Q2 2024 Science Applications International Corp Earnings Call
Speaker 1: Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the SAIC Fiscal Year 2024 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Speaker 1: After the speaker's remarks, there will be a question and answer session.
As a result of strong performance year to date, we are increasing our adjusted EBITDA margin guidance to a range of nine 3% to nine 4%.
We've provided additional detail regarding the drivers of first half the second half margins on slide 11 of the presentation, while our plan for FY 'twenty four calls for low 9% margins in the second half our performance to start the year. Both in terms of program execution and the impact of other margin improvement initiatives.
Drive increased confidence in our ability to reach our FY 'twenty six margin target of nine 5% to nine 7%.
As we've communicated our objective is to consistently and profitably grow the company and balance near term margin improvement against our objective to invest and drive long term value.
We are increasing FY 'twenty four adjusted EPS guidance to a range of $7 20 to $7 40, driven mainly by improved operating results and a lower planned effective tax rate.
We are maintaining our free cash flow guidance at a range of $460 million to $480 million and our performance year to date has put us in a good position to grow our transaction adjusted free cash flow by approximately 10% for the third consecutive year.
Finally, we continue to expect share repurchases of $350 million to $400 million. This year with similar levels in FY 'twenty five in FY 'twenty six.
Before turning the call over to <unk> I want to thank her for her leadership in recent years <unk> ability to create an inclusive culture and opportunities for all our stakeholders <unk>.
Employees customers and shareholders is unmatched across the industry.
With that I will turn the call over to <unk>.
Thank you for the kind words.
As we discussed on last quarter's earnings call I will be stepping down as CEO and transitioning to a special advisor role on October 2nd at which time, Tony Townes Whitley, we will assume the role of CEO .
As I reflect on these past few years I took a moment to look back at the commitments I made to you on my first earnings call as CEO .
I outlined three key priorities, then and I am proud of our team's ability to deliver on our commitments.
I discussed the immediate focus on the effective integration of agility.
SAIC effectively integrated its acquisition of agility quickly followed by Unisys co versus and half acre.
All of these transactions contributed to a stronger portfolio for SAIC and supported or accelerated our strategy.
I discussed our immediate focus on driving profitable organic revenue growth.
Our team has done exactly that in a consistent and disciplined way providing returns to our shareholders delivering greater value to our customers and career opportunities for our people.
And last but certainly not least our talent strategy was paramount to accomplishing any aspect of our strategy.
I feel confident that as I step down.
<unk> is in a strong position with an exceptional leadership team across the entire enterprise. We have raised the bar and continue to win the war for talent.
I am proud of what SAIC has delivered over these last several years, but I also recognize our work is never done I am very confident in tonys ability to lead SAIC. She is committed to advancing on these priorities in the future through innovation and differentiation, ensuring SAIC remains a leader in our industry.
We have worked closely together in recent months and will continue to in order to ensure a smooth transition for all our stakeholders.
I want to close by recognizing and thanking my friends and colleagues at SAIC for their contributions to our company their communities to each other and to our nation.
It has been an honor to lead a company so focused on our purpose to leverage technology to serve and protect our world.
It is clearly driven by mission, United by purpose and inspired by opportunities.
We can now open the call for Q&A.
Okay.
At this time I would like to remind everyone in order to ask a question simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Seth Steve Madden with Jpmorgan. Please go ahead.
Yes, thanks, very much and good morning, everyone and NASDAQ congratulations great job.
Iron work at SAIC and also it seems preparing the company for future success as well.
Catastrophe shape that.
Of course.
I wanted to ask about.
So the growth outlook.
All right.
If we look at what Youre forecasting for fiscal 'twenty five in 2006, it looks a lot like <unk>.
This goal 'twenty, two and 'twenty three.
And I would assume that given.
Changes at the company.
<unk> budgets, we have seen.
That there might be.
Opportunity for more there so.
Can you tell us kind of what what keeps you at that level for right now.
And how you think about what we should look for and what it might take for that growth to be a little bit faster.
Okay.
Yes.
Hi, <unk> good morning, and I. Appreciate the question a couple a couple of common share obviously, good strong trajectory on growth to start the year and as we've indicated in a couple of different places in the script.
We're expecting that trend to look more flat as we exit the year and given.
Book to Bill performance year to date, we are expecting some of that along with maybe difficult operating conditions on the budget to continue into the end of this fiscal year and then on to next year, but recognize that the team has done a fantastic job delivering real growth this year and obviously we are going.
