Q4 2022 Science Applications International Corp Earnings Call
Ladies and gentlemen, thank you for standing by.
Hi, My name is Brent and I will be.
Your conference operator today.
At this time I would like to welcome everyone to the SAIC fiscal year.
2022 fourth quarter and year end 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'd like to ask a question at that time simply press star followed by the number one on your telephone keypad.
Our one thank you. It's now my pleasure to turn today's call over to Mr. Joseph de Nardi, Vice President of Investor Relations. Sir. Please go ahead.
Good morning, and thank you for 2022 earnings call.
My name is Joe de Nardi, Vice President of Investor Relations.
Joining me today.
Dean, our Chief Executive Officer, and <unk> Shah, our Chief Financial Officer.
Today, we will discuss our results for the fourth quarter of fiscal year 2022 that ended January 28 2022.
Earlier. This morning, we issued our earnings release, which can be found at investors that FDIC 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.
These documents can be.
Filed later today should be utilized in evaluating our results and outlook along with information.
Please note that we may make forward looking statements on today's call that risks and uncertainties that could.
Cause actual results to differ.
I refer you to our SEC.
Including the risk factors.
10-K, and quarterly reports on Form 10-Q , our views as of today and subsequent.
Current events may cause our views to change.
We may elect to update the forward looking statements at some point in the future but.
In addition, we will discuss non.
non-GAAP financial measures and other metrics, which we believe provide useful information for investors.
Financial presentation slides include reconciliations to the most comparable GAAP measures.
It is now my pleasure.
As you have to introduce our CEO <unk> Keene.
Thank you Joe and good morning to everyone joining our call.
Before we discuss our 2023 I would like to recognize but continues to be an inspiring level of performance from our employees, who showcased the very best at SAIC values to our customers and their communities every day.
This performance and dedication is evident in our financial results and fiscal year 2022 with margins exceeding our expense.
Expectations due to strong execution in both sectors.
It is evident in the improvement we see in our customer satisfaction scores, which speaks to the value we provide and enables a strong on contract growth we delivered in fiscal year 'twenty to be 30000 volunteer hours.
Our combined employee and company charitable contributions made over the last two years.
And it is evident in the numerous awards recognize it.
Putting big named by Forbes as it.
In 2021.
It is my privilege to lead such a dedicated group of employees focused on using technology and expertise to serve our government.
Now onto a discussion of our fourth quarter results and.
We delivered full year revenue.
And adjusted EBIT.
<unk> margin of nine, 3% and $467 million of free cash flow.
This represents a two 5% increase in organic sales.
40 basis.
At this point year over year improvement in margin and a 10% increase in free cash flow.
For nonrecurring benefits.
We delivered on our financial commitments this going forward.
We returned $297 million of excess capital to our shareholders through our dividend and share repurchase program.
Full year 'twenty three provide the option.
Return to shareholders by Approx.
Hire an additional 4% of shares.
Outstanding.
To be clear.
Is that investing in our business.
And positioning our portfolio to drive sustained profitable growth and we have to.
Confidence in our plan to do just this.
Given that confidence we believe our share repurchase plan offers an attractive return on capital.
For fiscal year 2023, we are providing initial guidance for revenue of seven $3 5 billion to $755 billion representing.
Representing roughly 1% total growth at the midpoint.
Our fiscal year 'twenty three strong execution.
We expect to generate free cash flow in the range of 500 million to $530 million, representing over 10% growth at the midpoint compared to our fiscal year 'twenty two cash performance.
Before turning the call over to <unk> to discuss our financial results and outlook in more detail I would like to reflect on areas of our financial performance, where we have excelled in areas, where I expect performance to improve.
As I mentioned earlier, our ability to persevere and remain focused on delivering value to our customers and shareholders has been impressive.
Performance in fiscal year 'twenty two.
This points of the improvement in margin relative to our initial guidance.
Our cash performance continues to be strong with line of sight into double digit growth in fiscal year, 'twenty, three and 'twenty four.
In fiscal year 'twenty, two we established.
With goals to achieve parity between the representation of women and people of color within our leadership in non leadership roles within five years.
We made good progress towards our goals with women now representing 27% of our leadership and people of color representing 22%.
