Q4 2025 Science Applications International Corp Earnings Call
Q4 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during this session, please press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again.
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Joe DeNardi, Senior Vice President, Investor Relations, and Treasure. Please go ahead.
Good morning, and thank you for joining SCIC's fourth 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, our Toni Townes Whitley, our Chief Executive Officer, and Prabu Natarajan, our Chief Financial Officer.
Today we will discuss our results for the fourth quarter of fiscal year 2025 that ended January 31st, 2025.
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 statements 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 10K. 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 declaim any obligation to do so.
Speaker Change: It is now my pleasure to introduce our CEO , Tony Townes Whitley.
Speaker Change: Thank you, Joe, and good morning to everyone on our call. I want to start with a heartfelt thank you to my colleagues at SEIC for their focus, dedication and empathy amidst a dynamic operating environment for the company and our customers.
Speaker Change: The strong financial results we delivered to close the year reflect our commitment to driving improved mission outcomes for our customers.
Speaker Change: I will now provide an update on current market conditions and our perspective on the risks and opportunities from the administration's focus on accelerating the deployment of technology to drive greater efficiency across the government.
Speaker Change: To date, the financial impact SAIC from recent executive orders and program cancellations across the government has been nominal and our conversations with the administration today have been productive.
Speaker Change: However, given how dynamic the environment has been, we believe it prudent to be prepared should conditions change. Prabu will discuss in greater detail in his remarks some of the actions we have taken to date.
Speaker Change: While our base case does not assume a meaningful change in the size of our addressable market in the coming years, we do expect changes to the procurement environment that will place a greater emphasis on mission criticality and the infusion of cutting edge technology as well as outcome based contracting.
Speaker Change: We view this as an acceleration, perhaps a rapid acceleration, a prior trends, and one that our strategy and investments are designed to address.
Speaker Change: On slide four of our earnings presentation, we have shared several examples of programs which demonstrate our ability to build and integrate technology at the speed of the mission. I would like to call out a few of those examples today.
Speaker Change: For Customs and Border Protection, on the task PD program, we rolled out facial and touchless fingerprint technology to over 5,000 ICE agents.
fully integrated with our cloud.
Speaker Change: Machine Learning and AI capabilities, to rapidly identify shipments and travelers more efficiently and accurately for additional inspection.
Speaker Change: We have redesigned the license plate recognition system to a flexible open architecture system which has relieved the agency from legacy vendor lock.
Speaker Change: and has made 700 of these deployed systems configurable to weather conditions across more than 100 of the busiest land border crossings in U.S. border checkpoints nationwide.
Speaker Change: For the Space Force on our G-MAS program, we have leveraged our digital engineering and on-demand software development solutions to sustain and upgrade various radar systems in the United States and around the world at rates quicker and cheaper than the legacy providers.
Speaker Change: Our performance has contributed to G mass ramping to full run rate revenue faster than we had originally anticipated.
Speaker Change: In our commercial operating sector, we have a menu of offerings that customers can purchase on commercial terms.
Speaker Change: Revenue from our commercial operating sector has increased from less than 1 million in fiscal year 22 to approximately 45 million in fiscal year 25 and a goal of approximately 100 million by fiscal year 28 with healthy margins consistent with commercial terms.
Speaker Change: Our top selling offering is our DevSecOps sprints, which provide a skilled team of software developers ready to deploy rapidly fix and leave when the project is complete.
Speaker Change: typically in two-week increments, making them cost-efficient and agile, effectively sprints as a service.
Speaker Change: What makes our teams uniquely positioned to deliver this value is our role as a mission integrator with intimate and irreplaceable knowledge of customer missions. In other words, Gritty Tech, which underpins our legacy and undergirds our future.
Speaker Change: Lastly, we are currently assessing our cost plus portfolio to determine with some specificity and appropriate guardrails how much of this work could transition to fixed type contracting over time.
Speaker Change: As we have shared, we have performed quite well within our fixed price portfolio over the years, beginning with our acquisition of UNICEF's Federal and Fiscal Year 21.
Speaker Change: Our initial view is that a significant portion could migrate to fixed price over time assuming that the scope of work is well defined and opportunities for cost plus carve-outs still exist.
Speaker Change: This is an opportunity for our industry and the right thing to do for our customers.
Speaker Change: I'll now provide an update on our enterprise growth strategy and business development trends.
Speaker Change: We delivered net bookings in the fourth quarter of 1.3 billion and 6.6 billion in fiscal year 25 for a book to bill of 0.9.
Speaker Change: Not included in fourth quarter bookings since it was awarded subsequent to quarter close, SAIC won the $1.8 billion system software life cycle engineering contract, which is the next iteration of the software life cycle development program, one of SAIC's largest programs by revenue.
Speaker Change: I am proud of our team at Huntsville for their efforts in securing this important program and for the continuation of our long-term partnership with the Army.
Speaker Change: As we show on slide five, we submitted bids totaling 28 billion in fiscal year 25, well ahead of our initial plan of 22 billion.
Speaker Change: Our backlog of submitted bids increased to just over 20 billion at year end on a trailing 12-month basis over half of which is currently expected to award over the next two to three quarters.
Speaker Change: Our win on SSLE and our strong backlog of submitted bids provide visibility into driving our book to bill to our target of 1.2 by the first half of FY 26.
Speaker Change: Of course, subject to the caveat that timing may be impacted by the ongoing uncertainty facing our customers.
Speaker Change: While there have been some recent examples of procurement timelines being extended, it has not been broad-based.
Speaker Change: In addition, it is important to remember that procurement delays, while generally aheadwind to bookings, also prolong recompete schedules such that the net effect to revenue and earnings will be far less material.
Speaker Change: I will now provide a review of our fourth quarter and full year financial results
Speaker Change: We reported fourth quarter revenue of 1.84 billion, an increase of 6% year-over-year driven mainly by new program wins and on contract growth which offset program completions.
Speaker Change: Full year, fiscal year 25 revenue of $7.48 billion, represented 3.1% organic growth, which is at the high end of the guidance we provided at the start of the year.
Speaker Change: 4th quarter-adjusted EBITDA of $177 million resulted in a margin of 9.6%.
