Q1 2026 Science Applications International Corp Earnings Call
Okay.
Good day, and thank you for standing by welcome to the <unk> S. A I see fiscal year 2026 quarter, One earnings conference call.
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Again.
Speaker Change: Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Joseph de Nardi Senior Vice President Investor Relations and Treasurer. Please go ahead.
Speaker Change: Good morning, and thank you for joining Saic's first quarter fiscal year 2026 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>.
Speaker Change: Our Chief Financial Officer.
Speaker Change: We will discuss our results for the first quarter of fiscal year 2026 that ended May 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.
Speaker Change: You to our SEC filings for a discussion of these risks, including the risk factors section of our annual report on Form 10-K, we may elect to update the forward looking statements at some point in the future, but we specifically disclaim 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 will focus my remarks on an update of our current operating environment, followed by a review of our business development and financial results in the quarter.
Speaker Change: As I did last quarter I want to start by thanking our employees for their dedication to our mission and their support of our customers.
Speaker Change: The operating environment has stabilized in recent months and recent budget developments provide improved clarity around future spending we continue to see higher rates of turnover among our customers contributing to procurement delays in award timelines moving to the right the year to date net impact to our financial results from the government's efficiency.
Speaker Change: <unk> remain nominal with an estimated annualized revenue impact of less than 1%.
Speaker Change: We expect conditions to remain very fluid over the next few months as budget negotiations play out and agencies continued to implement the strategic priorities of this administration.
Speaker Change: Our initial assessment of the President's government fiscal year 'twenty six budget request is that the overall funding levels and strategic priorities create both opportunities and potential challenges, but on balance are supportive of our growth strategy. We were encouraged to see a solid requests for defense spending with a proposed increase of 13%.
Speaker Change: <unk> reconciliation and political support to provide additional funding in excess of that requested.
Speaker Change: As the administration prioritizes spending with a focus on readiness, we do expect certain branches of the Dod to see stronger budget support than others with a particular emphasis on the Navy Air Force and space Force, while the army may face some more challenging budget outlook. We believe the balance we have across the department of defense with roughly comp.
Speaker Change: Levels of revenue from these four branches positions us well to navigate these uncertain times.
Speaker Change: The mission criticality of our work as evidenced by the durability of our portfolio throughout those related scrutiny in recent months and our ability to support many of the department of Defense's 17 top priorities as detailed by Secretary headset, we have key programs and demonstrated technical leadership in a number of these.
Speaker Change: Most notably southwest border activities Homeland missile Defense, Virginia class submarines priority critical cyber security core readiness and combatant command support agency funding. The strategy, we began implementing roughly 18 months ago to pivot our portfolio to mission and enterprise.
Speaker Change: Aligns with the priorities of the new administration, and the acceleration of technology adoption to increasingly validating and efficiency. The space development agencies. Recent decision to include emission integrator role for tranche three after having not done so for tranches wanted to highlights the importance of integration to achieving cod.
Speaker Change: Plex outcomes on schedule.
Speaker Change: <unk> was awarded this new cost plus program roll in Q1, as part of a $55 million contract, where we will leverage our proven expertise in mission integration and digital engineering to dry program success at speed.
Speaker Change: Regarding non defense budgets the areas of focus for SAIC at our five largest civilian agency customers, we are well supported including over $1 billion of additional budget for the department of transportation to fund improvements at the FAA over $40 billion to the department of Homeland security focused in part on procuring.
Speaker Change: Advanced border security technology stay.
Speaker Change: Stable funding for our department of state operations as evidenced by the recent two year extension awarded for our Vanguard program.
Speaker Change: Specific support for technology improvements to drive greater efficiency at the department of Treasury.
Speaker Change: And over $1 billion for the Department of Veterans Affairs to accelerate the modernization of health Records and simplification of legacy it systems.
Speaker Change: As a reminder, annual revenue from these top five agencies represents over 70% of total revenue for our civilian segment.
Speaker Change: I will now provide a review of our first quarter business development and financial results. We delivered net bookings of $2 4 billion for a book to Bill of one three which included securing a key recompete. The five year system software lifecycle engineering contract for the Army and an eight year. It services program for the pension.
