gennardi, Vice President of Investor Relations, and joining me today to discuss our business and financial results are Nazik Kean, our Chief Executive Officer, and Prabhu Natrajan, our Chief Financial Officer.

Good morning, and thank you for joining Saic's third-quarter fiscal year 2022 earnings call. My name is Joe dDeNardi, Vice President of Investor Relations and joining me today to discuss our business and financial results are Nazzic Keene, our Chief Executive Officer, and [inaudible], Our Chief Financial Officer. Today, we will discuss our results for the third quarter of fiscal year 2022 that ended October 29th, 2021. 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 10-Q to be filed later today should be utilized in evaluating our results and outlook along with information provided on today's call.

Speaker 2: Today we will discuss our results for the third quarter of fiscal year 2022 that ended October 29, 2021.

Because our results for the third quarter of fiscal year 2022 that ended October 29 2021.

Speaker 2: 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 10-Q to be filed later today, should be utilized in evaluating our results and outlook, along with information provided on today's call.

Earlier. This morning, we issued our earnings release, which can be found at investors Dot SAIC Dot 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 10-Q to be filed later today.

be utilized in evaluating our results and outlook along with information provided on today's call.

Speaker 2: 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.

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 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.

Speaker 2: 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.

<unk> 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, Nazzic Keene.

Speaker 2: 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.

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.

Speaker 2: It is now my pleasure to introduce our CEO , Nazik Kean.

It is now my pleasure to introduce our CEO <unk> Keene.

Speaker 3: Thank you, Joe. Good morning, everyone, and thank you for joining us to discuss our financial results and updated outlook for our third quarter fiscal year 2022.

Thank you, Joe. Good morning, everyone and thank you for joining us to discuss our financial results and updated outlook for our third quarter fiscal year 2022. Before we begin, I'd like to welcome Joe DeNardi to his first earnings call with SAIC on this side of the table. We're excited to have Joe on our team to continue building on our already strong investor relations outreach effort as well as add expertise and leadership to our executive team.

Speaker 3: Before we begin, I'd like to welcome Joe Dinardi to his first earnings call with SAIC on this side of the table. We're excited to have Joe on our team to continue building on our already strong investor relations outreach effort, as well as add expertise and leadership to our executive team.

Before we begin I'd like to welcome Joe de Nardi to his first earnings call with SAIC on this side of the table. We're excited to have Joe on our team to continue building on our already strong investor relations outreach effort as well as add expertise and leadership to our executive team.

Speaker 3: Now on to our Q3 results. I'm pleased to report our fourth consecutive quarter of positive organic revenue growth and another quarter of strong profitability.

Now onto our Q3 results. I am pleased to report our fourth consecutive quarter of positive organic revenue growth and another quarter of strong profitability. Due to continued strong operating performance, adjusted EBITDA margin was 9% and contributes to the increase in our full-year margin outlook.

I am pleased to report our fourth consecutive quarter of positive organic revenue growth and another quarter of strong profitability.

Speaker 3: Due to continued strong operating performance, adjusted EBITDA margin was 9% and contributes to the increase in our full-year margin outlook.

Due to continued strong operating performance adjusted EBITDA margin was 9% and contributes to the increase in our full year margin outlook.

Our year to date strong results reflect our commitment to our customers' needs, success and creating value for our shareholders and a dedication to the mission from our 26,000 employees during a still challenging time.

Despite recent challenges related to supply chain disruptions and a tight labor market, we remain confident in our ability to sustain organic growth into next year and increase free cash flow by approximately 10%. We know that driving both of these metrics creates shareholder value. [inaudible] will provide further detail on our increased guidance for this year and initial outlook for next year in his prepared remarks.

We know that driving both of these metrics creates shareholder value.

Speaker 3: Prabhu will provide further detail on our increased guidance for this year and initial outlook for next year in his prepared remarks.

<unk> will provide further detail on our increased guidance for this year and initial outlook for next year in his prepared remarks.

Speaker 3: I would like to focus my comments this morning on two new initiatives which create value and opportunity for our employees and our shareholders.

I would like to focus my comments this morning on two new initiatives, which create value and opportunity for our employees and our shareholders. The first is what we're calling the future of work and it is our approach to enabling flexibility for our workforce while increasing productivity and financial returns.

Speaker 3: The first is what we're calling the future of work, and it is our approach to enabling flexibility for our workforce while increasing productivity and financial returns.

The first is what we're calling the future of work and it is our approach to enabling flexibility for our workforce, while increasing productivity and financial returns.

Speaker 3: The second is a reorganization of our internal investment effort, which has led to the creation of our innovation factory teams designed to better align our targets of organic investments with customer needs in the areas of AI, engineering, and digital.

The second is a reorganization of our internal investment effort, which has led to the creation of our innovation factory teams designed to better align our targets of organic investments with customer need in the areas of AI engineering and digital.

Speaker 3: Let me first start with the future of work. One of our top priorities continues to be ensuring that we are able to attract and cultivate the best talent while managing through pressures related to attrition and COVID. While we have more open positions than we would like, we're taking steps to proactively address this challenge in new and industry leading ways.

Let me first start with the future of work. One of our top priorities continues to be ensuring that we are able to attract and cultivate the best talent while managing through pressures related to attrition and COVID-19. Well, we have more open positions than we would like we're taking steps to proactively address this challenge and new and industry-leading ways.

One of our top priorities continues to be ensuring that we are able to attract and cultivate the best talent, while managing through pressures related to attrition and COVID-19.

Well, we have more open positions than we would like we're taking steps to proactively address this challenge and new and industry leading ways.

Speaker 3: In late September , we announced enhancements to our employee benefits package including the optionality of a four-day work week, the addition of backup child and elder care, the recognition of Juneteenth as a paid holiday, and increasing paid family leave while holding employee health care premiums flat for the second year in a row.

In late September, we announced enhancements to our employee benefits package, including the optionality of a four day work week. The addition of backup child and eldercare. The recognition of June 10th as a paid holiday and increasing paid family leave while holding employee health care premiums flat for the second year in a row. Under our future of work initiatives, we are streamlining our facility footprint, while investing assertively in a new operating paradigm.

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Speaker 3: Under our future of work initiatives, we are streamlining our facility footprint while investing assertively in a new operating paradigm.

Under our future of work initiatives, we are streamlining our facility footprint, while investing assertively in a new operating paradigm.

Speaker 3: This advances our vision to promote employee well-being and our ability to attract diverse talent while driving financial benefits in the form of increased competitiveness and cost savings.

This advances our vision to promote employee wellbeing and our ability to attract diverse talent while driving financial benefits in the form of increased competitiveness and cost savings. While this program will be implemented over a multiyear period. It is already underway and we have line of sight into annual cost savings of at least $25 million, which we expect to reinvest back into our workforce and to drive incremental growth into the future.

Speaker 3: While this program will be implemented over a multi-year period, it is already underway and we have line of sight into annual cost savings of at least $25 million, which we expect to reinvest back into our workforce and to drive incremental growth into the future.

While this program will be implemented over a multiyear period. It is already underway and we have line of sight into annual cost savings of at least $25 million, which we expect to reinvest back into our workforce and to drive incremental growth into the future.

Speaker 3: We continue to monitor COVID-19 vaccine mandates and the impact they may have on our workforce and business operations over the next few months.

We continue to monitor COVID-19 vaccine mandates and the impact they may have on our workforce and business operations over the next few months. To this point, we've not seen any noticeable impact on attrition or sourcing talent as a result of the vaccine mandate and it does not materially impacting our financial performance.

Speaker 3: To this point, we have not seen any noticeable impact on attrition or sourcing talent as a result of the vaccine mandate, and it is not materially impacting our financial performance.

To this point, we've not seen any noticeable impact on attrition or sourcing talent as a result of the vaccine mandate and it does not materially impacting our financial performance.

Speaker 3: Our outlook for this year and next year assumes that this remains the case.

Our outlook for this year and next year assumes that this remains the case. As of last week, roughly 96% of our workforce is compliant with our vaccine policy and we would expect that to increase modestly going forward. For those in our workforce, who are not vaccinated. We believe we can accommodate a reposition a large portion of these employees such that the eventual net impact is immaterial.

Speaker 3: As of last week, roughly 96% of our workforce is compliant with our vaccine policy, and we would expect that to increase modestly going forward.

As of last week, roughly 96% of our workforce is compliant with our vaccine policy and we would expect that to increase modestly going forward.

Speaker 3: For those in our workforce who are not vaccinated, we believe we can accommodate or reposition a large portion of these employees such that the eventual net impact is immaterial.

For those in our workforce, who are not vaccinated. We believe we can accommodate a reposition a large portion of these employees such that the eventual net impact is immaterial.

Speaker 3: Now I'd like to spend a few minutes discussing the development of our Innovation Factory Teams, or IFTs, and the initial returns we're seeing from our investments.

Now I'd like to spend a few minutes discussing the development of our innovation factory teams or IFTs and the initial returns we're seeing from our investments. A little over two years ago, we began the process of shifting our internal investments away from primarily enhancing program-specific capabilities to developing enterprise solutions directly aligned with future customer demand.

Speaker 3: A little over two years ago, we began the process of shifting our internal investments away from primarily enhancing program-specific capabilities to developing enterprise solutions directly aligned with future customer demand.

A little over two years ago, we began the process of shifting our internal investments away from primarily enhancing program specific capabilities to developing enterprise solutions directly aligned with future customer demand.

Speaker 3: To aggressively drive this part of our strategy, this year we implemented changes to our organizational structure and incentive metrics to tighten collaboration between our innovation factory teams and the growth priorities of our sectors.

To aggressively drive this part of our strategy, this year we implemented changes to our organizational structure and incentive metrics to tighten collaboration between our innovation factory teams and the growth priorities of our sectors. We are confident this refinement of our internal investment strategy will allow us to more efficiently and effectively invest shareholder capital.

Speaker 3: We are confident this refinement of our internal investment strategy will allow us to more efficiently and effectively invest shareholder capital. This focus and discipline will ensure our investments are well aligned with customer requirements and enhance our ability to market, sell, and ultimately deliver differentiated solutions in growth areas like IT as a service, application modernization and cloud management, and systems integration.

We are confident this refinement of our internal investment strategy will allow us to more efficiently and effectively invest shareholder capital.

This focus and discipline will ensure our investments are well aligned with customer requirements and enhance our ability to market sell and ultimately deliver differentiated solutions and growth areas like IT as a service, application modernization and cloud management and systems integration.

Speaker 3: A good example of this is the Mark 48 program win announced just after the close of the quarter. The U.S. Naval Sea Systems Command awarded SAIC a contract with a total value of up to $1.1 billion to integrate various subsystems for the Mark 48 Mod 7 heavyweight torpedo.

A good example of this is the Mark 48 program win announced just after the close of the quarter. The US Naval Sea Systems Command ordered SAIC a contract with a total value of up to $1.1 billion to integrate various subsystems for the Mark 48 months' seven heavyweight torpedo.

Speaker 3: This win is a direct reflection of SAIC's unique understanding of the undersea domain coupled with our internal enterprise-wide investments in our digital manufacturing solution, our integrated logistics and supply chain solution, and other digital engineering solutions and capabilities.

This win is a direct reflection of saic's unique understanding of the undersea domain, coupled with our internal enterprise-wide investments in our digital manufacturing solution, our integrated logistics and supply chain solution and other digital engineering solutions and capabilities.

Speaker 3: This award significantly expands our scope on this program and highlights our ability to leverage our legacy as a leading provider of high-end engineering services and move opportunistically and profitably into select systems integration and delivery roles.

This award significantly expands our scope on this program and highlights our ability to leverage our legacy as a leading provider of high-end engineering services and move opportunistically and profitably into select systems integration and delivery roles. We currently have a rich pipeline of systems integration opportunities across multiple domains and customers.

Speaker 3: We currently have a rich pipeline of systems integration opportunities across multiple domains and customers.

We currently have a rich pipeline of systems integration opportunities across multiple domains and customers.

Speaker 3: To be clear, we remain prudent and disciplined to ensure that opportunities we pursue are ones where we know the technology, we understand the mission and domain, have understanding of the legacy systems, and where we are able to contract, partner, and leverage organic investments in support of our long-term profitable growth strategy.

To be clear, we remain prudent and disciplined to ensure that opportunities we pursue are ones where we know the technology, we understand the mission and domain, have an understanding of the legacy systems, and where we are able to contract partner and leverage organic investments in support of our long term profitable growth strategy.

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Speaker 3: We're excited about the new business pipeline in front of us and feel confident that our legacy and recent investments position us to drive profitable organic growth.

We're excited about the new business pipeline in front of us and feel confident that our legacy and recent investments position us to drive profitable organic growth. I'll now turn the call over to [inaudible] to discuss our financial results and updated outlook.

Speaker 3: I'll now turn the call over to Prabhu to discuss our financial results and updated outlook.

I'll now turn the call over to <unk> to discuss our financial results and updated outlook.

Speaker 4: Thank you, Nazik. We're pleased with our financial performance in the third quarter. We generated 2.1% of year-over-year organic growth, which represents our fourth consecutive quarter of positive growth. Our third quarter revenues of approximately $1.9 billion reflect total growth of 4.4% as compared to the third quarter of last fiscal year due to the ramp-up on new and existing contracts and the addition of HAFIC.

Thank you, Nazzic. We're pleased with our financial performance in the third quarter, we generated 2.1% up year over year organic growth, which represents our fourth consecutive quarter of positive growth. Our third-quarter revenues of approximately $1.9 billion reflect total growth of 4.4% as compared to the third quarter of last fiscal year due to the ramp-up on new and existing contracts and the addition of ethics.