To grow off of a higher base than we had projected about a quarter or so ago and so to me. That's what gives us ultimately confidence that we can keep the trajectory of growth at 2% to 4% recognizing we're always going to push the team harder internally then we're committed to right now but.
The signs are good but we have to go execute with the intent that we have demonstrated the first six months of the year, Yes. That's the one thing I'll add is.
No.
It's early days still so we're giving you our best view as we sit here today, taking into consideration some of the budget challenges that probably we indicated and certainly take into consideration, where we sit today and the performance. We've had I will tell you. This team is laser focused on driving profitable organic growth and we will always look for the opportunity to outperform.
They are engineered as the way they are wired, but we just believe it's in our best interest in your best interest to share what we think today recognizing that as we get closer and as you hear from Tony and probably in the next earnings call. We'll have one more quarter of visibility will continue to provide those updates.
Great. Thank you and maybe just to follow up on this topic real quick.
The delays you've talked about.
In terms of awards and the impact on book to Bill and that difficult operating conditions you've described.
When we were just speaking about expected growth.
Can you talk a little bit more about about that environment. There are these delays mostly things that are behind you or you are you anticipating that.
Youll see more delays ahead in terms of the timing of awards.
Sure Hey, Seth for Blue here I'll take that one I think in terms of the budget environment. We expect Q3 fiscal <unk> as well as Q4 to be tight on the hill. We have all followed the dynamics on the on the Hill here and we expect that sort of environment to persist into the second half of our year.
So hopefully we get to resolution on some of those topics get appropriations done and have a budget to operate with but we are presuming right now.
Cautiously proceeding into the second half of the year, recognizing things will remain tight on the legislative side on the backlog and new business front as we pointed out in the script since the end of the second quarter. We won approximately $1 billion $1 $1 billion of work of which roughly 60% is actually new work for us.
We will have to wait for all of that to get through the customary protest cycle here over the next quarter plus and therefore, we're just proceeding cautiously recognizing we've got <unk> that is starting to ramp in the second half of this year. We will have very early signs of growth from key cloud.
Obviously <unk> is continuing to grow along with hopefully G. Mass on a couple of other things that are won but havent cleared the protest so by and large I would view those as things that are hopefully in the bag, but we won't know that for another quarter plus and therefore, we're just proceeding cautiously given.
How difficult the environment is going to be in the second half of the year.
Zooming that theres going to be some delay in the cadence around recognizing awards and obviously converting awards into revenue really big picture. We are encouraged by worthy alkylate by Ernest and it has been strong and therefore I think the teams up for the challenge relative to what's implied for topline growth in the second half.
Of the year as well as the first half of the year, but it's easy to get ahead with a Powerpoint chart much harder to actually execute and practice and thats what the team is committed to doing.
Great. Thank you very much.
Thank you thanks.
Your next question will come from the line of Jason Gursky with Citi. Please go ahead.
Okay.
Yes.
You may have missed it.
Sorry, let me start NASDAQ congratulations and I wish you the best in.
In retirement.
Thank you Jason.
Yes, sorry about that.
No worries.
Yes.
So I may have missed it.
You gave a little bit of color on.
Revenue expectations in the first half of next year, we'll be exiting the year at a lower adjusted EBITDA margin that we generated here in the first half. So maybe you could talk a little bit about the margin trajectory in 'twenty five as well.
Sure I appreciate the question Jason.
I think look first half performance was stellar.
And obviously sitting at 95.
The first six months of the year gives us a really good insight into where the euro is expected, having said that and we've indicated that in some of the supplemental material. We are expecting some additional investments in the second half of the year things that have shifted from <unk> into <unk> status is likely going to be a modest level of <unk>.
Wind to the operating performance of the business and and of course, there's always.
Factors around performance that was just stellar in the first half of the year relative to what we're assuming right now for our second half performance.
This is what I'll leave you with.
As you look at our incentive comp.
Improving margins generating more earnings growth is a key part of the incentive comp metric for the team.
And we are going to push as hard as we need to push recognizing that where we are right now allows us to meaningfully think about the balance between investing in the business for additional future growth relative to delivering upsized margins that may be a little more temporal in the near term. So we're trying to get that balance right.
But recognize where we're sitting right now is sort of near the top end of our current updated guide of about 94, but we obviously have our work cut out for us over the next couple of quarters and we are committed to doing the best we can but recognize that we are thinking about this on a multiyear journey.