Speaker Change: Benefit Guaranty Corporation. In addition, subsequent to quarter close we have received awards with a total contract value exceeding 2 billion, including a two year extension on our department of State Vanguard program and a large new business win with the Air Force.
Speaker Change: While certain of our quarter to date awards remain in the protest window and may not be reflected in second quarter bookings as a result, we are pleased with the progress we're seeing in our business development efforts in.
Speaker Change: In the first quarter, we submitted proposals with a total contract value of $7 billion.
Speaker Change: And we're seeing continued strong momentum and submit volume in the second quarter and expect to reach approximately $28 billion to $30 billion for the full year, our backlog of pending awards remained steady at approximately $20 billion and provides us with good line of sight into continued improvement in bookings as we target.
Speaker Change: One two trailing 12 month book to Bill in the coming quarters.
Speaker Change: While our pipeline and backlog of submissions continues to support reaching this target by the second quarter. It is reasonable to assume that procurement delays could lead to this moving to the right by one to two quarters. We do not expect these potential award delays to materially impact our revenue performance in fiscal year, 'twenty six or fiscal year 2000.
Speaker Change: Assuming the broader operating environment remains stable.
Speaker Change: I will now review, our first quarter financial results.
Speaker Change: We reported revenue of $1 877 billion representing growth of approximately 2% due to the continued ramp on new and existing programs, including T cloud, <unk>, and GMAT, which offset lower revenue from contract completions and transitions.
Speaker Change: Adjusted EBITDA in the first quarter was $157 million, resulting in an adjusted EBITDA margin of eight 4% margin performance was impacted by the typical seasonality of investments, including our healthy submit volumes and higher costs on a fixed price program in our space business.
Speaker Change: Subsequent to quarter close we received favorable option period extensions on this program and moved into the Sustainment phase of this program, which we expect will contribute to improved financial performance going forward adjusted diluted earnings per share of $1 92 with.
Speaker Change: Was flat year over year, as a lower share count offset a higher tax rate and lower adjusted EBITDA in the quarter free cash flow was negative $44 million and was impacted by the timing of receivables on two programs, which resulted in approximately $75 million shifting out of the first quarter. Shortly after quarter close we caught up on <unk>.
Speaker Change: Of those two programs are making progress on the second and do not expect this to impact full year guidance the.
Speaker Change: The delays experienced are not related to program performance, but rather to new personnel and processes in place at certain customers as we navigate these uncertain times with them.
Speaker Change: Overall, we're off to a solid start in fiscal year 'twenty six with palpable enthusiasm for the momentum we are building across the company. We expect to make further demonstrable progress against our strategy to position SAIC for sustained profitable growth in the coming quarters and look forward to sharing our results with you I'll now turn the.
Speaker Change: Call over to PREPA.
Speaker Change: Thank you Tony and good morning to those joining our call. My remarks today will focus on our outlook for FY 'twenty, six and an update on our capital deployment plans.
Speaker Change: Our guidance for revenue in a range of $7 6 billion to 775 billion represents organic growth of approximately two 5% at the midpoint. We continue to expect growth of 1% to 3% in the first half of the year and 2% to 4% in the second half with the improving growth driven by new.
Speaker Change: Business ramping up in a more modest headwind from contract transitions in the fourth quarter.
Speaker Change: Should the ramp on new business moved to the right as a result of the macro environment more of our growth in FY 'twenty six will need to come from on contract growth. This outlook is consistent with our prior framework.
Speaker Change: Reiterating our guidance for adjusted EBITDA and adjusted EBITDA margin.
Speaker Change: First quarter margins were impacted by the timing of investments that we typically see higher bid and proposal costs related to procurement delays and an unfavorable profit adjustment on a fixed price program and our space business as Tony mentioned subsequent to quarter close we received an award exercising option periods for this fixed.
Speaker Change: Price program as it transitions into the Sustainment phase over the coming weeks, which along with the execution initiatives, we've implemented should help improve margins going forward.