Both of these categories grew as compared to the prior year.
While there are areas of our business that are clearly performing well I want to acknowledge those who I am focused on driving further improvement.
The primary means we have to increase long term shareholder value is to deliver sustained and profitable organic growth.
Fiscal year 'twenty, two represented an improvement in our growth rate relative to prior years and we expect to continue this trend in the years to come.
While we recognize that our initial expectations for fiscal year 'twenty three are somewhat lower than our prior plan due to budget uncertainties and contract transitions, we remain confident in our ability to drive long term profitable growth.
To reinforce this I want to provide some insight that we typically do not disclose in order for our executive officers to earn target payout on the revenue component of our incentive compensation plan, we have to deliver fiscal year 'twenty three revenue at the top end of our revenue guidance.
In addition, beginning with the fiscal year 'twenty three grant we are modifying our long term incentive compensation program for the executive leadership.
We have substantially increased the relative importance of total shareholder return such that one third of the payout going forward will be tied to <unk>.
This reflects our commitment to holding ourselves to a higher standard while increasing our skin in the game. It is a challenge we believe is appropriate and one we embrace.
I am impressed by the energy and commitment to drive continuous improvement across the company. However, like most things are progress has not been perfectly linear and contract transitions due in part to recompete losses represent a headwind to growth in fiscal year 'twenty three.
Our pipeline, however remains very strong with roughly $21 billion of submitted value and ample opportunities to drive stronger growth in the future.
More importantly, the quality of our pipeline is improving.
As we outlined on our third quarter call, our innovation factories together with our sectors are developing solutions and capabilities that will improve our ability to win accretive new business aligned with our strategy.
This focus allows us to shape, our portfolio organically by approaching our pipeline development and pursuit decisions in a disciplined manner with an emphasis on markets of strength, including engineering and it services.
Finally, we expect to generate roughly 10% of our market value we.
We will continue to take a disciplined approach to capital deployment to maximize long term shareholder value.
I will now turn the call over to <unk>, and then discuss our outlook for fiscal year 2023, as well as some additional disclosures we are providing in our supplementary slides designed to improve transparency into our business.
Im pleased with the overall performance of the business in the fourth quarter.
We reported revenues of $1 78 billion for the quarter and 739 billion for the year in line with our most recent guidance.
For the quarter. This represented roughly 4% of total growth and one 4% organic growth and for the year, approximately 5% total growth and two 5% organic growth.
Our fourth quarter adjusted EBITDA margin of eight 2% was better than our plan, reflecting good program execution, partially offset by the impact of higher investment spend consistent with our prior guidance our full year adjusted EBITDA margin of nine 3% was 60 basis points.
Above the midpoint of our initial guidance for the year and 40 basis points higher on a year over year basis due to strong performance and the benefit of certain nonrecurring items.
We reported adjusted earnings per share of $1 50 for the quarter and $7 27 for the year with stronger performance driven by program execution and a favorable tax rate.
Our full year free cash flow of $467 million represents a roughly 10% increase year over year and as <unk> mentioned, we have good line of sight into continuing this growth in fiscal year 2023 and fiscal year 2024.
Consistent with the commentary from our Q3 earnings call in December <unk> assumed that the implementation of the section 174, R&D amortization provision will be deferred.
Lastly, net bookings in the quarter were $2 2 billion.
Resulting in a book to Bill ratio of approximately one two times for the quarter and one three times.
For the year, our backlog duration now stands at nearly four five years, which we indicated on slide 12 of our presentation.
We are providing initial fiscal year 2023 guidance for revenue.
Adjusted EBITDA margins of approximately eight 9% adjusted EPS was <unk> <unk>.
82.
The $7.
Version 10.
And free cash flow of 500 million to $530 million.
Okay.
Our revenue guidance reflects a few different factors, which I would like to make sure are well understood. Our outlook assumes about 3% to four points of headwind from contract transitions and run offs two points of total tailwind from our acquisition of half acre and the extra.
Fourth quarter, working days and 1% to three five points of tailwind 10 of our presentation. We.
We believe this revenue range properly captures the opportunities to grow both from new business and the known contract transition headwinds, we face against a somewhat uncertain and fluid backdrop, given the slower pace of outflows to start the year and the residual impacts.
