Q1 2024 Science Applications International Corporation Earnings Call

Speaker 1: and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures.

The non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP.

It is now my pleasure to introduce our CEO , Nasik Kean.

Earlier today, we reported strong results for the 1st quarter and increased our guidance for revenue and EPS for fiscal year 24. Our performance represents a strong start to the year, and we remain on track to the end of the year.

to deliver on the financial targets we provided to you at our investor day on April 11th.

Before discussing our results in more detail, I want to continue my tradition of highlighting colleagues at SAIC for their contribution to our success.

So this quarter there will be a slight twist which I'll get to shortly.

As many of you know, May is Military Appreciation Month, which is an especially meaningful time for SAIC given how foundational military personnel and their families are to our culture and our values.

Over 30% of SAIC employees are military service members and veterans, and our military and veterans employee resource group is SAIC's largest ERG.

During the month of May we recognize several important days for our country and our employees.

VE Day on May 8th, Military Spouse Appreciation Day on May 12th, Armed Forces Day on May 20th, and of course Memorial Day on May 29th.

In addition, on May 10th, SAIC gifted its 14th home through its partnership with Building Homes for Heroes.

For over 10 years, SAIC and Building Homes for Heroes have partnered to provide homes to deserving veterans and raised over $600,000 in the process.

Here's where the twist comes in. We've included links in these prepared remarks and our earnings presentation slides where you can donate to support this outstanding cause and help fund future homes for our veterans.

I want to recognize Mike Bramble, Stephanie Wall, and David Robinson for their leadership on this important program.

Now onto a review of our financial results and outlook.

As I mentioned, our performance in the first quarter positions us well to meet our goals for the year and is a solid first step towards achieving the long-term financial targets we provided in April .

Our revenue of two billion dollars represented pro forma growth of three and a half percent.

I remain encouraged by the performance we've delivered and expect revenue growth rates to further improve in both our second and third quarters.

We delivered strong operating performance as reflected by our 9.3% adjusted EBITDA margin in the quarter. We remain on track to deliver at least 50 basis points of margin improvement in fiscal year 24 through a combination of our portfolio shaping and our organic initiatives.

Our net bookings include $766 million from the DCSA 1IT program, which was reawarded to us in the quarter, and on which we've begun to ramp up.

However, our bookings do not include any contribution from the T-Cloud contract, which remains in the protest process.

Looking ahead, our pipeline and backlog of submitted proposals remained strong, with solid growth overall and within our GTAs specifically. At the end of our first quarter, the value of our submitted proposals was $26 billion, an increase of 10% year-over-year, and a decrease of $2.5 billion in 2018.

while our total qualified pipeline was up approximately 8% year over year.

Importantly, our pipeline continues to skew favorably towards the higher margin areas of our portfolio with approximately 50% of the contract award portion of our qualified pipeline aligning with our GTAs.

Before turning the call over to Prabhu, I want to highlight some encouraging trends we have seen of late in both talent retention and acquisition. While we attribute some of this to an industry-wide improvement in labor metrics, we believe SAIC is performing well against the industry benchmark for turnover and we are tracking ahead of our plan year-to-date on new hires and headcount.

Obviously, there are a number of factors contributing to this, including some of the employee well-being initiatives we've discussed previously.

I also believe that the leadership SAIC has shown in fostering a culture based on diversity, equity, and inclusion is a factor. It will continue to be a top priority for the company as we believe it best serves all of our stakeholders.

I will now turn the call over to Prabhu to discuss our results and improved outlook in greater detail.

Thank you, Nozick, and good morning, everyone. We reported strong fiscal first quarter results with revenue of $2.03 billion, up 3.5% year-over-year pro forma, or roughly 2% when excluding supply chain sales.

Revenue in the quarter benefited from the timing of certain material sales previously planned for later in the fiscal year, along with improved performance.

Given some of the potential macro risks facing the industry, we're encouraged by the strong start of the year.

The company's first quarter adjusted EBITDA margin of 9.3% was also strong, benefiting from solid execution and the impact of ongoing margin improvement initiatives.