Speaker Change: While we have some work to do to offset the first quarter headwind from these items, we remain focused on executing and delivering on our full year margin guidance of nine 4% to nine 6% as we've signaled before our flexible cost structure permits us to calibrate our spend in line with the macro environment.
Speaker Change: We are reiterating our full year adjusted diluted earnings per share guidance of $9 10 to $9 30, which assumes an effective tax rate of 23% and a weighted average share count of approximately $47 million.
Speaker Change: Our free cash flow guidance of $510 million to $530 million equates to approximately $11 per share of free cash flow. Despite <unk> free cash flow being impacted by slower collections on two programs, we expect trends to improve into Q.
Speaker Change: As a reminder, consistent with FY 'twenty five the timing of free cash flow in FY 'twenty six will be impacted by one additional payroll cycle in our first and third quarters, which results in approximately a $125 million of cash outflow in each quarter.
Speaker Change: With regard to capital deployment, we repurchased approximately $125 million of shares in the first quarter. We continue to target annual repurchases in a range of $350 million to $400 million with additional capacity of $150 million to $200 million for either capability focused tuck in M&A.
Speaker Change: Or incremental share repurchase we remain well ahead of our three year capital deployment commitment on repurchases and have ample capacity for capability based tuck ins with that I will turn the call over to the operator to begin Q&A.
Speaker Change: As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
Joe: Joe Your question. Please press Star one one again, please standby, while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Gavin Parsons from UBS.
Gavin Parsons: Hey, Thanks, guys good morning.
Speaker Change: Good morning Gabe.
Speaker Change: You mentioned the operating environment has stabilized, but still seems to be a lot of new directives coming out of say the Dod in particular, so just hoping you could.
Speaker Change: Just give us an update on what youre hearing from our customer and some of the budget priorities. Thanks.
Speaker Change: Yes. Thank you for the question David So as we talk to the operating environment I would say the things that have stabilized as you know we came through the <unk>.
Speaker Change: Last few months with a focus from GSA and an audit relative to.
Speaker Change: The dose effort and that we believe this has settled out we will able to respond to GSA identified the programs and the mission critical role that we've been playing and quite frankly have had very few conversations since.
Speaker Change: Submitting all of our information and I think we got to the right place. So understanding the role that SAIC is playing at the agency level.
Speaker Change: We do have significant turnover of personnel occurring in the agencies, particularly acquisition personnel, which has been more dim.
Joe: Demonstrable I think than maybe initially understood in terms of how many acquisition personnel are part of the turnover process. We've had some new processes at the agency's relative to funding and how they engage and move forward and basic contracting processes as well as <unk> seen obviously.
Joe: Some executive orders from Department of Defense sex, J, Hey, Seth relative to ongoing focus on lease Ality and mission criticality of the work and how they are looking to move forward with commercial technology, which again, we would argue aligns with the strategic pivot we've been doing on our portfolio towards more enterprise mission.
Joe: <unk> solutions and how we deliver those I would say, we're still obviously assessing all of the most recent.
Joe: Executive orders that are out but.
Joe: But on on par, we believe that it aligns more with our strategy going forward and we are focusing on how we bring those solutions faster and faster to the agency customers.
Joe: Have you seen the procurement environment get more competitive as maybe the bid processes become more disruptive.
Joe: I think it's a fair question on competitiveness as you know we've been amping up our submissions and being very selective in terms of.
Joe: Being on strategy with the bids that we've been making and as we become more and more focused on mission enterprise. It I fully expect a more competitive environment not just as a function of the new administration, but the type of work that we are actually bidding.
Joe: That said.
Joe: With the higher rate of submissions and we look at our historical win rates.
Joe: Even if at which have tended to be on the new business side higher than the industry average, but even accounting for any slip in those back towards an industry average we feel confident that we have a submission pipe pending award pipeline and win rate applied to drive the growth that we've been we've been.
Joe: Communicating to the street and the guidance that we've offered.
Speaker Change: Hey, Kevin the only thing I would add to that would be we are.
Speaker Change: We're not seeing.
Speaker Change: Sort of LPTA type trends.