Speaker Change: For the full year, adjusted EBITDA of $710 million produced a margin of 9.5%, which was 20 basis points ahead of guidance due primarily to strong program performance and lower incentive compensation expense compared to the prior year.
Speaker Change: Adjusted diluted earnings per share was $2.57 for the fourth quarter and $9.13 for the full year, benefiting from the strong operating performance and a lower effective tax rate.
Speaker Change: We delivered free cash flow of $236 million in the fourth quarter and $507 million for the year, resulting in free cash flow per share of just over $10.
Speaker Change: As Prabu will discuss, we expect to achieve our target for free cash flow per share of $11.00 in fiscal year 26 and $12.00 in fiscal year 27 and believe we can accomplish this in various revenue scenarios.
Prabu Natarajan: Again, I want to thank everyone at SCIC for the dedication they've shown to the company, one another, and our customers. With that, I will turn the call over to Prabu.
Prabu Natarajan: Thank you, Tony, and good morning to everyone joining our call. I will focus my remarks today on our financial guidance for FY 26 and an update on our capital deployment plans.
Prabu Natarajan: We are guiding revenues to a range of $7.6 billion to $7.75 billion, representing approximately 3% organic growth at the midpoint.
Prabu Natarajan: As we detail on slide 8, we expect growth to accelerate from 1% to 3% in the first half to 2% to 4% in the second half
Prabu Natarajan: This cadence is driven primarily by the timing of recompete headwinds which are more pronounced in the first quarter and ease through the year.
Prabu Natarajan: Our guidance assumes a roughly two-point headwind from recompete losses primarily related to a NASA program that exited our business in October .
Prabu Natarajan: In addition, we expect a roughly $200 million headwind related to low-margin Air Force Cloud 1, Computer Store Revenue, which we chose to know bit that will be spread evenly through the air.
Prabu Natarajan: We expect these headwinds to be offset by a fairly even contribution from the continued ramp up on previously one new business, including T-Cloud, DTAM, CBC2, and on contract growth across a number of programs.
Prabu Natarajan: While our guidance assumes no material disruptions resulting from the government's ongoing efficiency initiatives, we are preparing to respond with actions aimed at producing similar EBITDA and free cash flow if we see incremental revenue pressures
Prabu Natarajan: For EBITDA margin, we are guiding to a range of 9.4% to 9.6% and increase of 10 basis points.
Prabu Natarajan: driven by strong program performance, efficiencies from internal process improvements, and incremental scrutiny on investments given the uncertain revenue environment.
Prabu Natarajan: As shown on slide 10, we expect the trend to continue into FY27 with margins improving in additional 10 basis points to a range of 9.5 percent to 9.7 percent.
Prabu Natarajan: We are guiding adjusted deluded earnings per share to a range of $9.10 to $9.30, largely due to increased earnings and a lower share count offset by a higher effective tax rate of 23% We are guiding adjusted deluded earnings per share to a range of $9.30 to $9.30 to $9.30
Prabu Natarajan: Free cash flow of 510 to 530 million should translate into approximately $11 per share and continue to have good visibility to $12 per share in FY 27.
Prabu Natarajan: We're expect to repurchase between 350 to 400 million in FY 26 and 27, while maintaining sufficient capacity for capability focused emanating or additional shared repurchases. This is unchanged from our prior framework.
Prabu Natarajan: We are further refining our incentive compensation plans to ensure alignment with our investors.
Prabu Natarajan: For FY26, plans for all eligible employees will be based on enterprise-wide performance versus the prior plan which blended enterprise and business group performance.
Prabu Natarajan: As we focus on our strategy to more efficiently allocate capital across the company and operate as one SAC we believe aligning behind a single scorecard will enhance the push.
Prabu Natarajan: Finally, as you will see in their upcoming SEC filings, several members of the executive leadership team have indicated an intent to make a discretionary purchase of SAIC shares in the near future to further align our team's interest with those of our shareholders.
I'll now turn the call over to begin Q&A.
Speaker Change: Thank you. As a reminder to ask a question at this time, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. We ask that you please limit yourself to one question or one follow-up. One moment for our first question.
Speaker Change: Our first question is going to come from the line of Cullen Canfield with Cantor Fitzgerald. Your line is open. Please go ahead.
Speaker Change: Just making sure we understand the 1.8 billion dollar recompete. Can you talk us through how that impacts book to bill for the future quarter?
Speaker Change: Good morning, Helen. Thank you for the question and again, let me
to our results.
Speaker Change: on SSLE on this particular win. From a trailing 12-month perspective, it would this win.
Speaker Change: We get us close to the 1.0 trailing 12 month. You heard us report at 0.9 prior at the quarter or year in close.
Speaker Change: So that would be the impact on the trailing 12 month. Obviously we see this as an important continuation of our relationship with the Army Aviation and Missile Command. And quite frankly, not only the wind but also the ongoing work that we expect on this contract, we think sets us up.
Fairly well for this part of the business.
Speaker Change: Got it. And then maybe talking about the incremental submit increased so far from the 22 to 26 or 28, excuse me, he just talked a little bit about what's in that incremental 6 billion of submits.
Speaker Change: and where do you feel that SCIC has a right to win on those incremental, or incremental summits, excuse me.
Speaker Change: If we're talking about the increase from 22 to 28, we look, we think there's a combination of reasons for that to include the efficiency of having standardized our business development function using an enterprise operating model to drive that and we talk about in terms of not only bit more the quantity but also bit better the nature of those bits being on strategy and quite frankly marginally accretive to prior bid. Um.
Speaker Change: When we look at that pending plan right now, about two-thirds of that [inaudible]
Speaker Change: of that pipeline that we are waiting to have awarded and adjudicated is in the mission in your prize IT arena, about two-thirds of that is new business, a third is recompete. So, we feel balanced in both the new business recompete.
Speaker Change: component as well as that this is the strategic area that we put in place in our 2024 growth strategy and that the majority again over two thirds of our pipeline are in these strategic areas of our portfolio. Thank you very much.