Adjusted diluted earnings per share of $2.14 benefited from the stronger operating performance in the quarter and a lower effective tax rate. First quarter free cash flow was $76 million ahead of our plan as the momentum we demonstrated at the end of fiscal year 2023 on cash collections.

has continued into fiscal year 2024.

As we highlight in our earnings presentation, quarterly free cash flow in FY24 will be impacted by the timing of payroll cycles, with one additional payroll cycle in our first quarter representing a roughly $100 million headwind.

We expect this to reverse in our second quarter, be a headwind again in our third quarter, and then reverse to a tailwind in our fourth quarter.

I'll now discuss our updated outlook for fiscal year 2024.

We now expect revenues in a range of $7.125 billion to $7.225 billion, a $50 million increase at the midpoint from our prior guidance, which now represents approximately 4% year-over-year growth.

This increase is driven primarily by two factors.

roughly 35 million of outperformance from our supply chain business in one queue, and roughly 15 million from net improvements elsewhere.

In terms of the expected quarterly cadence of growth through the year, we continue to see low to mid single digit growth rate in every remaining quarter of our fiscal year after adjusting 4Q for the five fewer working days this year.

We have provided additional detail in our slides to assist with modeling.

We are maintaining our adjusted EBITDA margin of 9.2% to 9.4%. Though, as I mentioned, I'm encouraged by our strong start to the year and continue to see a multi-year path to further margin improvement.

We are increasing our adjusted diluted earnings per share guidance to $7 to $7.20 as a result of the improved operating performance and the expectation for lower interest expense going forward.

We are maintaining our free cash flow guidance of $460 to $480 million and continue to expect roughly $350 to $400 million in share repurchases.

We deployed about $70 million of cash to repurchase our shares in Q1 and have picked up the pace here in the second quarter.

Note that our free cash flow guidance excludes roughly $82 million of cash taxes, transaction fees, and other costs we expect to pay related to our supply chain sale.

While we expect to recognize the bulk of these costs in our 3Q and 4Q cash flow from operations, we're excluding these payments from our free cash flow guidance to provide investors with a clear understanding of the business's underlying cash flow performance.

In addition, we expect to record a gain as a result of the transaction in 2Q, which we will exclude from our adjusted results.

As Nozick mentioned, results in the first quarter position us well to deliver upon the multi-year financial targets we provided at our investor date.

This outlook will result in solid top-line growth, adjusted EBITDA margins greater than 9.5%, and free cash flow per share of approximately $11 by fiscal year 2026.

We intend to accomplish this while remaining true to our asset-like business model, which we believe will result in SAIC driving an industry-leading improvement in ROIC over the next few years.

While we recognize that driving sustained, profitable growth and increasing margins is a key priority, we believe that doing so while also being disciplined stewards of capital is in the best interest of our long-term shareholders.

As a leadership team and as a company, we remain focused on maximizing long-term shareholder value. With that, I'll now turn the call back over to Nozick.

Thank you Prabhu. As we announced on May 18th, I will be retiring from my role as CEO effective October 2nd.

The board has appointed Tony Towns Whitley to serve as SAIC's next CEO and I couldn't be more supportive of their decision. Identifying the very best candidate and putting in place a smooth and orderly transition have been key priorities for the SAIC board and we are confident that we have achieved both. The plan we announced allows for an eight month transition.

to ensure this is a successful process for Tony, our employees, our customers, and our shareholders. I can say with confidence that the SEIC leadership team and I are incredibly excited to welcome Tony to the team and to further accelerate our strategy under her leadership.

As I still have one more call with you all in September , let's leave our goodbyes until then. With that, I will now turn the call over to the operator to begin Q&A. At this time, if you'd like to ask a question, simply press star 1 on your telephone keypad. Our first question will come from the line of Seth Seifman with J.P. Morgan.

Apologies, our first question will come from the line of Toby Summer with Truist Securities. Please go ahead.

Hi, good morning. Thank you very much for the question.

I was wondering if you could talk to us about the opportunities that you're seeing develop in the space arena, something that we talk about periodically on these earnings calls. And if you could talk about them in terms of...

all the exposures of military intel and the civil agency. Thanks.

