Q2 2023 Science Applications International Corp Earnings Call
In a month in which we honor our first responders military members and so many civil servants, who protect us day in and day out we believe it's even more important to celebrate our own leaders who serve our government.
In prior calls we have discussed Saic's leadership as a top employer for veterans as evidenced by our number five ranking and Forbes most recent list of top employers for veterans.
In addition to this we were recently notified that the national Veterans small business coalition named SAIC as contractor of the year.
Just as impressively reader Brooks the leader of our small business organization was named the veterans small business advocate of the year for 2022.
These recognitions reflect readers efforts that of her team and Saic's commitment as advocates for the veterans small business community and we are very proud of this acknowledgment.
Working effectively with the small business community and in particular those led by veterans is an important part of our teaming strategy a heartfelt congratulations to reader and a small business outreach team at SAIC.
Shifting from some of our recent cultural successes to our financial results I am pleased with our performance in the quarter as we delivered revenue adjusted EBITDA margins and earnings consistent with or better than our plan.
As a result of our performance to date, we are increasing guidance for fiscal year 'twenty three revenue and earnings per share, which we detail on slide 13 of our earnings presentation. We continued.
To invest strategically for our future and remain confident in our ability to deliver organic revenue growth expand margins and increase free cash flow in the coming years.
Following our discussion last quarter around our growth and technology, accelerants or GTA and core areas of focus I want to provide three recent events that illustrate our leadership position as a technology integrator.
This role positions us well to best meet evolving customer requirements, particularly in markets with rapidly advancing commercially available capabilities.
The first example falls within our systems integration and delivery or Sid capability within GTA.
In April the joint capabilities office held flight tests in Arizona to assess counter UAS solutions across a variety of platforms and operating scenarios.
<unk> performed extremely well and delivered a technology agnostic scalable and modular solution capable of detecting tracking identifying and defeating UAS threats in various environments.
Our solution performed as well as it did for two reasons.
We integrate best available technologies in the area of directed energy radars optics and power management and second Valkyrie, which is our internally developed software solution in which allows us to be technology agnostic and deliver a single pane of glass single operator solution.
Both discriminator in this market.
Our success at this event served as a catalyst for an encouraging rate of adoption in recent months with greater potential upside going forward.
As Youll see on slide seven of our earnings presentation, our recent progress and counter UAS built upon our strong legacy in this market.
The second example sits and secure cloud within GTA in fiscal year 'twenty, two secured cloud accounted for roughly $1 billion in revenue for SAIC at accretive margins.
Over the last 12 months, we have won new programs centered on cloud migration and cloud management with a total contract value of roughly $500 million.
We have other large pursuits in our pipeline, which lay the groundwork for sustained profitable growth within secure cloud in the coming years.
A common thread, we have seen and customer feedback has been the technical quality of our offering which gives us confidence in the differentiation of our solution known as cloud, which.
Which we illustrate on slide eight.
According to Gartner SAIC is the number one vendor for infrastructure implementation and managed services by revenue in the United States government.
The third example relates to the recent successes, we've had winning programs to help several customers implement their <unk> strategy, which we show on slide nine while many of you on the call will appreciate the breadth of this effort across the department of defense, we are confident that our role as a technology integrator positions us as a leader.
<unk> in the market.
Last quarter, we indicated that we had roughly $1 $1 billion and award value under protest.
One of those wins known as Aoc Falconer with an award value of roughly $300 million was resolved in our favor.
Through this key program, we will help the air force modernize and advance a premier command and control system, using saic's expertise and jazz situ critical technologies, including cloud migration and modernization and big data integration Importantly, we won this competitive pursuit in large part because of our superior technical solution.
Fueled by cloud.
We believe our success in these three areas provide great proof points of our strategy to leverage our legacy as a technology integrator to deliver higher value solutions and fast growing markets, while maintaining our capital light business model.
Now I'll turn the call over to <unk> to discuss our financial results and improved outlook.
Thank you Isaac and good morning, everyone I am pleased with the financial results, we delivered in our fiscal second quarter and the continued progress I see in the areas of business development and the execution of our strategy. Despite the impact on organic growth in the quarter from Recompete losses, our performance in the quarter and year to.
<unk> contributed to our improved outlook for the full year.
In the quarter, we reported revenue of 183 billion roughly flat with the prior year.
Organic revenue declined approximately one 5% year over year, primarily due to one fewer working day in the quarter as we were able to largely overcome year over year revenue pressure from recompete losses, which improved on contract growth.
I'll discuss our revenue expectations through the remainder of the year shortly.
We reported adjusted EBITDA of $166 million, resulting in a margin rate of nine 1%.
The decline in margin year over year is largely due to greater onetime gains in the prior year period, which we've previously discussed incurred.
