Q1 2025 Science Applications International Corp Earnings Call
Krista: Thank you for standing by. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SAIC first quarter fiscal year 2025 earnings conference call. All lines have been placed on mute to prevent any background noise.
Thank you for standing by my name is Krista and I'll be your conference operator today.
This time I would like to welcome everyone to the U S. A I C first quarter fiscal year 2025 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question simply press star followed by the number one on your telephone keypad and if you'd like to withdraw that question again press star one.
Krista: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. Thank you. I will now like to turn the conference over to Joe DeNardi, Senior Vice President of Investor Relations and Treasurer. Joe, you may begin your presentation.
Speaker Change: I will now like to turn the conference over to Joe de Nardi Senior Vice President of Investor Relations and Treasurer, Joe You May begin your conference.
Joseph William DeNardi: Good morning, and thank you for joining SAIC's first quarter fiscal year 2025 earnings call. My name is Joe DeNardi, Senior Vice President of Investor Relations and Treasurer, and joining me today to discuss our business and financial results are Toni Townes-Whitley, our Chief Executive Officer, and Prabhu Natarajan, our Chief Financial Officer.
Speaker Change: Good morning, and thank you for joining Saic's first quarter fiscal year 2025 earnings call. My name is Joe de Nardi Senior Vice President of Investor Relations and Treasurer, and joining me today to discuss our business and financial results are Tony Townes, Whitley, Our Chief Executive Officer, and <unk> <unk>, our Chief Financial Officer.
Joseph William DeNardi: Today we will discuss our results for the first quarter of fiscal year 2025, which ended May 3rd, 2024. Earlier this morning, we issued our earnings release, which can be found at investors.seic.com, where you will also find supplemental financial presentation slides to be utilized in conjunction with today's call and a copy of management's prepared remarks. These documents, in addition to our Form 10-Q to be filed later today, should be utilized in evaluating our results and outlook, along with information provided on today's call.
Speaker Change: Today, we will discuss our results for the first quarter of fiscal year 2025 that ended may three 2024.
Speaker Change: Earlier. This morning, we issued our earnings release, which can be found at investors that SAIC Dot Com, where you will also find supplemental financial presentation slides to be utilized in conjunction with today's call and a copy of management's prepared remarks. These documents. In addition to our Form 10-Q to be filed later today.
Speaker Change: Be utilized in evaluating our results and outlook along with information provided on today's call.
Joseph William DeNardi: Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those made on this call. I refer you to our SEC filings for a discussion of these risks, including the risk factor section of our annual report on Form 10-K. In addition, the statements represent our views as of today, and subsequent events may cause our views to change.
Speaker Change: Note that we may make forward looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call I refer you to our SEC filings for a discussion of these risks, including the risk factors section of our annual report on Form 10-K.
Speaker Change: In addition, the statements represent our views as of today and subsequent events may cause our views to change we may elect to update the forward looking statements at some point in the future, but we specifically disclaim any obligation to do so.
Joseph William DeNardi: We may elect to update these forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures. The non-GAAP measure 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, Toni Townes-Whitley.
Speaker Change: In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures.
Speaker Change: non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP.
Speaker Change: It's now my pleasure to introduce our CEO, Tony Townes Whitley.
Toni Townes-Whitley: Thank you, Joe, and good morning to everyone on our call. I'll start with a quick review of our first quarter results and then provide an update on our strategic priorities. Prabu will then discuss our financial results and outlook in greater detail. We reported solid financial results in the quarter, 40 basis points of pro forma organic growth due to the ramp-up on new and existing programs offset by a roughly five point headwind from previously discussed recompete losses. First quarter adjusted EBITDA of $166 million resulted in an adjusted EBITDA margin of 9%, which reflects the impact of increased investment in the business.
Speaker Change: Thank you Joe and good morning to everyone on our call I'll start with a quick review of our first quarter results and then provide an update on our strategic priorities problem.
Speaker Change: <unk> will then discuss our financial results and outlook in greater detail we.
Speaker Change: We reported solid financial results in the quarter, a 40 basis points of pro forma organic growth due to the ramp up on new and existing programs offset by a roughly five point headwind from previously discussed recompete losses.
Speaker Change: First quarter adjusted EBITDA of $166 million resulted in an adjusted EBITDA margin of 9%, which reflects the impact of increased investment in the business. We expect the timing of certain program performance milestones in the second half of the year to improve margins transat.
Toni Townes-Whitley: We expect the timing of certain program performance milestones in the second half of the year to improve margin. Transaction-adjusted free cash flow of $21 million was ahead of plan as we continue to see good momentum on working capital efforts. I'll now provide an update on our strategic priorities. I want to again thank many of you for joining us at our April Investor Day, where we outlined SAIC's multi-year growth strategy.
Speaker Change: Transaction adjusted free cash flow of $21 million was ahead of plan as we continue to see good momentum on working capital efforts.
Speaker Change: I'll now provide an update on our strategic priorities.
I want to again, thank many of you for joining us at our April Investor Day, where we outlined saic's multi year growth strategy.
Toni Townes-Whitley: As we discussed then, SAIC's expertise in integrating emerging technology positions the company to deliver profitable growth by serving our customers across five national imperatives: All Domain Warfighting, Next Generation Space, Citizen Experience, Border of the Future, and Undersea Dominance. These imperatives represent drivers of long-term and enduring customer demand. In order to increase value to our customers' missions and grow more profitably across the five imperatives, we will work to progressively shift our portfolio and bid into four key growth vectors. Integrated Solutions, Enterprise and Mission IT, Civilian and Mission Advisory
As we discussed in Saic's expertise in integrating emerging technology positions the company to deliver profitable growth by serving our customers across five national imperatives, All domain Warfighting next generation space citizen experience border of the future.
Speaker Change: And undersea dominance.
Speaker Change: These imperatives represent drivers of long term and enduring customer demand in order to increase value to our customers' missions and grow more profitably across the five imperatives, we will work to progressively shift our portfolio and bid into four key growth vectors integrated solutions.
Enterprise and mission it.
Civilian and mission advisory.
Toni Townes-Whitley: And finally, to enhance our competitive position in the market and the value that we deliver to customers, we will prioritize investment in six portfolio differentiators: Secure Multicloud, Digital Engineering, Operational AI, Secure Data Analytics, System of Systems Integration, and On-Demand Solution Delivery, four growth vectors across five national imperatives with six differentiators.
Speaker Change: And finally to enhance our competitive positioning in the market and the value that we deliver to customers. We will prioritize investments in six portfolio Differentiators secure multi cloud digital engineering operational AI secure data analytics.
Speaker Change: System of systems integration and on demand solution delivery.
Speaker Change: Our growth vectors across five national imperatives with six Differentiators.
456.
Toni Townes-Whitley: The implementation of our enterprise operating model, which is optimizing program execution and building a best-in-class business development organization, continues to progress on schedule. While our business sales cycle is such that it will likely take 12 to 18 months for our strategy to more fully impact our BD results, we are seeing encouraging year-to-date progress with indicators including bid selection, bid thresholds, and submit volume. Bid selection assesses the degree to which our pipeline leverages innovation factory capabilities to drive differentiation and aligns with our national imperatives, growth vectors, and optimal mix of deals. Our win rate on programs with a TCV under $500 million has been quite strong in recent years.
Speaker Change: The implementation of our enterprise operating model, which is optimizing program execution and building a best in class business development organization continues to progress on schedule.
Speaker Change: While our business sales cycle is such that it will likely take 12 to 18 months for our strategy to more fully impact our BD results. We are seeing encouraging year to date progress with indicators, including bid selection.
Speaker Change: Thresholds and submit volume.
Speaker Change: Bid selection assesses the degree to which our pipeline Leverages innovation factory capabilities to drive differentiation and aligns with our national imperatives growth vectors and optimal mix of deal size.
Speaker Change: Our win rate on programs with a TCE under $500 million had been quite strong in recent years. We are focused on ensuring that our pipeline reflects a proper mix of deals in the <unk> zone with larger pursuits, like our Dcs a one and.
Toni Townes-Whitley: We are focused on ensuring that our pipeline reflects a proper mix of deals in this TCV zone with larger pursuits like our DCSA-1IT and Department of Treasury T-Cloud program providing measurable upside to our growth process. At present, our utilization of enterprise differentiators skews more heavily across our pipeline towards the higher TCB pursuits with less impact on midsize to smaller deals. Given the correlation we see between IEF involvement and win rate, our strategy will increase IEF utilization over time.
Speaker Change: And department of Treasury T cloud program, providing measurable upside to our growth prospects.
Speaker Change: At present, our utilization of enterprise Differentiators skews more heavily across our pipeline towards the higher TCE pursuits with less impact on midsize to smaller deals.
Speaker Change: Given the correlation we see between <unk> involvement and win rate our strategy will increase <unk> utilization over time.
Toni Townes-Whitley: Did threshold ensure that our pricing and profitability properly reflect the value and capability we're bringing to a program? Prabhu will discuss and share metrics on the improvement we have seen in recent quarters. Volume measures our ability to convert pipeline into submitted proposals and effectively reallocate internal investments as customer procurement schedules inevitably shift over time. We submitted proposals with a total value of over $8 billion in the first quarter. Our performance in the first quarter and the progress we're seeing gives us confidence in reaching our targeted value of submissions of $22 billion in fiscal year 25 compared to $17 billion in fiscal year 24. Of the expected $22 billion in submission value for the year, roughly two-thirds represents new business.
Speaker Change: Did thresholds ensure that our pricing and profitability properly reflect the value and capability, we're bringing to our program.
Speaker Change: Probably we will discuss and share metrics on the improvement we have seen in recent quarters.
Speaker Change: Submit volume measures, our ability to convert pipeline into submitted proposals and effectively reallocate internal investments as customer procurement schedules inevitably shift over time.