As a multi year journey and to the latter part of your question around margin rates for FY 'twenty five 'twenty six in our recognized that we're off to a really strong start and it obviously puts us in a good position relative to those targets, but I wouldn't want to get ahead of the transition. We have ahead of us and our first earnings call with Tony next.
Quarter as well as our guidance call in March of next year, and we'll get you guys appropriate to calibrate on where we see margins for next year recognized we've actually done a really good job and I'm just incredibly proud of the performance we have delivered and we've got work to do here for the next half year.
Okay, Great and then maybe just one quick follow up on.
Because it is kind of wrapped up into <unk>.
Bidding and book to bills, but just the availability of labor.
And the cost of that labor, what that's doing to your rates and just kind of just what youre seeing in the general.
Competitive environment.
You and others are reacting to what's been.
A few years of escalating costs.
And the success that you are all having it passing on those rates to the customer.
Yes.
Yes, Jason let me talk a little bit about the macro environment on labor and then probably we can provide some color I think as we sit here today, it's a very different place as we sat here a year ago.
And so we're seeing some great great progress in the labor market and our ability to hire.
We've got a very compelling value proposition as we hire employees our retention rates are higher than they've been in some time. So we've seen a reduction in our turnover rates and we've certainly seen our ability to hire and.
Increase over the course of the last year, So I feel very good about our position and our posture, we've implemented some new tools and practices and several things internally to help us advance that on the cost side, certainly we're seeing some minor escalation, but I would say probably we can provide some color we're not saying that it's a significant headwind as we continue to.
Advocate our contract base and certainly.
Half two and we'll always pay at market and ensure that we can attract and retain the best talent in the industry, but I sit here at a much better and more confident place than I was probably a year ago, just looking at our results on the labor.
Broad category of labor attraction hiring and retention property do you want to add some color that was perfect gnostic. Thank you Jason.
We're assuming for merit increases.
In that 2% to 4% range Inc.
Towards the higher end of that range for certain categories of employees that we believe have.
Skill levels that are that are going to require us to pay a little more so to me that's how we're calibrating it as a reminder, approximately.
60% of our business is cost plus so while inflation has been a factor over the last couple of years. We've also had the mix of contracts working in our favor that has allowed us to pass on somewhat higher cost.
It is not infinite mass at some point labor costs will catch up but we've actually managed that problem. If you will pretty effectively over the last couple of years, we've estimated the pressure from.
Labor related inflation is costing the company, maybe 10 2030 basis points of margin over the last couple of years and therefore as we look ahead with the improving labor environment.
Would expect some of that to inure to the benefit of margin rates and Thats, where the balanced conversation comes in around investing for growth versus investing to drive additional margin rate improvement in the business and we're laser focused on the dynamics, but recognize really big picture things are looking better now on the inflation front and labor.
Front, and we've got room in our rates and candidly one of the things we've really focused on over the last couple of years and we're starting to see the benefit of this in the margin rates, we're delivering as we've undertaken a significant number of cost related initiatives that has really allowed us to manage our wrap rates. If you will for overall competitiveness that includes <unk>.
The costs in all of the other sort of if you will fixed indirect costs that we have in running the business and therefore to the extent we continue our efforts to manage those costs effectively and assertively I would expect that the naturally sort of turning into iron around labor pressure and inflation pressure is going.
Be a little bit of a tailwind to margins, but again recognize we're trying to balance the equation here and stay calibrated.
That's great. Thank you very much book of industry.
Thanks Jesse.
Your next question will come from the line of David Scharf with Barclays. Please go ahead.
Okay.
Alright, thanks, and congratulations and best wishes.
Thank you very much.
Could you just run through the current kind of.
Landscape on the Recompete side.
How you've done year to date, what the rest of the year looks like and.
And updates as well kind of the.
The balance of work to be re competed over the forecast period.
Okay.
Yeah, Let me touch a couple of things so.
As we discussed probably a year ago, we have seen some challenges in the Recompete space.
I think the team has done an exceptional job.
Focusing on that and improving the overall metric in our in our underpinning of the business. So I would say I'm very confident with where we are in our recompete win rate clearly we lose some we're always going to lose some business and it's just the nature of the.
The way that the government acquires in the way that competitors step into new opportunities, but I feel we're in a much better space than we were a year year and a half ago as we look at Recompete. We don't really go through the big significant moving pieces as much for competitive reasons as anything else, but certainly the significant.
Deal that everybody is aware of as it sits on our portfolio is the vanguard that the department of state Vanguard deal that is being transitioned to evolve and so that is something that everybody is aware of is a significant part of our portfolio and we're going through that process. It will quickly become clearer sometime into next year as to how all of that play.