Encouraged by our margin performance year to date, and we have good line of sight to reaching our full year guidance of approximately eight 9%.
Adjusted EPS in the quarter was $1 75 slightly ahead of our plan primarily due to good operational performance and strong execution from our tax team.
Free cash flow of $74 million was negatively impacted by roughly $25 million due to temporary payment delays associated with a government agency, which affected much of the defense contracting industry. Subsequent to the end of the quarter. The delayed payments were received and we remain on track to meet our full year free.
Cash flow guidance book.
Bookings were roughly $2 1 billion, representing a book to bill in the quarter of one onex and one <unk> on a trailing 12 month basis.
Our <unk> bookings include the Aoc Falconer award the customer on a previously awarded TSA. One program is taking corrective action in response to a protest and we are awaiting the outcome of that process.
Based on results to date, we are increasing our guidance for revenue and earnings per share for fiscal year 2023.
Our updated revenue guidance provides for a range of $7 5 billion to 755 billion and represents year over year growth of roughly 2% at the midpoint.
We continue to expect a low single digit decline in the third quarter revenue and low single digit growth in the fourth quarter.
As previously communicated the primary driver of the anticipated change in growth from third to fourth quarter or five additional working days in the fourth quarter.
We expect the extra days to add roughly $110 million to our fiscal fourth quarter. When adjusted for these additional working days, we expect a fourth quarter revenue declined in the low to mid single digits.
Despite the revenue pressure expected in the second half of the year, our new business win rate year to date is nicely ahead of our plan in the past six months, we have won new business with a total value of over $1 2 billion, which provides us visibility into returning to growth in early fiscal year 2024, we note.
The timing of protest resolution and our ability to ramp up will influence whether we see this inflection in the first quarter or second quarter of fiscal year 2024, regardless of this uncertainty we have confidence in our ability to consistently grow the business and return value to shareholders as we've demonstrated over the past.
24 months.
Consistent with our performance through the first two quarters of this year, we will continue to aggressively pursue incremental new revenue opportunities with particular emphasis on contract growth as we indicated on our fiscal year 2022 fourth quarter earnings call in order for our executive officers to earn target payout.
On the revenue component of our incentive compensation plan, we have to drive revenue above the high end of our current revenue guidance we.
We are maintaining our full year adjusted margin guidance of approximately eight 9%. We note however that the potential timing of certain materials sales later in the year could push total revenues to the high end of our revised guidance, while putting modest pressure on margins. We are also increasing FY 'twenty.
Three adjusted EPS guidance by <unk> 10 at the low end, which reflects the strong operating performance to date and a lower expected tax rate, partially offset by increased interest expense.
We are reaffirming our full year free cash flow guidance of 500 million to 530 million for fiscal year 2023, we expect a roughly $325 million in free cash flow needed to reach the midpoint of our guidance to be slightly weighted to the fourth quarter.
Through the second quarter, we deployed approximately $130 million for the repurchase of one 5 million shares and are on track for full year repurchases at the high end of our prior expectation of $200 million to $250 million. This.
This of course is market conditions permitting and assumes a deferral of section 174 legislation.
As of quarter end, we have approximately eight 5 million shares remaining under our current authorization, which we intend to execute over the next few years.
To close our focus remains on driving profitable growth and we are committed to strong execution and delivering value for shareholders.
I'll now turn the call back over to NASDAQ.
Thank you.
I mentioned earlier in the call the importance of our strong culture.
<unk> on that theme I wanted to close our discussion by highlighting our recently published corporate responsibility report, which reflects our ongoing commitment to ESG and sustainability.
A few notable highlights from this year's report in progress include.
In our environmental efforts for calendar year 2021, our greenhouse emissions reflect a 30% decrease over our 2019 base here.
For our social efforts, we received recognition from Forbes for being a best employer for diversity.
And the human rights campaign for Best places to work for LGBTQ plus equality.
From a governance perspective, we are immensely proud to report that 64% of Saic's Board of directors are women are people of color, reflecting our commitment to providing diversity of thought at all levels of the company.
I encourage you to visit the corporate responsibility page on our website to view the full report.
With that I will now turn the call over to the operator to begin Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Ellen Page with Jefferies. Your line is open.
Good morning, I answered the question.
Just looking at one.
Great.
One one times.
And it looks like 31% you have Eric Larson Audrey.
What are you seeing in terms of.
And can you discuss some of that coming opportunity in the back half of the year.
I just want to make sure I understood. The question Alan what are we saying is part of the procurement environment.
Okay.
Alright.
Thank you Peter.
Procurement flour.
So what's different about what youre seeing.
And.
Do you have any upcoming opportunities.
To call out in the back half of the year that you're excited about.
Yes, we have certainly we've heard that narrative as well.