Speaker Change: We submitted proposals with a total value of over $8 billion in the first quarter.
Speaker Change: Our performance in first quarter and the progress we're seeing gives us confidence in reaching our targeted value of submissions of 22 billion in fiscal year 'twenty five compared to 17 billion in fiscal year 'twenty four.
Speaker Change: The expected $22 billion and submit value for the year roughly two thirds represents new business.
Toni Townes-Whitley: Similarly, in the first quarter, we delivered net bookings of $2.6 billion for a book-to-bill of $1.4, with roughly 60% of the awards representing new business. Our Space and Intelligence Business Group was a significant contributor to the strong bookings with a $444 million New Business Award with the U.S. Space Force and a $350 million Recompete win with NASA, relative to the multi-year goal to increase bid volume to $30 billion by fiscal year 27. We see three primary drivers behind this.
Speaker Change: Similarly in the first quarter, we delivered net bookings of $2 6 billion for a book to Bill of one four with roughly 60% of the awards representing new business.
Speaker Change: Our space and intelligence business group was a significant contributor to the strong bookings with a 444 million dollar New business award with the U S space Force and a $350 million recompete win with NASA.
Speaker Change: Relative to the multiyear goal to increased bid volume to $30 billion by fiscal year 2007, we.
Speaker Change: See three primary drivers behind this.
Toni Townes-Whitley: Greater organizational accountability to convert pipeline identified into pipeline bid, adopting enterprise-wide processes to drive standardization and increased efficiency, and Investment in BD Resources and Talent Upgrades to drive greater quality and throughput. Importantly, we intend to drive higher bid volume while also improving shot selection and margin threshold. In other words, we expect an improvement in the overall quality of our pipeline and submissions as we increase volume. Before turning the call over to Prabu to discuss our financial results and outlook in detail, I want to thank the SAIC team for their contributions in the quarter and for their partnership in implementing our strategy.
Speaker Change: Greater organizational accountability to convert pipeline identified into pipeline bid adapt.
Speaker Change: Adopting enterprise wide processes to drive standardization and increased efficiency.
Speaker Change: And investment in BD resources, and talent upgrades to drive greater quality and throughput.
Speaker Change: Importantly, we intend to drive higher bid volume, while also improving shot selection and margin thresholds in other words, we expect an improvement in the overall quality of our pipeline and submissions as we increase volume.
Speaker Change: Before turning the call over to <unk> to discuss our financial results and outlook in detail I want to thank the SAIC team for their contributions in the quarter and for their partnership and implementing our strategy.
Toni Townes-Whitley: I recognize the heavy lift that many of our functions and business groups have endured in recent quarters and appreciate their dedication to our customers and shareholders. I am proud of the performance we delivered in the quarter and encouraged by the indicators of progress we are seeing. Clearly, we have some revenue and margin headwinds to overcome this year. We have taken ownership of this challenge, and our business groups understand what is expected of them.
Speaker Change: I recognize the heavy lift that many of our functions and business groups have endured in recent quarters and appreciate their dedication to our customers and shareholders.
Speaker Change: Im proud of the performance, we delivered in the quarter and encouraged by the indicators of progress. We are seeing clearly we have some revenue and margin headwinds to overcome this year. We have taken ownership of this challenge and our business groups understand what is expected of them, we recognize that we must balance and an intense focus on.
Toni Townes-Whitley: We recognize that we must balance an intense focus on near-term execution with a commitment to our long-term plan. I believe this long-term plan will be a significant driver of value creation for our employees and shareholders. Prabu, over to you. Thank you.
Near term execution with a commitment to our long term plan.
I believe this long term plan will be a significant driver of value creation for our employees and shareholders <unk> over to you.
Prabu Natarajan: Thank you, Toni, and good morning to everyone joining the call. I will discuss our first quarter financial results in greater detail and provide an update on our outlook for the remainder of the year. We reported revenue of $1.85 billion, representing pro forma organic growth of approximately 40 basis points, as increased new business revenue and on-contract growth was largely offset by previously disclosed program transitions. In addition, it is worth noting that prior year first quarter revenue benefited from a roughly $30 million discrete material sales to one customer, which, as planned, did not reoccur, creating a roughly 1.5% year-over-year revenue decline. Adjusted Adjusted diluted EPS of $1.92 benefited from a tax rate of approximately 18.5% and a roughly 5% decline in our weighted average share.
Speaker Change: Thank you Tony and good morning to everyone joining the call I will discuss our first quarter financial results in greater detail and provide an update on our outlook for the remainder of the year.
Speaker Change: We reported revenue of $1 85 billion, representing pro forma organic growth of approximately 40 basis points as increased new business revenue and on contract growth was largely offset by previously disclosed program transitions. In addition, it is worth noting that prior year first quarter revenue.
Speaker Change: Benefited from a roughly $30 million discrete material sales to one customer, which as planned did not reoccur, creating a roughly one 5% year over year revenue headwind.
Adjusted EBITDA was $166 million in the quarter, resulting in a 9% adjusted EBITDA margin with the year over year decline largely due to increased internal investments and the timing of program performance milestones being weighted to the second half of the year.
Speaker Change: Adjusted diluted EPS of $1 92 benefited from a tax rate of approximately 18, 5% and a roughly 5% decline in our weighted average share count.
Prabu Natarajan: Transaction-adjusted pre-cash flow was $21 million ahead of plan and included a roughly $50 million year-over-year headwind due to the sale of our supply chain business in FY24 and higher cash bonuses in the quarter. Lastly, as you'll see in our earnings release in 10Q, beginning this quarter, we will be providing revenue and profitability metrics for two segments, defense and intelligence, and civilian. We've provided historical results for both segments in our earnings release and presentation slides to assist with your model.
Speaker Change: Transaction adjusted free cash flow was $21 million ahead of plan and included a roughly $50 million year over year headwind due to the sale of our supply chain business in FY 'twenty, four and higher cash bonuses in the quarter Lastly, as Youll see in our earnings release and 10-Q, beginning this quarter, we will be providing.
Speaker Change: And profitability metrics for two segments defense and intelligence and civilian we have provided historical results for both segments in our earnings release and presentation slides to assist with your modeling.
Prabu Natarajan: While we are reiterating our FY25 financial guidance for revenue, adjusted EBITDA margin, adjusted diluted earnings per share, and free cash flow, I'd like to provide some additional color around quarterly expectations and capital deployment. We now expect second quarter revenue to be roughly flat year over year, which assumes a similar dynamic as we saw in the first quarter, with a roughly 5% to 6% headwind from re-compete losses, offset by higher revenue from new business and continued strong on contract growth.
Speaker Change: While we are reiterating our FY 'twenty five financial guidance for revenue adjusted EBITDA margin adjusted diluted earnings per share and free cash flow I'd like to provide some additional color around quarterly expectations and capital deployment plans.
Speaker Change: We now expect second quarter revenue to be roughly flat year over year, which assumes a similar dynamic as we saw in the first quarter with a roughly 5% to 6% headwind from Recompete losses.
Speaker Change: Set by higher revenue from new business and continued strong on contract growth.
Prabu Natarajan: Second half FY25 revenue is expected to increase in the mid single-digit range with stronger growth in our fourth quarter as re-compete headwinds ease. For the full year, our guidance for 2% to 3% growth includes an expected headwind of approximately 5% from recompete losses, which we expect to ease to a more normalized 2% in our fourth quarter and into FY26. Overall, first quarter revenue was generally in line with our plan, though expectations for second quarter revenue have softened somewhat. We attribute this, in part, to the timing of certain materials revenue and to a recent normalization in government outlay transactions.
Speaker Change: <unk> half FY 'twenty five revenue is expected to increase in the mid single digit range with stronger growth in our fourth quarter as recompete headwinds ease for the full year, our guidance for 2% to 3% growth includes an expected headwind of approximately 5% from recompete losses, which we.
Speaker Change: We expect to ease to a more normalized 2% and our fourth quarter and into FY 'twenty six.
Speaker Change: Overall first quarter revenue was generally in line with our plan so expectations for second quarter revenue have softened somewhat we attribute this in part to the timing of certain materials revenue and to a recent normalization and government obviously trends.
Prabu Natarajan: Our team understands the push we face this year to overcome recompete headwinds and more difficult year over year comparisons to deliver on our two to four percent growth guide. We have specific initiatives in place to drive contract revenue growth on programs with remaining ceiling values, of which we have many, and we are proactively engaged with customers ahead of a potentially active end of year spending cycle. It is a challenge that is not without risk but one that we are focused on accomplishing.
Speaker Change: Our team understands the push we face this year to overcome recompete headwinds and more difficult year over year comparisons to deliver on our 2% to 4% growth guidance.
Speaker Change: We have specific initiatives in place to drive on contract revenue growth on programs with remaining ceiling value of which we have many and we are proactively engaged with customers ahead of a potentially active end of year spending cycle. It is a challenge that is not without risk, but one that we are focused on accomplishing.
Prabu Natarajan: We expect margins to follow a similar profile with lower margins in the first half of the year, with improvement in the second half, driven primarily by the timing of program performance milestones and the timing of investment. We repurchased 81 million shares in the quarter.
Speaker Change: We expect margins to follow a similar profile with lower margins in the first half of the year with improvement in the second half driven primarily by the timing of program performance milestones and the timing of investments.
Prabu Natarajan: As you recall from our Investor Day, our plan assumed we repurchased roughly 350 to 400 million shares this. We now intend to target the higher end of that range while maintaining sufficient capacity for capability-focused M&A. Faith in our capital deployment strategy is driven by confidence that we can consistently and profitably grow this business over the long term. As Toni discussed, we're focused on shifting our pipeline and portfolio over time to align with areas of the market that value differentiation.