Yeah, this is Nathik. Hi, Toby. I'll start off and then certainly Prabhu can add some color. I think consistent with the way we've been describing this market, we see the opportunity across the broad space domain, including DOD, obviously civilian and Intel, to really leverage some of the key areas of GTA. So as an example, in IT modernization and...

I would say it's a key part of our strategy. We see key areas of continued opportunity as it relates to the GTA. And then of course, we do some work in the CETA space as well in the space domain. And that's a key part of our, certainly our core business and allows us to have the skills and the competencies and past performance to further accelerate. We have anything you wanna add.

That was great, Nasik. Thank you for the question, Toby. In a really big picture, about a fifth of the portfolio has space exposure. And as Nasik pointed out, that's a combination of civil space, military space, and intel space. And, you know, the portfolio is pretty well balanced across the GTA areas, as well as sort of the core mission engineering side of the portfolio.

There's a fair amount of SITA inside our space business. And so that's predominantly in the Intel space area. So good exposure on the space side. We've flagged over the last couple of years or so, some things we are taking on to the development side of our space business.

not impacted by the OCI that you'll typically see on the CETA side, so the teams had some success building out a portfolio that is, I would say, a little more biased towards the development side. And as Nazik pointed out, there are a couple of neat things that are happening on the development side that hopefully will be able to update you all in future calls. Thank you. For a follow-up question, I'd like to talk to you about

Thank you.

Yeah, so I'll take that one. So really big picture. I think we recognize that in order to build ROIC over the long term, we've got to consistently be able to grow the business profitably and we believe we are demonstrating the capacity for this business to organically grow.

quarter over quarter, and we've I believe we've done that pretty well over the last couple of years. But there's more here to do and we're going to continue to do that. In addition to that, we recognize that there is a multi-year path for margin improvement inside this portfolio.

So we have provided multi-year targets on the margin side at our investor day and we are firm committed to ensuring that this Portfolio continues to do well on operating margin adjusted. You've adopted

And finally, we have been biased towards our share buyback program, which is clearly adding value here as I think about the buybacks over the last couple of years on a total share count basis. We've retired over 10% of our total share count, net of the equity issuances, I would say, in the high single-digit area in just two short years.

So we believe the combination of.

growing the business, improving margins, and favorably deploying capital to the long-term interest of our shareholders is going to allow us to be a leading in a generator of ROIC over the next couple of years relative to the peer set. And we actually have a chart in the presentation that demonstrates the progress we're going to.

growing the business and creating real economic value over the long term.

Our next question will come from the line of Matt Acres with Wells Fargo. Please go ahead. Yeah, hey, thanks very much. Good morning. I wonder if you could just comment your thoughts on the debt ceiling deal and how that sort of fits with, you know, the long term.

Assumptions in your long term guidance.

So I think as with everybody probably in the nation and certainly in our industry, we're really, really pleased that they were able to get a bipartisan bill passed and get it passed ahead of schedule. So very, very happy to hear that. We were having discussions around this. We happen to be doing our call on the day of when it was supposed to expire. So we're pleased that that's behind us.

At a high level, you know, we continue to see a very large addressable market, and we don't expect that to change materially as a result of this particular bill or any kind of near-term things that we're hearing about.

You know, our position is we're very well diversified across defense, non-defense, and intel. And so we believe that positions us well as we go into whatever the next few months might bring. And certainly well positioned in both modernization as well as sustainment.

So very pleased it got passed, very pleased it got passed in a bipartisan way. I think it showed some encouraging trends. But we don't see any short-term hiccups or challenges with it and we'll continue to monitor it just as everybody else does across the industry. I'm going to let Prabhu provide a little color as well. Sure. Hey, Matt, thank you for the question. You know, we've been messaging for probably three quarters now that we expect the long-term problem. MS.

basis, I would say it's fairly in line with what we've assumed. We have been communicating that that 2 to 4% long-term revenue guide at the midpoint 3 reflects some modest element of market share capture, which is sort of reinforced by the deal that we have in place.