Tell you that we're not seeing anything that I would call systemically different there are certainly pockets, which some things are getting delayed or getting pushed out and certainly we navigate that but we aren't seeing some of the areas.
Acute challenge that some of our competitors.
I will say that as we look to the back half of the year consistent with normative bookings behavior, we do see more opportunity in the back half of the year as compared to the first half of the year, but that's pretty that's pretty normal for us and it does reflect some seasonality as the government gets to the end of their fiscal year and into.
Our third quarter and fourth quarter.
Great and.
Steve's question framework.
Organic growth next year.
Are there any risks to think about.
I think Bob program time, Anr potential CR.
Well certainly I think all of us are expecting a CR.
I think the good news is that we're all accustomed to navigating our way through the CR as we think about.
Going in from this year of next year, certainly, we we've mentioned and provided the insight into some of the recompete losses that create the headwind for us as it relates to being able to return to growth and as Pablo mentioned in his.
Prepared remarks, we see the opportunity to do that the first half of next year timing is certainly has to work in our favor as it relates to some of the Recompete.
As well as <unk>.
Some of the protests that are outstanding and so that's how I would think about transitioning from this year's next I'm going to let probably provide a little more color as well.
Alan Thanks for the question as we noted.
Correct.
Booked in the first half of this year about $1 2 billion in new business.
In fact after the end of the quarter, we picked up another $300 million of new business or classified work for one of our G&P customers. So we're certainly seeing the momentum on the new business side, which is certainly going to help offset some of the headwinds that we can be losses, but as long as it exactly pointed out the timing of that inflection.
It occurs in <unk>.
2020 for Q1 or Q2 is a function of how quickly we cleared protest and candidly how quickly we are able to ramp up on these new programs and of course on $1 2 billion does not include <unk>.
<unk> Hundred 90 award that's about $1 billion.
Sitting out there in protest right now through corrective action. So certainly the momentum is there on the new business side and as we noted we're nicely ahead of our own internal plan for the new business side of things. So hopefully we will continue to make <unk> their six months left in the year and I think this will be a more.
More meaningful conversation hopefully in December or even in March next year. Thank you.
Great I'll hop back in the queue. Thank you.
Yes.
Your next question comes from the line of Gavin Parsons with Goldman Sachs. Your line is open.
Hey, good morning.
Good morning, Kevin.
I think you're beating your targets on revenue growth for both the first and the second quarter, but haven't changed the third or fourth quarter guidance. So can you talk a little bit about what's driven the outperformance in the first half.
Kind of what factors led you to raise guidance and whether or not those can continue in the second half.
Yes, I appreciate the question, Kevin and I think Youre exactly right.
On a year to date basis, we've delivered low to mid single digit organic growth.
We do have some recompete losses that will provide some amount of headwind here in the second half of the year now Q.
Q1, we said, we see low single digit contraction in Q2.
And <unk> and I are incredibly proud of the performance from the team to help us effectively offset the headwind from the Recompete losses will certainly implied and as we've expressly stated in the script is we expect some level of modest contraction in Q3, and some level of growth in Q4.
And the reality is we're challenging the teams to continue to push on the on contract growth message and if you just think about the step back and think about this contextual needs context really slow alkylate environments folks that have the backlog and have the ceilings on their contracts are going to do better in an environment where funding is slow.
And so what the teams have done remarkably well in the first half of the year is actually to deliver additional on contract growth for us and it is it drama.
In the evenings inside of the company. So I think I certainly appreciate the question all I would say is.
Over the last six to seven quarters, we have demonstrated that we will consistently keep intensity level up performance and make sure. We are doing better than whats implied in the guidance out there and the reality is I think we have an opportunity to do a little bit better than the guidance, but until we're actually going to do better it's hard to call that a victory. So.
We're going to continue to press the teams and ensure we deliver good robust operating performance quarters hope that helps.
Great. Yes, that's helpful and then.
Hello.
Early to get into specifics on fiscal 'twenty, four and I appreciate the color on the return to growth.
Is that a comment on full year 24 as well.
That is correct Kevin the short answer is full year expect returned to growth in fiscal 'twenty. Four we have good new business momentum right now yes. The re competes are unfortunate, but we have to deal with them. The team responded magnificently I think that the challenge in Q2, and that's what we've got ahead of us.
I think our view is there's a real opportunity for us to return to organic growth even accounting for the extra week that we have in fiscal year 2020, and that's really important because we've said that's about a $110 million in revenue. So it's about a one 5% headwind effectively the next years revenue and we think we can overcome that and deliver organic growth.
Yes, Kevin the one thing I would add and just as a reminder, we have demonstrated over the course of the last couple of years that we can deliver organic growth profitable organic growth and so I'm very confident in our ability to do that.
Thank you both for the detail.
Thanks, Kevin.
Your next question comes from the line of Bert <unk> with Stifel. Your line is open.