Speaker Change: We repurchased $81 million of shares in the quarter as you will recall from our Investor day, our plan assumed we repurchased roughly $350 million to $400 million of shares this year.
Speaker Change: Now intend to target the higher end of that range, while maintaining sufficient capacity for capability focused M&A phase.
Speaker Change: In our capital deployment strategy is driven by confidence that we can consistently and profitably grow this business over the long term.
Tony: As Tony discussed, we're focused on shifting our pipeline and portfolio overtime to align with areas of the market, which value differentiation. We are seeing a favorable shift in the margin profile implied within our backlog and pipeline, reflecting more stringent bid thresholds we have put in place.
Prabu Natarajan: We are seeing a favorable shift in the margin profile implied within our backlog and pipeline, reflecting more stringent bid thresholds we've put in place. We expect this mixed improvement to continue as our pipeline and strategy become more closely aligned over time. In closing, our focus remains on the implementation of our strategy to drive long-term profitable growth for SAIC while stepping up the intensity of our execution to best mitigate the revenue challenge we face this year.
And expect this mix improvement to continue as our pipeline and strategy more closely align overtime.
Tony: In closing our focus remains on the implementation of our strategy to drive long term profitable growth for SAIC, while notching up the intensity on our execution to best mitigate the revenue challenge. We face. This year, we are confident that our strategy will strengthen saic's competitiveness in the market and drive more consistent.
Prabu Natarajan: We are confident that our strategy will strengthen SAIC's competitiveness in the market and drive more consistent, predictable growth in the long term. While our near-term results may not always reflect the full impact of the strategy and our execution, we intend to remain rigorous in our capital deployment strategy and have the capacity and discipline to increase our investment in the company via our share repurchase program. I'll now turn the call over to the operator for Q&A.
Tony: Predictable growth in the long term.
Tony: While our near term results may not always reflect the full impact of the strategy and our execution, we intend to remain rigorous in our capital deployment strategy and have the capacity and discipline to increase our investment in the company via our share repurchase program.
Speaker Change: I'll now turn the call over to the operator for Q&A.
Speaker Change: I'd like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw that question again press Star. One. We also ask that you limit yourself to one question and one follow up.
Operator: If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw that question, again press star 1. We also ask that you limit yourself to one question and one follow-up. Your first question comes from the line of Cai Von Rumohr with TD Cowan. Please go ahead.
Speaker Change: Your first question comes from the line of Cai von Romer with TD Cowen. Please go ahead.
Cai von Rumohr: Yes, thanks so much, and impressive bookings, guys. Could you give us some update in terms of the Vanguard re-compete and any kind of re-compete we're still looking at over the second half? And maybe the timing, because I know Vanguard is split into several pieces.
Speaker Change: Yes, thanks, so much and impressive bookings guidance.
Speaker Change: Could you give us some update in terms of.
Speaker Change: The Vanguard Recompete and then they kind of Recompete, we're still looking at over the second half.
And maybe the timing because I know the vanguard is split into several pieces.
Prabu Natarajan: Sure. Hey, good morning, Cai, Prabu here. So I'll take the first part of that.
Sure Good morning, Kai probably here.
Speaker Change: So I'll take the first part of that on Vanguard I would say we're in process right now our expectations for the timing of the award as well as potential revenue impacts have really not changed we've seen minimal impact this year from any recompete on on Vanguard.
Prabu Natarajan: On Vanguard, I would say we're in the process right now. Our expectations for the timing of the award as well as potential revenue impacts have really not changed. We see minimal impact this year from any re-compete on Vanguard, and that's probably the single largest one for the year that's probably worth calling out. There's an outside chance that we may get an RFP on one of our Army S3I programs, but it's hard to say right now at this point. That may be in Q4 of this year or in Q1 of next year. So those are
Speaker Change: And Thats, probably the single largest one for the year, that's probably worth calling out there is an outside chance.
That we may get an RFP on one of our army <unk> III programs.
Speaker Change: But it's hard to say right now at this point that may be a Q4 of this year or Q1 of next year. So those are probably the two largest ones worth calling out.
Prabu Natarajan: Okay, so if you look at the re-compete...
Speaker Change: Could you give us so if you look at the Recompete I'm sorry go ahead.
Prabu Natarajan: I was just going to say, could you give us some sense of the timing of when you might expect a decision on Vanguard and S3I?
Speaker Change: Just going to say could you give us some sense of the timing of when you might expect a decision on vanguard in Australia.
Speaker Change: Yeah.
Speaker Change: Yeah.
Prabu Natarajan: Safe to assume probably the start of the second half of this year, I would say, probably buys towards the end of the fiscal year. So that's probably our best estimate right now.
Speaker Change: Safe to assume probably the starting the second half of this year.
Speaker Change: I'd say probably bias towards the end of the fiscal year. So that's probably our best estimate right now okay.
Prabu Natarajan: And that would be true for both, correct? And really for S3I as well. We won't have a clear sense of ending at the fiscal year kind.
Speaker Change: And that would be true for both correct and then really for <unk> as well. So you won't have a clear since the end of the fiscal year Cai.
Speaker Change: Got it and then the last one you mentioned that the margin in your backlog is stronger than the margin. Your book and can you give us any kind of that's the first time I think you met.
Prabu Natarajan: And then the last one, Prabu, you mentioned that the margin in your backlog is stronger than the margin you're booking. Can you give us any kind of... That's the first time I think you've mentioned that. Are we talking 10, 20 BIPs? Are we talking 40, 50? Can you give any kind of quantification or color on the... Yeah, good catch.
Speaker Change: You mentioned that.
Speaker Change: Are we talking.
Speaker Change: 10, 20 bps that we talking $40 50 can you give any kind of quantification or color.
Speaker Change: Yes.
Prabu Natarajan: Yeah, good catch, Cai. We did mention that, and this is the first time we're providing a little more by way of qualitative information on the margin implied in the backlog and the pipeline. We've put some, as we said in the script, stringent bid thresholds, and we are seeing some positive impacts from them on bids that are going out the door, but also on bids we're winning currently, where margin rates are inflecting higher.
Speaker Change: Yes, good catch Kai we did.
Speaker Change: We did mention that and it is the first time, we're providing a little more by way of qualitative information on the margin implied in the backlog and the pipeline. We've put some as we said in the script stringent bid thresholds and we are seeing some positive impacts from it on bids that are going up the door, but also the bids were winning currently.
Speaker Change: Where our margin rates are inflicting higher.
Prabu Natarajan: And I would say generally higher than the numbers you indicated in your question is probably all we can say, and we are seeing that across all of the contract types we have. For customers that are willing to pay for the differentiation, we are seeing our cost plus programs inflect higher as well as our fixed price and T&M work. It's not to say that we are not strategic in our shot selection as well as in our bid selection on specific programs, but the reality is, we are seeing higher levels of margin uptake coming through our pipeline as well as our backlog. And this is going to be a multi-year journey for us, and hopefully, this is the start of a new and improved pipeline.
Speaker Change: And I would say generally higher than the numbers you indicated in your question is probably all we can say and.
Speaker Change: And we are seeing that across all of the contract types. We have are cost plus.
Speaker Change: For customers that are willing to pay for the differentiation we have.
Speaker Change: We're seeing our cost plus programs inflect higher as well as our fixed price and PNM work, it's not to say that were not strategic in our shot selection is whether it's a bit selection on specific programs, but the reality is we are seeing higher levels of margin uptick coming through our pipeline as well as our backlog and this is going.
Speaker Change: Be a multi year journey for us and hopefully this is the start of a new and an improved trend.
Speaker Change: Thank you very much.
Speaker Change: Sure. Thank you.
Jason Gursky: Your next question comes from the line of Jason Gursky with Citi. Please go ahead.
Speaker Change: Your next question comes from the line of Jason Gursky with Citi. Please go ahead.
Prabu Natarajan: Good morning, everybody. [inaudible] I probably just wanted to make sure I heard you right in the prepared remarks about M&A and capabilities. Maybe you could just kind of talk us through, you know, what the M&A strategy is at this point and what you might have been referring to there. Thanks.
Speaker Change: Hey, good morning, everybody.
Speaker Change: Pardon me I just wanted to make sure I heard you right in the prepared remarks about <unk>.
M&A and capabilities.
Speaker Change: Maybe you could just kind of talk us through.
Speaker Change: What the M&A strategy is at this point in which you might have been referring to there.
Prabu Natarajan: Hey Jason, good morning. Thanks for the question. And I'll certainly let Toni chime in here as well.
Speaker Change: Hey, Jason but barring thanks for the question and I'll, certainly, let Tony talk chime in here as well, but really big picture not a lot of change in our M&A posture I think for a couple of years now we've signaled our preference for technology based kind of tuck ins and capability based tuck ins.
Toni Townes-Whitley: But really, big picture, not a lot of change in our M&A posture. I think for a couple of years now, we've signaled our preference for technology-based kinds of tuck-ins and capability-based tuck-ins. And, you know, we're seeing a reasonable pipeline of things out there, but I don't believe it's all that exciting right now. It still tends to be kind of a very seller-oriented market. And so we're just being very disciplined about what we're looking at.
Speaker Change: And we're seeing a reasonable pipeline of things out there, but I don't believe its all that exciting right now it's still tends to be kind of very seller oriented market.
Speaker Change: And so we're just being very disciplined about what we're looking at I think given the the strategy refresh we've got going.
Speaker Change: And our pipeline is starting to reflect the strategy. The realities are tuck ins now become acutely more sensible in terms of pivoting to where the strategy is preventing us and that's all we're simply thinking about it not really scaled based M&A, Tony and Jason I guess I would just highlight we recently hired a head of corporate development.
Toni Townes-Whitley: I think given the strategy refresh we've got going and our pipeline is starting to reflect the strategy, the reality is our tuck-ins are now acutely more sensible in terms of, you know, pivoting to where the strategy is pivoting us. And that's how we're simply thinking about it, not really scale-based M&A.