The reality is we're going to have to watch the specific line items inside of the budget, what the supplemental bills potentially could include, and potentially what it means for modernization versus legacy systems. As Nozick said, I think we are balanced in terms of our exposure to both legacy systems as well as modernization to the extent you see.

dollars flowing back into legacy systems and away from modernization inside of FedSieve in particular. I think where portfolio is actually rather well placed on that front as well. So again, I think we'll learn a lot. We'll discover even more things I think over the next six months. And we're just going to have to see how this plays out. But I'd say no real big change or impacts on the long term revenue guide we provided.

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

Yeah, so this question actually coincidentally came up on the last earnings call. Look, I think at a midpoint of that 2 to 4% revenue guide on a multiyear basis, we would expect Book to Bill over time to be comfortably over $1. And I think obviously we don't guide Book to Bill on a quarterly basis and you all recognize how lumpy it can be.

Your next question will come from the line of Bird Subin with Steve-O. Please go ahead.

Hey, good morning.

Good morning. I hate not to get maybe following up to Toby's question. What what are you expecting on the civil side of space? Just following a couple NASA contract headwind. And then more broadly, Prabhu, it sounds like your view towards sensitive is that it's

It's pretty in line with what you were previously thinking. Where do you expect some of that pressure will show up and festive because it looks like those budgets are gonna be the ones that are experienced most pressure when we look to next year. Sure, maybe I'll take the 2nd part 1st, Bert. So, on the on defensive side, as I said, you know, there's good balance between.

tax on the modernization accounts, if you will. Now, the caveat to all of this is this presumes that all 12 appropriation bills will actually get passed by early January , and the reality is we all know that if that does not happen, oddly enough, FedSieve is likely to see more money than they would in sort of the...

exposed to the legacy systems as well and therefore we think we can manage and navigate our way through any potential shifts in funding that we see over the next six or eight months. Yeah, I think one thing I would add to that Prabhu is, I think you hit the nail on the head, there certainly could be some short-term pressures, but the requirement and the necessity for the federal government across all of its, you know, kind of whether it's

defense, intel, civil, to modernize is absolutely critical. So although we might see some short-term headwinds, if your scenario plays out, we still believe that modernization is key. It's required for the federal government to stay current in systems, to deal with cyber pressures and all those things.

but I think probably we put it well. We can navigate either way, we can support either way, and we're well positioned across the portfolio. On NASA in particular, certainly the OMS contract is going through the protest process, so I'm not gonna discuss that in too much detail, but we do see continued opportunities in civil space. We see obviously the...

and of course we tend to see more pressure when it's labor only and when it's price and labor combined. And so it's really pivoting to those areas where we can bring differentiation, leverage the competency that we're seeing maybe in some of the other areas of the space domain to drive pipeline and opportunity in the civil side. Okay, okay, great. Maybe just

the follow up, you know, really strong first quarter performance. And now I think you had some positive commentary there on the hiring front, it sounds like that's going well. So you maybe just help us bridge the gap thinking about on contract growth, because I imagine that that's a pretty solid tailwind. And then just putting that into the context of

of sort of a pretty modest revenue increase after a pretty strong first quarter. So, hey, Bert, I'll take that one. So, you know, I think we signaled on the Q4 earnings call that we are seeing attrition start to flatten out. And I think we're pleased to report that that trend has continued. So attrition is certainly trending better than where it has been over the last couple of years.

spread our fixed costs, if you will. And therefore, that is certainly starting to come through on the margin side, which is certainly part of the reason why we delivered the 9.3% margin rate in spite of a good portion of that beat coming from our supply chain business, which we all know and we've communicated historically that is a lower margin business for us. So to me, I think when we talk about the mix here.

and the fact that labor is trending well, it bodes well for on-contract growth on a full year basis.

But having said that, in spite of the good strong first quarter, there's three quarters left in the year, and we've got to go do our share of the work. And we'll keep you all posted. As I said, our commitment is to keep you calibrated on what we're seeing internally. And the update you provided on the Q1 call is our first attempt to do that this year. And hopefully we'll have some good things to report on labor and margin and hopefully.

post-COVID to adjusting to what the new normal is. But the ability to hire, attract and retain talent is fundamental to our overarching growth strategy. And so very pleased to see the positive momentum, but as Prabhu stated, we watch it very closely. And we're really as good as our last quarter. So very pleased with what we're seeing relative to our industry.