Our third quarter revenues of approximately $1 $9 billion reflect total growth of four 4% as compared to the third quarter of last fiscal year due to the ramp up on new and existing contracts and the addition of ethics.

Speaker 4: Revenue results in the quarter were impacted by lower-than-planned material sales, labor market tightness, and a slower ramp in our supply chain business.

Revenue results in the quarter were impacted by lower than planned material sales, labor market tightness and a slower ramp in our supply chain business. Adjusted EBITDA dollars and margins were both ahead of plan due to continued strong execution and effective cost controls. Third-quarter adjusted EBITDA was $171 million, a $7 million increase from the prior year.

Speaker 4: Adjusted EBITDA dollars and margins were both ahead of plan due to continued strong execution and effective cost controls. Third quarter adjusted EBITDA was $171 million, a $7 million increase from the prior year.

Adjusted EBITDA dollars and margins were both ahead of plan due to continued strong execution and effective cost controls third quarter, adjusted EBITDA was $171 million or $7 million increase from the prior year.

Speaker 4: Adjusted EBITDA margin was 9% after adjusting for $12 million of acquisition and integration costs.

Adjusted EBITDA margin was 9% after adjusting for $12 million of acquisition and integration costs. Diluted earnings per share was $1.22 for the quarter inclusive of the third quarter acquisition and integration costs of $12 million. Excluding these costs as well as amortization of intangibles and net of a lower effective tax rate of approximately 19% in the quarter, our adjusted diluted earnings per share was $1.85, an increase of 14% compared to last year.

Speaker 4: Diluted earnings per share was $1.22 for the quarter, inclusive of the third-quarter acquisition and integration costs of $12 million. Excluding these costs, as well as amortization of intangibles and net of a lower effective tax rate of approximately 19% in the quarter, our adjusted diluted earnings per share was $1.85, an increase of 14% compared to last year.

Diluted earnings per share was $1 22 for the quarter inclusive of the third quarter acquisition and integration costs of $12 million. Excluding these costs as well as amortization of intangibles and net of a lower effective tax rate of approximately 19% in the quarter, our adjusted diluted earnings per share.

<unk> was $1 85, an increase of 14% compared to last year.

Speaker 4: Third quarter free cash flow was $124 million and free cash flow year-to-date continues to track ahead of plan. I would note that the year-over-year decline in third quarter free cash flow is due to the timing of payroll tax payments related to the CARES Act as underlying working capital efficiency continues to improve.

Third-quarter free cash flow was $124 million and free cash flow year to date continues to track ahead of plan. I would note that the year over year decline in third-quarter free cash flow is due to the timing of payroll tax payments related to the cares Act is underlying working capital efficiency continues to improve.

Speaker 4: In fact, adjusted for the impact of the payroll taxes deferral, operating cash flow has grown nearly 7% and free cash flow has grown about 9% year-to-date.

In fact, adjusted for the impact of the payroll taxes deferral operating cash flow has grown nearly 7% and free cash flow has grown about 9% year to date. During the third quarter, we deployed $97 million of capital, including $63 million of share repurchases, $21 million of dividends and 3 million for acquisitions. In addition, we continued to delever making mandatory debt repayments and ending the quarter with a net leverage ratio of roughly 3.5 times.

Speaker 4: During the third quarter, we deployed $97 million of capital, including $63 million of share repurchases, $21 million of dividends, and $3 million for acquisitions. In addition, we continued to delever, making mandatory debt repayments, and ending the quarter with a net leverage ratio of roughly 3.5 times.

During the third quarter, we deployed $97 million of capital, including $63 million of share repurchases $21 million of dividends and 3 million for acquisitions. In addition, we continued to delever, making mandatory debt repayments and ending the quarter with a net leverage ratio of roughly 3.5.

Five times.

Speaker 4: we continue to prioritize share repurchases over voluntary debt repayment in the quarter.

We continued to prioritize share repurchases over voluntary debt repayment in the quarter. Net bookings in the quarter were $1.4 billion for a book to Bill of 0.7 and results in a trailing 12-month book to Bill of 1.1. It is important to note that the Mark 48 award slipped out of the third quarter and was booked subsequent to the closer to the quarter. Our third quarter book to Bill would have been about one point to with a trailing tweet had booked in the quarter. Based on results to date, we are increasing guidance for revenue, EBITDA margin, earnings per share and free cash flow.

Speaker 4: Net bookings in the quarter were $1.4 billion for a book-to-bill of $0.7 and results in a trailing 12-month book-to-bill of $1.1. It is important to note that the Mark 48 award slipped out of the third quarter and was booked subsequent to the close of the quarter. Our third quarter book-to-bill would have been about $1.2 where the trailing 28 had booked in the quarter.

Net bookings in the quarter were $1 4 billion for a book to Bill of 0.7 and results in a trailing 12 month book to Bill of 1.1. It is important to note that the Mark 48 award slipped out of the third quarter and was booked subsequent to the closer to the quarter, our third quarter booked.

Bill would have been about one point to with a trailing tweet had booked in the quarter.

Speaker 4: Based on results to date, we are increasing guidance for revenue, EBITDA margin, and

Based on results to date, we are increasing guidance for revenue EBITDA margin.

Speaker 4: earnings per share and free cash flow. We are increasing revenue guidance to $7.35 billion to $7.4 billion, with a bias towards the higher end of the range. This implies roughly 1% to 2% organic growth in our forecast.

Earnings per share and free cash flow.

We're increasing revenue guidance to 7.35 billion to $7.4 billion with a bias towards the higher end of the range. This implies roughly 1% to 2% organic growth in our fourth quarter, reflecting modest incremental pressure related to the timing of material sales and a challenging market for attracting talent.

Speaker 4: fourth quarter reflecting modest incremental pressure related to the timing of material sales and a challenging market for attracting talent.

Fourth quarter, reflecting modest incremental pressure related to the timing of material sales and a challenging market for attracting talent.

Speaker 4: We are increasing our guidance for adjusted EBITDA margins by 10 basis points to 9% to 9.1% to reflect strong performance across the portfolio. We are increasing adjusted earnings per share guidance by 25 cents to a range of $6.75 to $6.95. Finally, we are increasing free cash flow guidance by $20 million at the low end to a range of 450 to 470 million.

We are increasing our guidance for adjusted EBITDA margins by 10 basis points to 9% to 9.1% to reflect strong performance across the portfolio. We are increasing adjusted earnings per share guidance by 25 cents to a range of $6.75 to $6.95. Finally, we are increasing free cash flow guidance by $20 million at the low end to a range of $450 million to $470 million.

Finally, we are increasing free cash flow guidance by $20 million at the low end to a range of $450 million to $470 million.

Speaker 4: I would now like to provide some directional guidance for SAIC's fiscal year 2023. We expect to generate positive organic revenue growth in FY23 and have the pipeline and business development opportunities to sustain this beyond FY23. We will be in a position to provide more detail on the key drivers in ASSUM 22.

I would now like to provide some directional guidance for SAIC's fiscal year 2023. We expect to generate positive organic revenue growth in FY '23 and have the pipeline and business development opportunities to sustain this beyond FY '23. We will be in a position to provide more detail on the key drivers in our some '22.

We expect to generate positive organic revenue growth in FY 'twenty, three and have the pipeline and business development opportunities to sustain this beyond FY 'twenty three we will be in a position to provide more detail on the key drivers in our some 'twenty two.

Speaker 4: However, we believe this outlook, while not without risk, properly captures the opportunities in front of us, while balancing certain potential contract transitions. Further, we believe we can deliver positive organic growth in FY21.

However, we believe this outlook, while not without risk, properly captures the opportunities in front of us while balance. Potential contract transitions. Further, we believe we can deliver positive organic growth in FY '23, even without a full recovery in our supply chain business for context.

Potential contract transitions further we believe we can deliver positive organic growth in FY <unk>.

Speaker 4: 23, even without a full recovery in our supply chain business for context.

23, even without a full recovery in our supply chain business for context.

Speaker 4: We expect our logistics and supply chain business to generate just over $600 million in revenue in FY22, down from well over $700 million in the years prior to COVID. We do expect this business to improve over time and are hopeful of an inflection in the near future. However, our ability to grow is limited. We remain focused on improving margins in this business, automation, and differentiated services.

We expect our logistics and supply chain businesses generate just over $600 million in revenue in FY '22 down from well over $700 million in the years prior to COVID. We do expect this business to improve over time and are hopeful of an inflection in the near future. However, our [inaudible] business, we remain focused on improving margins in this business. Automation and differentiator. Bid strategies that can add value to our overall portfolio. Margins in FY '23 to be in the high 8% range in line with a normalized margin. It's been great for our business as previously communicated. I would note that there is opportunity to improve margins over time as we continue our journey to transform the business.

Our <unk> business, we remain focused on improving margins in this business.

Automation and differentiator.

Speaker 4: bid strategies that can add value to our overall portfolio. We want our margins in FY23 to be in the high 8% range, in line with a normalized margin

Bid strategies that can add value to our overall portfolio.

Margins in FY 'twenty three to be in the high 8% range in line with a normalized margin.

Speaker 4: for our business as previously communicated. I would note that there is opportunity to improve margins over time as we continue our journey to transform the business.

It's been great for our business as previously communicated. I would note that there is opportunity to improve margins over time as we continue our journey to transform the business.

I would note that there is opportunity to improve margins over time as we continue our journey to transform the business.

Speaker 4: Lastly, we expect to generate free cash flow growth in FY23 of approximately 10% from the midpoint of our updated FY22 cash guidance. We see opportunities to structurally improve the cash conversion of our business over the next few years and have a roadmap of initiatives we are executing.

Lastly, we expect to generate free cash flow growth in FY '23 of approximately 10% from the midpoint of our updated FY '22 cash guidance. We see opportunities to structurally improve the cash conversion of our business over the next few years and have a roadmap of initiatives we are executing. As a result of these initiatives, we view our expected FY '23 free cash flow as a base off which we can continue to grow in FY '24 at a similar 10% rate. Our plan assumes we improve to become a top tier generator of free cash flow and you will recall that this is an important component of our incentive compensation plans.

Speaker 4: As a result of these initiatives, we view our expected FY23 free cash flow as a base off which we can continue to grow in FY24 at a similar 10% rate. Our plan assumes we improve to become a top-tier generator of free cash flow, and you will recall that this is an important component of our incentive compensation plan.

As a result of these initiatives, we view our expected FY 'twenty three free cash flow as a base off which we can continue to grow in FY 'twenty four at a similar 10% rate. Our plan assumes we improve to become a top tier generator of free cash flow and you will recall that this is.

An important component of our incentive compensation plans.

Speaker 4: We do not face any meaningful headwinds related to the rolloff of cash tax assets until FY26, which we expect to be manageable. Our view on cash assumes that the Section 174 R&D headwinds are addressed via the bills pending before the Congress.

We do not face any meaningful headwinds related to the roll off of cash tax assets until FY '26 which we expect to be manageable. Our view on cash assumes that the section 174 R&D headwinds are addressed via the bills pending before the Congress.

Speaker 4: Finally, I would note that our priorities from a capital deployment standpoint have not changed. Position and grow our portfolio to maximize shareholder value, return cash to our owners, and delever our balance sheet over time. I'll turn the call back to Nazik for some closing remarks.

Finally, I would note that our priorities from a capital deployment standpoint have not changed position and grow our portfolio to maximize shareholder value, return cash to our owners and delever our balance sheet over time. I'll turn the call back to Nazzic for some closing remarks.

I'll turn the call back to <unk> for some closing remarks.

Speaker 3: Thank you Prabhu. I'm pleased with the performance of our business this year and very proud of the SAIC team as we continue to deliver with excellence to our customers, to our shareholders and in support of each other.

Thank you. I am pleased with the performance of our business this year and very proud of the SAIC team as we continued to deliver with excellence to our customers to our shareholders and in support of each other. First set of opportunities over the next few quarters into shareholder value. The investments we have made internally combined with our deep technical expertise and most of [them.] Importantly, our tremendously talented workforce positions us well to succeed.

Speaker 3: best set of opportunities over the next few quarters into shareholder value.

First set of opportunities over the next few quarters into shareholder value.

Speaker 3: the investments we have made internally, combined with our deep technical expertise, and most importantly,

The investments we have made internally combined with our deep technical expertise and most of them.

Speaker 3: Importantly, our tremendously talented workforce positioned us well to succeed.

Importantly, our tremendously talented workforce positions us well to succeed.

Mission as well to succeed.

Speaker 3: Now, before I turn the call over to the operator for our Q&A, I would like to wish everybody a wonderful holiday season. Operator, over to you.

Before I turn the call over to the operator for our Q&A, I would like to wish everybody a wonderful holiday season. Operator, over to you.

Speaker 1: At this time, I would like to remind everyone, if you would like to ask a question, please press star and the number one on your telephone keypad.

At this time I would like to remind everyone. If you would like to ask a question please press star then the number one on your telephone keypad. Your first question comes from the line of Matt Akers with Wells Fargo.

Speaker 1: Your first question comes from the line of Matt Akers with Wells Fargo.

Your first question comes from the line of Matt Akers with Wells Fargo.

Speaker 5: Hey, good morning guys. Thanks for the question. I want to ask about the margins into next year and sort of the sequential drop-off versus what we've done kind of year-to-day. What are kind of the biggest drivers of that? I kind of want to thought. Maybe mix is still pretty decent for you guys, but just how you think about sort of getting back to the lower level. Sure.

Yeah. Hey, good morning, guys. Thanks for the question. I wanted to ask about the margin into next year and sort of the sequential drop off versus what we've done kind of year to date, what are the kind of the biggest drivers of that kind of thought maybe mix is still pretty decent for you guys, but just how you think about sort of getting at that lower level.

I wanted to ask about the margin into next year.