Prabu Natarajan: And Jason, I guess I would just highlight that we've recently hired a head of corporate development. She's in, and we are tightening our processes, obviously, in terms of reviewing the market, assessing against a strategy that includes not only the hardening of our current enterprise differentiation, think about the fact that we've identified where we believe our technology differentiation is, hardening that capability, but also looking, as part of our strategy, into the advisory consultancy in our civilian business, which are also growth targets in terms of where there would be tuck
Speaker Change: She is and we are tightening our processes, obviously in terms of reviewing the market assessing against the strategy that includes not only the hardening of our current enterprise differentiation think about the fact that we've identified where we believe our technology differentiation is hardening that capability, but also looking at par.
Speaker Change: Our strategy into the advisory consultancy in our civilian business, which are also growth targets in terms of where there would be tuck in capability. There. So we've expanded our aperture a bit we've gotten very tight on our process and as probably as indicated the market hasnt been flushed with.
Prabu Natarajan: So we've expanded our aperture a bit. We've gotten very tight on our process. And, as Prabhu has indicated, the market hasn't been flushed with that many relevant opportunities to date, but we are diligent in our process and looking forward.
Speaker Change: That many relevant opportunities to date, but we are we are diligent in our process and looking forward.
Toni Townes-Whitley: Okay, great. And then I might just ask a follow-up question, talk a little bit about what you're seeing for the company on the opportunity side in Europe. That's a comment that seems like it's going to have a prolonged upcycle here and spending, and just kind of curious if you see any opportunities over there that could potentially be added to your expected growth rates here in the next few years.
Speaker Change: Okay, Great and then if I might just like follow up question.
Speaker Change: Talk a little bit about.
Speaker Change:
Speaker Change: What youre seeing.
Speaker Change: For the company on the opportunity side in Europe.
That's a continent that seems like it's going to have a prolonged upcycle here and spending.
Speaker Change: Just kind of curious if you see any opportunities over there that could potentially be additive to your expected growth rates here over the next few years.
Prabu Natarajan: Hey, Jason, I'll take the first part of that. See, in the big picture, I'd say our opportunity set is very closely aligned to where the customer priorities remain. And that means if they see more up-tempo in that part of the world, we're likely to follow them there. I'd say, specifically, as we think about what will create real differentiation in that market, I think we very much follow the strategy and the pipeline to say, are there interesting tuck-in opportunities internationally, just as we are looking at those domestically, to say, are there specific capabilities that will be more differentiated in that particular theater?
Jason Gursky: Hey, Jason I'll take the first part of that say Big picture I'd say.
Speaker Change: Our opportunity set is very closely aligned to where the customer priorities remain and that means if they see more up.
Speaker Change: Op tempo in that part of the World, we are likely to follow them. There I would say specifically as we think about what will create real differentiation in that market I think we very much follow the strategy in the pipeline to say.
Speaker Change: Are there interesting tuck in opportunities internationally, just as we are looking at those domestically to say are there specific capabilities that will be more differentiated in that particular theater. So I'd say by and large kind of sticking to our knitting at this point in terms of opportunities I think primary primary statement that probably made their customer driven.
Prabu Natarajan: So I'd say, by and large, kind of sticking to our knitting at this point in terms of opportunities. I think, yeah, primary statement that Prabu made there, customer-driven. Secondary statement, capabilities enabled, right? And so if we're – those two will trump a geographic location initially in our thesis. And look, we're having the conversations, right?
Secondary statement capabilities enabled right and so that those two will Trump a geographic location.
Speaker Change: Initially in our in our thesis.
Speaker Change: And look we're having the conversations we're having the conversations internally to look at our strategy, that's part of having a multi year strategy.
Toni Townes-Whitley: We're having conversations internally to look at our strategy, and I think, obviously, that's part of having a multi-year strategy is our ability to refresh and consider all of the opportunities that come with that strategy. So we're obviously looking. We're – our head's up and out. But to Prabu's point, we're looking at a multi-year strategy, versus just taking a geography and determining if it is a good place for us to do business. We're much more disciplined around where our customers are and where our capabilities need to be.
Speaker Change: Is our ability to refresh and to consider really consider all of the opportunities that come with that strategy. So, we're obviously looking where our heads up and out but.
Speaker Change: <unk> point versus just taking a geography and determine if it is a good place for us to do business, we're much more disciplined around where our customers are and where our capabilities need to be.
Speaker Change: Great. Thank you.
Speaker Change: Okay.
Jason Gursky: Thanks, Jason.
Matthew Carl Akers: Your next question comes from the line of Matt Akers with Wells Fargo. Please go ahead.
Your next question comes from the line of Matt Akers with Wells Fargo. Please go ahead.
Operator: Hey, good morning, everybody. Thanks for the question. Good morning.
Matthew Carl Akers: Yeah, Hey, good morning, everybody. Thanks for the question.
Thanks for.
Matthew Carl Akers: Thanks for providing the segment. David, at this time, I had a couple of questions that I guess just think about the mix between, you know, defense and Intel, you know, kind of around three quarters of the business. And how do you think of the right mix going forward? Is that the right mix? Or do you think you'll kind of move more toward one segment or the other? And then, on the margin side, I guess, between the two segments, as you think of kind of the 10% long-term target, which of those two segments kind of has the most upside potential?
Speaker Change: Yes, good morning, thanks for providing the <unk>.
Matthew Carl Akers: <unk>.
David: David I thought I had a couple of questions that I guess, just thinking about the mix between <unk>.
David: And Intel.
David: Kind of around three quarters of the business.
How do you think of the right mix going forward is that the right mix or do you think youll kind of move more towards one segment or the other and then on the.
David: Margin side.
David: I guess between the two segments.
Speaker Change: The 10% long term target, which of those two segments kind of has the most upside potential.
Speaker Change: Okay.
Prabu Natarajan: Hey, Matt, I'll probably take the quantitative part of this first. And in terms of the two reported segments that we have out there, I think it's fair to say that we would expect both segments to grow over the long term. Data point one.
Matt: Hey, Matt I'll, probably take the quantitative part of this first and in terms of the two reported segments that we have out there.
Matt: It's fair to say that we would expect both segments to grow over the long term data 0.1 data point too.
Prabu Natarajan: Data point two: by and large, the civilian business is where we have the predominant mix of fixed price and T&M work. Not surprising for that market. And therefore, we would expect us to continue to improve the mix relative to the defense and Intel market. I think the third data point we would say is, as we think about where the optimal mix is, we're not targeting a specific long-term mix. But I think given the potential in that market and the strategy pivots that Tony has referenced a few times, the reality is we would expect the civilian business to grow as a relative share.
Matt: By and large the civilian business is where we have the predominant mix of fixed price in PNM work not surprising for that market and therefore, we would expect us to continue to improve the mix relative to the defense.
Speaker Change: And Intel market I think third data point, we would say is as we think about where the optimal mixes we're not targeting a specific long term mix, but I think given the potential in that market and strategy pivots that Tony referenced a few times over the reality is we would expect Seville.
Speaker Change: <unk> business to grow as a relative share and candidly I wish I could sit here and say that the margins are only going to improvements to our business group teams recognize that we have to improve margins across the portfolio and that includes margins on a cost plus programs, which is where our defense and Intel business have to continue to pound the pavement here to ensure.
Prabu Natarajan: And candidly, I wish I could sit here and say that the margins are only going to improve in the civilian world. Our business group teams recognize that we have to improve margins across the portfolio. And that includes margins in our cost plus programs, which is where our defense and Intel business have to continue to pound the pavement here to ensure that we are improving margins there as well on the mix side. Tony No, I think not.
Speaker Change: That we are improving margins there as well on the mixed side Tony.
Toni Townes-Whitley: I think that's where the earlier question relative to our bid profile, as you start to see how we measure and determine what that growth will look like, will be how we bid into these two areas going forward in a more accretive way. Civilian, we talk about growth there as one of our strategic areas, and quite frankly, even launching an advisory capability is part of how we look to expand that growth on the civilian side.
That's where the earlier question relative to our bid profile as Youll start to how we measure and determine what that growth will look like will be how we bid into new entities two areas.
Speaker Change: Going forward in a more accretive way.
Speaker Change: When we talk about growth there as one of our strategic areas and quite frankly, even launching an advisory capability as part of how we look to expand that growth on the civilian side defense and Intel is our value creation story, where we are currently positioned we have to move up the value chain and we still have I think we still have significant growth.
Toni Townes-Whitley: Defense and Intel is our value creation story where we are currently positioned. We have to move up the value chain, and we still have, I think we still have, significant growth opportunities in those spaces as well. So I think Prabhu's first statement, we plan all five business groups have to grow, and we expect all of them to grow. I think that's the major takeaway. Civilian, we will be putting quite a bit of focus on making sure we get a larger part of that addressable market over the next three years.
Speaker Change: Opportunity in those spaces as well so I think probably his first statement. We plan all five business groups have to grow and we expect all of them to grow I think that's the major takeaway.
Speaker Change: We will be putting quite a bit of focus on making sure we get a larger part of that addressable market over the next few years.
Operator: Great, I'll leave it there. Thank you.
Speaker Change: Great I'll leave it there thank you.
Speaker Change: Yeah.
Matt: Thanks, Matt.
Sheila Karin Kahyaoglu: Your next question comes from the line of Sheila Kahyaoglu with Jeffreys. Please go ahead.
Speaker Change: Your next question comes from the line of Sheila <unk> with Jefferies. Please go ahead.
Operator: Good morning, everyone. And thank you for your time.
Speaker Change: Good morning, everyone and thank you for your time.
Sheila: Maybe my first question just continuing.
Sheila: On the segment discussion and thank you for that.