Speaker Change: The only thing I would add to that would be that the margins that are implied in the submissions are also higher than current company wide margins. So therefore that's the other side of this that we're pleased to see that we're continuing to move core margins up into business. [inaudible]
David Strauss, David Strauss, David Strauss, David Strauss
Speaker Change: Got it, got it, yeah, definitely understood that algorithm. Maybe just last one for me before I get back on the queue, focusing on, so if I think about this, this bit pipe, can you just maybe talk a little bit about the nature of the budget dollars in this bit pipe, whether it's time more to FY 25 or FY 26 budget.
Speaker Change: The nature of the budget dollars and the submit pipeline meeting for the submissions for this year.
Speaker Change: Look, we've got as we look at this year the way we understand the CR that's in place for the year we believe that there's some flexibility in that CR that we have not seen in previous continuing resolutions so when we think about the ability to have new starts. [inaudible]
Speaker Change: The ability to have flex across the Department of Defense and Intel.
Sectors,
We feel strongly that our current pipeline has submitted the plan.
is competitive.
It can be funded in this environment.
Speaker Change: and it's sufficient, by frankly to drive to the 1.2 book to build that we have.
We have been putting forward as our first half exit [inaudible]
Speaker Change: in Book to Bill. So right now, we feel pretty strong about that. Obviously, we're monitoring on a daily basis. The CR information came in last week. We're staying on this on a every 24 hour run here, but in real update, if any conditions fundamentally change, but right now, we feel fairly solid. [inaudible]
Thank you.
Thank you in one moment for our next question.
Speaker Change: Our next question is going to come from the line of Jason Gursky with City. Your line is open. Please go ahead.
I'm just kind of curious.
Speaker Change: How that will work mechanically for you all, as you've done that.
Speaker Change: Analysis. Is there the potential that we see higher margins but lower revenue? Is that one of the things that you've kind of discovered is you've gone through that that analysis? Yes sir.
Speaker Change: Look, we're in, thanks, first of all, for the question, Jason. We've been doing that analysis for a number of quarters, quite frankly, we have.
Speaker Change: looked at opportunities to move our cost plus contracts into more of a fixed price.
Speaker Change: Environment. We see the upside as well as we understand the additional risk. What it requires for us, we probably spend more time making sure that we have the frame for what we call service level agreements, very clear agreements with the government of what success looks like measurable.
Speaker Change: We've seen in our civilian business which we see a good portion of fixed price.
Speaker Change: Work in our civilian business that we've been able to not only compete and win that business but also deliver it at higher margins and continue to to be competitive in that space that we feel like we have a lot that we can.
Speaker Change: If you will, transfer from that civilian business into other parts of our organization and other business groups for fixed price.
Speaker Change: And right now, I don't know if we have the assumption that revenue is necessarily decline. I think more we probably see it more as a margin improvement opportunity with the appropriate execution with the appropriate guardrails as it relates to. [inaudible]
Prabu Natarajan: Service-level agreements with the customer, not yet a revenue impact that we see to date. Probably any thoughts you might have there? Hey Jason, the only thing I would add to that would be the transition from cost to fixed price.
will depend on the customer and the current contract vehicles.
If we assume...
Prabu Natarajan: that invasive changes occur in the procurement environment you're going to likely see that transition happen sooner than you know one might reasonably expect.
Prabu Natarajan: On the other hand, by and large, we expect the transition to happen as things come up for renewal as we introduce more fixed price work inside of existing cost plus work, so I think. Thank you.
Prabu Natarajan: that is in our best interest in the customer's best interest. So it's an ongoing process so stay tuned.
Speaker Change: Right. Okay. That's helpful. I appreciate that. And then my follow-up question.
Speaker Change: Just has to do with risks and opportunities around, you know, what we've all been reading in the headlines at DUD.
Speaker Change: where they've got, I think the list is something like 17 protected capability sets.
Speaker Change: and then they're asking the rest of the building to go find some percentage, I think the headline number has been 8%.
Speaker Change: in cuts so that they can reallocate, freed up money through those efficiencies to support those core 17 or so capabilities.
Speaker Change: So I'm just kind of curious, as you assess the portfolio and the things that you have in your pipeline and your bid submit.
Speaker Change: Where the risks and opportunities are there for you, those protected areas, where do you have exposure and where do you think you might have some risks on the areas that are asked, being asked to enter seat cuts. Thanks.
Speaker Change: Thank you, Jason. Thank you for the question and obviously a great one. I'll take the first crack at it and I'll need just time in here. In terms of the protected capability sets, I think part of the message that we're communicating is that if the [inaudible]
Speaker Change: Program is considered mission-critical. Then you're likely to see programs like that continue in an environment like this.
Speaker Change: Justice. And I think that's why, instead of trying to figure out, is there, you know, sort of a capability set match to the existing portfolio, just selecting the right targets, continuing to invest in capabilities that we believe are...
broadly needed across the customer landscape.
Speaker Change: is the right way to do it. So we are focused on making sure that the programs we're bidding on and executing on are mission critical that we could do them effectively and execute well because we all know that in a constrained budget environment or where reallocation decisions get made. Thank you very much.
Speaker Change: that underperforming programs are likely to see the brunt of that. That is just history in this business as you know from a...
Speaker Change: from decades here in the industry as well. So the reality is that's the focus right now. And while we are investing in critical areas that are relevant to the 17 or so critical mission sets, I think our fundamental focus is, are we executing and delivering mission critical capabilities to the customer? So we are executing and delivering mission critical capabilities to the customer?
Speaker Change: and I guess I just summarized that back to the data point that I gave initially, over two-thirds of our ...
Speaker Change: Submit portfolio or pipeline for this year is admission critical, admission IT and enterprise IT capabilities.
Speaker Change: that are driving directly towards mission programs and or the IT infrastructure that is supporting the mission incessant to bleed technical ways and so.
Speaker Change: This is where we tend to look at it in terms of the portion of our portfolio that we are bidding that is driving mission critical outcomes and that we believe will be durable. That funding will continue to be durable and that we're well positioned in the space.
Great, thanks, appreciate it.
Thank you and one moment for our next question.