Hey, good morning.
Good morning, Brian .
So just a follow up to some of the CR comments were about a month away from that and impending CR.
However, outlays I think Pablo as you noted has been pretty sluggish and slow. So is it fair to think that a CR maybe less painful for your business because there'll be this ability to increase outlay, even if funds get frozen and in that context. How are you planning your revenue Accordingly, do you assume that.
Net outlays do not improve or do you assume they do open.
Hi, Brian This is not like let me provide a little color and then certainly probably can weigh in as well.
We're pretty accustomed to navigating our way through the CCAR process and its been something thats been relatively consistent good bad or indifferent for the last several years.
So as we go into this CR, we don't see any what I would consider incremental risk to the profile of the business and we are assuming with the guidance that we're giving we are assuming STR will will be how we'll have to navigate a few months after the government fiscal year. So.
Certainly, it's something we pay a lot of attention to we absolutely understand how new starts have to navigate their way through this but as we think about our guidance and the position the numbers and the guidance that probably was sharing it is with the assumption that STR will be in place and it will be a normal cadence to how we would operate through that I'll do anything to add.
Good question and at the end of the day.
<unk> is not a good thing, but I think we've all learned to navigate the reality is in a business with a good amount of visibility into the backlog net net I think it makes it a little bit easier to have line of sight and visibility.
Yes.
We had guidance from that implies a lot of new business to make guidance.
Some risk on balance I think we feel pretty good about the guidance out there and we don't really need a lot of new business to go make our guidance for this year or what's implied into FY 'twenty four so on balance I think we feel pretty good.
I guess I meant that as a positive because outlays are quite a bit below where the budget is today. So you could go into a CR is they'll see outlays rise, which is maybe a slightly different story than past years, I guess would you agree with that just as a clarification.
I would agree with that.
Okay.
And then I think the buying that Tommy.
You mentioned.
The other thing I, probably mentioned earlier is just we also are in a position of having contracts with ceiling that we can drive on contract growth through the process as well.
Got it okay that makes sense.
Just as a follow up maybe switching gears a little bit.
SAIC is a larger space business and I think many investors realize.
Can you provide some context on your state exposure and then just highlight outgrowth across all of those agencies both on the space side. The intelligence side, it's impacting impacting you today and maybe some broad.
It's a broad comments on your thoughts on direction into fiscal 'twenty four.
Yes.
Base business for us represents around 20% of our portfolio and across as you mentioned, whether it's Dod.
Civilian agencies in the intelligence community. So it is a diversified space business, which we believe gives us some advantage as we look at the focus on space throughout the federal government.
We're all saying we do believe this is an area of growth, especially when you link the space related missions to some of our GTA areas and so we do think that this is an area, where we can drive organic growth over the course of the next several years in support of the customer's mission.
And a couple other data points, there one would be <unk>.
What built the space business was the agility acquisition and as we've demonstrated I think on the chassis to surcharge, we have which is chart number seven in the earnings package tactical data link as well as space ground situ came out of that acquisition and I think this is our attempt to share a little more insight into how the acquisitions are actually sold.
<unk> buildup at technology baseline for us thats, allowing us to actually improve one generation to another on the technology side and nothing said Theres also.
So some work.
The work that we have inside of our space business and so that's a core element of.
The capability set that we have for our various cedar customers. So really good business and if you think about the <unk> business in particular.
One of those that does not require a significant amount of investment and the cash returns are really good. So it's a good economic business to be in and we're making remark there.
Thanks, very much just a really quick follow up I didn't hear.
An update to that.
The amount of submitted proposals outstanding do you have an update on that number.
It's over $20 billion.
Okay. Thank you.
Thank you. The next question comes from the line of Cai von rumor. That's ASC. Your line is open.
You mean cowen so listen thanks, good quarter.
So protests I think you said $1 billion, but Dcs I believe is under corrective action. So.
What is in that billion dollars and when would you expect GAA decision not mine.
So.
So do you see as you mentioned the one it is and going through corrective action. So there is no timeline on that at this point.
It's back in the government's hands to run their corrective action as they see fit so.
So it's very hard to predict what that timeline would look like and so we'll continue to navigate that the other significant item that was in that in excess of $1 billion plus the Aoc Falconer that we made reference to that.
That has been re awarded in our favor and we are beginning work on that.
So the one is essentially $800 million something like that roughly is that correct, yes roughly.
Roughly look like.
I believe 900, Okay and you don't therefore, you don't have much in the way of other protest outstanding.
Correct nothing significant yet.
Some of these new wins that I referenced two are still in a window. So we're not going to comment on it and we're just going to wait for the process. Yes can I just just to clarify the $1 1 billion was as of last quarter that consisted primarily of D. CSA what I'd.
At AFC Falconer.