Speaker Change: Procurement is still seem to be best value and Thats, where the focus is so some price pressure, which is typical to see but but not back to kind of the 2012 2013 to circa.
Speaker Change: Okay. Thank you Tony a problem.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Gautam Khanna from Cowen.
Speaker Change: It was on mute there guys.
Speaker Change: I appreciate the comments. This morning I was curious if you could just remind us of what the known headwinds are now that Vanguard Scott got an extension.
Speaker Change: As we look out over the next 12 to 24 months the firm contracts that are either being <unk>.
Speaker Change: Broken up as you recompete them or things that just the known headwinds from losses already incurred.
Speaker Change: If you could just frame that.
Speaker Change: Nice to hear from you. This morning, Yes, no worries, let me start and I think probably we'll round out.
Speaker Change: As it relates to headwinds on the Recompete side.
Speaker Change: You really hasnt changed since last quarter, we've got as you know our NASA program lots from last.
Speaker Change: From last year that will that will round out in third quarter of this year that sort of are only known recompete headwind of any meaningful size. We also as you know made the conscious decision to no bid or a lower margin cloud one program and.
Speaker Change: The headwind there is reflected.
Speaker Change: And our Q1 results.
Speaker Change: Got some increased modestly in the second quarter, and then will stabilize throughout the rest of the year and look at an annualized sort of $200 million of run rate there, but that was a conscious decision to go.
Speaker Change: More strategically in our cloud services area outside of that we don't see any known Theres no known recompete risk.
Speaker Change: As you as you know we had we filed a pre award protest on one program that was announced recently and so we're not in a position to comment on that particular program. However that program. We did get a six month extension interesting Lee and we.
Speaker Change: We don't see that having an impact on our FY 'twenty six financials. So when I look at those three areas I don't see.
Speaker Change: Any impacts uniquely from what we have already communicated to the street.
Speaker Change: That was right on Tony.
Speaker Change: And caps, which was the last of the NASA losses left out at the end of Q3.
Speaker Change: Should be less of a headwind heading into Q4 of this year, that's really the only known one aside from the items pre award protest, which is unlikely to really impact.
Speaker Change: This year's revenues.
Speaker Change: Got you and that mentioned in the.
Speaker Change: I'm sorry, it broke late in the earnings statement I just wanted to highlight that we did mention and we want to be cognizant of with some of the Dod.
Speaker Change: Conversations that happened as well as the Army transformation initiative that was launched that we do see across our our dod's sector that there will be places a priority and the prioritization that we are tracking very directly.
Speaker Change: So in terms of a headwind I think our army business, we've been looking at the impact there, but we are also very well positioned within our Air Force Combatant Command Navy and space and Intel businesses to offset any challenges there.
Speaker Change: That's helpful. Thank you and just on the.
Speaker Change: The cost overruns that you guys described in the prepared remarks.
Speaker Change: Could you could you frame the nature of that and how.
Speaker Change: You mentioned the work's been extended.
Speaker Change: How comfortable are you on kind of recovering from the level at which you have the negative EAC.
Speaker Change: Yes, so I think again I'll start I'll answer probably has some comments here as well.
Speaker Change: Look this is a program a fixed price program of development protect development program with the space Development Agency, where it is fairly unique across our portfolio.
Speaker Change: Nature and the complexity of the work we're doing here.
Speaker Change: And we have seen some cost initially driven by our some challenges on the tech development.
Speaker Change: Phase of the program. However, we do feel good about the progress we've made on the technical side and the feedback we've had from the customer relative to that progress.
Speaker Change: We've got an EAC thats captured all of the additional cost required to get us into the Sustainment phase over the next few months.
Speaker Change: And as proud of and I, both mentioned in our remarks option period extensions that we've received most recently gave us some relief in terms of other hardware delays and things we've seen that have been outside of our control of the program that those will be addressed so going forward as we look at our Q1 I would say it was more anomalous versus indicative of a concern with that.
Speaker Change: Program.
Speaker Change: We are doing work quite frankly that we're very excited about for SBA.