Speaker Change: Our next question is going to come from the line of Matt Akers with Wells Fargo. Your line is open. Please go ahead.
Matt Akers: Yeah, good morning. Thanks for the question. I wanted to ask about
Hey, good morning. One of the pushes from the government.
Matt Akers: Efficiency Initiative is, you know, we've seen a lot of layoffs of sort of the federal
Speaker Change: exposed to that as a risk in the near term that maybe there are fewer people to support, even if, you know, longer term, you know, potentially maybe there's an opportunity for you to pick up some of that work is kind of how you think about that, that that I see.
Speaker Change: Yeah, hey Matt, I think it's a fair question. Obviously we're tracking all of the various initiatives coming out of Doge and other parts of the administration that affect program by program agency by agency. To date, we've not seen a number, it's been fairly nominal. We have not seen a significant impact. I think we are also prepared and working with our customers directly as their personnel changes or the, let's say, potential cuts in their workforce. How do we support?
Speaker Change: on the ground, with ongoing continuity of, if you will, business operation.
Speaker Change: I think many of us see that as both risk and opportunity, as you mentioned, where we may be the contractor staff that may be part of the ongoing
Continuity of those government operations both mid-term and long-term.
Speaker Change: So we are very close to our customers right now and provided them all the support that they need.
Speaker Change: and understanding what personal cuts mean for them and for their particular. Thank you very much.
Speaker Change: Missions. I would say there's no one unique area that we that has stood out as a specific you know what our footprint is in civilian and in our civilian agencies, particularly we are in mission critical cabinet agencies that have not had major cuts to date.
But we are obviously tracking.
Against That
focused on mission criticality and what agencies were serving and
Speaker Change: and to suggest that there's going to be no impact from any of this would likely be viewed as naive and the reality is there are so many mixed signals we get every day from a variety of different sources that it's hard to react to every one of them.
Speaker Change: So just being able to zoom out a little and think about big picture underlying trends I think it's probably the right posture for us so I think that's why we're back to very much focused on [inaudible]
What we do has to be mercy mission critical? [inaudible]
Speaker Change: to justify the investments we're making in the organization, as well as generating good ROI. Replicability of solutions across the landscape, that is a really important part of the investment thesis we have inside the company. And our view is, if we do those two things effectively and make smart capital allocation decisions.
Speaker Change: We're going to ride this out as uncertain as these times are. So that's sort of how we think about it.
Speaker Change: Yeah, got it. Thanks. I asked you to follow up. So the 2% to 4% organic growth this year. Could you talk about?
Speaker Change: Your backlog, I guess, is down your year of year. We're operating under a CR. I guess how much of that is already in backlog or how much maybe do we need to maybe new new work to come through to get to that that two to four percent level.
Speaker Change: A great question, Matt. I would say, you know, a very high percentage of...
Speaker Change: That two to four, I would say probably north of 75% right now. I sort of rounded up a little bit and say about three fours.
Speaker Change: In Backlog, we are not relying on a kind of new business revenue in the year, I think.
Speaker Change: Our Submit Plan and our Book to Bill for the Year suggests that we expect to have a good year on Book to Bill but overall we're not expecting a ton of incremental revenue. I think you're exactly right to be, you know, tempered in the question, which is in a CR environment how much of a go get is there and I think our operating plan for the year is very much an on contract growth operating plan with some higher targets this year relative even our performance last year which I thought was a pretty good
Speaker Change: on Contract Growth here. So I think that's the name of the game for the near term and hopefully we'll start to see some awards come here over the next couple of quarters and hopefully sets us up for the second half and, you know, into FY Cornice.
Thank you for joining.
Speaker Change: You know, I think that was, I think, probably that was it that was spot on and again staying close to the customers. A very solid Q4 close on program execution and every dimension continuing that into the year and the on contract growth expectation has increased. [inaudible]
Speaker Change: Year over year in this environment, we obviously want to be in the right places that are being funded.
Speaker Change: State-of-the-art capability into these mission areas, and that's probably an area that's another lever that we've been able to exercise over the last couple years, you'll see even more of that this year.
Speaker Change: Yeah, yeah, thanks. If I could do one more, I guess, you know, seasonality you talked about first asking a little bit slower or is there a seasonality within Q1 versus Q2? Do we start out slower and do you think, you know, kind of both quarters will still be positive growth or could we go ahead and negative and then accelerate from there?
Speaker Change: Fair question, Matt. I think, you know, with all of the health warnings that come with quarterly level guidance. And I think we do our best.
Try to estimate what these trends look like.
Speaker Change: I think we're seeing a little more in the way of recompete headwinds in Q1 relative to Q2.
Speaker Change: at the end of Q1 of this year. So in theory, that would suggest that Q2 ought to be better than Q1.
Speaker Change: But candidly with $18 million being 1% to revenue in a quarter, the reality is that's easy to move the dial inside of a quarter and between quarter. So with the caveat that things, you know. [inaudible]
Speaker Change: You know, are going to move around a little bit. I think it's fair to say, you know, fewer headwinds than Q2 than even Q2. Yeah, right.
Prabu Natarajan: But growth in both, I mean the idea of H1 over H2 or H2 if you will over H1 in terms of higher growth, we do anticipate growing throughout the year and combination of how we grow as Prabu has mentioned, as well as we do see some movement to the right on on recompete. [inaudible]
Prabu Natarajan: across the government. And so we're looking at and understanding what that may mean for our year as well as we push out some recompete risk towards the end of the year.
Thank you.
Prabu Natarajan: Thank you, one moment as we move on to the next question.
Speaker Change: Our next question is going to come from the line of Gavin Persons with UBS. Your line is open. Please go ahead.
Hey, guys. Good morning.
Good morning, Gavin.
Speaker Change: Sounds like there is still a lot of uncertainty, and like probably you mentioned the mixed signals and appreciate you guys are being very proactive. Anything specific that gave you confidence to raise the low end of the 26 guidance in light of that?
Speaker Change: I would say here's maybe how we think about this Gavin, I think the signals are very mixed and then we look at what do we actually know as we go into this print and as Tony I think
Absolutely correctly summarized it the impacts of the nominal.