If it's not taken back and what kind of a ramp and. Oh, you lost it. It's in protest. When is the protest date and when would it transition and then Vanguard maybe an update there. Thanks. Okay, I'll let probably do the.

away from them and onto our labor base. And it's certainly helping the labor front as well. But in terms of the run rate on DCSA 1IT, we expect it to get to probably, let's call it 50 million run rate for this year, this fiscal year FY24. And at full run rate, I think this program probably generates a...

out there sometime towards the second half of June , we will see some resolution of that. And of course, there may be other steps from there, who knows, in this crazy environment. But we are watching it. We think probably the second half of June is sort of when the clock runs out and we'll

hopefully get some clarity here before the end of June . So to me that's T Cloud. Ohms obviously in protest right now and unfortunately we're unable to say a whole lot more than to say that if we are unfortunately in the position of not holding onto the contract, we are likely to see impacts from that transition beginning in our Q4. But of course it goes without saying Kai.

that the updated revenue guidance we have provided accommodates and accounts for all possible scenarios that may happen with any one of those three contracts that I just talked about. So suffice it to say we're comfortable with the updated guidance, but that is notionally the timeframe for the OMS transition Q4 this year.

And then I think on Vanguard, we expect to have nothing really material happening this year as it relates to the existing contract. The customers going through their procurement cycle. We did, as we reported out, have an extension a few months ago. And so, you know, it's hard to predict because it's a very complicated procurement.

but could see some things start to happen mid next year on Vanguard CHI. I just want to reiterate the comment that Prabhu made. Obviously, these are all big contracts. We watched them all very closely, but the revenue guidance that we provided in April really took into consideration various scenarios of all of these and we remain confident in that guidance that we provided.

Terrific. I had a huge question so I will pass for a second.

Okay, thanks guys. Your next question will come from the line of Sheila Keogh, with Jeffries. Please go ahead. Thanks, sit down.

Thank you guys for the time, Nasik and Prabhu. And Kai for being so kind with one question. Hi guys. So, probably you kind of talked about this answering a question that wasn't really asked, but profitability up 60 basis points year over year in Q1 at the midpoint of your guidance, despite the debt. You know.

lower margin supply chain business in there. So kind of can you talk to us about how much you know we should think about the supply chain helping margins in the next three quarters and then you know the indirect cost that really or lower cost that helps you get to a better profitability point this quarter.

Yeah, appreciate the question Sheila and supply chain on a full year basis. The divestiture of that business adds about 30 basis points to margin. And obviously that business, the sale closed at the end of Q1. So we've got potentially three quarters of tailwind, if you will, or margin expansion potential from that business. So think somewhere between.

investments in some differentiated areas that allow us to impact our objectives to continue to grow this business profitably. In other words, it's a good place to be at the end of Q1. Lots of variables, including the balance that the team has to go through in terms of margin expansion in the near term.

beyond what's implied in the guidance right now versus being able to reinvest some of that in the business to drive additional profitable growth down the road. As most companies go through, we go through a series of trades when we decide which investments to prioritize and which ones are on a, I'm gonna call it.

air quote, regret list. And this performance allows us to sort of dust off, if you will, the regret list and say, are there things there that will continue to generate profitable growth for the organization? And that's a good position for us to be in. So pretty comfortable with the 9.2 to 9.4. Obviously Q1 performance biases us to somewhere higher than that. Obviously, if you just add the supply chain element to it.

But it's an enviable amount of flexibility to have so early in the year for us to think about reinvestment and continuing to drive this business beyond estimates that may be out there.

Sure, that's helpful. And I know you guys talked about this at analyst day a little bit, but just given it's such a hot topic now, can you quantify your AI exposure and maybe talk about one example how you're using it internally and how you think the DoD will take it in as a customer?