The continuing resolution.
Our revenue guidance is roughly one to two points below what we had contemplated on our previous earnings call with modest incremental pressure from contract transitions and a more conservative view regarding the pace of customer activity over the next several months.
As <unk> mentioned, our pipeline remains strong both in terms of the magnitude of the opportunity and the quality of the work. While we were unsuccessful on one of the larger new business pursuits, I referenced on our third quarter call I remain confident that the investments, we're making will allow us to win more than our fair share going forward.
Additionally, I would like to remind you that our pipeline contains some significant opportunities over the course of fiscal year 2023 across our engineering and it service domains.
In terms of revenue cadence throughout the year at this time, we expect low single digit total revenue growth in the first and fourth quarters and low single digit declines in the second and third quarters, our margin guidance of approximately eight 9% represents comparable year over year performance when occur.
Rounding for certain onetime gains in fiscal year, 2022, which we estimate added roughly 40 basis points to full year margins. This is consistent with the fiscal year 2023 margin expectations. We communicated on our Q3 earnings call for additional clarity we have provided a walk from fiscal year 2021.
Okay.
Challenge that you have to overcome unfortunately, sometimes we all lose contracts.
We certainly win more than our fair share as well.
But definitely the incredibly successful.
Both protecting our recompete submitting either.
Got it thanks, and I guess, if you could remind us in terms of re competes coming up in 'twenty. Three years are there any big ones, we should watch for.
Let me take that one.
I would say it's primarily.
Okay.
Great.
We'll go into the <unk> cycle here of course in all of this year.
The big needle movers for the year and as you know in Vanguard, that's a complex procurement.
Executing well on the program.
Supporting the customer as they lay out there.
Aspirations for that they can be.
Maybe other thing that I'd add is it's a free formative year for us.
Re competes are there.
Tenants.
To a range of.
15% to 20% range and it's a pretty limited here.
Got it alright, thank you.
Your next question is from the line of Cai von <unk> with Cowen Your line is open.
Thank you very much.
So I guess probably <unk>.
To help us understand the fourth quarter profitability a bit better.
Your release talks the favorable impact of settlement of prior year indirect rates and negative compare year over year in <unk> could you quantify both of those items for us. Please.
So on the <unk>.
The feedstock.
As you'll see in the 10-K that will get filed at the end of the day.
It's about the other indirect rate question.
We typically swap rates at the end of it.
Unexpected for us to have some degree of either capability.
Sales of $1 billion range.
End of the year. So this is fairly routine.
Yeah.
Q4 week flag.
So we had up there was sort of a mid to high 70% range and we get a little bit better than our expectations.
Primarily driven by some of those rate settlement offers.
Office.
For the year, so we sort of calibrated I think Rx.
Expectations are on execution for the year I think as we step into FY 'twenty. Three we provided initial guide of 1819, which is sort of our way of thinking about comparable year over year performance. So I'd say nothing unusual.
Any of the Q4 items.
Certainly competition I'd say at least partially if not mostly within the guidance that was implied for Q4 on the margin.
Terrific and then.
Obviously, we have the Ukraine conflict on us now and I would assume that's going to have.
Some impact on.
Our defense business as you see things today.
Proper.
What sort of impact do you think it might have on your business and are you seeing any preliminary signs.
Any change in terms of your outlook as a result of the Ukrainian conflict.
Yes, hi, good morning, well first and foremost.
Quite a bit focused on supporting our country and enabling execution of emission and employees and they continue to do an excellent job of rising certification and I know that we're all saddened by it.
<unk>.
Over there we have not seen any changes to date and our business or really any impact to revenue that I would classify as material.
Within certain business areas, we are seeing some changing demand signals related to increased focus on Ukraine.
Really in certain pockets of the portfolio that we just remain focused on supporting our country and our customers and if they require additional resources from us.
Absolutely and always be there and Thats really what were focused on at this point, but it's too early to answer the broader question as it relates to the long term impact properties, one color and specifically with respect to guidance.
We are not assuming.
Upside from that situation.
Items.
Okay, great. Thank you very much.