Speaker Change: And there is some additional profitable opportunities with that work. So we feel like we have rights right sizing the ship, obviously, we're tracking it very very.
Speaker Change: Closely in a very detailed way, but we feel like we've turned the corner.
Tony: That was perfect Tony.
Speaker Change:
Speaker Change: This is somewhat unique but program for us as we're sort of building the ecosystem of applications that can be deployed on our bid.
Speaker Change: And I think as Tony said, we've got a good handle on the baseline and we do expect to get into Sustainment in the coming weeks. So the active core development part of it is.
Speaker Change: It's coming to an end.
Speaker Change: It's getting a lot of time from the management team as you can imagine.
Speaker Change: We're doing everything we can to get into the Sustainment phase, we do expect to get healthier on the program.
Speaker Change: And we do believe the EAC adequately captures the remaining risk over the next couple of months on the program as we are in the development phase.
Speaker Change: Thanks, guys.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Jason Gursky from Citi.
Jason Gursky: Hey, good morning, everybody.
Speaker Change: Tony Good morning, Yes. Good morning, you mentioned, both civil and Army during your.
Speaker Change: Prepared remarks, <unk> got five business leaders or force focused on the army.
Speaker Change: Navy in the civilian business can you just maybe just kind of do a walk around the world here and talk about the atmospherics.
Speaker Change: Each one of those end markets so to speak.
Speaker Change: You mentioned the fiscal 'twenty six budget showing some.
Speaker Change: Support in some areas you mentioned the civilian seven.
Speaker Change: 70% of your program do you feel like you've got good support for but maybe just go through each one of.
Speaker Change: Those end markets, there and talk about the risks and opportunities for each.
Speaker Change: Sure. Thank you Jason for the question, so, let's let's start with our civilian business as you know we report that separately.
Speaker Change: We've been focusing on really over even over the last year as we said the civilian business was a critical one for US we want to see further growth in that business and we have seen quite frankly growth in that business, we expect margin improvement in that business as well and part of that's because of the footprint that we have where we're located the agencies were.
Speaker Change: Located in where the funding we see going towards the agency and the work that we're currently doing so if we look at work.
Speaker Change: The Ah <unk>.
Speaker Change: CBP Arena within Department of Homeland Security, if we look at the role that Treasury is playing in the work that we do in supporting the cloud infrastructure for that.
Speaker Change: For that agency that department as well as obviously IRS within that department as we look at state Department in the World airplane and the consolidation of other functions within state Department, we see that.
Speaker Change: As Grand dialing it back.
Speaker Change: Backbone there within state Department when you look at Department of Transportation, and FAA and the clear investments are being made an air traffic controller training as well as the FAA.
Speaker Change: Infrastructure. If you just take a look at where we are positioned best. They are also the areas where the administration is looking to invest looking to bring more commercial technology and I believe we are well positioned there, hence why we feel.
Speaker Change: Obviously.
Speaker Change: I won't go to the word bullish at this point that I would suggest that we do believe we are not in the midst of significant tailwind and headwinds in our civilian business and we see opportunity there.
Speaker Change: If you go to the Dodd Frank we have four business groups that are on different parts of the national Security intelligence infrastructure.
Speaker Change: I mentioned army the army transformation initiative with significant cuts in shifts that are being made out of the <unk> and other types of line item within the army.
Speaker Change: Are positioned well with our recent win that we announced with <unk>.
Speaker Change: To do continue our support for Huntsville, and the work that's being done out of the aviation missile command there, but we're also positioned in other areas around.
Speaker Change: Operating proving ground in other types of work and our situ arena and that is our fastest growing opportunity within the army is in our our command and control capabilities, what we call our <unk>.
Speaker Change: In that arena is one that we see will be funded and continue to be funded and dollars are being reallocated in that position. If we look across our air, forcing combatant commands again a very.
Speaker Change: It has been a fast growing part of our business. We are very well positioned in all mission critical work. There. If we look at the end of Pacific and the work that we do for Indo pay com the joint fires network the cloud based <unk> to work with.
Speaker Change: We feel very well positioned there in the current programs that we have as well as in our pipeline that is significant a forward looking pipeline on the airport side.