So the sequential drop off versus what we've done kind of year to date, what are the kind of the biggest drivers of that kind of a thought maybe mix is still.

Pretty decent for you guys, but just how you think about sort of getting at that lower level.

Sure. Good morning, Matt. Thanks for the question. With respect to this year, I am going to answer this in two parts. Q4, what's implied in the guidance implies a step down in margin rates. I think there are a couple of drivers here year to date performance on margin. We're very proud of the performance year to date. In Q4, we are expecting to make additional investments in our innovation factories as well as some other indirect expenses unbilled running year to date, so that's sort of implies a margin compression in Q4 relative to the first three quarters. Clearly, it's an important metric for us and we're going to continue to do better than what's implied in the guidance, but that's sort of the Q4 compared to Q3.

Speaker 4: Thanks for the question. With respect to this year, I'm going to answer this in two parts.

Thanks for the question with respect to this year I am going to answer this in two parts.

Speaker 4: Q4, what's implied in the guidance, implies a step down.

Q4, whats implied in the guidance implies a step down in margin rates I think there are a couple of drivers here year to date performance on margin.

Speaker 4: I think there are a couple of drivers here. Year to date, I think our performance on margin has been really.

We're very proud of the performance year to date.

Speaker 4: In Q4, we are expecting to make additional investments in our innovation factories, as well as some other investments.

In Q4, we are expecting to make additional investments in our innovation factories as well as some other indirect expenses.

Unbilled running year to date, so that's sort of implies a margin compression in Q4 relative to the first three quarters.

Speaker 4: So that sort of implies a margin compression in Q4 relative to the first.

Speaker 4: Clearly, it's an important metric for us and we're going to continue to do better than what's implied in the guidance, but that's sort of the Q4 compared to Q3.

Clearly, it's an important metric for us and we're going to continue to do better than what's implied in the guidance, but that's sort of the Q4 compared to Q3.

Speaker 4: With respect to FY23, consistently this year, we've described this business as being sort of in that high 8% margin.

With respect to FY '23, consistently this year we've described this business as being sort of in to high 8% margin rate and sort of our prepared remarks we are communicating that margin rates are in that range. So I would say fairly in line with where FY '22 margins would have been but for a couple of onetime items that we had. So this year we've called out over the course of the year about 70 basis points of one time items that benefited our margin rates on a year to date basis. I think there are a couple of contract transitions that could produce some modest level of margin pressure next year. I'd say a couple of other factors to think about there are a few macro variables, which presents some uncertainty right now. I'd say the labor market and operating perhaps SKU by 8% right now.

Two key this year. We've described this business as being sort of mid to high 8% margin rate and sort of our prepared remarks. We are communicating that margin rates are in that range. So I would say fairly in line with FY 'twenty two margins would have been but for a couple of onetime items that we had so this year we've called out.

Speaker 4: And sort of our prepared remarks, we are communicating that margin rates are in that range, so I'd say fairly in line with where FY22 margins would have been, but for a couple of one-time items that we had. So this year, you know, we've called out, over the course of the year, about 70 basis points of one-time items that have benefited.

Over the course of the year about 70 basis points of one time items that benefited our margin rates on a year to date basis. I think there are a couple of contract transitions that could produce some modest level of margin pressure next year I'd say a couple of other facts.

Speaker 4: Margin rates on a year-to-day basis. I think there are a couple of contract transitions that could produce a modest level of margin pressure Next year I'd say, you know a couple of other

Speaker 4: factors to think about is there are a few macro variables which present some uncertainty right now. I'd say the labor market and operating perhaps too high 8 percent right now, but I'd reinforce the comment that, you know, sort of an early view of FY23, we'll have an opportunity to talk about margin rate guidance for next year. And I will remind you.

there are a few macro variables, which presents some uncertainty right now. I'd say the labor market and operating perhaps SKU by 8% right now.

I would reinforce a comment that sort of an early view of FY '23 we will have an opportunity to talk about margin great guidance for next year. And I'll remind you. But because we're focused on improving margins in the business via profitable growth. It's an important incentive compensation metrics. So it's an early view consistent with what we've communicated and hopefully we will have a chance to do better as we roll into FY '23.

And I'll remind you.

Speaker 4: that because we're focused on improving margins in the business via profitable growth, it's an important incentive compensation metric. So it's an early view consistent with what we've communicated, and hopefully we'll have a chance to do better as we roll into.

But because we're focused on improving margins in the business via profitable growth. It's an important incentive compensation metrics. So it's an early view consistent with what we've communicated and hopefully we will have a chance to do better as we roll into FY 'twenty three.

Speaker 5: Okay, you got it. That's really helpful. And I guess, there's one more kind of on capital deployment. I think you've, you've talked about three times being kind of the leverage target for next year, but it sounds like you're kind of prioritizing share repurchases over over paying down the debt. Is that still the target? And how important is that? Could you stay at sort of a higher level, if buying back the stock looks attractive?

Okay, got it, that's really helpful. And I guess just one more kind of like capital deployment I think. You've talked about three times as being kind of the leverage target for next year, but it sounds like you're kind of prioritizing share repurchases over paying down the debt. Is that still the target and kind of how important is that could you say, it's sort of a higher level if the buyback the stock looks attractive?

Just one more kind of like capital deployment I think.

You've talked about three times as being kind of the leverage target for next year, but it sounds like you're kind of prioritizing.

Share repurchases over over paying down the debt is that still the target and kind of how important is that could you say, it's sort of a higher level.

The buyback the stock looks attractive.

Speaker 4: end of the quarter with about 3 million shares remaining on our repurchase authorization. Our strategy really has not fundamentally changed around capital.

We ended the quarter with about 3 million shares remaining on our repurchase authorization. Our strategy really has not fundamentally changed around capital deployment, really deploy capital to waste that generates the greatest long term return for our shareholders. I think we've mentioned over the course of the year that if we find dislocations in stock price, if we're going to take advantage of it. So view our Q3 performance is one where we saw some dislocation in value and we took advantage of it in the course of the quarter. Capital deployment and creating value over time are central components of how we think about the trades on a year over year basis. So I would say it's an important lever that is out there for us. With respect to the leverage ratio itself, we signaled we'd like to step down to about three times. Where we are sitting right now is organically there is a path for us to grow earnings and improve our cash performance. So organically, we do see ourselves getting to about three times. So I'd say no real change from what we previously communicated.

Speaker 4: really deploy capital to ways that generate

Capital deployment really deploy capital to waste that generates the greatest long term return for our shareholders I think we've mentioned over the quarter.

Speaker 4: of the year, that if we find dislocations in stock price, we're going to take advantage of it. So view our Q3 performance as one where, you know, we saw some dislocation in value and we took advantage of it in the course of a quarter.

Course of the year that if we find dislocations in stock price, if we're going to take advantage of it. So view. Our Q3 performance is one where we saw some dislocation in value and we took advantage of it in the course of the quarter.

Speaker 4: I'd say the capital deployment and creating value over time, those are essential components of how we think about the trades on a year-over-year basis.

Capital deployment, and creating value over time, Israel central components of how we think about the trades on a year over year basis. So I would say, it's an important lever that is out there for us with respect to the leverage ratio itself, we signaled we'd like to step down to about three times.

Speaker 4: I'd say it's an important lever that is out there for us.

Speaker 4: Where we're sitting right now is organically, there's a path for us to grow earnings and improve our cash performance. So organically, we do see ourselves getting to about three times. So I say no real change from what we previously got.

Where we are sitting right now is organically there is a path for us to grow earnings and improve our cash performance. So organically, we do see ourselves getting to about three times. So I'd say no real change from what we previously communicated.

Okay, great. Thank you. Sure. Your next question comes from the line of Seth Sigman with JPMorgan.

Sure.

Speaker 1: Your next question comes from the line of Steph Seifman with J.P. Morgan.

Your next question comes from the line of Seth Sigman with J P. Morgan.

Speaker 6: Hey, thanks very much and good morning.

Hey, thanks, very much and good morning. I know you mentioned it give us more color on the March call, but just as we think maybe just qualitatively about the different puts and takes to be aware of for topline growth and in fiscal. What are the opportunities that are going to drive growth? How do you think about book to Bill in the quarter that's going to end in January and then what are kind of the headwinds. Thanks for the question. As probably indicated as we look at next year, we do see the opportunity for continued organic growth and very pleased with our ability to do that.

I was wondering.

Speaker 6: I know you mentioned you give us more color on the March call, but just as we think maybe just qualitatively about the different puts and takes to be aware of for top-line growth in fiscal, you know, what are the opportunities that are going to drive growth?

I know you mentioned it give us more color on the on the March call, but just as we think maybe just qualitatively about the different puts and takes to be aware of for topline growth and in fiscal <unk>.

What are the apo.

Opportunities that are going to drive growth.

Speaker 7: How do you think about book-to-bill in the quarter that's going to end in January ? And then, what are kind of the headwinds and, you know, how... Thanks for the question.

Alright.

How do you how do you think about book to Bill in the quarter, that's going to ebb in January and then what are kind of the headwinds and thanks for the question.

<unk>.

As probably indicated as well.

Speaker 3: look at next year, we do see the opportunity for continued organic growth and very pleased with our ability to do that. As we think about the programs that are coming online, we see some growth in the Continued Army Program that we won a couple of years ago, S3I. We see the ramp in some of our space-related programs.

Look at next year, we do see the opportunity for continued organic growth and very pleased with our ability to do that.

As we think about the programs that are coming online we see some growth and then continued army program that we won a couple of years [inaudible]. We see the ramp in some of our space-related programs. And looking at my notes here sorry. What was the other one?

Some of our space related programs.

And.

Looking at my notes here sorry.

Speaker 3: What was the other one? RITS. RITS. Sorry. Thanks, Prabhu. And so we see those as ramping up as well as other very high-probability pipeline options.

What was the other one sorry.

And so we see those ramping up as well as other very high probability pipeline opportunities. The biggest headwinds we see in the next year is obviously the NASA program that's been discussed as well as a potential headwind of the Vanguard program.

Probability pipeline.

Speaker 3: opportunities. The biggest headwinds we see in the next year is the obviously the NASA program that's been discussed as well as the potential headwind of the Vanguard program. And so as we balance those out and risk adjust it, we still see the opportunity for profitable growth into next year as Prabhu indicated.

And opportunities the biggest headwinds we see in the next year is the obviously the NASA program, that's been discussed as well as a potential headwind at the Vanguard program.

And so as we balance those out and risk adjust that we still see the opportunity for profitable growth into next year as probably have indicated. So couple of other data points here. Our focus has remained positioning the portfolio to enable us to grow the business profit. We believe we can sustain organic growth into next year and importantly, we have the pipeline to support the growth. There are scenarios where we are able to grow at rates faster than the rates at which we've grown over the last few quarters, but it will require us to win new work, NASA portfolio as well as army [inaudible].

Speaker 4: So a couple of other data points here. So, you know, our focus has remained, you know, positioning the portfolio to.

Our focus has remained.

Positioning the portfolio to enable us to grow the business profit.

Speaker 4: We believe we can sustain organic growth into next year, and importantly, we have the pipeline.

Believe we can sustain organic growth into next year and importantly, we have the pipeline to support the growth. There are scenarios, where we are able to grow at rates faster than the rates at which we've grown over the last few quarters, but it will require us to win new work nice portfolio as well as army rich.

Speaker 4: There are scenarios where we are able to grow at rates faster than the rates at which we've grown over the last few quarters.

Speaker 4: but they won't require us to renew work. Now, this portfolio, as well as our new risk.

Speaker 4: And, of course, we called out the headwinds, potentially, from the NASA program. So as we sort of think about the potential.

And of course, we called out the headwinds potentially from the NASA program. So as we sort of think about the puts and takes and given the number of new business pursuits that are out there waiting to be dispositioned by early next year, we do believe we have an opportunity to do better on organic growth. So I'd say that's probably the organic growth comment. With respect to book to Bill at Q4, Mark 48 volt at the start of Q4, we expected that work to come in towards the end of Q3. We also have another space award that we were expecting to have in Q3 is likely also slipping into Q4. So as I think about book to Bill, we don't ever want to provide guidance on a quarterly basis on book to Bill. I think we're off to a healthy start is probably the way to characterize Q book in Q3 and had that come through our book to Bill for the quarter would've been about 1.2. So I think I just for context for the question and hopefully, that's helpful.

Speaker 4: And given the number of new business pursuits that are out there waiting to be dispositioned.

Speaker 4: By early next year, we do believe we have an opportunity to do better on organic growth. So I'd say that's probably the organic growth comment. With respect to book-to-bill at Q4, Mark 48 booked at the start.

<unk> early next year, we do believe we have an opportunity to do to do better on organic growth. So I'd say, that's probably the organic growth comment with respect to book to Bill at Q4, Mark 48 volt at the start of Q4, we expected that work to come in towards the end of Q3, we also.

Speaker 4: Q4, we expected that award to come in towards the end of Q3. We also have another space award that we were expecting to have in Q3, it's likely also slipping into Q4. So if I think about book-to-bill, we don't ever want to provide guidance on a quarterly basis on book-to-bill.

Have another space award that we were expecting to have in Q3 is likely also slipping into Q4. So as I think about book to Bill we don't ever want to provide guidance on a quarterly basis on book to Bill.

Speaker 4: But I think, you know, we're off to a healthy start is probably the way to characterize Q book in Q3, and had that come through, our book to build for the quarter would have been about 1.2. And so I think I just want to give a little context for the question, and hopefully that's all.

I think we're off to a healthy start is probably the way to characterize Q book in Q3 and had that come through our book to Bill for the quarter would've been about 1.2. So I think I just for context for the question and hopefully, that's helpful.

So I think I just.

For context for the question and hopefully that's helpful.

Yes.