Your next question is from the line of Colin Canfield with Barclays. Your line is open.
Okay.
So in terms of the recovery on the logistics side.
Great.
On the call we are not assuming that there is a material improvement in the performance of that business and I'd say that continues to be.
Our posture as we head into FY 2003 to the extent that there is an inflection towards maybe higher spend.
And our readiness than currently assumed in the guidance. It is fair to say that we may see some upside from that business, but on a relative basis on a on a year over year basis, I'd say, we're thinking that business modestly accruals, but not materially so.
Split between sales growth margin improvement and working capital.
So improvements as well as kind of the capital intense need it you are contemplating within your pipeline.
Sure I would say we are comfortable with what we said on the December call, which is we see about a 10% increase in our ability to generate free cash flow FY 'twenty. Please.
Right.
The comfortable but thats a good way to think about the cash generation capacity of this business.
Two we've also said our focus here is to consistently grow the business improved margin rates over time, and I've always said for about nine months, but there is opportunity on the working capital. So I think as I think about.
Where is the incremental benefit comes from ink, it's a combination of working capital improvement with all of the initiatives. We have underway on the DSO side on the GTO side on subcontract side that will provide some tailwind to cash.
And in addition to that it is our urban sold and what we aspire to which is to generate consistent topline growth and improve margins here. So we do see multiple ways to get to that 10%.
Target for FY, 'twenty I think says.
Got it got it and then one last one on strategy going back to kind of ask the question on price can you just discuss.
The sort of scale of contracts that you are competing for an it services I know <unk> isn't really the right comp for you guys, but if you think about the final bidders there versus CIC do you view that you have the scale to kind of go after some of the larger it modernization contracts or is there a better way to think about your strategy in that business.
No great question, So I would say with confidence we absolutely have the scale to go after most of the enterprise.
Large enterprise it modernization contract and we've got sufficient past performance in this area and we have the capabilities.
<unk>.
He brought to bear and we layered in the Unisys federal capabilities.
Year to have the government two years ago, I guess the point time flies.
And continued performance across again, all aspects of the government. So I feel very confident in our ability to be a leader in the it modernization arena for the U S government.
Excellent. Thank you.
Thank you.
Your next question is from Gavin Parsons with Goldman Sachs. Your line is open.
Hey, good morning.
Good morning, guys.
And I appreciate there's a lot of budget uncertainty still in a lot of unknowns, but a few of your peers have longer term growth outlook SAIC on kind of what the medium term growth rate or end market addressable market growth rate looks like for you.
So as.
We've been discussing we're not in a position to share multiyear targets at this juncture. We are laser focused on continuing to position our portfolio to truly maximize the long term shareholder value and we have a strategy that we've shared over the last many calls to support that we continue to make investments in those areas of the portfolio that will produce.
<unk> can produce higher rates of growth over time, and so really looking at a portfolio view of our business.
We know there's interest test to hearing more from us on longer term targets were not prepared to people on this call, but it is something that probably and I talk about quite a bit and we'll look for the opportunity to do that in the future.
And I think the last thing I would draw your attention to is hopefully.
Really the insight that we provided around the changes pretty substantial changes to our incentive compensation demonstrate our commitment to delivering sustained profitable growth. Our leadership will continue to benefit from the shareholders benefit and creating that linkage. We believe is a very powerful tool.
Again, the one thing I would add to that is one of the more important changes we've made toward incentive comp metrics.
It's not just a plan focused on communication.
So we recognize what our peers communicate regularly in terms of their growth rate aspirations and I think the buses.
But to say that we are challenging the teams.
At or above those targets, but recognize every year. It comes in both sets of challenges in its own sense of this new opportunities. It is our job to go execute on a year over year basis.
This call is in probably the perfect venue for a long term guidance conversation, we will certainly look forward to having the conversations with the street.
Sometime over the course of the year.
That makes sense all right that's helpful.
Quick clarification, then on the.
Buybacks, reducing the share count by 7% the deck says it could be 8% to 10%.
The upside scenario.
What are your thoughts on.
Getting more towards buybacks relative to M&A. Thanks.
Thank you for the question I would say the deck refer specifically to the auto show count.