Speaker Change: Space and Intel.
Speaker Change: Significant pipeline, we built around our Intel business as well as you've heard some of the ramp that we mentioned in terms of growth on mass and other programs within our space and we mentioned obviously a recent win on integration within FDA.
Speaker Change: This is a fast growing area for us in this space, particularly space defense. So we feel strongly there and then our navy business.
Speaker Change: Which obviously is a range of work that we do across programs like Mark 48, our torpedo after body Telkom support all the way to the work that we do in <unk>.
Speaker Change: Situ and command and control and San Diego all of those we see areas, where the Navy we are understanding the signals.
Speaker Change: A little less clear exactly where the major investments will be but as the navy takes on more commercial and cloud base. We can leverage from the cloud based work, we've done and air force and civilian into the Navy. So we feel pretty solid there and their results have been have shown us that we can demonstrably grow there without structural challenges and in fact improve margin. So.
Speaker Change: When I look across the business left to right.
Speaker Change: I feel like we've got enough diversity in the portfolio to offset risk as well as we've got opportunity in the portfolio to support the guidance, we have offered to the street.
Speaker Change: Okay great.
Speaker Change: Maybe just one quick follow up and probably maybe you can at the pioneer as well given your experience with.
Speaker Change: Awards and budget flushes, and all that kind of good stuff is so unique about fiscal 'twenty five given the foresee full year CRE, we haven't necessarily done this before but does this make it more challenging for timely awards does it set us up for more.
Speaker Change: Words to happen in the third calendar quarter, just kind of curious.
Speaker Change: What kind of ROE.
Speaker Change: Restraints and opportunities there are around this full year CR and what it means for bookings this year, because you alluded to.
Speaker Change: On contract growth needing to be.
Speaker Change: There for you if awards slipped to the right. So I'm just kind of curious how this is all going to play out this year from your perspective.
Speaker Change: Hey, Jason. Thank you for the question I'll go first and then Tony will add some additional color here as we go.
Speaker Change: Big picture, we've really not seen a slowdown in the actual solicitation proposals.
Speaker Change: So the environment continues to be pretty robust I would say and we are expecting to have a good submit quarter in Q2.
Speaker Change: We are seeing some delays, especially around the larger awards.
Speaker Change: Let's call it circa $1 billion plus that is going through some extra scrutiny inside of the various agencies to ensure that the programs and the contracts are delivering real value to the U S. Taxpayer. So we're seeing a little bit of that but it's.
Speaker Change: More anecdotal than not and it's hard to really pick a trend and say therefore, we are expecting to see that sort of play out over the rest of the year in reality I think we did see a slew of things happen right. After we finished Q1 and we noted in excess of $2 billion.
Speaker Change: Contracts about half of which was actually new business for us.
Speaker Change: So we're cautiously optimistic that maybe the gates are starting to open up a little in terms of the actual announcements as.
Speaker Change: As we said in the prepared remarks, I think for the near term instead of relying on new business to generate the ramp needed to get to the two.
Speaker Change: Comfortably get to the guide the reality is the team is focused on contract growth in the near term and Q1 was actually a really solid quarter for on contract growth. So I would say starting with maybe the premise of the question around the CR I think the CR feels a little bit different than prior <unk> and maybe a little more flexibility at the customer led.
Speaker Change: Will if they navigate a very uncertain environment, there and the reality is I think we're cautiously optimistic that.
Speaker Change: If we stay focused on generating good on contract growth for the next quarter or two there is enough in the way of new stuff out there that even if things get delayed by a quarter or so.
Speaker Change: Don't really expect it to have a significant impact for the year.
Speaker Change: Im thinking you're spot on <unk> and I think we are trying to assess all the variables. The CR is one I think probably mentioned the flexibility and that CR is something we haven't seen previously so it feels a little bit different you offset that with personnel turnover and other changes that may create more of the impact than maybe the CR itself.
Speaker Change: And we're working through those but we haven't seen any single trend that would be so dominant that it would affect our color. If you will the way we look at the year. We've seen actual I think it's interesting to look at our first quarter submit in the second quarter. We think will be just as robust. It's an interesting environment, where we are able to submit proposed.