Speaker 6: That's great. Thanks very much. And maybe just to follow up real quick on the theme of organic growth.

That's great. Thanks very much and maybe just to follow up real quick on the theme of organic growth. You mentioned the hiring environment being difficult and you talked about some of the changes you're making to attract people. But I guess if you could put a little bit more color on sort of maybe the ways in which things are difficult or the degree to which the pace of hiring will be enable or be a break on growth going into next year.

Speaker 6: You know, you mentioned the hiring environment, you know, being difficult. And you talked about some of the changes you're making to attract people. But I guess, you know, if you could put a little bit more color on sort of, you know, maybe the ways in which things are difficult or the degree to which, you know, the pace of hiring will be, you know, enable or be a break on, you know, on growth going into the next year.

Being difficult and you talked about some of the changes youre, making to attract people but.

I guess.

If you could put a little bit more color on sort of Bob.

Maybe the ways in which things are difficult or the degree to which the pace of hiring will be.

Enable or be a break on.

On growth going into next year.

Speaker 8: Yeah, let me provide a little bit of color and then certainly probably can weigh in as I think consistent across many industries, ours included, is there is a tightening labor market and we're certainly seeing that as well as it relates to COVID.

Yes, let me provide a little bit of color and then certainly [inaudible] can weigh in. As I think consistent across many industries, ours included is there is a tightening labor market and we're certainly seeing that as well as it relates to COVID-19. And as it relates to some just the general turnover. I think the way that we're thinking about it is to ensure that we're doing things disproportionately, create an attractive workforce for ourselves so that we mitigate attrition. We look to internal efforts to drive engagement. Flexibility is key we've learned certainly from the COVID experience and employees are looking for that so we're doing a great deal around ensuring that our employees can continue the flexible work model, obviously hand in glove with our customers. So we've got several initiatives taking place as well to ensure that we remain a very attractive place for our current employees as well as be able to attract new employees. We've also done considerable work in ramping up our recruiting and our onboarding process as well. And so we've seen great results over the course of the last couple of months in being able to attract and hire very qualified great talent.

And as it relates to some just the general turnover.

Speaker 3: I think the way that we're thinking about it is to ensure that we're doing things disproportionately create an attractive workforce for ourselves.

I think the way that we're thinking about it is to ensure that we're doing things disproportionately create an attractive workforce for ourselves so that we mitigate attrition.

Speaker 3: so that we mitigate attrition. So we look to internal efforts to drive engagement. Flexibility is key. We've learned that certainly from the COVID experience and employees are looking for that. So we're doing a great deal around ensuring that our employees can continue the flexible work model, obviously hand in glove with a customer. So we've got several initiatives taking place as well to ensure that we remain.

We look to internal efforts to drive engagement flexibility is key we've learned certainly from the Covid experience and employees are looking for that so we're doing a great deal around ensuring that our employees can continue the flexible work model, obviously hand in glove with our customers. So we've got several initiatives as well.

To ensure that we remain.

Speaker 3: a very attractive place for our current employees, as well as be able to attract new employees. We've also done considerable work in ramping up our recruiting and our onboarding process as well, and so we've seen great results over the course of the last couple of months in being able to attract and hire.

Very attractive place for our current employees as well as be able to attract new employees. We've also done considerable work in ramping up our recruiting and our onboarding process as well and so we've seen great results over the course of the last couple of months and being able to attract and hire.

Speaker 3: you know, very qualified, great talent. So, so certainly a headwind, certainly something we're navigating, but I believe we are in a great position to be able to mitigate some of that risk going into next year, all things being equal, obviously.

Qualified great talent so so.

So certainly a headwind certainly something we're navigating but I believe we are in a great position to be able to mitigate some of that risk going into next year, all things being equal obviously. As it relates to any other potential headwind on labor escalation or cost of labor certainly, we're managing that as well, but the overall cost we're not seeing anything significant at this juncture, because even though there's pockets where the cost of labor may rise or it's going up. The other cost such as, and you heard us talk about whether it's facilities, travel are also looking to be able to mitigate some of that. So we certainly are paying a lot of attention to it it's top of mind as a key part of our strategy and our growth strategy and we believe we're well-positioned going into next year.

Speaker 3: As it relates to, you know, any other potential headwind on labor escalation or cost of labor, certainly we're managing that as well. But the overall cost, we're not seeing anything significant at this juncture because even though there's pockets where the cost of labor may rise or is going up, the other costs such as, and you heard us talk about, whether it's facilities, travel, are also looking to be able to mitigate.

As it relates to any other potential headwind on labor escalation or cost of labor certainly, we're managing that as well, but the overall cost we're not seeing anything significant at this juncture, because even though there's pockets where the cost of labor may rise.

At the other cost such as and you heard us talk about whether it's facilities travel are also looking to be able to mitigate.

Speaker 3: some of that. So we certainly were paying a lot of attention to it. It's top of mind. It's a key part of our strategy and our growth strategy, but we believe we're well positioned going into next year.

Some of that so we certainly are paying a lot of attention to it it's top of mind as a key part of our strategy and our growth strategy and we believe we're well positioned going into next year.

Great. Thank you very much. Your next question comes from the line of Noah [inaudible] with Goldman Sachs. Hey. Good morning, guys. This is Gavin, [that might've been in autofill,] how are you doing? Yes. Hey, Gavin. Probably I got a bit of a two-parter for you. On the organic growth rate for next year. Maybe I'm reading too much into your remarks, you said there is the possibility or the opportunity to grow faster next year than you are this year if you win some work. So is your base case assumption that you grow in line to slower than you are this year? And then as the follow up to that. When you look back at how you approached original guidance this year. You've raised throughout the year, so kind of what was better than plan and then there is that the same level of conservatism you want to take going forward or do you have more visibility now than you did coming in?

Speaker 1: Your next question comes from the line of Noah Popperneck with Goldman Sachs.

Your next question comes from the line of Noah <unk> with Goldman Sachs.

Speaker 9: Hey, good morning guys. It's Gavin. I think that might have been an autofill. How you doing?

Hey, Good morning, guys. This is gavin that might've been in auto Phil how are you doing.

Yes.

Hey, Devin.

Speaker 9: Prabhu, I've got a bit of a two-parter for you. On the organic growth rate for next year, I think without maybe reading too much into your remarks, you said there's a possibility or the opportunity to grow faster next year than you are this year if you win some work. So is your base case assumption that you grow in line to slower than you are this year? And then as the follow-up to that, you know, when you look back at how you approached original guidance this year?

Probably I got a bit of a two parter for you.

On the organic growth rate for next year.

Maybe I'm reading too much into your remarks, you said there is the possibility or the opportunity to grow faster next year than you are this year. If you win some work. So is your base case assumption that you grow in line to slower than you are this year and then as the follow up to that when you look back at how you approached original guidance this year.

Speaker 9: You've raised throughout the year, so what was better than planned, and is that the same level of conservatism you want to take going forward, or do you have more visibility now than you did coming in?

Throughout the year, so kind of what was better than plan and then there is that the same level of conservatism you want to take going forward or do you have more visibility now than you did coming in.

Sure. Thank you for the questions. I'm going to take the second one first. So when we started about conversation at the start of the year. We said organic revenue guide of 71 to 73. And then in the, and towards the end of the first quarter, starting second quarter, we added Halfacre, which increased the top end of the revenue guide to about 74. If you look back and you look at where the top end of the current revenue guidance. It's still 7.4 reflecting the addition of our into the portfolio. I think one of the guiding principles for us at the start of the year when you set guidance was how do we derisk the year as we go through the course of the year.

Speaker 4: Hey, Gavin, thank you for the questions. I'm going to take the second one first. So when we started out the conversation at the start

Thank you for the questions I'm going to take the second one first so when we started about conversation at the start of the year.

Speaker 4: We said, you know, Organic Revenue Guide of seven.

We said organic revenue guide of 71 to 73.

Speaker 4: And then towards the end of the first quarter, starting the second quarter, we added half acre, which increased the top end of the revenue guide to...

And then in the.

And towards the end of the first quarter, starting second quarter, we added Halfacre, which increased the top end of the revenue guide to about 74.

Speaker 4: If you look back and you look at where the top end of the current revenue guide is, it's still 7.4 reflected.

You look back and you look at where the top end of the current revenue guidance. It's still seven four reflecting the addition of <unk>.

Our into the portfolio.

Speaker 4: We said one of the guiding principles for us at the start of the year when we set guidance was how do we de-risk the year as we go through.

One of the guiding principles for us at the start of the year. When you set guidance was how do we derisk the year as we go through.

Speaker 4: So the consecutive revenue changes, guidance changes at the bottom end for each of the first.

And so the consecutive revenue changes, guidance changes at the bottom end for each of the first three quarters reflects our team's fantastic performance derisking over the course of the year. So I would say philosophically, we are thinking about the business as a way to start the year and then de-risk over the course of the year. So philosophically, I don't think we're going to see a whole lot different next year. I did talk about potentially a robust pipeline of opportunities ahead of us. This is the first part of the question and specifically, the question around could be ROE at rates higher than potentially we're at for FY '22 the answer is there are couple of big swingers on the new business front, which could position us to grow a little bit faster than what's implied in the current year guidance was one important health warning, which is [Nazzic] portfolio is in contract rather, is in the portfolio this year and we could have potential headwinds depending on how the protest gets disposition as well as the timing of the protest itself. So I would say a good solid pipeline on the new business front with an opportunity to grow at rates, perhaps better than where we're at.

Speaker 4: reflects our team's fantastic performance de-risking.

Speaker 4: So I'd say philosophically, you know, we are thinking about the business as a way to start the year and then de-risk over the course of the year. So philosophically, I don't think.

We are thinking about the business as a way to start the year and then derisk over the course of the year. So philosophically I don't think we're going to see a whole lot different next year I did talk about potentially a robust pipeline of opportunities ahead of us. This is the first part of the question and specifically the question around could be.

Speaker 4: I did talk about potentially, you know, a robust pipeline of opportunities ahead of us.

Speaker 4: and specifically the question around could we grow at rates higher than potentially we're at for FY22? The answer is there are a couple of big swingers on the new business front which could position us to grow a little bit faster than what's implied in the current year guidance with one important health.

ROE at rates higher than potentially we're at for FY 'twenty. Two the answer is there are couple upbeat swingers on the new business front, which could position us to grow a little bit faster than whats implied in the current year guidance was one important health warning, which is Nash.

Speaker 4: which is NASA's next portfolio, contract rather, is in the portfolio this year and we could have potential headwinds.

[Nazzic] portfolio is in contract rather, is in the portfolio this year and we could have potential headwinds depending on how the protest gets disposition as well as the timing of the protest itself. So I would say a good solid pipeline on the new business front with an opportunity to grow at rates, perhaps better than where we're at.

Speaker 4: depending on how the protest gets dispositioned, as well as the timing of the protest itself. So I'd say good, solid pipeline on the new business front with an opportunity to grow at rates perhaps better than where we're at.

Speaker 4: But with the health warning that the outcome on NASA Netflix could then have a little bit of a headwind effect to growth rates, which is why we're comfortable given how much of the year we have left to go and how much we have in the way of new business.

But with the health warning. Outcome on [Nazzic] could then have a little bit of a headwind effect to growth rates, which is why we're comfortable given how much of the year we have left to go and how much we have in business, starting out the year committing to continued organic growth in the portfolio. That's we believe an important signal to send to our shareholders to show that we are committed to growing this business on an organic basis year over year. And that's the focus of the team right now and obviously, we'll share a lot more detail with you in March.

Outcome on NASA Nix could then have a little bit of a headwind effect to growth rates, which is why we're comfortable given how much of the year. We have left to go and how much we have in the way of <unk>.

Speaker 4: starting out the year, committing to continued organic growth in the portfolio. That's, we believe, an important signal to send to our shareholders.

<unk> starting out the year committing to continued organic growth in the portfolio that we believe an important signal to send to our shareholders to show that we are committed to growing this business on an organic basis year over year.

Speaker 4: to show that we are committed to growing this business on an organic basis year over year, and that's the focus of the team right now, and obviously we'll share a lot.

Because the team right now and obviously, we'll share a lot more detail with you in March.

Speaker 9: Got it. That's really helpful. Do you have good visibility into, you know, the timing of some of those new winds? And is that potentially impacted by an extended continued resolution?

Got it, that's really helpful. Do you have good visibility into the timing of some of those new wins and is that potentially impacted by an extended continuing resolution? So the answer is to the first part is yes, and I think the answer to the second part is also yes. I'd say the next two to five months will be fairly indicative of where FY '23 will shake out. And our hope is it's earlier in that window or rather than later, but we'll certainly have more visibility into FY '23 by the time we get to March and provide our guidance for FY '23. Okay. Thank you.

Speaker 4: So the answer is the first part is yes, and I think the answer to the second part is also yes. I would say the next two to five months will be fairly indicative of where FY23 will shake out and our hope is it's earlier in that window rather than later, but we'll certainly have more visibility into FY23 by the time we get to March and provide our

So the answer is to the first part is yes, and I think the answer to the second part is also yes.

I'd say the next two to five months will be fairly indicative of where FY 'twenty three will shake out and our hope is it's early.

Earlier in that window or rather than later, but.

We'll certainly have more visibility into FY 'twenty three by the time, we get to March and provide our guidance for FY 'twenty three.

Okay. Thank you.

Yes.

Speaker 1: Your next question comes from the line of Kai Von Ruemer with Cowan.