Speaker Change: And then you look back to say, how do we end the year?
Speaker Change: And I think we forget that we grew about a little over 4% in Q3, close to 6% in Q4, and
and so I think, you know, the actual organic growth...
Speaker Change: thesis is intact and you know our teams are doing a good job you know scouring and figuring out how to grow this business organically absent in a new large recompete wins. [inaudible]
Speaker Change: and that OCEG machine is working effectively and that doesn't mean any of this guidance is a gimmick.
Speaker Change: It just means that we are betting on ourselves a little bit to say, can we keep the momentum up and I think we're keen on delivering in a solid OCG and something changes, you know our reputation and we'll be the first to come out and say we're seeing some headwinds but we're not seeing those just yet.
Thank you.
Speaker Change: Great, Dan, I appreciate all the transparency. Does it feel like visibility is improving or day by day that things are getting increasingly less certain?
Dan: Gavin, that's a great question right there and I look, I think we obviously we are tracking this on a daily basis but
Speaker Change: We are, I think whenever messages get compounded or reinforced, you start to feel a little bit better directionally, obviously having a CR in place [inaudible]
for the year, Seth, some expectation. It does. [inaudible]
Speaker Change: Actually offset some of the volatility by acknowledging that we have a CR in place and a CR that has flexibility more than what we've seen in prior years so that I would say is a
Speaker Change: It's a net positive in terms of just stabilizing our environment and helping us
and helping us make good.
decisions going forward.
I think there's education going on. And...
Speaker Change: I think as we engage both with GSA and other parts of the government, we've been able to clarify the work that we do, explain where SAC fits in this ecosystem, explain the mission-cratic criticality of our work as well as some of the technical work that we do to support at an enterprise IT level.
Speaker Change: and I think with greater explanation, it'll start to, if you will, bring down some of the more knee-jerk reactions that all of us have had over the last few weeks. And so I actually feel like it's moving towards a little more.
Speaker Change: Stiftability, not to say there won't be new initiatives that are introduced, but we are seeing at least some coalescing around clarity on the CR, clarity on flexibility within the CR, clarity on who SAIC is engaging with the new administration.
Speaker Change: and as they learn more about who we are, I think it's going to become very, very clear on the mission role we play.
That's great color. I appreciate it.
Thank you, one moment for the next question.
Speaker Change: Our next question comes from the line of Seth Seifman with JP Morgan, your line is open, please go ahead.
Good morning.
Seth Seifman: The prior goal was to increase the share of civil work. However, with the spreading priorities of this administration, does the strategy still make sense? Or will SIC shift the focus more towards defense and intelligence work?
Seth Seifman: I'm sorry, could you repeat the first part of your question? I heard the last part, excuse me, what?
Seth Seifman: Yes, sorry. With the prior kind of focus being on increasing the share of civil work, but with this administration, it's kind of focused on cutting the civil budget and moving more towards the fence. It's SCIC strategy kind of shifting with that administration.
Seth Seifman: Now, we haven't made a shift in strategy to date, and our civilian work is...
Seth Seifman: is just around 20% of our overall portfolio. We have done well at civilian, as you can see, as a reportable segment had a very, very solid year this last year. If you look at the footprint of where we are within civilian, we're in mission critical spaces, around five to six key cabinet agencies that are continually going to be funded, we believe, and particularly in the mission areas where we find ourselves. So, I'm not going to say that we are
Seth Seifman: Bullish, I would say, of course we're watching the market to see if there are any fundamental changes, but right now our strategy was a strategy that focused on a portfolio shift.
Seth Seifman: in those areas and as civilian was a growth sector where we are in civilian we have been growing and we expect to continue to grow if we see a fundamental shift obviously we will pause and re-evaluate but right now we feel like given where we're positioned we'll hold with the strategy that we put in place.
Speaker Change: I've been building on it. How should we think about the segment growth between civil and defense this year and moving forward?
Speaker Change: How's it relative, you mean civil versus our other business groups? Look, I mean, I had a phenomenal year this year. I think I'm sorry.
Oh, yes.
Speaker Change: Yeah, okay, yeah, okay, we're in agreement, great. Civil had a great year and they are part of our overall expectation to continue to grow particularly in the on contract growth arena. They also have a pretty significant part of our pending award.
Pipeline as well or Backlog as well
Speaker Change: I think that when we look at it, we do expect that the...
Speaker Change: Growth rates relative to the market will be higher in defense and intel than in civilian on the growth side in terms not our growth rates with the market and how spending will occur but for civil there's always the conversation about how we grow on contract.
Prabu Natarajan: How we have a significant pipeline there and how we are positioned in mission critical areas. So my expectation is not a fundamental mix shift between civilian and defense in terms of our expectations of growth. The only thing I would add is, as you know, we do not provide guidance at the segment level.
Prabu Natarajan: and I think it's fair to say that we see good prospects for growth in both of our reportable segments.
Speaker Change: Three, the re-compete headwinds and the decision to walk away from the low-margin computing store is actually in our defense business.
specifically Air Force and Space and Air Force respectively.
So, I think...
Speaker Change: If you sort of nominally adjusted for those headwinds, I would say both seconds are on the ground.
Speaker Change: The reality is, I think we do have some known headwinds in defense and intel, and that's likely going to impact the relative growth rates, which obviously will report as we cycle through the air, but as you know, we do not provide specific guidance on the segments themselves. [inaudible]
Great. Thank you.
Speaker Change: Thank you and one moment as we move to the next question.
Speaker Change: Our next question comes from the line of Ellen Page with Jeff Rees. Your line is open. Please go ahead.
Hi guys, thanks for the question.
Speaker Change: Maybe just on a contract basis. I think you had a favorable outcome on the FAA test protest during the quarter. How are you thinking about that contract going forward? And more broadly with the FAA, how are you thinking about the funding support there given it's become more of a priority under the current administration? Thank you very much.
Speaker Change: Okay, Ellen, thanks for the question. Thanks for joining the call.
Speaker Change: Decision was, and so we're going to continue with the expectation that we will be able to continue to deliver against that very important program for FAA. I had
Speaker Change: Opportunity to spend some time with Secretary of Transportation last week and can see his.