Sheila Karin Kahyaoglu: Um, maybe my first question, just continuing on the segment discussion, and thank you for that. If we could just maybe focus on the shorter term with the defense value proposition and defense and intelligence margins, they contracted year over year, which I guess part of it was attributed to the divestiture. But how do we think about the profitability profile longer term here of the two segments? You kind of touched on it, Tony, a little bit earlier, but should we expect a wider divergence?
Speaker Change: If we can just.
Speaker Change: Maybe focusing on the shorter term with the defense value proposition in defense and intelligence margin that contracted year over year.
I guess part of it was attributed to the divestiture, but how do we think about the profitability profile longer term here.
Speaker Change: Sure.
Speaker Change: Got it Tony a little bit earlier, but.
Speaker Change: Should we expect a wider divergence.
Prabu Natarajan: Hey Sheila, Prabu here. I'll take the first crack at this one.
Sheila: Hey, Sheila here I'll take the take.
Speaker Change: Take the first crack at this one.
Prabu Natarajan: You know, the big picture, margins came down in defense and intel relative to Q1 of last year. Part of that is the timing of EACs, which are more second-half focused. I think the additional investments we're making across the business, as we've explained through our year-end earnings call as well as our investor days, are partly what's driving margins down in defense and intel relative to, I'd say, Q1 of last year. In the big picture, as we just mentioned, I think we have a higher mix of cost-plus work in our defense and intel business, but we do expect our EBITDA margins, as well as our EBIT margins, to go up in that business.
Speaker Change: Big picture.
Speaker Change: Margins came down in defense and Intel relative to Q1 of last year part of that is the timing of the Acs, which are more second half focus I think at the end of the additional investments, we're making across the business as we've explained through our year end earnings call as well as our Investor day. So that's partly what's driving margins down in defense and Intel.
Speaker Change: Relative to I'd say Q1 of last year, I think big picture as we just mentioned I think we have a higher mix of cost plus work in our defense and Intel business.
Speaker Change: But we do expect our EBITDA margins as well as our EBIT margins to go up in that business and as I mentioned in the prepared remarks.
Prabu Natarajan: And as I mentioned in the prepared remarks, you know, we have a fair amount of work in our pipeline that is cost-plus work, and we are seeing margin rates pick up there. In terms of the relative spread, the reality is the civilian business does have, as I said, TNM and fixed price work, and their EBITDA margins and EBIT margins are roughly, I'd say, low double digits. Our expectation is that we'll continue to grind up margins in our civilian business as we continue to expand our presence in that particular market.
Speaker Change: We have a fair amount of work in our pipeline that is cost plus work and we are seeing margin rates pick up there in terms of the relative spread the reality is the civilian business does have as I said in our PNM in fixed price work and their EBITDA margins and EBIT margins are roughly I'd say low double digits our XP.
Speaker Change: <unk> will continue to grind up in margins in our civilian business as we continue to expand our presence in that particular market. So.
Prabu Natarajan: So I would expect both segments, reportable segments, to improve margins over the long term. And the reality is it's probably a little bit easier to do that in civilian just given the mix there in the near term.
Speaker Change: I'd expect both segments reportable segments to improve margins.
Speaker Change: Over the long term and the reality is it's probably a little bit easier to do that and simply and just given the mix. There in the near term I think the only thing I would add to that Sheila would be the investment thesis was our return relative to inserting more.
Toni Townes-Whitley: I think the only thing I would add to that, Sheila, is that the investment thesis was a return relative to introducing more differentiation, both in terms of our current programs, as well as our bid cycles. So, as we move into more differentiated space, the expectation is that that plus contracts mix is what's going to drive more accretive revenue, as well as introducing advisory capability, which has a different profile, as you know, in terms of its accretive nature. So, it's really those three aspects that are going to drive growth on top and bottom of the next few years.
Speaker Change: Differentiation, both in terms of our current programs as well as our bid or.
Speaker Change: Our bid cycles, so as we move into more differentiated space. The expectation is that that plus contracts mix is what's going to drive the more accretive revenue as well as introducing the advisory capability, which has a different profile as you know in terms of its accretive nature. So it's really those three aspects that are going to drive the growth.
Speaker Change: And on top and bottom over the next few years.
Sheila Karin Kahyaoglu: Sure. Now, the advisory capability definitely seems really neat.
Speaker Change: Sure.
<unk> capability.
Speaker Change: Maybe on the.
Speaker Change: Organic growth and just talking about more of the quarterly cadence comments, probably when you talked about in your prepared remarks.
Sheila Karin Kahyaoglu: Maybe on organic growth, just talking about more the quarterly cadence comments, probably you talked about in your prepared remarks, you know, just basically flat in the first quarter and then ramping to mid-single digits and rather Q4 weighted. Can you talk about the drivers of that growth outside of timing of re-compete losses? And what are the biggest programs that ramp?
Speaker Change: Just basically flat in the first quarter and then ramping to mid single digits, rather Q4 weighted can you talk about the drivers.
Speaker Change: Of that growth outside of timing of Recompete losses on what are the biggest programs that ramp.
Speaker Change: Sure, we'll do that Sheila.
Prabu Natarajan: Sure, we'll do that, Sheila. Relative to organic growth, I think we're signaling, you know, kind of a flat-ish first half, ramping up to, you know, mid-singlage growth in the second half of the year. I think part of the change in expectations, as we mentioned in the script, is that some of the material sales that we expected would occur in Q2, may shift, I will underline the word, may shift into Q3, but obviously, you know, working as much as we can to pull things to the left here as we cycle into the second half.
Speaker Change: Relative to organic growth I think we're signaling kind of flattish first half ramping up to mid single digit growth in the second half of the year I think part of the change in the expectations as we mentioned in the script is that some of the material sales that we expected will occur in Q2 may shift I will underline the word.
May shift into Q3.
Speaker Change: Obviously working as much as we can to pull things to the left here as we cycle into the second half in terms of the growth drivers between <unk>, and <unk> or <unk>, which we called out and.
Prabu Natarajan: In terms of the growth drivers, between H1 and H2, our DTAM win, which we called out, and on our year-end call, that is expected to ramp over the course of the year. I'd say it's more likely to be the second half of the year, as the team continues to fill out the task orders on that program. And then the T-Cloud program, we are building good momentum on the program, but we're still relatively early days there, and we'd signal T-Cloud's likely to be over 1% of revenue growth this year, relative to last year, so we're gonna see some more growth from T-Cloud coming through.
Speaker Change: On our year end call that is expected to ramp over the course of the year I would say biased to the second half of the year as the team continues to fill out the task orders on that program.
Speaker Change: And then to the <unk> program, we are building good momentum on the program, but we're still relatively early days, there and we'd signalled multi cloud is likely to be over 1% of revenue growth. This year relative to last year. So we're going to see some more growth from tea 12, coming through <unk>, which we won in Q3 of last year is continuing to ramp up and.
Prabu Natarajan: GMAS, which we won in Q3 of last year, is continuing to ramp up, and we are likely to see some progress there. And there's a more recent win, over $200 million in Air Force, that we will likely talk about over the next several weeks, that is also likely to generate some growth on the new business front. And then, separate from that, Sheila, we've had about 5% of recompete losses as our estimate for the year.
Speaker Change: We are likely to see.
Speaker Change: We're likely to see some progress there and.
Speaker Change: There is a more recent win over $200 million and Air Force that we will likely talk about over the next several weeks that it is also likely to generate some.
Speaker Change: On.
Speaker Change: The new business front, and then separate from that Sheila.
Speaker Change: About 5% of Recompete losses, as our estimate for the year. The reality is we are also expecting on contract growth to be about 3% to 5% incremental to last year. So if you put all of that together between the recompete losses, and the increased store on contract growth with them as well as new business wins, that's what ultimately gives us.
Prabu Natarajan: The reality is, we are also expecting on-contract growth to be about 3% to 5% incremental to last year. So if you put all of that together between the recompete losses and the increase to our on-contract growth through them, as well as new business wins, that's what ultimately gives us comfort that we'll be in that 2% to 3%, although I'll be a little more back-and-loaded this year, relative to our Thank you so much.
Speaker Change: Comfort that we'll be in that 2% to 3%.
Speaker Change: Although albeit a little more backend loaded this year relative to our initial estimates.
Speaker Change: Thank you so much.
Thank you Scott.
Operator: Thank you so much. Your next question comes from the line of Seth Selman with J.P. Morgan. Please go ahead.
Speaker Change: Your next question comes from the line of Seth Feldman with J P. Morgan. Please go ahead.
Seth Michael Seifman: Thanks very much and good morning everyone. I wanted to ask, I think Prabhu, you made some comments in the script about a normalizing environment for government outlays as a reason for some of the slowness that you're expecting in the second quarter, and I wonder if you could talk a little bit more about how the environment might be changing, what's driving it, why that doesn't alarm you a little bit more about the second half, and yeah, if you can address that.
Seth Michael Seifman: Okay, Thanks, very much and good morning, everyone.
Speaker Change: Uh huh.
Speaker Change: I wanted to ask.
Speaker Change: I think probably you made some comments in the <unk>.
Speaker Change: Script about a normalizing environment for government outlays.
Speaker Change: As a reason for some of the slowness that you're expecting in the second quarter and I Wonder if you could talk a little bit more about how the environment might be changing what's driving it.
Speaker Change: Why that doesn't.
Speaker Change: Alarm you.
Speaker Change: A little bit more about the second half.
Speaker Change: Yes.
Speaker Change: Address that yes.
Prabu Natarajan: Yeah, I'll do that, Seth and Toni, if I may. Seth, as we sort of began our fiscal year here, we began to see some softening in O&M outlay. I think you all saw the data that came out of the DoD. Now we saw that weakness for maybe two or three months, and then it began to change again the last time we saw the O&M outlay data. So I think what we're really signaling is a softness that we saw in the outlay data to start the fiscal year, and I think part of the caution heading into the second quarter is that we would like to sit back and see if the April trend is a one-month blip on the radar or actually a reversion to what we saw last year.