Yeah, certainly. Hi, Sheila. I'm getting a lot of press these days in AI across, I think, every industry, including ours. So I think a couple points I want to make. This is an area, this is a market that we've been investing in for several years. And certainly, you know, the discussion from coming out of the federal government appears to be that we're near a tipping point.

and the customers seem to be more interested these days in looking at driving advantage through using AI. So we feel good about our position in the market and our ability to do that. I think it's also important to know that the way that we think about AI, in addition to AI for AI's sake, it's clearly embedded in so many of our solutions that we bring to market. And so it's very hard to quantify.

this market for a while and that broadened our exposure to both AI and data analytics and we've been really pleased with the customer feedback we've received on the solution and it has already contributed to several winning you know several hundred million dollars of wins across both the civilian space and the defense space so very pleased with that as part of our portfolio. we've been investing in an asset called Tenjin which is an...

just AI, but we see it embedded in those types of programs and solutions. And then last but not least, I'll just mention that just a few quarters ago we were named a JADC2 company to watch. It's one of the things that I highlighted. And it was really called out because of our experience in both data analytics and AI. So we recognize this is an important part of our industry.

important part of our market and our ability to differentiate our solutions leveraging AI for our customers is something that we're very focused on and will continue to invest in as our government customers get more mature in the way they acquire.

and our ability to differentiate our solutions leveraging AI for our customers is something that we're very focused on and we'll continue to invest in as our government customers get more mature in the way they acquire. Okay thank you.

Thank you. Our next question will come from the line of Jason Gerstke with Citi. Please go ahead.

Hey good morning everybody. I wanted to stick with the generative AI question.

Can you hear me okay? Yes, we can hear you Jason. Yep. Oh you can't okay great. Yes, we can hear you. Okay great. So on generativity, I talked a lot about the opportunities. I wanted to see if there are any threats to the current book of business and just kind of making sure we're balanced and understand you know what

This all represents I know this is moving very quickly So I suspect it, you know create some opportunities as well as some potential threats to the business So I was wondering if you could kind of balance it out for us and tell us a little bit from your perspective Where you think the threats might be?

Absolutely, and I think you captured it well. With anything that's a huge change or a huge incision into the market, our federal government is considering some of these types of competencies and technologies. It's both a threat as well as an opportunity. So we're navigating that on both sides. Certainly on the threat side, you could see AI have the potential of reducing headcount on certain programs and so much of the way that our...

We want to make sure we manage it on both dimensions, but I will say it's relatively early days in the federal government's adoption, and so I think there's a lot of maturity that can come, and we intend to be a leader and driver in those areas where, again, where we've carved out our strategy and where we believe it could make a difference in our solutions. Okay, great, and you'll have to excuse me.

understand from a big picture perspective, you know, how you are currently seeing, you know, the pipeline kind of developing from a seasonal perspective. I think earlier in the year, you suggested that, you know, we could see some softness as everybody gets ready for a potential CR. We just had a debt deal that maybe.

You know, we delivered solid book to bill Q1, 1.1 and we expect to be comfortably over 1 on a full year basis. We've got a few larger needle moving things in the pipeline, which we expect to hear over the course of maybe the 2nd, half of this year. So it's certainly.

An area we continue to watch obviously, as now as you mentioned in her prepared remarks, cloud is actually not in the bookings or the book to bill numbers. We reported. So obviously we're watching that space as well. So we feel pretty good about what that seasonality looks like right now. Again.

I think Q2, Q3 probably higher than where Q4 is likely to be if I had to put a finer point on the quarterly distribution of backlog in book to bill. But that's sort of how we are seeing things right now. I think as now as I mentioned in her prepared remarks to the broader question around the depths of the pipeline, you know the value of the

is also up 8% year over year. So I think those two data points continue to tell us that the pipeline is deeper, perhaps than a year ago. The number of qualified bids out there that we are waiting to hear from is also higher than it was. And most importantly, that the mix of GTN core is really skewing to about 50-50.

account all of that sort of relative factoring in order to come up with our estimates. But Q2 and Q3 should be solid and Q4. Seasonality will impact likely kind of some softness in the Q4 bookings as we probably saw at year end of last year. Jason, the only thing I would remind you of is, as we said before, T-Cloud was structured as an IDIQ. So we're not going to book the full value if and when that gets resolved in our...

Favor we'll book kind of as we go. So that's just 1 factor to consider for the year.

Great. Thank you, everybody. Appreciate it. Great. Thank you. Thank you. We have no further questions at this time. We will conclude today's meeting. We thank you all for joining. You may now disconnect.

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