Speaker Change: His focus, Secretary Duffy, on all things related to FAA and modernization and that program is I think critical to that effort so...
Speaker Change: CTS Program, and, you know, I think it's fair to say that we should expect to see higher volumes specifically from that program because we do see that area as a priority for the FAA beyond ATIPS.
Speaker Change: Great, thank you. And then on the S3I Recompete that you won after close, I think that's the first of four. Recomputes you had or contrast you had. How are you thinking about the rest of that program? Yeah, I am.
Coming up for a bit in the next
Speaker Change: Yeah, I'll take a fair question, Ellen. I remember this. This is like deja vu. I feel like Bill Murray, a little bit like that. So, so we do have all four of them over the next several years. There's one that's probably furthest out in, you know, beyond FY28.
Speaker Change: The next two are in various levels of shaping and procurement. We are obviously focused on ensuring that what we deliver is mission critical and that we can improve our execution on a day-in-day basis. So I would say fair to say that the procurements are generally staying on track.
Speaker Change: So I would say over the next couple of years you'll see at least two of those four programs, you know, come up or we can do it.
Speaker Change: and all of the, Ellen, all of the indications on our program reviews are that we are executing super well against those programs now from customer's app to our day-to-day requirements. And so we feel pretty solid about our execution and our opportunity to be able to.
to hold on to those programs going forward.
Great. Thank you all. I'll hop back in the queue.
Thank you, one moment for our next question.
Speaker Change: Our next question is going to come from the line I've got them with TD Cowan. Your line is open, please go ahead.
Hey, good morning guys.
Good morning
Speaker Change: I wanted to ask if you could give us some anecdotes on the ground of dimensions, kind of nominal impact.
Speaker Change: from the administration change over in Doge. How does it manifest? How has it manifested?
across your business, if at all.
Speaker Change: Well down, I think we could all acknowledge that we've seen delays in different parts of the business, right? So
and having some kind of financial impact.
Speaker Change: Physicians, there's a delay factor and I think those are the two that are probably most notable and the need and I super proud of our team, the entire team and my leadership team in making sure that all of the incoming. Thank you very much.
Speaker Change: Leaders understand what FACIC does in the mission criticality of what we do.
Speaker Change: Pick out some. The only thing I would add to that would be, you know, if we think about what seems to get some level of scrutiny.
Contracts that are viewed as consulting arrangement.
Speaker Change: where people fly in for, you know, two hour meetings and fly out.
Speaker Change: I think those are likely to get a little more attention is I think the folks in the government are recognizing, you know, that's generally not what we do. We are mission focused with people that have hands on keyboard.
Generally not a core part of our business. [inaudible]
Speaker Change: I think the other thing that you'll likely see is, is there a focus on simply, you know, buying and selling at higher profits to the government. In other words, think of these as sort of your fairly typical will be stellar agreements.
Speaker Change: consumption patterns inside the government in a way that is cost effective for the government long term. I think there's a growing recognition of that. The uncertainty also manifests in, you know, I would say very conflicting emails, you know, five of them over the course of, you know, 48 hours and just knowing not to react to that or any one email and just saying can we just keep our heads about us and sort of navigate the environment together with our customer who frankly also have the same level of uncertainty. [inaudible]
Speaker Change: So that I think it's an environment that is uncertain and I think our priorities to not overreact and make sure that we're doing the right things for the nation long term.
Speaker Change: That's very helpful color. I don't want to put words in your mouth, but it sounds as though what you're describing as more a function of an administration change versus any sort of intervention on any given contract. [inaudible]
Speaker Change: to take away work or end work. You're not seeing that.
Right. You're not seen. All right. So.
Speaker Change: Yeah, unfortunately, that probably would be putting words in my mouth. So I would just say that it's by and large, you know, folks understanding during transition.
Speaker Change: and because of the change out in personnel, we're seeing, you know, a little bit of catch up in terms of just the base level of knowledge on programs. And I'd say the caveat on the second part of your question is, you know, we just don't know what we don't know, and we're just watching to see how the environment plays out. Let's go.
Yeah.
Fair enough, that's helpful. One last one for me.
Speaker Change: Obviously, this also, this relook at by Doge and the lead administration could actually be beneficial to the industry.
via more outsourcing.
Speaker Change: Eventually, I'm curious also on the SBA side, have you seen any movement effort to kind of?
Speaker Change: Maybe lower the threshold of small business satisfies that can enforce those contractors like yourself to sub out a lot of work.
Speaker Change: or to sub as a, you know, to a prime at the small business center side. Any movement to put policy-wise?
Speaker Change: That could actually be beneficial to larger services firms like yourself.
Thank you.
Speaker Change: Yeah, but yeah, got the SBA set aside program has already gone through a number of if you will reducing of the threshold for small business set aside. I believe 5% with the last that I saw and that's still being discussed with the new administration.
Speaker Change: So we're always tracking this sort of what the threshold looks like. I think the more profound part of your observation and question is
Speaker Change: What are the opportunities for a company like ours in this new environment and a combination of conversion of contract type which has always been an interest to us in certain areas where we can't and sometimes inserted fixed price line items within existing cost plus but the idea of being able to move to more favorable contracting is we see as an opportunity. Thank you very much.
If you will, reductions in force [inaudible]
Speaker Change: and ongoing government operational continuity are at risk that we could be a partner to support in that regard, the opportunity to use more of our commercial operating segment to, with new technologies coming in from different parts some.
Speaker Change: Some from the sort of defense side and other sectors we want to be able to use what we have been building in our portfolio to integrate some of the more state-of-the-art commercial technologies that exist.
Speaker Change: and we feel like we're an integrator that's really well positioned to do that so there of course we don't want to be bullish about this environment from the perspective of there's no risk there's absolutely risk.
Speaker Change: and there is volatility. And yet, we do see opportunity in every conversation we have, balances those two, and gets proactive about being able to speak with our customers about opportunities even before they fully materialize.
Speaker Change: I would say it's a balanced environment still, eclectic every day is a new set of conversations and a new set of emails to Prabu's point, but it's going to be how we manage ourselves through this.