Ryan rewarded Aoc salary.
<unk> and corrective action.
Got it got it and then so your interest expense is up obviously it looks like you have about 80% of your <unk>.
Borrowings R.
Our floating and that looks like it's essentially offset by the higher interest higher and lower tax rate excuse me, but I mean, how should we think about that when we look forward to next year, because I assume interest rates I mean would guess one would guess will be about the same or higher.
'twenty three kind of a normalized tax rate moving forward.
Yeah.
Thank you Kai multiple pieces there. So let me take the interest component of that I think.
So the floating we do have floating debt, but it's actually hedged out so effectively I think of it as about 70%, 80% hedged on the portfolio side is fixed so there's only a nominal amount of exposure I would say on the balance of the debt.
We did update our guidance for interest expense.
I think you should think of that as sort of a rough baseline of where interest expense is likely to remain for next year, so to be that sort of a second.
The question now at the start of the year, we've assumed about 6% or seven rate increases for about 50 effectively.
This increase interest rates. Obviously, we're ahead of that right now and that's why we updated our interest.
Expense guidance or taxes.
We guided at the start of the year to about 24%, we're looking to be tracking closer to 23 right now so.
For this year.
Increase in interest as effectively getting offset by a lowering of the tax rate.
It's a conversation we have internally about where the appropriate tax rate ought to be I would say in 'twenty three 'twenty, 4% for next year is about where the baseline should be I don't expect it to be higher I suspect it won't be lower than 23%. So we're probably going to be in that range for next year again guidance for tax rate.
No no no.
Absolutely.
So the last question is if you turn positive organic growth in the first or second quarter.
Back to Kevin's question, the fourth quarter as it looks like the toughest compare because you have five fewer working days. So that's like a 7% to 8% hit so I mean.
I mean, it's obviously a little early to talk too much about pattern, but you must be assuming a relatively good.
Turn into organic growth in the middle two quarters, because the fourth on paper it looks like the toughest.
Compare.
It's a fair way to think about it.
And again I think given that we've already won about $1 2 billion of new work.
That is starting to come through dissipated here.
Our ability to ramp on these programs.
We'll have a fairly outsized impact on how quickly we ramp so I wouldn't disagree with the math I think it does imply that the growth rates in the second half of next year, but again, we've got six months left and I want to make sure. We win all the retail piece. We have ahead of us and continue to pick up some new business wins here and obviously.
Clearing protest successfully via corrective action on this just a one it will obviously be immensely helpful for next year.
Thank you.
Sure.
Your next question comes from the line of Matt Akers with Wells Fargo. Your line is open.
Hi, good morning, Thanks for the question.
I wanted to follow up.
The payment delays.
<unk> talked about can you say.
Which customer that was that was in bulk of most of those that I know you said.
You get some look back after the close of the quarter, but just what are you seeing kind of in the second half are you expecting that that kind of returns to normal.
Hi, Matt I'll offer a little bit of color no specific customer references other than to say that the delays were related to a single government payment offices.
Just going through some software updates on their end and some process and system changes that caused delays not just for us, but a large set of our competitiveness and we believe that they are largely done with the upgrades on their side and.
As of this week we are.
Effectively collected what was due to us at the end of the second quarter. So.
That's the environment, having said that lots of customers are going through the system upgrades here and given given the need to upgrade our it systems and one can never rule out some potential impacts from similar things or other offices, but the realities on this one.
This one is largely behind us.
Okay, great. Thanks, and then I.
I guess on the section 174.
Shane I don't think you said, how big is the impact if that doesn't get rolled back and what's the timing of when that cash impact would be.
If that doesn't get rolled back.
Yes, no a fair question.
If we think about it.
It was a provision that was introduced as part of the 2017 reform package.
It impacts us in FY 'twenty FY.
Slide 23, and it requires capitalizing and amortizing them qualified research expenditures.
And.
As we think about the prognosis for the fix to this particular legislation, which by the way is really bad tax policy to penalize companies that do research and development activity in the United States. So really bad policy. We are hopeful that we see a fair amount of bipartisan support to actually defer the provision we think that.
The fixed to this if one were to happen is more likely towards the end of this calendar year as part of the end of year Extender package typically kind of think of this as the two weeks leading up to Christmas. So thats when we see a potential six to this we're still able to view that as more likely than not that this.
We'll get done by the end of the calendar year again bad policy lot of bipartisan support to make sure that this gets deferred and in terms of what the impact to us. We've disclosed we expect an impact of around $90 million in FY 'twenty three the reality is and we've seen disclosures from other companies all the way from.
$150 million to $1 billion, it's up.
About 90, we think for us and the reality is our tax team is working feverishly to ensure that we can do as much as we can to minimize that number and the reality is we don't have a lot of guidance I think from the from the IRS and Treasury Department and so in the absence of real guidance everybody's estimating and they are probably a handful of this.