As a reminder, they are taking us different pockets of work inside of naphtha and putting it into multiple award streams and so we're looking at.
Certainly what makes the most sense for us, but and we expect to win our fair share of that work in the meantime, I just want to take.
Take a shout out to the team that's delivering because its always.
Always a distraction when there is a lot of procurement activity, but this team is laser focused on delivering to the mission delivering to the department of state and ensuring that we don't Miss a beat and continue to innovate and accelerate our position supporting this customer probably do you want to add some color on <unk> that was perfect David Here's what I would add.
We're growing this business at the midpoint of our updated guide about four 5% and as we noted in the prepared remarks that is.
The highest growth rate, we've posted organically since the separation. So in spite of the headwinds from the Recompete loss owns notably which were assuming will cycle out of the portfolio. Beginning in Q4, we are delivering approximately let's call. It mid single digit growth rate.
Since.
The last quarter. We've also won some new work, which will start to backfill the loss that we have but the timing of the Olmos project program exiting the portfolio and the timing of the new work sliding into the portfolio is what impacts the cadence of the revenue growth, but recognize that we are laser committed.
Delivering consistent growth rate consistent with.
The 2% to 4% that we outlined at Investor day, but recognize that <unk> is probably the biggest one worth calling out for the year and if you really think about the performance of this business you would expect about a 1% to 2% growth rate impact on an annual basis from Recompete losses, such as the nature of the business I think and we.
We are looking at something a little bit higher than that this year, but recognized four and half 5% growth is just really solid growth and right in line with where the peer surface and we've got our work cut out for us for next year and Thats, what the team is committed to doing.
Okay.
That was great color. Thanks.
And then on cash.
Wanted to wanted to.
I get an update on on working cap on what you see there for Lou.
Yes, I think year to date has been a slight drag.
Kind of what's embedded for for the second half of the year end.
An update kind of on the working capital tailwind that you have embedded.
Sure.
Sure.
Thanks.
Yes no.
I appreciate the question.
First half of the year was actually really good performance and relative to the first half of last year and the momentum that we began to see in the business at Q4 of last year and as a reminder, we collected more than $2 billion of cash in a single quarter of Q4 of last year. So that momentum has actually continued into the first half.
For the year.
Historically, if you think maybe three to five years back the cadence of collections tends to be about let's call. It 45% in each one and 55% in <unk> last year was actually flipped we actually had more to collect a lot more to collect in Q in H. Two then H one and this year is actually more north.
<unk> relative to the historical pattern here. So we actually have good visibility into getting to the midpoint of our guided range as we sit there now but recognize that our guidance range is $20 million, which happens to be about a days worth of DSO really big picture. So we're dialing the forecast down to within a day.
What our full year cash performance is going to be but I am really just pleased with where we are for the first half of the year. It is ahead of where we expect it to be from an internal plan perspective, but recognize we've got six more months of collections and disbursements, we have to worry about really big picture on FY 'twenty five 'twenty six.
Performance we've had.
In the first half of the year gives us continued comfort that we can get to the targets that we laid out at Investor day, approximately 10 Bucks a free cash flow per share in FY 'twenty, five and 11 Bucks in FY 'twenty six recognizing that we are addressing the headwinds from the section 174 that slowly starting to burn off.
The system here, but obviously from a working capital perspective, really big picture I continue to see good level of opportunity.
We've dialed the process down where we could see working capital accretion and dilution. If you will at the individual program level and we have program managers, taking responsibility for working capital. That's the level of traction we wanted to see two years ago and that's exactly what we're seeing right now so I continue to see that and cap.
Deployment is a multiyear opportunity as we sit here in the second half of FY 'twenty four.
Okay.
Terrific. Thank you very much.
Sure. Thanks.
Your next question will come from the line of Matt Akers with Wells Fargo. Please go ahead.
Yeah, Hey, good morning, Thanks for the question and good luck.
Working with you.
Thanks, Matt.
I just wanted to follow up on the commentary on.
What are the bookings delays you mentioned year to date as <unk> been a little bit slower than we thought and I would like some more.
So in the back half maybe it will shift into 2020.
And what do you think is driving that I guess customers.
Kind of more cautious given the budget environment or is it just kind of a few large award lift is it.
That's just kind of curious what you think driving that dynamic.
Yes, Matt a couple of comments and then I'll, let property to provide some detail on the book to Bill as probably mentioned in his prepared remarks. It certainly was below where we had planned for it to be and.