Your next question comes from the line of Cai von Rumohr with Cowen. Yes, thank you very much. So could you give us maybe the numbers on bids awaiting decision? And you talked of the big swingers. Maybe give us some color if you could on your expected bid submitted for Q4 or the next six months. Whichever way you think. About 21.5 billion. At Q2 that number. Both were up high single digits relative to the Q2 watermark so I see the right directionally the better we want to see in terms of the outcomes. And in terms of the materiality of what's out there for obviously a variety of strategic and competitive reasons, we would not talk specifically about any of those other than to say they are needle-moving opportunities for the company. So it's some potentials upsized impacts on growth rates, but we have to go win them and these are takeaways.

Speaker 4: Yes, thank you very much. So, Prabhu, could you give us maybe the numbers on bids awaiting decision and, you know, you talked of the big swingers. Maybe give us some color, if you could, on your expected bid submits for Q4 or the next six months, you know, whichever way you think is best. It's about 21 and a half billion. At Q2, that number...

Yes, thank you very much.

So <unk> could you give us maybe the numbers on bids awaiting.

Decision and you talked of the Big Swingers, maybe give us some color if you could on your expected bid submitted for Q4 or the next six months.

Whichever way you think about 21 5 billion.

At Q2 that number.

Both were up high single digits.

Relative to the Q2 watermark so.

Speaker 4: say the right directionally, the vector we want to.

Right.

Directionally the Vectra, we want to see in terms of the outcomes and in terms of the materiality of what's out there for obviously, a strategic and competitive reasons, we would not talk specifically.

Speaker 4: outcomes. And in terms of the materiality of what's out there, you know, for obviously a variety of strategic and competitive reasons, we would not talk specifically about any of those other than to say they are needle-moving.

About any of those other than to say they are needle moving opportunities for the company. So it's some potentials upsized impacts on growth rates, but we have to go win them and these are takeaways.

Speaker 4: up-sized impacts on growth rates, but we have to go win them, and these are take-homes.

And so that's not obviously, an easy combination, but we are well-positioned for these opportunities we have to actually go in and some of them, but they are needle-moving for the company. And Cai, this is Nazzic. Just to add to that. Prabu gave you a couple of metrics. But anecdotally, we also see continued growth in the pipeline consistent with the areas of focus and strategy for the company. So very pleased with the pipeline development. We've also done a lot of work this year and not just increasing the reach of our sales team and business development team, but also in ensuring that we're focused on the right accounts, on the right solution. We're pleased with the development pipeline consistent with our strategy, consistent with driving greater profitability over the years to come. And so we feel like we're in a good position as probably as indicated. We've good visibility, but we also pay a lot of attention to the long term health of the pipeline as well. I wanted to reinforce that.

Speaker 4: That's not obviously an easy combination, but we're well-positioned for these opportunities. We have to actually go win some of them, but they are...

Speaker 3: And Kai, this is Naz. Just to add to that, I probably would give you a couple of metrics, but anecdotally, we also see continued growth in the pipeline consistent with the areas of

Anecdotally, we also see continued growth in the pipeline consistent with the areas of.

Speaker 3: focus and strategy for the company, so very pleased with the pipeline development.

Our focus and strategy for the company. So very pleased with the pipeline development. We've also done a lot of work this year and not just increasing the reach of our sales team and business development team, but also in ensuring that we're focused on the right account on the right solution.

Speaker 3: We've also done a lot of work this year in not just increasing the reach of our sales team and business development team, but also in ensuring that we're focused on the right account from the right solution. So very pleased with the development of the pipeline, consistent with our strategy, consistent with driving greater profitability over the years to come. And so we feel like we're in a good position, as Prabhu indicated. We've got good visibility, but we also pay a lot of attention to the long-term health

We're pleased with the development pipeline consistent with our strategy, consistent with driving greater profitability over the years to come. And so we feel like we're in a good position as probably as indicated. We've good visibility, but we also pay a lot of attention to the long term health of the pipeline as well. I wanted to reinforce that.

Good visibility, but we also pay a lot of attention to the long term health of them.

The pipeline as well wanted to reinforce that.

Speaker 10: So I don't expect you to give us, you know, the specifics on the potential takeaways, but maybe if you could give us some, you know, bounding of the size. I mean, what you expect to submit in Q4 or next year. And secondly, you know, you've mentioned a couple of times, you know, incentive comp depends on margin, depends on cash flow. Maybe give us, you know, the things you are emphasizing with the incentive comp plan and any changes in direction you might sort of be envisioning.

So I don't expect you to give us the specifics on the potential takeaways, but maybe if you could give us some bounding of the size. I mean, what do you expect to submit in Q4 or next year? And secondly. You've mentioned a couple of times, you know incentive comp depends on margin, depends on cash flow. Maybe give us the things you are emphasizing with the incentive comp plan and any changes in direction you might sort of be envisioning for the incentive comp plan? Thanks.

The specifics on the potential.

Takeaways, but maybe if you could give us some.

Pounding of the sized I mean, what do you expect to submit in Q4 or next year and secondly.

You've mentioned a couple of times, you know incentive comp depends on margin depends on cash flow, maybe give us. The things you are emphasizing with the incentive comp plan and any changes in direction, you might sort of be envisioning for.

Speaker 10: for the incentive comp plan. Zach, thanks.

For the incentive comp plan.

Speaker 4: Sure. Thank you for the questions, Kai. So on incentive comp, you know, at the start of FY22, we made a set of really

Sure. Thank you for the questions. So on incentive comp, at the start of FY '22, we made a set of really important changes. I think we balanced the metrics between revenue adjusted EBITDA growth as well as operating cash flow. And we balanced it by having to wait and be a third, a third, a third across to treat metrics. And we then set target-based off of relative peer performance. In other words, paying keen for performance against the plan is interesting what's far more interesting just paying the team for performance against a relative peer side. So we really made that really important change at the start of this year. And I believe we're starting to see some real traction from the changes we've made. We also introduced an element of total shareholder return. In the long term value back to our shareholders. So to me, I think those are really important chain changes we made at the start of the year. And I dare to say the performance this year reflects I believe the team's sort of embracement if you will, of the updated incentive comp metrics. So that's sort of the first leg of the question on sort of Q4 and book to bill et cetera, we really wouldn't get into the quarterly level book to bill guidance other than to say, while it's an important metric. It could also be misleading in some ways because it can be very lumpy as a non-GAAP metric. And we define it perhaps a little bit differently than our peers, who might define it differently from that other peers, so because of the variability we'd rather not get into guidance around book to bill other than to say our backlog has remained at about $24 billion at the end of Q3.

Speaker 4: I think we balanced the metrics between revenue-adjusted EBITDA growth as well as opportunity-adjusted

I think we balanced metrics between revenue adjusted EBITDA growth as well as operating cash flow.

Speaker 4: And we balanced it by having the weight be a third, a third, a third.

We balanced it by having to wait and be a third a third a third across to treat metrics and we then set.

Speaker 4: And we then set targets based off of relative peer performance. In other words, you know, paying the team for performance against a plan is interesting. What's far more interesting is paying the team for performance against a relative peer.

Target based off of relative peer performance in other words.

Paying keen for performance against the plan is interesting what's far more interesting just paying the team performance against a relative peer side. So we really made that really important change at the start of this year and I believe we're starting to see some real traction from the changes we've made.

Speaker 4: really made that really important change at the start of this year. And I believe we're starting to see some real traction from the change.

Speaker 4: We also introduced an element of total shareholder return in the long-term bringing value back to our shareholders. So to me, I think those were really important changes we made at the start of the year and I dare say the performance this year reflects, I believe, the value that we've been able

We also introduced an element of total shareholder return.

Long term.

Value back to our shareholders. So to me I think those are really important chain.

Changes, we made at the start of the year.

We're seeing the performance this year reflects I believe.

Speaker 4: team sort of embracement, if you will, of the updated incentive comp metrics. So that's sort of the first leg of the question. On sort of Q4 and book-to-bill, etc., we really wouldn't get into the quarterly level book-to-bill guidance other than to say, while it's an important metric, it could also be misleading in some ways because it can be very lumpy.

Teams sort of Embracement, if you will.

So that's sort of the first leg of the question on sort of Q4 and book to bill et cetera, we really wouldn't get into the quarterly level book to bill guidance other than to say, while it's an important metric. It could also be misleading in some ways because it can be very lumpy as a non-GAAP metric. And we define it perhaps a little bit differently than our peers, who might define it differently from that other peers, so because of the variability we'd rather not get into guidance

Speaker 4: is a non-GAAP metric, and we define it perhaps a little bit differently than our peers who might define it differently from their other peers. So because of the variability, we'd rather not get into guidance around the bill other than to say our backlog has remained at about $24 billion.

Again, we define it perhaps a little bit differently than our peers, who might define it differently from that other peers, so because of the variability we'd rather not get into.

around book to bill other than to say our backlog has remained at about $24 billion at the end of Q3.

Speaker 4: and we are committed to growing the total backlog as well as the funded backlog. And importantly, it is not an incentive.

And we are committed to growing the total backlog as well as the funded backlog. And importantly, it is not an incentive comp metrics backlog, but it does reflect the quality of the pipeline that Nazzic referred to but also effectively not just growth rates, but also the margin rates implied in the pipeline. So there are some qualitative elements that we've always looked at when we think about the backlog and is not to say the team is doing a really nice job out there. And we're seeing some quality and longevity in the backlog as well that I believe it is helpful for the long term.

And importantly, it is not an incentive comp metrics backlog, but it does reflect the quality of the pipeline that <unk> referred to but also effectively not just growth rates, but also the margin rates implied in the pipeline. So there are some qualitative elements that we've always looked at.

Speaker 4: backlog, but it does reflect, you know, the quality of the pipeline that Nazik referred to, but also, you know, effectively, not just growth rates, but also the margin rates.

Speaker 4: So there are some qualitative elements that we always look to when we think about the backlog. And as Nathan said, the team is doing a really nice job out there, and we're seeing some quality and some longevity in the backlog as well.

When we think about the backlog and is not to say the team is doing a really nice job out there and we're seeing some quality and longevity in the backlog as well.

I believe it is helpful for the long term.

Speaker 3: A couple of other things I'd like to add, I think Prabhu captured exceptionally well. The other major thing that we did this year is actually, as we outlined the components of the incentive comp, we actually pushed it lower in the organization. And so we have many more leaders that are directly aligned to the same metrics, same values that drive shareholder values. So I thought that was a very important move this year. We aren't contemplating any significant changes to the plan. We believe it's a good move.

And Cai, this is Nazzic. A couple of other things I'd like to add. I think probably captured exceptionally well. The other major thing that we did this year is actually as we outlined the components of the incentive comp, we actually pushed it lower in the organization. And so we have many more leaders that are directly aligned to the same metrics, same values that drive shareholder value. So I thought that was a very important move this year. We are contemplating any significant changes to the plan we believe it's balanced. We believe it is producing great results, but we always take the opportunity to take a fresh look at that during our normal board cycle going into next year. But nothing specific that's on the table. But if we step back and we say that something would serve us better, serve the shareholders better we do keep that top of mind as we go through the process. Thank you very much. Sure.

Same values that drive shareholder value. So I thought that was a very important move this year, we are contemplating any significant changes to the plan we believe it.

Speaker 3: We believe it's producing the right results, but we always take the opportunity to take a fresh look at that during our normal board cycle going into next year. But nothing specific is on the table. But if we step back and we say that, you know, something

It's balanced we believe it is producing great results, but we always take the opportunity to take a fresh look at that during our normal board cycle going into next year.

Nothing specific that's on the table.

If we step back and we say that something.

Speaker 3: would serve us better and serve the shareholders better, we do keep that top of mind as we go through the process.

Would serve us better serve the shareholders better we do keep that top of mind as we go through the process.

Thank you very much.

Sure.

Speaker 1: Your next question comes from the line of David Strauss with Barclays.

Your next question comes from the line of David Strauss with Barclays. Good morning, Nazzic and Prabu. It's Collin on for David. First question, if you could talk about working capital upside embedded in your guidance for free cash flow as well as kind of what you envision longer-term potential capital efficiency for this business.

Speaker 5: Morning, Nazik Prabhu. It's Colin on for David. First question, if we could talk about working capital upside embedded in your guidance for free cash flow, as well as kind of, you know, what you envision longer term potential of capital efficiency for this business. Sure. Thank you for the question.

Good morning, nothing probably was calling on for David.

First question, if you could talk about working capital upside embedded in your guidance for free cash flow.

As well as kind of what you envision longer term potential capital efficiency for this business.

Sure. Thank you for the question, Collin. So I think we've mentioned over the course of the year, we are a strong generator of cash. But we've also said over the course of the year, we believe there is real opportunity to improve the cash performance of the business. Over the last couple of quarters, we've spent a fair amount of calories inside the company to look at working capital performance specifically. And as Nazzic just alluded to, we're looking at working capital not just at the consolidated level, we look at the sector level and then within the business unit level and within our program level. And then we truly want to understand what drives working capital at the program level. There are a couple of opportunities here. The reason we're signaling potentially up to 10% increase in free cash flow next year is if you think about the contract mix we have in a predominantly cost-plus business in there, but we also see if you think about the process for working capital all the time that it takes to get costs accrue get it on an invoice through our review cycle for the invoice all the way to the collection cycle, we see opportunity for an end to end improvement of our cash performance across the cash cycle.

Speaker 4: As I think we've mentioned over the course of the year, we're a strong.

I think we've mentioned over the course of the year, we are a strong generator of cash.

Speaker 4: But we've also said over the course of the year, we believe there's real opportunity to improve the cash performance.

But we've also said over the course of the year. We believe there is real opportunity to improve the cash performance of the business.

Speaker 4: Over the last couple of quarters, we've spent a fair amount of calories inside the company to look at working capital.

Over the last couple of quarters, we've spent a fair amount of calories inside the company to look at working capital performance specifically.

Speaker 4: And as Aziz just alluded to, we're looking at working capital, not just at the consolidated level. We look at it at the sector level, and then within the age.

Just alluded to.