<unk>.
Estimates of number so it's about $90 million, we think hopefully a little bit less and we think as the year index and the package in December .
Sure.
Okay, Great. That's helpful. Thank you.
Sure. Thanks.
The next question comes from the line of Seth Sigman with J P. Morgan Your line is open.
Thanks, very much and good morning, everyone.
Just wanted to ask about.
We think about next year.
If you could give us an update on the <unk>.
Vanguard program and move it to.
Balls at the State Department.
Think about the latest.
Strategy there for.
For that contract and the timing.
Of.
When do you expect awards and the potential impact as we think about 2024.
Great. Thank you this is not but thanks for the question on Vanguard, which obviously is a very important program for us.
The good news for us as an incumbent is that we have gotten a contract extension for an additional six months. So at this point and the government is still going through working through their acquisition strategy.
And so we don't we obviously don't see any impact to this year's revenue as we sit here today and even as we go into next year, most likely if any impact would be in the second half of next year, but again the current strategy.
As they are evolving to evolve is to do a multi award several different chunks of the contract pulling many things together and so even when that happens we expect to win our fair share and we believe we're very well positioned to do that.
Once you have that ill give to our team is certainly a lot of uncertainty a lot of moving pieces, but our team remains laser focused on supporting this customer supporting their mission and we will absolutely do so even as we transition to a new contract vehicle.
Great.
Thanks, and then just.
As a follow up.
It was interesting.
<unk> that you guys had on <unk>.
Counter UAS and I Wonder if you could talk a little bit about how you see that market evolving and saic's rolling It I know.
That's obviously very important I mean, we see it in the news from from Ukraine.
But also there's a lot of different companies participating in it some more well known and some smaller.
I think the Senate Appropriators took money away from the army because they said that service lacks a strategy this year and so it has not necessarily been clear on the outside the way that that market is evolving.
And so maybe if you could talk a little bit about how you see saic's role there and the opportunity.
Absolutely so as we demonstrated in the slides. This has been an area of focus for us for many years in partnership with our customers.
<unk>.
Our role as a technology integrator, where we can bring the best of commercial or government technology to bear integrate it in such a fashion that allows really a vendor agnostic approach and we believe that is something that differentiates us from hardware providers or others that might have their.
Their own solution to bring to bear so we continue to execute our strategy of being a technology integrator being bringing the best of technology and then we also say to your question about the market.
We see a vast.
Ray of opportunities across not just <unk>.
But if you think about some of the work that has to get done and some of the civil agencies and certainly this is an area that is still in a still a lot of opportunity for the government to play a governance role and how we're going to actively manage this across the next many years. So for us it's a great opportunity it plays very well to our strength and.
And we've gotten very good reviews from our customers as we deployed our solution today and look for opportunities to deploy it in the future probably early thoughts on that.
And specifically to the question around funding vis vis government.
We're actually seeing some modest increases to funding for our specific program. We saw some revenue from it in Q2, and we expect to see some revenue as well in the second half of this year. So.
We're certainly seeing some of it just given the success we are demonstrating.
Great. Thanks, very much I appreciate it.
Olivia.
Your next question comes from the line of Tobey Sommer with Truth Securities. Your line is open.
Thanks, I wanted to get your perspective on how we should think about incremental margin.
<unk>.
<unk> is poised to.
Grow organically next year, because there are a lot of inputs to get there whether it's mix.
Wage pressures et cetera, how do we think about what that nets out to in terms of incremental margins.
Yes, So let me provide a little bit of.
Kind of a context around where we're focused and then probably you can provide some color we do see the opportunity to drive incremental margin and a couple of different ways. One is we've.
<unk> been discussing our area the areas of focus GTA, we see those types of programs, bringing additional margin just by the nature of the type of the work that we do so as we continue to focus on the GTA part of our portfolio, we see the opportunity.
Margin expansion over the next several years. We're also very focused on driving margin expansion in our core business and our existing portfolio and looking for the opportunity to do exactly that with the base business that we have today and the third dimension is we are always looking.
For the opportunity to reduce costs drive efficiencies inside the organization.
So that we can want increased margin, but also be able to invest in ourselves and invest in our growth and so those are the three levers that we are laser focused on each and every day I'll, let probably will provide some color as well that was perfect.
And Toby just a question. We've previously signaled the GTA is would be about 200 300 basis points.
<unk> margin higher margins in our core work and as we continue to expand pipeline and have new business wins in this area. We do expect some tens of basis points of improvement.
From that too.
<unk> is now as I mentioned, there are efficiency initiatives, some things underway that will continue to help us refine.
The case to ensure that we are bridging the gap in my last comment is it will be peculiar for us to not.