I think if if it was where we planned we would be having a very different call here today and things that look different but I wanted to give you a little bit of context on that.
So book to Bill as we all know is an indicator, but not the indicator for growth and there is so many components that go into it probably touched on one of them, which is how anybody book.
Books, there <unk>, a single award or multi award going into book to Bill period of performance that can have an impact as well how much of the bookings is new business versus recompete business. So theres. So many aspects that go in that just don't get captured in a metric in and of itself now with that being said, obviously, we had planned for and anticipated a higher book to Bill as.
As probably also mentioned we've had incredible bookings for the first month of this quarter and in the world of what it could or should if it happened last.
Last quarter again, a very different metric a very different conversation. So I don't think there's anything that's systemic in the delays delays is good bad or indifferent as a part of how this this ecosystem operates we do our absolute best to forecast with as much diligence as we can when things will close when they'll cleared the protest cycle.
But of course much of that is not in our handsets in the customers hands. So with all that being said I don't I don't believe there's anything systemic in our portfolio Thats an issue I don't believe there's anything thats really.
The big difference in the customers' buying behavior, obviously, the the headwinds around budget and CR I'm sure way on People's minds.
But I don't see anything that would cause at least doesn't cause may considerable alert or concern as I look to the future and as probably was mentioned even with this book to bill even with some of these delays we've got new business coming online and we have a very strong and healthy pipeline. So that's my view of it but I want to make sure we can address.
Some of the specifics. Thank you let me add a couple of color here.
Going to take us up one level up.
As we think about where this business is positioned relative to the pipeline. We have a pipeline that's I'm going to say circa 100 billion.
And to me that's.
Really where I start and then I think as we think about multiyear growth objectives, we've laid out.
2% to 4% certainly hopefully at the midpoint about 3%.
We have to then work our way from where the pipeline is to how much of it is qualified and then how much we are submitting as a fraction of that pipeline.
As we work our way down the funnel.
I want to reassure folks listening to this that we have sufficient pipeline to go prosecute the growth objectives. We've identified we've got to get our submit volume higher.
Some of that is seasonal some of that is timing and we're seeing some of that this year.
And some of that is recompete losses, which do impact book to Bill and therefore to me as I put the macro with the micro I think about it as over time, we have enough pipeline and therefore, we get our submits up higher and our win rates are actually pretty competitive on the new business front, we've shared over.
Over the last year, and a half or so that our new business win rates are tracking a lot higher than they have been tracking historically and I don't need to go through the list of new programs that we've won just in the last 18 months, but recognize that there is enough pipeline here and the award activity has slowed a little bit in the first half of the year, but some of that is transitory.
I think and the reality is we feel good about where the overall portfolio sets, but we've got to get that with volume up and we are holding our share of re competes is not as I've said earlier on the call but to me that's the macro into micro together.
Okay. Great. Thanks, that's helpful color and then I guess I wanted to ask on the cloud and how fast you kind of see that program ramping up.
I think thats kind of encapsulated in the guidance, you've given or the next couple of quarters, but.
How fast is it that were pretty sizable program.
Sure I'll take that one at this point, what our guidance reflects is a nominal amount of contribution from <unk> cloud.
We've received the first task order on the program.
And we are expecting a fraction of that to convert into sales this year.
One way to think about it is probably less than one half of 1% this year ramping to somewhere between one to one 5% of enterprise sales next year and hopefully higher than that the year. After but we are assuming that the ramp is going to be methodical.
Got to get through some initial design gates that we are working with our customers actively.
But we do expect that program to ramp at this point.
There is very minimal amounts of revenue contribution assumed in the guidance for FY 'twenty four.
Okay. Thank you.
Sure.
Your next question comes from the line of Mark <unk> with Stifel. Please go ahead.
Hey, good morning.
I'll Echo my congratulations and actually my first question for you.
As you reflect.
Yes.
Thanks, Patrick.
Just a high level question sort of thinking through your tenure just as you reflect on your time at SAIC, where do you think we are in the evolution toward.
Sustaining that profitable organic growth that you mentioned and what in your view has changed at the company and your time that you think.
SAIC up well too.
Increased growth as we think into the future.
Okay.
Yes, thanks for the question so.
As I look forward as I look at the company today and I reflect on what I believe it looks like going forward and Tony and I are in lockstep on.
So much so so focused on profitable organic growth. So I do think the company is well positioned to keep this drumbeat going forward now as we all know any given quarter. You could have 8% are you could have less than 8%, but but I think the ingrained in the DNA of the company at this juncture is.