And the 7% is effectively net does the equity issuances that we have here. So they are entirely consistent with each other I would say as we sort of start out.
And we think about capital allocation.
<unk> allocated in ways that are accretive to shareholder value.
We believe the market does not have conviction that we can consistently grow this business.
To justify repurchases and repay debt.
Slide into discount that we see in the stock price that we see as a dislocation in the market for our equity and we have therefore purposefully chosen to invest a little more capital than buybacks. Because we believe that is a good way for us to return value to our shareholders. So as long as the dislocation.
Is there.
Made aggressive on the share repurchase program.
That's sort of implied in the guide.
As we start out the year, we do typically open market repurchases and we've got a great in place and not surprisingly.
Buy more at lower prices that we buy less at higher prices.
You'll see how the year plays out.
Recognizing 7% reaching.
We can target for us.
In terms of production shutdown by the end of FY 'twenty three.
Thank you Bob.
Okay.
Your next question is from the line of Sheila.
Now glue with Jefferies. Your line is open.
Thanks, Good morning in particular time, but to your question I guess with Dol.
My favorite topic is our revenue bridge and on Slide 10, we talk about new business on the contractor Thats one.
5% growth.
Just thinking about the budget that came out the president's budget in a nutshell that then it's already at three and a half.
Well I guess, what end markets are you basing that off and then how do you come up with that one.
Three five net.
<unk> growth forecast.
Okay.
Hi, Sheila I'll take that one so.
So in terms of the bridge that you provided.
FY 'twenty to be broken up in new business is on contract I.
I would say, let's start with the backlog we have.
24 billion.
Thanks.
It was about 2% last year and as we think about where the greatest set of near term opportunities.
That is from things that are already sitting in the backlog.
Hence the amount of focus for the teams to go generate incremental growth beyond what's reflected implied in the guidance. We have out there. So we're comfortable that that would provide a good source.
Consistent year over year revenue on the new business front it's.
It's probably a tale of two times in this particular fiscal year, the first half, which means lower given the slower pace of I would say it is also our expectation that as we start the next fiscal year for the government GFY 2020 or likely to start in a CR again, so as we said in our prepared remarks, I think what's changed.
But some of it is sort of a conversation you had with.
With you all is that our view of the.
Award activity has become a little more conservative just given what we've seen in the market over the losses and so as we think about it.
Portfolio will always can work on the portfolio, but we are aligned with where the spending is going to be but I think we tend to decompose the spending into the <unk> and then within the customer classes, we see those spending patterns.
You think about primarily O&M.
<unk>.
Like a flat plus three and with the buyer and that's effectively what's captured in members there.
Okay.
Thanks, Brian I'm going to touch on my second question, So I guess, where do you think.
I think their portfolio has been fairly defensive in terms of your pipeline strategy. When we think about <unk> in the army portfolio overall.
Keybanc.
Business and Recompete turnover.
When you say you are working on that.
Our pipeline and quality of that where are you being most authentic look different.
In your pipeline in terms of going after new wins.
By customer or by end market.
Yes. This is <unk>, let me provide a little bit of color as well so.
In the prepared remarks that <unk> 21 billion.
Puzzles awaiting award and probably you gave great color on certainly we watch the pace of that award and we continue to navigate that about half of that give or take it's new business and so so considerable amount of both protect obviously.
Is that the posture as well as the opposite the posture of being able to go secured new business. Just wanted to give you a couple of metrics around that as we think about what areas of the portfolio.
That are driving the growth it is consistent with what we've been talking about in the past in a couple of questions ago as well certainly the it modernization cloud migration across all aspects of the federal government, we see considerable opportunity for growth in our space related market, we see opportunity as well and that's an area that we've been been folk.
<unk> and then certainly in all aspects of it.
Portfolio, there are pockets that we see greater growth and there is some pockets of the portfolio that we do not and so we have become much more disciplined over the course of the last couple of years and ensuring that we're in.
And those areas, where we believe and we're confident that we can drive profitable organic growth.
While I wouldn't say diminishing other aspects of the portfolio, but certainly disproportionately investing those that will drive the growth and so those are the aspects of how we think about it we do have confidence that we're seeing certainly in the new business submissions as well as some of the wins some of those proof points, probably I'll, let you provide some more color. Thank you Dennis.