The margin rate difference between us and our peers and we know exactly what we have to do to bridge the gap and we've talked about it internally all the time with our teams and therefore suffice it to say that just probably isn't the right venue to talk about what the specific plan as to bridge as much of the difference is we can.
But at an appropriate time, we will certainly give you the pieces that help you appreciate the journey we're on.
Thank you and then I wanted to get some color on.
Procurement environment, and the activity and sort of contextualize it from.
<unk>.
Russia, and Ukraine War.
Extraordinary all hands on deck nature.
Our.
<unk> in particular.
Customers, who are customers kind of supporting.
Supporting Ukraine, maybe slower throughput as a result is that normalized.
I kind of wanted to get a sense for whether you think you can.
It has been whether it will soon because you keep emphasizing alright contract growth.
<unk>.
Rather than sort of.
Seasonal surge in contract activity.
Your final fiscal quarter of the federal government.
This is <unk>, let me see if I can tackle some of that and if I. If I don't get it you broke up a little bit so I want to make sure I address it but let me know if I don't and certainly probably provide some color as I mentioned earlier, we're not saying.
Big episodic changes.
Procurement or the buying behavior. So so for us it's been relatively consistent now certainly there are pockets of the business, where we work hand in glove with our customer and if there is that customer is doing something to support.
Ukrainian.
Initiatives and certainly there are times in which we might pivot a bit to help support that but we're not seeing big big impact positive or negative from the war in Ukraine or the impact of the procurement environment does that does that address your question.
Yes, I guess.
If I can sneak a last one.
Over time do you have a sense for whether.
Contract Award.
Or sort of growing in size and scale of customers on average.
Unify and may contract bigger.
I just wanted to kind of.
Compare and contrast, what's happening with vanguard with what might be sort of the industry trend overtime.
I think I'd ask a question.
The question is are we seeing a consolidation of contracts contracts getting larger I believe is what you asked tobey, but the.
Answer is in general I would say there are some trends and where we're seeing that happen and it really if I think back to the last several years. There was a period of time, where all the contracts are getting divided up.
And.
Issued in smaller increments more multi awards, we are seeing some areas.
The buying customer do some consolidation, bringing more things together and so we are seeing some of that but then you also as you mentioned with the ball we're seeing.
Customers take very large contract and divide them up so I'm not sure I could.
To say that there is a definitive trend I know in our portfolio I can tell you that we are seeing some some greater contract consolidation with the way the customers are buying but I wouldnt say that thats an industry an industry average.
Thank you very much.
I can answer your questions.
I think a little bit I wanted to make sure okay.
The next question comes from Colin Canfield with Barclays. Your line is open.
Thanks, Good morning.
So it is part of the pieces on the.
The FY 'twenty for return to growth.
Probably just mentioned tens of basis points per year of margin expansion. So maybe if you can just kind of rich those pieces to the previous comment of double digit free cash flow growth in 2014, FY <unk> FY 'twenty four.
Yes, so youre breaking up just a tad bit here, but but I think if I got the question.
We're expecting a return to growth in FY 'twenty four on the backs of the new business wins, we are generating this year.
We are seeing as we've indicated potential for margin expansion in <unk>.
And Thats, a multi year journey, where we're going to be specifically on margin for next year, its probably best deferred for the December or the March earnings call, but suffice it to say Directionally, we want to move margins up.
And then on the cash side I think.
We reaffirm that our view is we can grow free cash flow by 10% next year. That's what our commitment is for this year and we think we can do that.
And obviously beyond FY 'twenty floor is a conversation we will have a separate time, but IAC potential for underlying improvement in cash flow in this company from a combination of both topline and margin dollar increases translating pre cash flow as well as working capital improvement.
In an environment, where we're still see somewhat sluggish growth. So it can be as we put the pieces together I see a potential for continued expansion in the amount of cash we can generate on a year over year basis.
Got it got it and then maybe if you can talk about the level of competition that you're seeing between expertise and technology not to use the kind of deal.
Framework, but if we think about kind of the bid environment that youre looking at expertise.
Obviously been challenged for a while.
New work mix can typically come with lower margin so.
Think about maybe the technology side and what you are trying to get into significant commercial players buildup defense primes. So maybe if you could just talk about.
That level of competition between the two focus areas.
And then what are some of the drivers that enable us to win profitable growth okay.
Yes, so as we think about the competitive environment.
Certainly, it's a dynamic environment for certain as we indicated.
Our focus areas of GTA.
Leverage the expertise in the organization that domain, the domain knowledge and knowledge of the customer.
And bringing innovative technology to bear and many times that technology can be ours, but it could also be the best a commercial technology and so that continues to be our prioritization as we think about the opportunities to grow.