Speaker Change: Yes, I'll do that sets and Tony if I Miss something please add.
Speaker Change: <unk> in here.
Speaker Change: As we sort of began.
Speaker Change: Our fiscal year here, we began to see some softening in O&M outlook I think you all saw the data that came out of the Dod.
Now we saw that weakness for maybe two or three months and then it began to change again. The last time, we saw the O&M. Okay data. So I think we're really signaling is a softness that we saw in the outlay data to start the fiscal year and and I think part of the caution heading into the second quarter.
Speaker Change: Is that we would like to sit back and see if the April trend is a one month blip in the radar or actually a reversion to what we saw last year and.
Prabu Natarajan: And just as a reminder, outlays remained incredibly strong through the course of last fiscal year and caused us, as well as many in the industry, to continue to beat consensus numbers very handsomely. And we've been signaling for a couple of months now that when the outlay environment returns to something that is more normalized, we are likely to see some impacts on the revenue profile. So the reason it doesn't alarm me is we do have a budget in place for GFY24, and therefore, we do expect O&M outlays to pick up again sometime this year, but the reality is we are being cautious because the last time we saw outlays pick up, we didn't always see revenue come through right away, but we saw a little bit of a lag, about a three-to-six-month lag
Speaker Change: And just as a reminder, ladies remained incredibly strong through the course of last fiscal year and cost us as well as many in the industry to continue to beat consensus numbers very handsomely and we've been signaling for a couple of months now that when when the outlay environment returns to something that is more normalized we are.
Speaker Change: Likely to see some impacts on the revenue profile. So the reason it doesn't alarm me is we do have a budget in place for GFY 2004, and therefore, we do expect O&M outpace to pick up again sometime this year, but the reality is we are being cautious because the last time, we saw pick up we didn't always see revenue come through right.
Speaker Change: The way, we saw a little bit of a lag of about a three to six months lag. So I think we're just being cautious about it and as I've said, we'd like to stay calibrated with our investors around what we're seeing in the market. So we're not alarmed because we don't think it's a long term trend, but we are certainly cautious given that it may have some temporary impacts to our revenue pro.
Prabu Natarajan: So I think we're just being cautious about it, and as I've said, we'd like to stay calibrated with our investors around what we're seeing in the market. So we're not alarmed because we don't think it's a long-term trend, but we are certainly cautious given that it may have some temporary impacts on our revenue profile, and that's simply all we're signaling in the script, Seth.
Seth Michael Seifman: And that's simply all we're signaling in the script it's Seth.
Speaker Change: Alright, okay. Okay, great. Thanks, and then maybe just to follow up on that point.
Seth Michael Seifman: Okay, okay, great. Thanks.
Speaker Change: You also mentioned potentially a.
Speaker Change: Active.
Speaker Change: End of year spending cycle.
Speaker Change: And so <unk>.
Speaker Change: <unk> maybe.
Speaker Change: Some of this unevenness in the outlays.
Speaker Change: It sounds like maybe you are looking for a fair amount of.
Toni Townes-Whitley: And then maybe just to follow up on that point, you also mentioned potentially an active end-of-year spending cycle. And so, you know, despite maybe some of this unevenness in the outlays, it sounds like, you know, maybe you are looking for a fair amount of award activity as we exit the year. And I'm wondering, you know, the extent to which that is tempered at all by, you know, potential continuing resolution through the last part of your fiscal year and the election.
Speaker Change: Award activity.
Speaker Change: We exit the year and I'm wondering the <unk>.
Speaker Change: Stent to which.
Speaker Change: That has tempered at all by.
Speaker Change: Potential continuing resolution through the last part of your fiscal year end in the election.
Seth Michael Seifman: So, Seth, let me just jump into that particular part of the question. We have worked with our government relations team to get a pretty clear signal on what will be an end-of-fiscal-year sort of spending cycle, and that happens, as you know, every fiscal year. We do see, and we've obviously done the research down to our customer set, we do see where agencies across the various government sectors are going to be active at the close of the fiscal year.
Seth let me just jump into that particular part of the question. We have worked with our government relations team to get pretty clear signal on what will be an end of fiscal year sort of spending cycle and that happens as you know every fiscal year, we do see and we've obviously done that.
Speaker Change: The research down to our customer set we do see where.
Speaker Change: Agencies across the various <unk>.
Speaker Change: Government sectors are going to be active at the close of the fiscal year in fact in advance of what may be.
Seth Michael Seifman: In fact, in advance of what may be either concerns, trepidation, or not having a clear signal for the next continuing resolution, we've got a plan in place and a fairly robust playbook to make sure that we are part of sort of sweeping changes at the end of the fiscal year across every one of our business groups. In fact, we've targeted it down to specific program levels, so that's partially an offset when Prabhu talks about H-2, the Q-3 component of H-2 for us. We are looking to see some lift in that regard.
Speaker Change: Either concerns trepidation and door.
Speaker Change: Not not having clear clear signal for the next continuing resolution. So we've got a plan in place and a fairly robust playbook to make sure that we are part of sort of sweeping and the end of the fiscal year across every one of our business groups. In fact, we targeted it down to specific program level. So that's partially offset when probably.
Talks about H to.
Speaker Change: The Q3 component of <unk> for US we are looking to see some lift in that in that regard.
Operator: Great, excellent. Thanks. Thanks very much.
Great excellent. Thanks, Thanks very much.
Speaker Change: Thank you Sir.
Bert William Subin: Your next question comes from the line of Bert Subin with Stiefel. Please go ahead.
Speaker Change: Your next question comes from the line of Bert Steuben with Stifel. Please go ahead.
Toni Townes-Whitley: Hi, hey, good morning, and thank you for the question. Good morning, Bert. Maybe just following up to Seth's question there, it sounds like you're somewhat cautious about the spending environment, but we're now in a position with appropriations having taken place, supplemental spending bills in the past, and that should drive incremental improvements in the first quarter. Assuming that does happen, how do you go about pushing for more on-contract growth, maybe above the 3 to 5% levels you mentioned, and just broader new task order wins to help provide some padding in what's likely to be a more uncertain FY25 setup where you're still going to be awaiting some of those larger awards?
Speaker Change: Hey, good morning, and thank you for the questions.
Speaker Change: Good morning, Berkeley.
Speaker Change: Okay.
Speaker Change: Maybe just following up to that question there it sounds like you're somewhat cautious on the spending environment.
Speaker Change: But we're now in a position with the appropriations, having taken place supplemental spending bills in the past and that should drive incremental improvements in the first quarter, assuming that does happen. How do you go about pushing for more on pan on contract growth, maybe above the 3% to 5% levels you mentioned.
Speaker Change: And just broader new task order wins to help provide some padding and what's likely to be more uncertainty FY 'twenty, five setup, where youre still going to be awaiting some of those larger awards.
Prabu Natarajan: Hey Bert, thank you. Good question. Look, as Prabhu mentioned, we've got specific programs that we're looking to ramp up, and he mentioned a number of them, even programs that we've had for over a year here at DCSA, OneIT, AOC, Falconer, and others. But fundamentally, we have a playbook around contract growth that we are working across each one of our business groups that actually gives, if you will, a template around different types of contracts, how we grow off of those contracts, whether it be fixed price, TMM, cost plus, or how we introduce differentiation.
Bert William Subin: Hey, Bert. Thank you. Good question look as probably mentioned we've got specific programs that we're looking to ramp and you mentioned a number of them even programs that we've had even for over a year here at <unk>, one it Aoc falconer and others, but fundamentally we have a playbook around on contract growth that we are.
Bert William Subin: Working across each one of our business groups.
Bert William Subin: That actually gives if you will a template around different types of contracts, how we grow off of those contracts, whether it be fixed price tnn cost plus how we introduce differentiation we are starting to measure the differentiation in our current programs and we know about a quarter of our programs right now.
Prabu Natarajan: We're starting to measure the differentiation in our current programs, and we know about a quarter of our programs right now. Our larger programs that we deliver have differentiation from our factory. We are looking to drive that systematically beyond a quarter to the majority of our programs that we are delivering, as many as possible. So we're starting to measure where, if you will, our enterprise tech and other forms of differentiation occur on existing contracts, and how do we introduce that differentiation as part of our on-contract growth.
Bert William Subin: Our larger programs that we deliver.
Bert William Subin: Have differentiation from our factory, we are looking to drive that systematically beyond a quarter two the majority of our programs that we are delivering as many as possible. So we're starting to measure where if you will or enterprise tech and other forms of differentiation occur on existing contracts and how do we introduce that differentiation as part of our own.
Bert William Subin: Contract growth.
Prabu Natarajan: And then Prabhu mentioned even in terms of understanding where our customers are putting their focus in terms of growing their programs for their various missions. So we have a pretty tight playbook that we're working on. We've just instituted for the rest of the fiscal year that we'll be driving this on-contract growth with the goal of starting as soon as possible. As you heard Prabhu say, move left. We all understand that on-contract growth has to start right now to have the annualized impact that we need.
Bert William Subin: And then.
Bert William Subin: Probably we mentioned even in terms of understanding where our customers are putting their focus in terms of growing their programs for their various mission. So we have a pretty tight playbook that we're working we've just instituted for the rest of the fiscal year that will be driving this on contract growth with the goal of starting to as soon as possible as you heard.
Speaker Change: You say move left we all understand that on contract growth has to start right now to have the annualized impact that we need.