Really focused on driving profitable organic growth and we see it across the board over the course of my tenure, we have done substantial work at the leadership levels of the organization ensuring that we have leaders that have a growth mentality and a growth mindset. We have done significant work in changing out our sales organization, our go to market organization and <unk>.
The investments in the innovation areas that differentiate us so I'm very proud of what the team has been able to accomplish the good news is although I am stepping down that the team that does the heavy lifting every day is here every day and so that that mindset that focus and that energy will continue and even access.
Right under Tony's leadership, so so I feel very confident in the company as it sits today with this as an underpinning of what gets done what gets measured gets done and where we focus each and every day. So I think.
That's how I would answer the question around how do we sit today, what we accomplished and how does that look forward and hopefully that addresses.
The highlights of your question.
Doug.
No no that's for sure.
And maybe just a follow up for you per BOE you provided some great commentary on the pipeline and your view towards the macro setup for the company.
Or just the broader business, if we're thinking through current dynamics what successes the company, having when it comes to growth within contracts, where you already have a current book of work just given what you've noted on favourable hiring retention and <unk> trends.
How much of a tailwind do you think on contract growth can be in these next couple of quarters is that something that potentially pushes you towards the higher levels.
The guidance levels Youre looking at.
I appreciate the question Bert.
We've signaled for a couple of years now for a company with between 22 and $23 billion of backlog. There is <unk> of Sealy left that we can go deliver growth.
One of the things that we've been laser focused on over the last couple of years is instead of chasing the shiny rabbit, let's focus on the things that have ceilings that are right in front of us because the P win on filling up the sealy is far greater than the P win on any new business suite or any.
And any sort of new ventures out there. So to me that's been the focus it has proven to be a source of tailwind to organic growth over the last couple of years.
I would characterize that tailwind as between 1% to 3% higher than our initial plan expectations for any given year now recognize that there is always a balance between.
More on contract growth offset by maybe less in the way of new business growth and therefore, when you sort of work your way through the dynamics of new business competition and your win rates are higher and on top of that you are beginning to deliver but better on contract growth organically. Because you have ceiling ahead of you that actually does creep.
A pretty favorable dynamic again it's.
It's our commitment that we need to go fill out the ceiling and that's what the team is laser focused on doing and and I would say hopefully the team's going to continue to execute the way we've done it in the first half of the year and deliver some upside here for the full year and hopefully next year as well, but we've got work to do.
And.
And we as we always remind the team internally.
Filling it up in a Powerpoint chart is good but that's just the first step of actual real execution, let's focus and intent and that's what we've done I'm going to add a little color on that because I think that's a great question. It's one of the areas that as I look back and reflect on where we sit today and where we sat even two or three years ago. The focus on on contract growth as is <unk>.
Actually oddly enough relatively new and so so as we looked at opportunities to strengthen our culture and to look again in grain.
The drive for profitable organic growth really ensuring that we have the people the talent the leadership at the program the portfolio level that can focus on this was paramount and so a lot of work has been done to to actually accomplish great success in the on contract growth again, I think it's an area. We can continue to.
<unk>, but that's an area to your earlier question Bert around where I've seen changes that is absolutely an area that I believe is fundamentally different and better than it was just a few years ago.
Great very helpful. Thanks, and congratulations again.
Thanks, so much.
Your next question comes from the line of Cai von <unk> with TD Cowen. Please go ahead.
Yes, thanks, so much and the <unk> again, I would like to join that removes.
Job well done.
Probably not too much.
Not to beat a dead horse, but historically Q3 is your biggest.
Book to Bill quarter, and certainly I think an obligated O&M funds are kind of on.
An all time high in and.
So.
These have been strong.
You mentioned, you've got $1 billion, one bookings so sort of what are we looking for for book to Bill.
Range.
In this quarter you got a $1 1 billion certainly not all of that was.
Is under.
And still in the protest window.
Yes.
What should we be looking for the bookings book to Bill in this quarter.
Yeah Kai so so so let me try and answer it a little bit differently.
Maybe in response to earlier question.
In order to support the growth aspirations of this organization as outlined at Investor Day, which is 2% to 4%. We said, we want book to bill to be comfortably over one <unk>.
It's not a great indicator in a one quarter, we're off to a really good start at Q3.
But I would expect that number to be one <unk> or better in Q3, but recognize that we don't always control the timing of things like protests that may be out there and therefore, we're just going to navigate it one quarter at a time, but recognize that on average over time, we want book to bill to be comfortably over one <unk>.