Speaker Change: and I feel very, very fortunate to have a team on the ground as well as here surrounding them are executive team that is fairly unflappable in this kind of environment. We've been there, we know how to operate through it.
Thank you very much, Dave. Good luck.
Thank you. One moment for our next question.
Speaker Change: Our next question is going to come from the line of David Strauss with Barclays. Your line is open. Please go ahead.
Speaker Change: Hi, good morning. Thanks for taking the question. This is Josh Korn on for David.
Speaker Change: I wanted to follow up on the last question. The last quarter you highlighted, I think it was 11% of the business that's professional services related. Do you view any of that portion of the business at elevated risk given the current environment? Thanks.
Speaker Change: Hey Josh, maybe I'll take the first part of it. So that 11% you're exactly right, that includes our professional services and embedded within it is actually the core part of our CEDA work.
Speaker Change: And so as we think about the 11% there, our CEDA portfolio has remained relatively stable here to all of the changes. And so, you know, not a lot of updates there. And I think you're just we're just prepared to respond to the procurement environment, but, you know, our CEDA portfolio, as you know, is top top notch and that team's doing a fantastic job. [inaudible]
Speaker Change: continuing to drive real value for our customers. And to Prabu's point, our understanding, Josh's, from our own customers here, is that our CEDA capability we provided deemed as mission critical by our customers.
Speaker Change: So we're not as concerned about that part of the portfolio given the designation that our customers have given us.
Speaker Change: Okay, great. Thanks. And then just wanted to ask about recompete overall, you know, if you could give us any more specifics on where you're running relative to the target and what you're assuming for win rate, you know, next year and the year after. Thanks.
Speaker Change: Yeah, I'll take maybe the first crack at this one and Toni just now so I would say they are not quite yet where we want them to be.
Speaker Change: but it is our and the team's full expectation that we will restore recompense.
Speaker Change: to the high 80 to 90% range in relatively soon.
Speaker Change: Time. So I would say that's the going in assumption our new business windrates continue to be pretty good. And so as I've said multiple times we think about wind rates on a blended basis. And anytime you bid, that's called a 28 billion and your blended wind rates are 30% or 40% that should set you up for a good bookings.
Speaker Change: We've also indicated, as you know, Josh and our own narrative here, that our headwinds coming into this year are less than what we came into last year with, and that those headwinds include program.
Speaker Change: Transitions and Recompete. So we see that if you will, the trend is improving year over year. We're not where we need to be, but we are better than where we were.
Speaker Change: and we are identifying and we've also said the environment that we have right now.
Speaker Change: May be one where there may be some movement right against some recompense as we look.
Forward as the government is determining what.
constitutes their critical portfolio going forward so we are.
Speaker Change: We are focusing on program execution, heads down, meeting all of our and exceeding all of the customer requirements.
Speaker Change: because as you know, the best way to win in the recompete spaces to deliver super well and bring innovation to that delivery. So the more we track that and the more we see that in our outcomes, we feel better about our recompete prospects going forward.
Great, thank you.
Thank you and one moment for our next question.
Speaker Change: Our next question is going to come from the line of Tobey Sommer with true Astroliner's Open. Please go ahead.
Speaker Change: The Recompute Winrate, and maybe a little bit of a fundamental driver there. How are the companies? Seapar, scores, tending? In particular, on your larger programs, because one would think that there's a probably a pretty strong connection between that and your expectation for improving Winrates.
Hey Toby, thank you for the questions. We are...
Speaker Change: Review, and I think we talked about a few quarters ago that we had put in more rigor in our program review process.
Speaker Change: to not only look at CPAR scores but to ask a broader set of customers for their feedback on the program, so expand the customer base as well as to ask more questions about that delivery to include and most particularly around innovation.
Speaker Change: So those were changes we made to our process and what I feel better about than I did a year ago is that we're asking broader set of customers.
Speaker Change: We're asking about the innovation that's being delivered and both of those we found as a correlation to possibly having fairly solid customer set prior or customer response prior but not having that fully correlate with a recompete win.
Speaker Change: So, we feel like we're doing, we've got all the levers and inputs and those outcomes from...
Speaker Change: and expanding the customer base and having more innovative conversations around innovation. We think are starting to show up, if you will, in results positive customer feedback. And when they're not positive, we're being able to assess that and quickly intervene and introduce more from the portfolio. So, I think it's he-pars is absolutely a critical metric, but I think getting beyond to a broader audience and having a broader conversation is what we see as our way
Speaker Change: AFU to proofing our position on recompense going forward. Toni, that was great. Tobey, the only other thing I would add is, you know, there's almost a counterintuitive correlation between C-PAR scores and recompense going to end rates. And that is because...
Speaker Change: It's customers that put us to recompense cycles, expect real innovation to be delivered during the program [inaudible]
Speaker Change: and so I think it's only set with the Enterprise Operating Model, the focus there around ensuring that we are bringing day-to-day innovation is going to be really helpful. The other thing that does show up sometimes on recompenses, how well you begin a program.
Speaker Change: and customers have long memories as they should. We do as well, and making sure that we transition programs effectively, and I think with the enterprise operating model, we've set up transition teams, and most recently on our Air Force nor at night program, we did a program review very recently, and that the team's done an outstanding job relative to what the customer was getting from the prior incumbent on the program. So I say those are really important things. Again, heads to the ground. Do the right-
and Joseph DeNardajan.
Thank you very much. My follow-up relates to NASA.
Speaker Change: Could we get your comments on what you're hearing from that customer and...
Just given the proximity
Speaker Change: that DOGE has some business relationship with that customer, curious whether this has been an area of more stability or more relative volatility relative to what you're hearing from other agencies. Thank you.
Speaker Change: Okay, Tobey, we haven't heard anything uniquely from NASA. We're not overly concerned of our positioning there. We have not.
Speaker Change: had signal of greater volatility in the spaces where we are.
Speaker Change: As you know, we do a bit of enterprise IT support there at NASA. We have some parts of our pipeline. We've looked at our new business, both with pending award as well as what is moving forward that we would be bidding this year. We've got great partnerships in place with many of the. [inaudible]
Speaker Change: The sort of tech players that are looking at NASA. And so I don't see us as handicapping that business in any unique way based on any signals we're getting at this point.