We're looking at working capital not just at the consolidated level, we look at the sector level.

Business unit level and within our program level and then we truly want to understand what drives working capital at the program level.

Speaker 4: And then we truly want to understand what drives working capital at the program.

Speaker 4: There are a couple of opportunities here. The reason we're signaling potentially up to 10% increase in pre-cash flow next year is if you think about the contract mix we have in a predominantly cost-plus business.

There are a couple of opportunities share. The reason, we're signaling potentially up to 10% increase in free cash flow next year is if you think about the contract mix, we have in a predominantly cost plus business in there, but we also see if you think about the process for working capital all the time that it takes to get.

Speaker 4: But we also see, you know, if you think about the process for working capital, all the time

Speaker 4: costs accrued, get it on an invoice, through a review cycle for the invoice, all the way to the collection cycle, we see opportunity for an end-to-end improvement of our cash performance across the cash system.

It costs accrue get it on an invoice through our review cycle for the invoice all the way to the collection cycle, we see opportunity for an end to end improvement of our cash performance across the cash cycle and.

Speaker 4: In addition to that, we also have a significant number of subs on our programs, and we want to make sure that we are looking at working capital at the sub-level to make sure that we have terms that are symmetric with the terms we have at the prime level, so we flow down terms appropriately, and there's potentially opportunity there as well. So as we step back and look at fundamentally working capital improvement, obviously it starts with profit.

In addition to that, we also have a significant number of subs on our programs and we want to make sure that we are looking at working capital at the sub-level to make sure that we have terms that are symmetrical with the terms we have at the prime level. So we flowed down terms appropriately and there is potentially opportunity there as well so as we step back and look at fundamentally working capital improvement, obviously, it starts with profit improvement. That's going to be a key for sort of persistent improvement to cash flow potential, but as we sit here, we see improvement potential in working capital and that's why we signaled in the prepared remarks, there is up to 10% improvement to free cash flow next year, and we see that FY '23 free cash flow is offering a base off of which we can grow an extra 10% beyond that.

Back and look at fundamentally working capital improvement, obviously starts with profit improvement that's going to be a key for sort of persistent improvement to cash flow potential, but as we sit here, we see improvement potential in working capital and that's why we signaled in the prepared remarks, there is up to 10 <unk>.

Speaker 4: That's going to be a key for, you know, sort of persistent improvement to cash flow potential. But as we sit here, we see improvement potential in working capital, and that's why we signaled in the prepared remarks that it's up to 10% improvement of free cash flow next year. And we see that FY23 free cash flow as offering a base off of which we can grow an extra 10% beyond that.

<unk> improvement to free cash flow next year, and we see that FY 'twenty three free cash flow is offering a base off of which we can grow an extra 10% beyond that.

Speaker 4: And then finally, as we mentioned in the prepared remarks, you know, we do have some tax assets that we're currently benefiting from on a cash tax basis.

And then finally, as we mentioned in the prepared remarks, we do have some tax assets that were currently benefiting from on a cash tax basis. But you don't really see a material step down until maybe FY '26 or later and the realities, we expect those impacts to be quite manageable over the long term. So I would say as we step back and look at the business, we see some real opportunity and the fact that it's an important incentive complementary pulls in the near term metrics as well as the longer-term operating cash metrics, we see some real opportunity and the team really committing to improving this at the enterprise level. And we've got an enterprise-level initiative that Nazzic and I are chairing and we're committed to truly making a difference over the next few years because there is real value here.

Speaker 4: But you don't really see a material step down until maybe FY26 or later. And the reality is we expect those impacts to be quite manageable over the long term. So I'd say as we step back and look at the business, we see some real opportunity. And the fact that it's an important.

But you don't really see a material step down until maybe FY 'twenty six months later and the realities, we expect those.

<unk> be quite manageable over the long term, so I would say as we step back and look at the business, we see some real opportunity and the fact that it's an important incentive complementary pulls in the near term metrics as well as the longer term.

Speaker 4: near term metrics as well as the longer term, you know, operating cash metrics, we see some real opportunity and the team really committing to improving this at the enterprise level and we've got an enterprise level initiative that Nazik and I are chairing and we're committed to, you know, truly making a difference over the next few years because there is

Operating cash metrics, we see some real opportunity and the team really committing to improving this at the enterprise level and we've got an enterprise level initiatives that nonstick and I are chairing and we're committed to truly making a difference over the next few years because there is real value.

Speaker 5: Got it. And in terms of the guide rails for that metrics, you know, should we be thinking about this percentage of sales, networking capital days, kind of, you know, where do we think about or where do we hang our hat on into that underlying working capital and efficiency?

Got it. And in terms of the guide rails for that metrics, should we be thinking about this as a percentage of sales, net working capital base kind of where do we think about what or where do we hang our head on its underlying working capital efficiencies? Yes. So if you think about we've talked about DSO and if you think about where DSO is currently we're at about 60 days. And DSO is one component of the total working capital picture, but it's an important component. Everyday cash so if you think about a 10% improvement that's implying about a two to three days improvement in DSO over a period of time and there was of course, DPO, which is the payable side of the contractual terms that we're ensuring we get into contracts that we're getting into the books right now that allow us to liquidate if you will based on milestones we achieve on program milestones. So you sort of there is a multi-pronged effort to it but if you think about DSO is the most obvious one. We see two or three-day improvement at the low end and potentially provide some element of applicability over the years that allows us to get too far lower DSO days. But as we think about your go-to-market strategy between IT [inaudible] talk about to the extent you're competing on price versus services capability, and how that's going to the margin guidance for FY '23?

Sales net working capital days.

Where do we think about what do we hang our hat on.

Working capital efficiency.

Speaker 4: Yeah, so if you think about, we've talked about DSO. And if you think about where DSO is currently, we're at about

Yes. So if you think about we've talked about DSO and if you think about where DSO is currently we're at about 60 days.

Speaker 4: And DSO is one component of the total working capital picture, but it's an important one.

And Dsos one component of the total working capital picture, but it's an important component.

Speaker 4: Every day cash, so if you think about a 10% improvement, that's implying about a two to three day improvement in DSO over a period of time, and there's, of course, DPO, which is the payable side of it, contractual terms that we're insuring we get into contracts that we're getting into the books right now that allow us to liquidate, if you will, based on milestones we achieve on program milestones. So you sort of...

Everyday cash so if you think about a 10% improvement that's implying about a two to three day improvement in DSO over a period of time and there was of course, <unk>, which is the the payable side of the contractual terms that we're ensuring we get into contracts that we're getting into the books right now that allow us to.

Liquidate if you will based on milestones we achieve on program milestones. So you sort of.

Speaker 4: There's a multi-pronged effort to it, but if you think about DSO as the most obvious one, we see a two- or three-day improvement at the low end and potentially provide some element of replicability over the years that allows us to get to.

There is a multi pronged effort to it but if you think about DSO is the most.

One we see two or three day improvement.

At the low end and potentially provide some element of applicability over the years that allows us to get too far lower DSO days.

Speaker 5: But as you think about it, you go to market strategy between IT modernization.

But as we think about your go to market.

Good strategy between IC market.

Talk about the extent you're competing on price.

Hi services capability, and how Thats point to the margin guidance for FY 'twenty three.

Speaker 3: Yes, I can certainly talk about the go-to-market. As we've indicated, the broad IT modernization, the cloud migration, all of those IT-related programs, the good news is we do a considerable amount of that today, and it is a significant part of our pipeline going forward, leveraging our partners, leveraging our own IT, and leveraging very strong past performance. So we're well-positioned in that broad market. We see it across all the customers we serve, whether it's the Intel community, whether it's

Yes, I can certainly talk about the go-to-market. As we've indicated the broad IT modernization, the cloud migration, all of those IT-related programs. The good news is we do considerable amount of that today and it is a significant part of our pipeline going forward leveraging our partners, leveraging our own IP and leveraging very strong past performance. So we're well-positioned at that broad market, we see it across all the customers we serve whether it's the Intel community, whether it's the DOD, whether it's civilian agencies. And so very pleased with the maturation of that part of the pipeline and certainly see long term opportunity to do that. In general, and there's always exceptions, but in general that type of work tends to drive higher margins. The closer you get to an as a service model, the closer you get to being able to leverage our solutions and our IP that does tend to drive higher margins, which is one of the reasons that we're optimistic about the long term margin profile of the company. And then on the quantitative side. As we think about the quality of the pipeline, one of the metrics we use to measure health and quality is whether there is an implied improvement to the margin rate organically that puts some extra eyes on bids that go below threshold. We're thinking about the bids on a consistent long term basis. So to me, that's an important metric we track to see continued improvement there. As we've said on the margin story over time because we believe we have potential to improve there.

As indicated the broad it modernization cloud migration.

All of those related program. The good news is we do considerable amount of that today and it is a significant part of our pipeline going forward leveraging our partners leveraging our own.

IP and leveraging very strong past performance. So we're well positioned at that broad market, we see it across all the customers we serve whether it's the Intel community, whether it's the Doj civilian agency and so very pleased with the maturation of that part of the pipeline and certainly see long term opportunity to do that in general.

Speaker 3: And so very pleased with the maturation of that part of the pipeline and certainly see long-term opportunity to do that. In general, and there's always exceptions, but in general, that type of work tends to drive higher margins. The closer you get to an as-a-service model, the closer you get to being able to leverage our solutions and our IP, that does tend to drive higher margins, which is one of the reasons that we're optimistic about the long-term margin profile of the company.

always exceptions, but in general that type of work tends to drive higher margins. The closer you get to an as a service model, the closer you get to being able to leverage our solutions and our IP that does tend to drive higher margins, which is one of the reasons that we're optimistic about the long term margin profile of the company. And then on the quantitative side.

Closer you get to an as a service model the closer you get to being able to leverage our solutions and our IP that does tend to drive higher margins, which is one of the reasons that we're optimistic about the long term margin profile of the company and then on the on the quantitative side.

Speaker 4: And then on the quantitative side, as we think about the quality of the pipeline, one of the metrics we use to measure health and quality is whether there is an implied improvement to the margin rate organically, if they put some extra eyes on bids that go below threshold. We're thinking about the bids.

As we think about the quality of the pipeline, one of the metrics we use to measure health and quality is whether there is an implied improvement to the margin rate organically that puts some extra eyes on bids that go below threshold. We're thinking about the bids on a consistent long term basis. So to me, that's an important metric we track to see continued improvement there. As we've said on the margin story over time because we believe we have potential to improve there.

We're thinking about the bids on a consistent long term basis. So to me that's an important metric we track two.

Speaker 4: in the long-term basis. So to me, that's an important metric we track to.

Thank you to see continued improvement there.

Speaker 4: we've said on the margin story over time because we believe we have potential to improve there.

As we've said on the margin story over time, because we believe we have potential to improve there.

Got it, thanks so much for the color. Sure. Thank you, Colin. Your next question comes from the line of Tobey Sommer with Truist Securities. Thanks. Good morning. We're hearing from many companies as they react to a tightening labor market. To the extent you've been able to benchmark your new labor initiatives to know where you're positioned better than the market. Have you been able to do that as opposed to sort of reacting to the tighter labor market and putting some things in place? So where do you stand out in that regard you think?

Sure. Thank you Tom.

Speaker 1: Your next question comes from the line of Toby Sommer with Truist Security.

Your next question comes from the line of Tobey Sommer with <unk> Securities.

Speaker 11: Thanks. Good morning. We're hearing from many companies as they react to a tightening labor market. To the extent that you've been able to benchmark your new labor initiatives to know where you're positioned.

Thanks, Good morning.

We're hearing from many companies as they react to a tightening labor market.

To the extent you've been able to benchmark your new labor initiatives.

Where are you positioned.

Speaker 11: Have you been able to do that as opposed to sort of reacting and putting some things in place?

This is better than the market.

Have you been able to do that.

As opposed to sort of reacting to the tighter labor market and putting some things in place so where do you where do you stand.

And out in that regard do you think.

Speaker 3: Let me try to tackle that. I don't have any specific benchmarks in front of me. Many of the things that we touched on, as an example, the change in benefits we just implemented are messaged in September , so it's still early days.

Tobey, this is Nazzic. Let me try to tackle that. I don't have any specific benchmarks in front of me. Many of the things that we touched on as an example, the change in benefits. We just implemented our messaged in September so it's still early days. I will tell you that we are seeing, we do our own internal metrics, obviously on recruiting and offers and we are seeing continued improvement in that regard in a pretty material way. So we feel good about the focus areas. We feel good about the investments that we're making. And I think we're well-positioned going into next year. Now with all that being said, there is certainly is broad industry markets as it relates to turnover and we're holding our own as it relates to the labor pool, the turnover within the industry and I don't see anything on either side of that that is out of SKU. So it is something that is top of mind, we actually have an executive leadership team get metrics every week, we're paying. So certainly it's something we can probably add some color to as we go into the March time frame and get a couple of cycles behind us. But I don't have any specific metrics. Prabu?

Speaker 3: I will tell you that we are seeing, you know, we do our own internal metrics obviously on recruiting and offers and we're seeing continued improvement in that regard in a pretty material way. So we feel good about the focus areas, we feel good about the investments that we're making.

I will tell you that we are seeing we do our own internal metrics, obviously on recruiting and offers and we are seeing continued improvement in that regard and a pretty material way. So we feel good about the focus areas. We feel good about the investments that we're making.

Speaker 3: and I think we're well positioned going into next year. Now with all that being said, there certainly is broad industry markets as it relates to turnover, and we're holding our own as it relates to the labor pool, the turnover within the industry, and I don't see anything on either side of that that is out of skew. So it is something that is top of mind. We actually have a, we as an executive leadership team get metrics every week. We're paying.