Greg I think one other comment which is not as I've said.
Just over half of it is new business.
Sort of step back and think about this business over kind of a 10 year period.
So we went through a recompete cycle on mix will go into a recompete on PV MRO, we're going through that Recompete.
And so and we just went through we can recycle owner and Columbus C&I portfolio. So as I step back and think about the next couple of years.
I'm gratified to see that Super cycle for SAIC franchise program Recompete is behind US and what is ahead of US is a set of opportunities in the pipeline, where it gives us an opportunity to take away business from others. So to me. This is an important inflection with oilfield in the portfolio.
I think it actually is one that positions us to be more successful taking away market share year ago into a super cycle for our large franchise.
Okay.
Thank you.
Thank you.
Your next question is from the line of Seth Sigman with Jpmorgan. Your line is open.
Okay, Thanks, very much and good morning.
Just a couple of questions about.
Since we had later into the year, maybe and into 'twenty four.
I guess first of all does the guidance for 'twenty three I assume.
Continuing resolution and your I guess fiscal fourth quarter and that.
Or I guess from September 30th.
Yes, it does.
Okay, great. Okay, and then when we look at the the elevated number of working days.
It looks like in this year.
Do we think about that as a headwind to growth as we head to fiscal 'twenty four.
So so in technically.
This happened last time in 2017, I would say in terms of the few extra working days it would represent a modest headwind into FY 'twenty.
Okay. Thanks.
<unk> already hit on the Big picture stuff, So I'll leave it there. Thank you.
Thank you.
Your next question is from the line of Tobey Sommer with <unk> Securities. Your line is open.
Thank you.
With respect to being focused on <unk>.
And share repurchase.
How would you describe the effect of that.
Company's posture in the acquisition market in <unk>.
Appetite over the next year or more if this is powered by a focus on the incentive comp.
For me.
So thank you for the question Tobey I think we've said.
Our focus remains on organically investing in the business.
And then a bias towards repurchases on capital allocation.
With respect to the excess capital that we generate every year and this becomes a viable way for us to allocate sort of excess capital towards buyback given where the equity is currently trading. So I think it's really important to recognize that that is the primary focus for the management.
With respect to whether that diminishes or has an impact to our capacity for M&A.
I would say the following.
Say, if we find good M&A deals that are accretive tuck it is things like half the acres that have the capacity to get us into markets that we don't have exposure to all generate good returns and are speaking with earnings as well as the cash that we can do.
Incremental capacity to go raise the debt raise or levers that we are organically target is between three and three and a quarter give or take this year and therefore, we believe we have capacity for M&A.
Obviously large M&A maybe out of the question for the near term, but thats a function of whats out there specifically, but in terms of just the M&A appetite I don't think there is.
To be diminished by our desire to repurchase shares.
And quick question for you about the.
The following fiscal new federal budget. So as you said you assume.
We are in the final quarter.
Historically, when you look back at periods, where there's been sort of.
<unk> been a charity.
Adrian towards NATO.
On sort of a higher op tempo.
The government tends to.
Be a little bit more responsive and get budgets done.
Maybe not perfectly timely fashion, but better than the six month CR, we recently got.
I think there's certainly an argument that would set suggests that in time.
But you referenced when there's a need to do something there.
There tends to be less partisanship, when it comes to being able to get a budget through in support of the national priorities, but.
I wouldn't want to predict what.
What should happen, but I can tell you that one would assume there'll be less partisanship and so maybe a better appetite for getting some things through.
If you want to comment maybe the other data point would be that.
We're seeing pickup starting right now.
I would say is operating under the assumption that this year would go on a little bit longer and therefore, there is a little more money to be spent in the next six months before we potentially could see rfps as you know a.
We are tailored to the O&M money, so some of that incremental funding that.
For GFY 'twenty, two we'll continue to offer support for whats implied in the Q4 guidance, which as you say.
With that low single digit revenue growth.
Thank you.
Okay.
There are no further questions at this time.
Now ill turn the call back over to Mr. Dinardo.
Great. Thank you Brent and thank you everyone for joining us today ladies.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
[music].