Bert William Subin: And Bert, the only thing I would add to that response would be that we are not relying on a lot of new business wins in the second half of the year to make the 2-3% guide we have out there. I think our focus, you know, acutely remains on contract growth, and to the extent we can upsize the 3-5%, it's likely to help us bolster, you know, what we deliver as underlying performance. We also have $24 billion in backlog, and so there are many, many large contracts we have with ample amounts of ceiling, and the team is laser-focused on delivering additional volume through these large ceiling programs.
Speaker Change: And the only thing I would add to that.
Speaker Change: <unk> would be that we are not relying on a lot of new business wins in the second half of the year to.
Speaker Change: 2% to 3% guide we have out there I think our focus okay.
Speaker Change: <unk> remains on contract growth and to the extent, we can upsize that 3% to 5% it's likely to help us bolster what we deliver is underlying performance. We also have 24 billion in backlog.
Speaker Change: And so there are many many large contracts we have with ample amounts of ceiling and the team is laser focused on delivering additional volume through these large ceiling programs.
Prabu Natarajan: Got it. Maybe as a follow-up, but we think about the other side of things, which is the recompete area where you noted sort of five points of headwinds this year. NASA seems to be the partner, at least where a lot of those recompete losses have shown up, first with Aegis and then OMS and now potentially NASA East. I guess my question is sort of two parts. One, is there a chance you still maintain some work under NASA East, or is that assumed in the recompete headwinds? And then two, how do you get confident that you sort of changed your go forward strategy with NASA such that those pursuits circle the other way?
Speaker Change: Got it.
Speaker Change: Maybe as a follow up when we think about the other side of things, which is the recompete area.
Speaker Change: Five points of headwinds this year.
Speaker Change: That does seem to be the partner at least where a lot of those recompete losses showed up first with aegis, and then <unk> and now potentially NASA east.
Yes, My question sort of two part one is there a chance you still maintain some work under NASA east or is that assumed in the protest and the recompete headwinds.
Speaker Change: And then two how do you get.
Speaker Change: Confident that you've sort of changed your go forward strategy with NASA.
Speaker Change: Proceed with Yodlee.
Operator: I'm going to go ahead and take a short break. Thank you. Thank you. Thank you. Thank you. Hey, Bert, I appreciate the question.
Speaker Change: I'll take that.
Prabu Natarajan: We did win a NASA ReCompete, our SMAG program that we booked in Q1 of this year, roughly $350 million that went into bookings, you know, so I think it certainly counts. On the NCAPS program, I think right now our expectation is that we are unlikely to see major revenue disruptions from NCAPS this fiscal year, but we are being very careful in the way we are thinking about NCAPS's impact on next year's revenue, and that is fully reflected in the 2 to 4% guide we've got out there.
Bert William Subin: Hey, Bert I. Appreciate the question we did win every NASA Recompete, our <unk> program that we booked in Q1 of this year roughly.
Bert William Subin: Roughly $350 million that went into bookings.
Bert William Subin: So I think it's certainly accounts on the on the end caps program I think right now our expectation is that.
We are unlikely to see major revenue disruptions from end caps this fiscal year.
Bert William Subin: But we are being very careful in the way we are thinking about any <unk> impact to next year's revenue and that is fully reflected in the 2% to 4% guide we've got out there and the emission suitability is the one area, where we have the team has spent a lot of time on.
Prabu Natarajan: And mission suitability is the one area where we've, you know, the team spent a lot of time evaluating our submissions relative to the evaluation itself on mission suitability. But, you know, we're laser focused, and hopefully, SMAG represents a little bit of a turn in terms of our ability to fix that particular part of the portfolio. I'm right in line with Prabhu.
Bert William Subin: On evaluating our.
Submissions relative to the evaluation of itself on mission suitability, but.
Bert William Subin: We're laser focused on hopefully smack represents a little bit of a turn in terms of our ability to fix that particular part of the portfolio.
Toni Townes-Whitley: I'm right in line with Prabu there in terms of mission suitability, as well as the differentiation within our factory that actually resonates well within the NASA customer set. So, I think we've done a number of deep dives and loss, if you will, loss reviews to understand where we did not meet the challenge, both in terms of the solutions proposed, as well as, quite frankly, our execution on the ground. And both of those were contributors to our poor positioning with NASA on the re-compete side.
Bert William Subin: Right in line with PREPA, there in terms of emission suitability as well as the differentiation within our factory that actually resonates well within the NAFTA NASA customer set so.
Bert William Subin: We've done a number of deep dives and loss. If you will loss reviews to understand where we did not meet the challenge both in terms of.
Bert William Subin: The solutions proposed as well as quite frankly, our execution on the ground.
Speaker Change: And those both of those were contributors to our positioning our poor positioning with mass on the Recompete side, we are improving in both areas as <unk> mentioned with the recent recompete win substantive enough to mention on the call here over $300 million, but also quite frankly, the differentiator is being driven into the programmatic.
Toni Townes-Whitley: We are improving in both areas, as Prabu mentioned, with a recent re-compete win, substantive enough to mention on the call here, over $300 million. But also, quite frankly, the differentiators being driven into the programmatic delivery of our current contract. NASA is still an opportunity. I think we're still evaluating where we play, and we've got a couple of major, major opportunities there for bid purposes over the next two to three quarters. Thank you.
Speaker Change: Delivering on our current contract so.
Speaker Change: NASA is still an opportunity and I think we're still evaluating where we play and we've got a couple of major major opportunities there for bid purposes over the next two to three quarters.
Speaker Change #100: Thank you.
Speaker Change #101: Thank you.
Operator: Your next question comes from the line of David Strauss with Barclays. Please go ahead.
Your next question comes from the line of David Strauss with Barclays. Please go ahead.
Speaker Change #101: Okay.
Speaker Change #102: Thanks, Good morning.
David Egon Strauss: Hey David, just wanted to go back to this first half versus second half growth dynamic. Uh, you know, you're talking about mid-single-digit second half of the year growth. Is it, is it really all gonna just come through in the fourth quarter? I mean, you're comping Q3 is still really tough, you're comping the, In Q4, I think on work days it's relatively easy. Is that basically to set up the minimal growth increase and kind of a hockey stick in Q4?
David: Hey, David just Hey, just wanted to go back to the first half versus second half growth dynamic.
Speaker Change #103: You are talking about mid single digit second half of the year or is it is it really all going to just come through in the fourth quarter I mean, your comp in Q3 still really tough you're comping.
Speaker Change #104: In Q4, I think I'm workdays as relatively easy that is that basically to set up the minimal growth three of them kind of a hockey stick in Q4.
Prabu Natarajan: Yeah, David, I think you're picking up on something. We are signaling roughly flat-ish H1 and mid-singlage growth.
David: Yes, so David I think you're picking up on something we are signaling roughly flattish H, one and mid single digit growth, yes, I think youre exactly right. The comps do get hard in the second half of the year, which is partly why we're being cautious heading into this particular print I think.
David Egon Strauss: Yeah, I think you're exactly right. The telecoms do get hard in the second half of the year, which is partly why we're being cautious heading into this particular I think the on-contract growth regime that we have in place right now is going to take some time to gain traction here over the rest of the fiscal year. Obviously, the teams are getting pushed to pull revenue in, so hopefully, my expectation would be, my hope certainly would be that we start to pull revenue left in Q2 beyond what we have in our forecast right now, and that improves in Q3 so that it becomes less of a hockey stick in Q4.
David: The on contract growth breads.
David: <unk> that we have in place right now is going to take some time to gain traction here over the rest of the fiscal year. Obviously the teams are getting pushed to pull revenue and so hopefully my expectation would be my hope certainly would be that we start to pull revenue left starting Q2.
David: Beyond what we have in our forecast right now and that improves in Q3, so that it becomes less of a hockey stick in Q4, that's the that's what the game plan looks like for the operational execution side of this but the reality is we don't always control the cadence of that.
David Egon Strauss: That's what the game plan looks like for the operational execution side of this, but the reality is we don't always control the cadence of that procurement volume or moving revenue to the left, and so I think we're just being careful in the way we're calibrating the H1 versus H2, but we don't want this to be a go-getter in Q4 because we all know that that's going to be very, very hard
David: Procurement volume more moving revenue to the left and so I think we're just being.
David: Careful in the way, we're calibrating the H one versus <unk>, but we don't want this to be a go get in Q4, because we all know that that's going to be very very hard to do.
David: Okay.
Prabu Natarajan: Okay, got it. And then on cash flow, what does the kind of the cadence on cash flow look like for the rest of the year? When does this, you know, the receivable benefit that you had in Q1 reverse itself out?
Speaker Change #105: Okay got it and then on.
Speaker Change #106: On cash flow.
Speaker Change #107: What are what is kind of the cadence on cash flow look like the rest of the year when does that.
The receivable benefit that you had in Q1 reverse it out.
David Egon Strauss: Yeah, so fair question, David. I think, you know, in terms of Q1 itself, we delivered $20-22 million of free cash flow. If you normalized it for the higher incentive comp accrual as well as the sale of the supply chain business, we'd be right on top of where we were last year. So roughly $70-75 million of free cash flow.
Yes, So a fair question, David I think.
Speaker Change #107: In terms of Q1 itself.
Speaker Change #108: We deliver 2000 $22 million of free cash flow if.
Speaker Change #109: If you normalize it for the higher incentive comp accrual as well as the sale of the supply chain business, we'd be right on top of where we were last year, so roughly $70 million to $75 million of free cash flow are typical rhythm for free cash flow tends to be weighted in the second half. This year is no different than our typical <unk> versus H two dynamic.
Prabu Natarajan: Our typical rhythm for free cash flow tends to be weighted in the second half. This year is no different from our typical H1 versus H2 dynamic for free cash flow. Where I get comfortable for the full year is that our collections were actually incredibly strong from, you know, I'd say Q2 of last year all the way through Q1 of this year. So I would expect that trend to continue to help us.
Speaker Change #109: On free cash flow.