Objective for the team.
Okay and then.
So the pattern you've laid out for the third and fourth quarter.
So the first the second quarter, you beat consensus on revenues by $100 million.
And if we look at the third quarter.
Actually your revenue number is higher than I would've guessed and then we've got a very big step down in the third and I recognize you have 135 mill.
Impact from from from five fewer days, but help us understand why is it. So sharp you mentioned that homes kind of drops out how big is the sequential drop in homes from the third to the fourth.
I would assume with key cloud and with one building.
You would not have had such a severe drop off sequentially.
Right. Thank you I appreciate the question and look I think.
It was important for us.
To give you all a perspective on how we think sitting here today, the second half to play out and we've signaled approximately mid single digit growth rate in Q3, and roughly flat in Q4, our assumption right now is that <unk> will exit the portfolio at the very end of the third quarter.
So to me the obvious bridge from Q3 into Q4 is predominantly almost driven big picture. The second variable is that Q4 tends to be the weakest revenue quarter in a year just given seasonality not just the working days component of this but also just the <unk>.
<unk> of labor hours that we typically calculated Q4, so to me those are probably the two variables.
Ken.
Our performance year to date has been very pleasing to us and the team has done a stellar job.
And as we sit here today, we are starting to see that flattening trend, which is really important for us and for those that have interacted with nonstick and with me know that we try to be as transparent as we can about the next two or three quarters.
It's a little bit unusual for us to talk about forecast into the second half of this year or even into the first half of next year typically but given the transition we thought it was.
Just as important if not more important to give you. Some additional color as we can see the second half rolling out here. So to me that's sort of the the sort of the more important drivers on Q3 versus Q4, but recognize that the performance year to date has been stellar and we want to make sure we keep the momentum up because we recognize the exit.
<unk> out of this year is going to inform how we think about each one of next year and hopefully a couple of months from now when we're doing our Q3 earnings call. We will give you an update on where things are.
Okay. Thank you very much.
Thanks, guys. Thank you your next.
Your next question will come from the line of Tobey Sommer with Chewy Securities. Please go ahead.
Okay.
Thank you I was wondering if you could quantify what the changes in employee retention.
<unk>.
How that has impacted growth and contributed to the acceleration in organic growth.
I mean, some of that of course is internal actions, but some of it also changes in the labor market broadly and how does employee retention compared to pre COVID-19 levels.
Some context around the current snapshot of figures.
Yes, Tobey I'll give you the macro view so.
I actually don't have the specific numbers in front of me, probably who may may have them memorized uncertainty does.
But I will tell you that as we sit here today, our ability to retain the employees which is the.
The opposite is what's the turnover rate is certainly a couple of points better than it was at least a year ago give or take and probably much more in line with what it was pre COVID-19 and so so certainly any impact or movement and our ability to retain people just helps retain our base.
And it allows US then to focus on hiring for new roles, new talent and so that coupled with the.
The ability to some of the things that I mentioned earlier, and our ability to hire retain and attract new folks.
That's given us really a great opportunity to as you mentioned to drive revenue, where we can and so that's certainly been a component of that to bring in some new new talent in some key areas in which we're growing the business. So we can strengthen our talent base, but it really is the combination of being able to retain the labor that we have as well as some of the <unk>.
Great work that the hiring teams have done across the company and being able to add and attract and retain new talent in general and we track. This on a regular basis, our turnover is below our industry turnover and we see that as a very positive sign probably of any specifics. Thank you nozick. The one thing I will probably tee up his site from all.
The macro factors driving improved labor conditions across the business.
We are probably seeing for the first time in maybe a little over 24 months.
Organic head count increase that is comfortably better quarter over quarter, we've signaled for about two to three quarters now that labor conditions are improving it is directly contributing to higher head count inside the organization and the other thing that the team is doing that is really bearing fruit is to the extent we have.
Some difficult Recompete challenges, we are finding ways to redeploy talent that is needed in other parts of the business. This has always been the Holy Grail for human capital management inside companies and we're doing a better job of it now than we did a couple of years ago kudos to the team. So we are holding on to critical.
Higher and talent that we are effectively redeploying and other programs. So instead of seeing the head count come in and go with programs, we're actually doing a better job holding onto that head count. So we can organically drive head count retention.
For a company with that much backlog in that much sealy, we have enough and more opportunities inside the company to redeploy talent and that's an area, where we've spent some time in investment getting better at and we're starting to see the benefit of that.