And I think we're well positioned going into next year now with all that being said there is certainly is broad industry markets as it relates to turnover and we're holding our own as it relates to the labor pool that turnover within the industry and I don't see anything on either side of that debt.

It is out of SKU.

So it is something that is top of mind, we actually have.

<unk>.

Leadership team get metrics every week, we're paying.

Speaker 4: So certainly it's something we could probably add some color to as we go into the March time frame and get a couple of these cycles behind us, but I don't have any specific metrics. Prabhu? Just a couple of other quantitative data points. So, you know, as you step back and think about attrition rates as well as required head count,

So certainly it's something we can probably add some color to as we go into the March time frame and get a couple of cycles behind us. But I don't have any specific metrics. Prabu?

Just a couple of other quantitative data points. So as you step back and think about attrition rates as well as required headcount. Last year, it was an anomaly because we had lower attrition rates across the industry. As I look at attrition rates this year and just the tightening labor market. We're looking at a labor market that actually feels more like a labor market pre-COVID-19. And not to say, it's an exact one to one comparison, but we do see that comparability in the labor market. So the reality is we've actually navigated that market. So it sort of gives us comfort that we know how to navigate it.

Last year it was an anomaly because we had lower attrition rates.

Across the industry.

Speaker 4: As I look at attrition rates this year and just the tightening labor

As I look at attrition rates this year and just the tightening labor market. We're looking at a labor market that actually feels more like a labor market pre COVID-19 and not to say, it's an exact one to one comparison, but we do see that comparability.

Speaker 4: We're looking at a labour market that actually feels more like a labour market.

Speaker 4: Not to say it's an exact one-to-one comparison, but we do see that.

Speaker 4: in the labor market. So the reality is we've actually navigated that market, so it sort of gives us comfort that we know how to...

In the labor market. So the reality is we.

Actually navigated that market. So it sort of gives us comfort that we know how to.

Speaker 4: navigate this. The other things we're seeing is, you know, the tightening of the labor market is a function of job...

But a navigator.

The other things we're seeing is, the tightening of the labor market is a function of geography. It's a function of skill set and it's also a function of where non-labor costs are for every employee that we bring onboard. So as you think about the total bundle of factors, we're developing metrics at the geography level to see are there pockets, where there are heightened levels of demand. We're looking at skill sets. As we look about next year's plan, we actually have a sense going into next year's plan, where the skill sets are going to be needed at what those markets are fundamentally running in at. So those are metrics, we are starting to track too, but not hard metrics to communicate on that one but I wanted to be able to share a little more color on all the other factors that play into this equation.

The tightening of the labor market is a function of geography.

Speaker 4: It's a function of skill set and it's also a function of where non-labor costs are for every employee that we bring on board. So as you think about the total bundle of factors, we're developing metrics at the geography level to see are there pockets where there are heightened levels of demand. We're looking at skill sets as we look about next year's plan, we actually have a sense going into next year's plan where the skill sets are going to be needed and what those markets are fundamentally.

Function of skill set and it's also a function of where non labor costs are for every employee that we bring onboard. So as you think about the total bundle. The factors, we're developing metrics at the geography level to see are there pockets, where there are heightened levels of demand.

We're looking at skill sets as we look about next year's plan, we actually have a sense going into next year's plan, where the skill sets are going to be needed at what those markets are fundamentally running unit. So those are metrics, we are starting to track too, but not hard metrics to communicate on that one but I wanted to be able to share a little more color on all the other factors that play into it.

Speaker 4: So those are metrics we're starting to track to, but no hard metrics to communicate on the phone, but I wanted to be able to share a little more color on all the other factors that played.

This equation.

Speaker 11: Okay, thank you. My follow-up question is more on re-compete. What do re-compete percentages look like over the next couple of years, please, and is there, or I should say, are there certain significant programs that we should keep in mind as we map that out?

Okay. Thank you. My follow up question is more on recompete. What do recompete percentages looks like over the next couple of years, please? And is there, or I should say, are there certain significant programs that we should keep in mind as we map that out?

Follow up question is more on Recompete.

We compete percentages looks like over the next couple of years. Please is there.

Sure.

Or are there certain significant programs that we should keep in mind as we map that out.

Speaker 3: I think as we look forward, Toby, a couple of comments. For the next couple of years, it's more normative. It's more in the 15 to 25 percent.

I think as we look forward, a couple of comments. For the next couple of years, it's more normative. It's more in the 15% to 25%, which is a normal year give or take. Now obviously things get pushed out, things slide if that changes that metric, especially if they are significant. As we've touched on for next year, the two most significant ones. There is always stuff coming in and coming out of the portfolio. But the two that would bring your attention to are, is the NASA recompete that we've touched on giving you an update on that as well as the Vanguard program, which is the department of State program that we've held for the last 10 years that will go through a bit of a different recompete cycle as we get into mid next year. So we're keeping obviously, we're very aggressively pursuing that. But that would be one that I think would be top of mind as we think about the revenue flow for next year. Prabu, anything to add. PB MRO is up for recompete, but it doesn't have a revenue impact next year, but the following year.

For the next couple of years, it's more normal it's more in the 15% to 25%, which is a normal year give or take now obviously things get pushed out things slide if that changes that metric, especially if they are significant as we've touched on for next year. The two most significant ones. There is always stuff coming in and coming out of the portfolio.

Speaker 3: which is a normal year, give or take. Now, obviously, things get pushed out, things slide, and that changes that metric, especially if they're significant. As we've touched on, for next year, you know, the two most significant ones, there's always stuff coming in and coming out of the portfolio, but the two that I would bring your attention to is the NASA Recompete that we've touched on, giving you an update on that, as well as the Vanguard program, which is coming out next year.

But the two that.

That would bring your attention to.

Are the is the naphtha recompete that we've touched on giving you an update on that as well as the Vanguard program, which is the department of State program that we've held for the last 10 years that will go through.

Speaker 3: Department of State program that we've held for the last 10 years that will go through a bit of a different re-compete cycle as we get into mid-next year. So we're keeping, obviously, you know, we're very aggressively pursuing that, but that would be one that I think would be top of mind as we think about the revenue flow for next year.

Bit of a different recompete cycle as we get into mid next year. So.

So we're keeping obviously, we're very aggressively pursuing that but that would be one that I think would be top of mind as we think about the revenue flow for next year.

Speaker 4: PBMRO is up for recompete, but it doesn't have a revenue impact next year, but the following year.

Anything to add.

MRO is up for Recompete, but it doesn't have a revenue impact next year, but the following year.

Thank you. Your next question comes from the line of Louis DiPalma with William Blair. Good morning, Nazzic, Prabu and Joe. Good morning, Louis. SAIC along with nearly all of your peers have reported significant margin expansion relative to last year. Has work from home flexibility and a driver for your higher margins? And if not can you just provide an overview on what has been the main catalyst for your margin expansion?

No.

Speaker 1: Your next question comes from the line of Louis De Palma with William Blair.

Your next question comes from the line of Louis Dipalma with William Blair.

Good morning, Nasdaq's, Abu and John.

Good morning Lee.

Speaker 12: SAIC, along with nearly all of your peers, have reported significant margin expansion relative to last year. Has work-from-home flexibility been a driver for your higher margins? And if not, can you just provide an overview on what has been the main catalyst for your success? And if not, can you just provide an overview on what has been the main catalyst for your success?

SAIC along with nearly all of your peers have reported significant margin expansion relative to last year.

As work from home flexibility and a driver for your higher margins.

And if not can you just provide an overview on what has been the main catalyst for.

Your margin expansion.

Speaker 4: Sure, thank you for the question. For FY23, sorry FY22 rather, certainly there's a dynamic around, you know, total costs which have run lower than planned and that's true not just

Sure. Thank you for the question. For FY22, certainly, there's a dynamic around total costs, which have run lower than planned. And that's true not just for FY22, but it was actually just as true for FY21. We actually called out the tailwind for FY21 margins when we sort of gave you the bridge between '21 going into '22. Clearly, how this plays out next year, I'd say that's probably an open question right now. So as we sort of think about margin rates, we called out a couple of items over the course of the year just as we did in FY21 that were a significant tailwind to operating margin, we called out in your leased 60 to 70 basis points of margin tailwind in FY22 primarily related to the upmarket liability pickup that we referred to on our Q2 call. So the way we thought about guidance for FY23 at this juncture is while we see potential for long term improvement to operating margin rates, we bridged it back to the high 8% range, which is sort of inherently where this portfolio is operating at currently. But again, recognizing as I've said, probably four times on this call already that the team is going to be incentivized to improve margin out of this business and therefore, we're not going to sit over the course of the year at the high 8% range. And hopefully, we have got our incentives working in the way that it worked in FY22. But we have to be realistic to acknowledge the tailwind from those couple of significant onetime pickups in FY22

FY 'twenty two rather certainly there's a dynamic around total costs, which have run lower than planned.

That's true not just.

Speaker 4: for FY 22, but it was actually just as true for FY 21. We actually called it out as a tailwind for FY 21 margins when we sort of gave you the bridge between 21.

For FY 'twenty, two but it was actually just as true for FY 'twenty, one we actually called it out.

And for FY 'twenty, one margins when we sort of gave you the bridge between 'twenty, one going into 'twenty two.

Speaker 4: I'm querying how this plays out next year. I'd say that's probably.

Query how this plays out next year I'd say, that's probably an open question right now so as we sort of think about.

Speaker 4: right now. So, as we sort of think about, you know, margin rates, you know, we called out a couple of items over the course of the year, just as we did in FY21, that were significant tailwinds to operating margin. We called out nearly 60 to 70 basis points of margin tailwind in FY22, primarily related to the off-market liability pickup that we referred to on our Q2 call. So, you know, the way we thought about guidance for FY23 at this juncture...

Margin rates, we called out a couple of items over the course of the year just as we did in FY 'twenty.

'twenty one.

that were a significant tailwind to operating margin, we called out in your leased 60 to 70 basis points of margin tailwind in FY '22 primarily related to the upmarket liability pickup that we referred to on our Q2 call. So the way we thought about guidance for FY '23 at this juncture is while we see potential for long term improvement to operating margin rates, we bridged it back to the high 8% range, which is sort of inherently where this portfolio is operating at currently. But again, recognizing as I've said, probably four times on this call already that the team is going to be incentivized to improve margin out of this business and therefore, we're not going to sit over the course of the year at the

Speaker 4: is while we see potential for long-term improvement to operating margin rates, we bridged it back to the high 8% range, which is sort of inherently where this portfolio is operating at currently.

Term improvement to operating margin rates, we bridged it back to the high 8% range, which is sort of inherently where this portfolio is operating at currently but again recognizing as I've said, probably four times on this call already that the team is going to be incentivized to improve margin out of this business and therefore, we're not going to sit over the course of the year.

Speaker 4: But again, recognizing, as I've said probably four times on this call already, that the team is going to be incentivized to improve margin out of this business. And therefore, we're not going to sit over the course of the year at the high eight range, and hopefully we've got our incentives working in the way that it worked in FY22. But we have to be realistic to acknowledge the tailwind from those couple of significant one-time pickups.

high 8% range. And hopefully, we have got our incentives working in the way that it worked in FY '22. But we have to be realistic to acknowledge the tailwind from those couple of significant onetime pickups in FY '22

Speaker 3: And Louie, the other thing I would just reinforce, and I touched on this a bit ago is.

The other thing I would just reinforce that I touched on this a bit ago. Of course, this takes time, but we're also very focused, as probably we indicated. And I've talked about and the margin profile of the pipeline. And so not only in maximizing the margins from the programs that we execute today but really looking for ensuring that our pipeline is reflective of the margin expansion. Again, in aggregate any one program can have an impact one way or the other but in aggregate in those areas that we've highlighted as being part of our strategy, that will, in fact, drive higher margins in the portfolio over time as we win and prosecute those.

Speaker 3: And, of course, this takes time, but we're also very focused, as Prabhu indicated, and I've talked about, in the margin profile of the pipeline. And so, you know, not only in maximizing the margins from the programs that we execute today, but really looking for ensuring that our pipeline is reflective of the margin expansion. Again, in aggregate, any one program can have an impact one way or the other, but in aggregate, in those areas that we've highlighted as being part of our strategy, that will, in fact, drive higher margins in the portfolio over time as we win and prosper.

Of course this takes time, but we're also very focused is probably a indicated and I've talked about and the margin profile of the pipeline and so not only in maximizing the margins from the programs that we execute today, but really looking for ensuring that our pipeline is reflective of the margin expansion again in aggregate any one program can have an impact one way or the other but in aggregate.

And those areas that we've highlighted as being part of our strategy that will in fact drive higher margins in the portfolio over time as we win and prosecute those.

Speaker 12: Great, Nazik. And related to that commentary on the pipeline, are there other...

Great, Nazzic. And related to that commentary on the pipeline. Are there other hardware type systems production contract in your pipeline similar to the Navy torpedo MK 48 that you think that you are strongly positioned to win? And for hardware type contracts, is the margin profile consistent with your IT systems integration base type contracts?

And related to that commentary on the pipeline are there other.

Speaker 12: hardware-type systems production contract in your pipeline, similar to the Navy Torpedo MK-48, that you think that you are strongly positioned to win? And for hardware-type contracts, is the margin profile consistent with your IT systems integration space-type contracts?

Hardware type system production contract and your pipeline similar to the Navy to our P&L MK 48 that you think that you are strongly positioned to win and four.

Hardware.

Contract is the margin profile consistent with your.

Systems integration.

Contract.

Speaker 3: Yeah, Louie, let me take that, and then Prabhu can add some color, certainly. So the answer is yes. This is an area, and it's very consistent with, you know, with SAIC's heritage and engineering and modernization. And so we do have other...