About commercial players if I understood. The question too that are entering our market certainly we see some of that but many of them look to leverage their technology to bring to bear for the federal government as opposed to a holistic end to end solution and so many times, we partner with us commercial technology providers as <unk>.
They look to enter the federal market or look to expand in the federal market and so where they can bring the best of technology. We can bring the domain expertise the understanding patent navigate the federal government procurement environment and that creates a <unk>.
Unique opportunity for us to drive growth as well.
That's how I would characterize that.
The competitive landscape the infusion of commercial technologies, and our role with the systems and technology integrator into the market.
That address your question.
Sure.
Yes.
The last one for me.
As you think about kind of the.
Appetite for private equity within the government space, how do you think about selling pieces of your portfolio. The logistics business as we've talked about I think last call.
Coming back in.
There are pieces of your business that could probably.
Well within our scaled up cost out player. So maybe if you can talk about your appetite for portfolio shaping and what you view as kind of core versus noncore.
Hi familiar here a fair question I mean, as we've said fairly consistently now.
We're always actively looking at our portfolio.
Whether thats, increasing the technology components inside the portfolio with acquisitions small tuck ins or parts of the portfolio.
Be better as core for somebody else that has an active conversation we have we certainly recognize the level of interest in the industry and broad government services as well as sort of components of the portfolio. We have so that is always part of the equation.
That's typically all we tend to say about these things.
Other than to say I want to reassure people that are listening that that is an active part of the strategy conversation internally.
Got it thanks as always.
Thank you.
Your next question comes from the line of Louis Dipalma with William Blair. Your line is open.
Good morning, <unk> and Joe.
Good morning, Julie.
Okay.
You have experienced particular success with air force programs using your cloud solution you referenced.
Five different contracts in your slide presentation is there the potential to cross sell cloud than tier several army customers.
Yes, great question and the answer is absolutely, we see the ability to leverage cloud and across our entire customer base and so certainly good references here to the airport, but as the broad federal space, whether it's Dod Intel civilian agencies.
Look to modernize their systems look to drive their systems to the cloud in a secure and low risk manner. We believe that we've got a differentiated offering in cloud set to do exactly that so.
We are very focused on leveraging this technology leveraging the broad solution to all of our customers across the federal space.
Thanks.
On that point, where does your air force.
Cloud one program fit into the department of Defense's broader plan for the <unk>.
Sure.
<unk>.
And more fair cloud capability that has.
Been repeatedly delayed and delayed.
It benefited you or in.
In general how does.
How does it fit into the mix.
Great question, and obviously still a lot of uncertainty on what's going to be a long term play there I can tell you that the cloud to cloud spend and the program in support of the Air Force has allowed.
That part of the government to accelerate and to continue their drive and their journey to the cloud and not have to be dependent or wait for a broader acquisition strategy and so I think it's been great positioning it's allowed them to do what they need to do and at this point, it's a great mechanism for the air force to to drive there.
Strategy, while the government decides on what Theyre going to do in the long term.
Great and probably if the margin profile for these cloud spend and broader cloud migration solutions higher than the company average should we think of it more consistent with that GTA bucket that you referenced.
That's exactly right.
Great. That's it for me thanks, everybody.
Thanks Ronnie.
Your next question comes from Seth Sigman with Jpmorgan. Your line is open.
Thanks for the follow up but just a quick one.
I think partially out just a few moments ago.
What about the logistics.
And just how that recovery is proceeding.
How it factors into your expectations for the rest of the year in fiscal 'twenty four it seems like maybe thats going to be a contributor too.
Outsized fourth quarter growth and lower margins.
Yeah.
Yes, so I'll give you the latest on that.
We think about that business on a weekly run rate basis.
Third this back in March of 2021, and we said we tend to see.
Weekly revenue volumes in there.
10% to $50 million range at the height of Covid volumes were at the lower end of that range and pre COVID-19. It used to be at the high end of that range about 15, roughly a week. The reality is it's sort of stubbornly right in that second half of that 10 to 15 range right now.
No.
With the potential conflict overseas, we could see some upside to that particular element of that business, but.
At this point I'd say, we're stubborn lease sort of in that middle part of that 10 to 15 range do.
Do we see that business growing modestly next year, we absolutely do we do have some newer programs inside the portfolio that are going to generate some growth for us. There are a couple of big bets inside of the pipeline in that particular business that could actually allow us to see outsized growth in over the next couple of years.
So there is some revenue potential here, but at this point, our hope as we start to modestly improve from a baseline.
<unk> hundred 43, industrial three or four.
Perfect. Thanks very much.
Thank you.
There are no further questions at this time, Mr. Dinardo, I'll turn the call back over to you.
Great. Thank you <unk> and thank you to everyone for joining US today, we look forward to speaking with you all next quarter.
Yeah.
This concludes today's conference call you may now disconnect.
Yes.
Sure.
Yes.