Inside our head count numbers themselves. He told me one more thing I'll add and you guys have heard me string. These words together now for for several years, but profitable organic growth creates an environment. So not only does it create opportunity because you are growing the business you'd have to hire people.
But people like to be part of a growing organization and some of the programs we've won.
Probably we mentioned several but in the area of space or the area of cloud are exciting sexy new programs and people want to be associated with the company that are winning these types of programs that are so mission critical so I think the the goodness in addition to being good for the shareholders.
It's great for an organization to be a growing entity, especially in areas that are exciting and new.
Thank you if I could sneak a follow up on the outside of Vanguard are there any sort of chunky contracts.
Could.
Prospectively be broken apart into multiple procurements over the next couple of years.
Vanguard is certainly the largest one in the most visible.
It's probably was mentioned any given year, 20% give or take of our portfolio is up for recompete and so that's.
That's just the nature of the business, but vanguard is one certainly that would have and could have the biggest impact but again, we expect to win our fair share and and we will continue to deliver on that program until until things change and one last data point here as we signaled in the script, there's about $8 billion of IDI cues that.
We've won over just the last two to two and half years.
That is not fully reflected in the backlog. In addition to that we are part of multi award <unk> wins over the last couple of years that are probably just as big as the single award <unk> number if not bigger. So if you think about the labor environment, improving if you think about the work being task order driven and filling up the <unk>.
Inside of contracts I think the conditions are right for organizations that focus on contract growth to deliver outsized on contract growth over the next few years, especially in the backdrop of a budget environment thats likely to be somewhat difficult. So to me I think as I think about the context, that's the environment, we're sitting in right now.
On the whole we're pleased with how we're doing on the wafers.
Thank you good luck.
Thank you.
Okay. Thank you.
Your next question will come from the line of Louis Dipalma with William Blair. Please go ahead.
<unk> congratulations on your tenure at SAIC.
And a much better place than when he started on the culture front and you also hired.
Tony and Joe which were three great additions to the team.
Thanks Louis.
And for either NASDAQ or probable SAIC has shown nice balance between its services and mission services can you talk about your exciting takeaway win from Northrop Grumman for the.
Whereas ground radar contract contract at <unk>.
Reference than I know.
Protect windows you may be limited, but are there <unk>.
Again, others space opportunities in the pipeline.
Yes, let me, let me tackle the first part of that so.
As you hit the nail on the head it is still in the window. So we're not going to say a whole lot, but I will say is we're very excited we're thrilled with with the win and we expect to be able to book that hopefully in the near term, but but im not going to say a lot more than that just because it is going through the process, but we always love to win new business and we always love to win from a formidable competitor.
Petitor so thats.
This is it's really great to be able to talk about it what I will provide some color on is.
This is a great example, and we talked about this periodically on the call of our space strategy, and so being able to navigate the work that we have today being able to expand our footprint in the broader space domain with critically important mission programs. As you as you referenced has been fundamental to our strategy and it's great to see these proof points and to your the latter part of your <unk>.
<unk> is absolutely.
Later opportunity in our space related pipeline, and we look forward to being able to talk about those and announced those over the course of the next couple of years. So it's a very important part of our strategy.
To your.
First part of your question our ability to deliver on mission engineering programs as well as <unk> centric programs is critical to our overarching strategy of being a diversified player and so this is a great proof point of exactly that.
Great and also on the mission front.
Analyst Day in New York City, and previously in Huntsville, Saic's showcased its counter UAS system the system solution.
Has the SAIC system.
We need to make progress and demonstrations with the U S Army and is there opportunity for the system.
To be deployed in Ukraine, and other hot geopolitical area.
Okay.
Great question, Yes, we're still very pleased and very proud of the counter UAS business that we have.
And I certainly can't speak specifically to Ukraine, I don't think that would be in good context, but I can tell you that we are getting great traction with not just the Dod.
Army as an example, but broader Dod customers as well as civilian customers.
And they certainly see the value in this we've been able to demonstrate in many many ways and are looking to continue to advance our position in posture with this solution. The unique nature of how we built the solution, where we take best of breed.
Parts for lack of a better word and integrate it to an end to end solution, allowing us to tune it to the specific need of the customer is something that has stood out and it's been very powerful as we continue to have the conversation and dialogue with with our U S government customers.
Okay.
Thanks, that's it for me.
Yes.
Perfect. Thanks, so much.
And we have no further questions at this time that will conclude today's meeting ladies and gentlemen, we thank you all for joining you may now disconnect.
Thank you.
Okay.