Speaker Change: Thank you. Thank you and one moment for our next question.
Speaker Change: We have a follow-up question from the line of Collin. Can field with Cantor Fish Gerald. Your line is open. Please go ahead.
Speaker Change: David Clarifying, Seth Seifman, if you can clarify how much of that gets booked in fiscal
Speaker Change: I'm sorry, I didn't know what it was. It was a little weird. Hey Colin, maybe I'll take a crack at this. I think, you know, maybe a little bit of a, you know, sort of a history
Speaker Change: And we still have a few quarters left of the current program. This was exactly what happened when we transitioned from the prior AMCOM program to SRI. So SRI into the next avatar of these programs is going to look the same.
Speaker Change: As we sit here, obviously, we'll have our bookings decision to make in Q1 when we report. Like we do always, we look at the $1.8 billion on the program as a representing perhaps the running rate on the current program, especially has grown pretty nicely over the last few years as the team's done an amazing job.
Speaker Change: and the 1.8 billion reflects the run rate on that program.
Right now with some room for potential improvement.
Speaker Change: What that means for the net booking as we, you know, take some, take some factoring on the previous
Speaker Change: Okay, I've got it. I appreciate that math. Um, and then maybe just on the prohibit marks, it looks like the margin of group is driven a little bit by more focused investing. Um, you know, maybe biz dev or this kind of general cost of program improvement.
Speaker Change: So maybe talk a little bit about kind of where you're focused on driving savings [inaudible]
Speaker Change: and how you're balancing that versus investing for growth and then just one kind of third part there is maybe talking a little bit about the algorithm for margin expansion in your backlog and whether that's more.
Speaker Change: Hardware-driven and systems engineering are more enterprise IT and kind of more expertise typework.
Thank you.
Prabu Natarajan: Yeah, why don't I take the first part then? I'll pass the algorithm question to Prabhu. I'll have to pass other one of the questions to Prabhu anyway.
Speaker Change: So, look in terms of the margin side. We are looking at, we've obviously got a very sharp eye to any internal investments.
Speaker Change: And yet in the same context, we are also looking at as we've talked about the margin improvement that we have in our bid pipeline. So we're incrementally improving on what we're bidding. We are driving an underlying margin in our program execution, which was evidenced at Q4. [inaudible]
Speaker Change: We're looking as I said at Investments and we're also proactively suggesting we're appropriate conversion on contracts that we have currently that may drive a more creative position moving into more fixed price contracting and I assume that to be a gradual process and to be customer connected that's not something we can do you know laterally. [inaudible]
As always, we are tied on our cross [inaudible]
Speaker Change: Management and do a phenomenal job. I think the enterprise operating model has helped us see and understand in our program reviews, very solid cost management. Thank you very much.
Speaker Change: Fundamental Health of this business is improving. Order of the quarter, we've seen that, and that includes the margin profile of the business on the algorithm side. Thank you, Tony. I think the way we're thinking about, you know, sort of. [inaudible]
Speaker Change: you know, margin expansion opportunity is, you know, as we're bidding.
Speaker Change: You know, things that are more accrued with the pipeline, we are also requiring folks that are bidding on recompedes to more margin rates up. So we're seeing that impact both inside of the things that we're competing on, recompeting right now, and the new business front. Clearly, I think we have chosen to remain as it like. [inaudible]
Speaker Change: and we are not going to trade margin expansion for hardware intensity or balance sheet intensity, and that philosophy, I think, and Toni's set it multiple times, I think we are going to remain asset light in the way we approach it.
Speaker Change: So we're trying to do it in the good old fashioned way, which is how do you get 10 basis points, 20 basis points out of every single program that are
Speaker Change: going up for recompense and squeezing a little more margin. So, focuses, mission IT and enterprise IT. Our point of view is that if we are delivering real innovation to customers.
Speaker Change: Customers are actually open to having discussions around fee rates and transitioning certain
So I think that's really the focus which is...
Speaker Change: It will be foolish to just cut costs for the sake of cutting costs [inaudible]
Speaker Change: and then stifling the growth engine inside the company. And that means, you know, every spring we have the conversation around, are we, you know, right sizing some things and making sure that we don't stifling the growth engine for the company is one of the most important priorities that Tony and I and the leadership team have going through the cycle because that would be the easiest thing to do and it's probably the worst thing we can do on a long term.
Speaker Change: So that's the balance we're trying to strike. We don't always get it right. I know I'd screw up all the time, but the reality is that's what we aspire to do.
Speaker Change: I've got it. And the middle and last one on SCSC is a lot of I think focus on kind of efficiency and thematic stuff on the call. So maybe focusing more on SCSC, but the space
Speaker Change: This is an opportunity to leverage the digital engineering investments on the side of the business to do.
Speaker Change: You know, not so much hardware, but more to kind of like the back end of the hardware. So maybe talk a little bit a little bit about kind of how you view SAIC's position and kind of spacecraft designs, spacecraft integration and the like. [inaudible]
Acid-like integration. So,
Speaker Change: Somebody else's payload, somebody else's bus, and focused on, how do we put that together in a software enabled way that focuses then on integrating the work and focused on the data that comes out of the platform?
Speaker Change: That's how we're thinking about that part of the business, so I don't expect us to become a systems integrator at scale building hardware for space. That is modern business.
Speaker Change: But leveraging digital, I think he brought out correctly digital engineering and the number of them and we highlighted these differentiators even last year in our overall investor conversation.
Speaker Change: Digital Engineering is a core capability that the space and intel group are using.
Speaker Change: to try to drive that integration going forward. And look, we've got a few programs. You look at ground-based modernization. You look at this.
Speaker Change: Production satellites. All of that to Prabhu's point is not about us being a builder of it's an integrator across and that's where we stay in our lane and we bring I think great value.
Speaker Change: on it. I appreciate the color as always and thanks for your questions.
Speaker Change: Thank you. Thank you. This is going to conclude today's question and answer session. Ladies and gentlemen, this is also going to conclude today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.
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