Speaker Change #109: Where I get comfortable on the full year is that our collections were actually incredibly strong from Q2 of last year. All the way through Q1 of this year. So I would expect that trend to continue to help us and but in terms of the rhythm itself. The cadence itself I'd say H, one H to cash flow.
Prabu Natarajan: But in terms of the rhythm itself, the cadence itself, I'd say H1, H2, cash flow tends to be more H2 focused, and that's not likely to change. Our cash flow is also impacted by our pay periods. And so there is typically one additional pay period every other quarter. And so that actually impacts our cash flow timing as well. But again, no real surprises expected for the year. I think we're right on track in terms of collections. It's just the timing of some of these one-time items, including our cash bonuses in Q1. Hopefully, I was responsive.
Speaker Change #109: To be more H, two focused and and thats not likely to change our cash flow is also impacted by our pay periods and so there is typically one additional pay period every other quarter and so that actually impacts our cash flow timing as well, but again no real surprise is expected for the year I think we're right on track.
Speaker Change #109: In terms of collections is just the timing of some of these one time items, including our cash bonuses.
Speaker Change #109: At Q1 here hopefully that was responsive.
Speaker Change #110: Thanks very much.
Speaker Change #110: Sure.
Tobey O'Brien Sommer: Your next question comes from the line of Tobey Sommer with Truist Securities. Please go ahead. Yeah, good morning. This is Jack Wilson on behalf of Tobey. I'm sort of continuing on sort of the cadence.
Operator: Your next question comes from the line of Tobey Sommer with Truist Securities. Please go ahead. Yeah, good morning. This is Jack Wilson on for...
Speaker Change #111: And your next question comes from the line of Tobey Sommer with <unk> Securities. Please go ahead.
Speaker Change #111: Hey, Good morning. This is Jack Wilson on for Tobey.
Jack Wilson: Sort of continuing on sort of the cadence to try and can you speak to any changes in sort of historical seasonality expect to see.
Jack Wilson: 26 in 2017, given sort of the ramp time line of some key contracts.
Jack Wilson: Okay.
Prabu Natarajan: So let me, Jeff, good morning. Let me try and take the first half, and if it's not responsive, do let us know. We're happy to clarify. Kind of a big picture, as we said, we're expecting the headwinds from our recompete losses to, I'd say, simmer down to about the 2% rhythm at the end of the year, in Q4 specifically. That's the assumption we have going into FY26. Last year, FY24 was a more normal recompete loss year cycle for us with about 2%, and we delivered about 7.5% growth last year.
So let me Jeff Good morning, let me try and take the first half and if it's not responsive do let us know we're happy to clarify.
Speaker Change #113: Kind of a big picture as we said, we're expecting the headwinds from a recompete losses to I'd say similar down to about the 2% rhythm at the end of the year at Q4, specifically that's that's the assumption we have going into FY 'twenty six last year FY 'twenty for was a more normal recompete.
Speaker Change #113: Late last year cycle for us were about 2% and we delivered about seven five for some growth in last year. So so I would say if re competes are back to that 2% to 3% rhythm, which is expected to be at Q4, and if that trend continues into next year. We would expect this business to grow in our current guide is 2% to 4%, but again.
Prabu Natarajan: So I would say if recompetes are back to that 2% to 3% rhythm, which is expected to be in Q4, and if that trend continues into next year, we would expect this business to grow. Our current guide is 2% to 4%, but again, that depends on, frankly, conversion of outlays into revenue heading into next year. Well, we also have a robust pipeline out there.
Speaker Change #113: It depends on frankly conversion of our plays into revenue heading into next year, but we also have a robust pipeline out there.
Tobey O'Brien Sommer: As we mentioned in the prepared remarks, we submitted about $8 billion in volume in Q1. We submitted $17 billion in all of last year combined. So we are certainly on pace to get to about $22 billion, and I would say the vast majority of that, at least two-thirds of that, is inflecting into new business. So I think part of the expectation is that while new business is not something we're relying on for this year, we are expecting new business wins to continue to ramp and provide some support for our organic growth rate thesis as we head into 2026. That's helpful. And then maybe, as a quick follow-up, is it possible to quantify sort of in what percentage of the bids you're submitting you're using AI as a differentiator? That's a good question.
Speaker Change #113: We mentioned in the prepared remarks, we submitted about $8 billion of volume in Q1, we submitted $17 billion in all of last year combined so we're certainly on pace to getting to about $22 billion and I would say the vast majority of that at least two thirds of that is inflicting to new business. So I think part of the expectation is that.
Speaker Change #113: While new business is not something we're relying on for this year, we are expecting new business wins to continue to ramp and provide some support for our organic growth rate. This year as we head into 'twenty six 'twenty seven.
Speaker Change #114: That's helpful. And then maybe as a quick follow up is it possible to quantify sort of what percentage of the page you're submitting youre using AI as a differentiator.
Speaker Change #113: Okay.
Prabu Natarajan: I don't know if we are using AI as a differentiator for the bids that are going out the door, but we are certainly using tools inside our business development organization as we're reviewing the proposals that are coming in the door here. There are a handful of bids that are more AI-oriented, operational AI-oriented, in the pipeline, and we're likely to talk about them when something comes up. Yeah, I would just say think about AI both in terms of how we use it to bid and then what is actually in the solution set.
Speaker Change #115: That's a good question I don't know that we are using AI as a differentiator for the bids that are going out the door. We are certainly using the tools inside our business development organization as we're reviewing the proposals that are coming into the door here there is.
Speaker Change #115: A handful of bids that are more AI oriented operational oriented in the pipeline and we're likely to talk about it when something comes up.
Speaker Change #115: Yes, I would just say when you think about both in terms of how we use it to bid and then what is actually in the solution set and operational AI that we talk about differentiating on which is which is AI that.
Prabu Natarajan: And the operational AI that we talk about differentiating on, which is AI that we say operational is fairly unique in that it is sort of a lightweight AI. It's got form factor considerations. It's air-gapped for certain environments, for classified environments.
Speaker Change #115: We say operational is fairly unique in that it is sort of a lightweight AI. It's got form factor considerations. Its air gapped for certain environments for classified environments that is usually combined with some of our secured data.
Toni Townes-Whitley: That is usually combined with some of our secure data capability on our platform, on our Cobras data platform. And for those bids, we are measuring our ability to insert those, and we are pleased to see that that capability is in our largest bids. We're finding that in the majority of our bids that are our top, largest revenue bids, we are, in fact, leveraging those kinds of capabilities. What we have to do, again, to be balanced, is to make sure that we are systematically driving that capability into all of our bids. And so we're measuring both aspects, revenue, and the count.
Speaker Change #115: <unk> ability on our platform on our Cooper state of platform and those bids we are measuring.
Speaker Change #115: Our ability to insert those and we are pleased to see that that capability is in our largest bids. It is refined it and the majority of our bids that are top largest revenue bids that we are in fact, leveraging those kinds of capabilities. What we have to do again to be to be balanced just to make sure that we are system.
Speaker Change #115: <unk> driving that capability into all of our bids and so we're measuring both aspects revenue into account.
Speaker Change #116: Thank you very much.
Speaker Change #116: Okay.
Operator: Our final question today comes from Cai Von Rumohr with TD Cowen.
Speaker Change #117: Our final question today comes from Cai von <unk> with TD Cowen. Please go ahead.
Cai von Rumohr: Yes, thanks so much. This has been partially answered, but you had 79 million MARPA benefits in the quarter, so if I back that out, it looks like the DSOs went from 45 to 50, so you have a relatively high, you know, hill decline. Do you expect MARPA to be zero for the year, patent 79 to reverse out, or is that gonna be part of the way we get to our cashflow target?
Speaker Change #118: Yes. Thanks. So much this has been partially answered, but you had 79 million benefit in the quarter. So if I back that out it looks like Dsos went from 45 to 50. So you have a relatively high.
Hill decline do you expect them ARPA to be zero for the year.
79 to reverse out or.
Speaker Change #119: Not going to be part of the way, we get to our cash flow target.
Prabu Natarajan: Hey Cai, I appreciate the question. Our guidance for free cash flow and, by definition, operating cash flow excludes our borrowings from our mark facility. So we're actually normalizing for that, and we're not including it in our operating cash metrics. I think in terms of the DSO questions, it's very hard to measure DSO on a quarterly basis. What we tend to look at is sort of our average daily collections volume. And if I look at the trend in our average daily collections, it's remained very, very strong over the course of the last six or nine months.
Speaker Change #120: Okay. I appreciate the question our guidance for free cash flow and by definition operating cash flow excludes our borrowings from our Mark facility. So we're actually normalizing for that and were not including it in our operating cash metrics.
Speaker Change #120: In terms of the DSO questions its very hard to measure DSO on a quarterly basis.
Speaker Change #120: What we tend to look at it as sort of our average daily collections volume and if I look at the trend in our average daily collections is remains very very strong over the course of the last six or nine months and it remained very very strong at Q1. So yes, DSO went up a little bit and reality is.
Prabu Natarajan: And it remained very, very strong in Q1. So yeah, DSO went up a little bit. The reality is that we are pretty comfortable with our rhythm on collections and have no concerns around the full year, but MARPA is not in our adjusted operating cash or Terrific. Thanks so much.
Speaker Change #120: We are pretty comfortable with our rhythm on collections and.
Speaker Change #120: And no concerns around the full year, but mark was not in our adjusted operating cash or free cash flow metric.
Cai von Rumohr: Terrific. Thanks so much. A good answer.
Speaker Change #121: Terrific. Thanks, so much good answer.
Speaker Change #122: Sure sure.
Operator: Ladies and gentlemen, that does conclude our question and answer session. And with that, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Speaker Change #123: Ladies and gentlemen that does conclude our question and answer session and with that that does conclude today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change #122: Thanks.
Speaker Change #122: Yeah.