Yes, Louie, let me take that and then Prabu can add some color certainly. So the answer is yes. This is an area and it's very consistent with SAIC heritage in engineering and modernization. And so we do have other potential opportunities, that's a significant size and scale and strong margins in our pipeline. We are, as I mentioned in my prepared remarks, very selective. And so we want to make sure they are programs in which we absolutely customers mission as well as ourselves. Something we look at and it really is building on the very strong complex engineering heritage of SAIC.

Speaker 3: potential opportunities of significant size and scale and strong margins in our pipeline. We are, as I mentioned in my prepared remarks, very selective, and so we want to make sure they are programs in which we absolutely support our customers' mission as well as ourselves. Pipeline is something we look at, and it really is built on a number of different things.

In our pipeline, we are as I mentioned in my prepared remarks, very selective and so we want to make sure. They are programs in which we absolutely customer's mission as well as ourselves.

Something we look at and it really is built.

Speaker 3: building on the very strong, complex engineering heritage of SAIC.

Building on the very strong complex engineering heritage of SAIC.

Speaker 4: And then we bring forth some tools, repeatable tools, in the form of supply chain management, in the form of digital engineering, digital twins. And so that combination has given us a strong position in the market. So we do have strong opportunities, strong pipeline opportunities, but we are selective. And I think Prabhu and I lay our eyes on every one of those of any size or scale that go through the pipeline to ensure that it is consistent with our strategy. And in terms of the margin grade question, I'd say the aspiration for margins from.

And then we bring forth some tools, repeatable tools in the form of supply chain management, in the form of digital engineering digital twins. And so that combination has given us a strong position in the market. So we do have strong opportunities, strong pipeline opportunities, but we are selective and I think probably when I lay eyes on every one of those of any size or scale that go to the pipeline to ensure that it is consistent with our strategy. And in terms of the margin. Great question. I'd say that aspiration for margins from this part of the business would be more in line with margins that we see on the hardware side. So think of that as sort of the circa 10% to 14% margins as sort of our aspiration. Not to bill something that's technically challenging and complex and sell it at 8% or 9% margin rate. So to me, I think that's the aspiration. We've got a good pipeline of evolving opportunities, but not as a can I spend a lot of time on the ROI on these investments to make sure that why SAIC is an important question for us. And if we have the domain experience and we know what we need to deliver, that gives us additional comfort that our legacy here as a systems integrator will actually help us execute and deliver what we need to deliver. So we're very thoughtful about the opportunities we pick up in this space.

Repeatable tools in the form of supply chain management in the form of digital engineering digital twins, and so that combination has given us a strong position in the market. So we do have strong opportunity strong pipeline opportunity, but we are selective and I think probably when I lay eyes on every one of those.

Of any size or scale that go to the pipeline to ensure that it is consistent with our strategy in terms of the margin great question I'd say.

Aspiration for margins from this part of the business would be more in line with margins that we see on the hardware side, so think of that as sort of the circa 10% to 14% margins as sort of our aspiration.

Speaker 4: be more in line with margins that we see on the hardware side. So think of that as sort of the circa.

Speaker 4: not to build something that's technically challenging and complex and you know sell it at eight or nine percent.

Not to.

Bill something thats, technically challenging and complex and sell it at eight or 9% margin rate. So to me I think that's the aspiration. We've got a good pipeline of evolving opportunities, but not as a can I spend a lot of time on the ROI on these investments to make sure that why SAIC is an important question for us and if we have the domain experience.

Speaker 4: So to me, I think that's the aspiration. We've got a good pipeline of evolving opportunities, but Nazik and I spend a lot of time on the ROI on these investments to make sure that, you know, why SAIC is an important question.

Speaker 4: have the domain experience and we know what we need to deliver, that gives us additional comfort that our legacy here as a systems integrator will actually help us.

we know what we need to deliver, that gives us additional comfort that our legacy here as a systems integrator will actually help us execute and deliver what we need to deliver. So we're very thoughtful about the opportunities we pick up in this space.

Speaker 4: what we need to deliver. So we're very thoughtful about the opportunities we pick on this in the space.

Excellent and happy holidays. Happy holidays. Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Hi, good morning, guys. Thanks for the time. So just on the top line, you guys have talked about it a few times already. It seems like there is maybe three contracts that really helped you grow. One of them is RITS. The other is maybe some AMCOM on [contract growth]. And is [inaudible] Nazzic, the third one that you mentioned, Nazzic, about, is that all the new work, how should we think about that being incremental? And Prabu, you talked about the recompetes for next year, it just really being the big one and HPCMP and Vanguard kind of rollover into fiscal '23, '24 potentially. So how do we think about that program completion percentage and recompete percentage delta? So three questions in that one.

Happy holiday.

Speaker 1: Your next question comes from the line of Sheila Kayabloo with Jeffries. Hi. Good morning, guys. Thanks for the

Your next question comes from the line of Sheila <unk> with Jefferies.

Hi, Good morning, guys. Thanks for the time.

Speaker 13: So, just on the top line, you guys have talked about it a few times already. It seems like there's maybe three contracts that really help you grow. One of them is risk. The other is maybe some outcome on contract growth. And is NAVSEA, the third one that you mentioned, Nazik, is that all new work? How should we think about that being incremental?

So just on the top line you guys have talked about it a few times already it seems like there is maybe three contracts that really helpful. One of them and the other is <unk> and on contract growth.

Obviously, the third one that you mentioned.

Is that all cash if we think about that being incremental and probably you talked about the recompete for next year, that's really been the big one and <unk> and thank God kind of all over into fiscal 'twenty three 'twenty four potentially.

Speaker 13: And probably you talked about the re-competes for next year, Aegis really being the big one and.

Speaker 13: HP, CMP, and Vanguard kind of roll over into fiscal.

Speaker 13: 23, 24 potentially. So how do we think about that program completion?

How do we think about that program completion.

Speaker 14: percentage, and we complete percentage delta. So three questions in that one. Okay, probably I can tag team as I

Percentage and we can stop.

So three questions on that one.

Okay. Prabu, [I can tag team]. The first part of your question on that, I would say the tailwind is going to next year, the growth opportunities. You touched on RITS. You touched on S3I. You got some growth in some of our space portfolio and on the NAVSEA had some growth going into next year. It is an existing program on which we are building on so there'll be incremental growth there. On the headwinds side, certainly the Vanguard as a headwind depending on timing, obviously, we were going to pursue a significant portion of that. The parts that we believe we have, we're well-positioned to win they are going to do some breakup multi-award. So it's a bit more complicated than just a line for line recompete. But we feel very strongly positioned in much of that work and we'll certainly pursue that. Timing is key on that because that certainly does go into that depends on the timing of the recompete award into next year as far as the revenue headwind. And then, of course, we've talked about the NASA program. So I think you captured most of the headwinds and tailwind correctly. Prabu, anything you want to add color? No, that's perfect. Okay, anything I missed there, Sheila?

And I can tag team.

Speaker 3: The first part of your question on, I would say, the tailwinds going into next year, the growth opportunities, you touched on RIF, you touched on S3I, we've got some growth in some of our space portfolio.

The first part of your question on that I would say the tailwind is going to next year the growth growth opportunities you touched on rips you touched on <unk> got some growth in <unk>.

Some of our space portfolio.

Speaker 3: And on the NAVSEA, some growth going in the next year. It is an existing program of which we're building on, so there'll be incremental growth there. On the HEDWINS side, certainly...

And on the NAV see some growth going into next year. It is an existing program of which we are building on so there'll be incremental growth there on the headwinds side certainly the vanguard as a headwind depending on timing, obviously, we were going to.

Speaker 3: The vanguard is a headwind, depending on timing. Obviously, we're going to pursue a significant portion of that. The parts that we believe we're well-positioned to win, they are going to do some breakup and multi-awards. So it's a bit more complicated than just a line-for-line re-compete. But we feel very strongly positioned in much of that work.

Pursue a significant portion of that the parts that we believe we have a we're well positioned to win they are going to do some breakup multi award. So it's a bit more complicated than just a line for line recompete, but we feel very strongly positioned and much of that work and we'll certainly pursue that timing is key on that because that certainly does go into that depends on the time.

Speaker 3: certainly pursue that. Timing is key on that because that certainly does go into the, depends on the timing of the recompete of the award into next year as far as the revenue head.

<unk>.

The Recompete award into next year as far as the revenue headwind and then of course, we've talked about the NASA program. So I think you captured most of the headwinds and tailwind correctly.

Speaker 3: And then, of course, we've talked about the NASA program. So I think you captured most of the headwinds and tailwinds correctly. Probably anything you want to add, Keller? That was perfect. Okay. Anything I missed there, Sheila?

Anything you want to add color as perfect. Okay anything I missed there Sheila.

Speaker 13: No, no, that's all good. And then just on the head count, you guys grew to, uh, sorry, your top line grew 2% organically and your head count was flat year over year. When we look at some of the other public peers, it looks like, you know, they grew maybe 3%. I don't know what the industry grew. Um,

No, no. That's all good and then just on the head count you guys grew to, sorry, your top line grew 2% organically and your head count was flat year over year. When we look at some of the other public peers it looks like they grew maybe 3%. I don't know what the industry grew. But kind of how do you think about your growth in the quarter? Was that on contract growth? Was that wage inflation? And it does seem like there's a bit of a doubt that with your attrition rates versus the industry, but I only have a subset appears I look at, you guys look at that broader industry. So maybe if you could comment on head count a little bit more.

So 2% organically in your head count was flat year over year, when we look at some of the other public peers it looks like.

Maybe 3% I don't know what the industry.

But kind of how do you think about your growth in the quarter was that on contract growth with that wage inflation and it does seem like there's a bit of a doubt that with your attrition rates versus the industry, but I only have a subset appears I look at you guys look at that broader industry. So maybe if you could comment on head count a little bit more.

Speaker 4: Sheila, I'll take that one. On headcount, I'd say your math sounds about right. I think we were more flat on headcount than at least some of the reported numbers we've seen from our peers, and I'd say

Yes, Sheila. I'll take that one. On headcount, I would say your math sounds about right. I think we were more flat on headcount than at least some of the reported numbers we've seen from our peers. And I would say, we think about this on a total net company basis, which includes programs that end and new programs that ramp. Clearly, as we mentioned in the prepared remarks, the topline for the quarter at 2.1% organic came in a little bit lighter just based off of the continued tightness we're seeing in the labor market. So as we think about our growth year over a year, we have metrics around what we want that headcount number to be for FY23. As we look back two or three months and we do these weekly reviews of headcount, what we see are two trends. Labor utilization is up. Which is a good sign.

Head Count I would say to you or Matt sounds about right. I think we were more flat on head count and achieve some of the reported numbers we've seen from our peers.

And I would say, we think about this on a total net company basis, which includes programs and new programs that Graham I'm clear.

Speaker 4: programs that end and new programs that ramp. Clearly as we mentioned the prepared remarks you know the top line for the quarter at 2.1% organic came in a little bit lighter just based off of the continued tightness we're seeing in the labor market. So as we think about labor growth year over year we have metrics around what we want that headcount number to be.

Clearly as we mentioned in the prepared remarks, the topline for the quarter at two 1% organic came in a little bit lighter just based off of continued tightness, we're seeing in the labor market. So as we think about our growth.

Over a year, we have metrics around what we want that head count number to be for FY 'twenty three as we look back two or three months. These weekly.

Speaker 4: We look back, you know, two or three months and do these, you know, weekly reviews.

Weekly reviews of head count.

Speaker 4: What we see are two trends. Labor utilization is up, which is a good sign. Spare time, if you will, that's actually flapping out, which is also a good sign. Three, we're not quite seeing the needed headcount curve bend, but we're actually starting to see the needed headcount curve.

We see our two trends labor utilization is up.

Which is a good sign.

Spare time, if you will that's actually flattening out which is also a good sign. Three, we're not quite seeing the needed headcount curve bend, but we're actually starting to see the needed headcount curve flat. That tells me, we're starting to catch up with what the inherent demand is internally for headcount, but we're not starting to bend the headcount curve, yet. But we do have a robust plan process with a good perspective on what the net increase to headcount needs to be organically for the company to grow next year. And that's what the team is committed to executing. Just a little more color for you.

That's actually flattening out which is also a good sign.

<unk>, we're not quite seeing the needed head count curve bend, but we're actually starting to see the needed head count curve flat.

Speaker 4: That tells me we're starting to catch up with what the inherent demand is internally for headcount But we're not starting to bend the headcount curve yet, but we do have a robust plan process

That tells me, we're starting to catch up with what the inherent demand is internally for head count, but we're not starting to bend the head count curve, yet, but we do have a robust plan process.

Speaker 4: with a good perspective on what the net increase to headcount needs to be organically for the company to grow next year, and that's what the team is committed to executing.

With a good perspective on what the net increase to head count needs to be organically for the company to grow next year and Thats. What the team is committed to executing just a little more color for you.

Okay. Thank you. Thanks for your question. I would like to turn the call back over to Mr. Joseph DeNardi for closing remarks. Great. Thank you Lisa and thank you all very much for your participation in today's earnings call and for your continued interest in SAIC. Have a nice day. This concludes today's conference. You may now disconnect.

Speaker 1: If you have any questions, I would like to turn the call back over to Mr. Joseph Dinardi for closing remarks.

Thanks for your question I would like to turn the call back over to Mr. Joseph <unk> for closing remarks.

Speaker 2: Great. Thank you, Lisa, and thank you all very much for your participation in today's earnings call and for your continued interest in SAIC. Have a nice day. This concludes today's

Great. Thank you Lisa and thank you all very much for your participation in todays earnings call and for your continued interest in SAIC have a nice day.

This concludes today's conference you may have.

And now disconnect. [music].

[music].

Q3 2022 Science Applications International Corp Earnings Call

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