Speaker Change: <unk> and we are getting awards that are occurring.
Speaker Change: Question will be what does the year rely on it's a combination of as its always been on contract growth. If we had seen a slowdown there we'd be concerned.
Speaker Change: But we have not seen that hold as well as we've got $19 8 billion in pending awards that we expect adjudicated over the next few quarters here and be able to hold to the expectations. We set of a trailing 12 months one two book to Bill this year.
Speaker Change: Okay, great. Thanks, I'll pass it along.
Speaker Change: Thank you Jason.
Speaker Change: Thank you one moment for our next question. Our next question comes from the line of Sheila <unk> from Jefferies.
Sheila: Good morning, guys and thank you. So Tony you just talked about this a little bit that you are feeling more confident with the pipeline and the conversion, but the trailing 12 months of Cabela's plenty.
Sheila: So how do you think about that relative to your guidance on the exit rate for the year implied at a mid single digit growth rate. How do you get there in terms of the re competes and the new book of business that you might have.
Speaker Change: Hey, good morning, Sheila. Thank you for the question Hey look from a compare look we had a tough compare Q1 to Q1 for the trailing 12 month, we had a significant Q1 in the prior year. So.
Speaker Change: In quarter book to Bill I was pleased obviously, we would have liked to pull a couple of the deals that came right. After the quarter close if we had had a weeks' difference in timing I think we'd be having a different conversation right now in terms of.
Speaker Change: The likelihood of our trailing 12 month getting to one two by the end of each one which is I think the premise of your question gives.
Speaker Change: Given what's occurred since the quarter quarter close what we see in our in our sights for Q2 and Q3, we still feel fairly confident that we are able to get to that trailing 12 month. This year and obviously, that's assuming that the award environment continues and what we've seen and theres nothing drastically affecting that over.
Speaker Change: The next few months and quarters. So from that perspective, and then I think the second part of your question Sheila was correlated to what what's the book to Bill needed relative to holding our guide for the entire year from a revenue perspective, and obviously, that's a combination of the the on contract growth that appropriately just mentioned ramp.
Speaker Change: Up on key programs, we mentioned.
Speaker Change: Some awards that have come in we will see what the protest environment looks like relative to those awards and whether those ramp ups are transitions can begin even earlier than anticipated, which which again helps to underpin the revenue call for the year, we're not coming off our guidance because we do have line of sight to how we can grow to be expected.
Speaker Change: Level, and obviously, a combination of new business that we expect to land in the next couple of quarters as well as our our current path on on contract growth. The last part of that will be to make sure that we we don't have any self inflicted wounds on the recompete side and as I've already said earlier I think in response to an earlier question.
Speaker Change: In terms of what we've seen to date, we feel still fairly confident that we are starting to address the recompete issue and it will not create the headwind for us this year.
Speaker Change: Hey, Sheila the only thing I would add to that is that in order to get to the one two trailing 12 months, we need somewhere between three and a half from $4 billion of net bookings in Q2.
Speaker Change: Since the end of the quarter, we generated bookings of over $2 billion, so I'm going to say.
Speaker Change: We're about halfway there to what we need to do for the remaining two months of the quarter.
Speaker Change: As we signaled in the script.
Speaker Change: If things do slip.
Speaker Change: Expect the slip to impact maybe a quarter or two when we get to one two but the reality is we feel good about getting to that one too which should get us to a place where we can support.
Speaker Change: 3% to 5% revenue growth rate guidance that we've offered for FY 2017, so cautiously optimistic but there are a few things that are outside of our control right now and we're watching the environment.
Speaker Change: Our new business win rate is pretty good has remained pretty healthy through the first quarter of this year end.
Speaker Change: I think we just have to make sure that we are executing to what we've committed to.
Speaker Change: Super helpful color and maybe if I could ask one more on margin margins of eight four in the quarter.
Speaker Change: Implies a ramp of 100 basis points to meet the full year guidance. So maybe two things on the margins one civil was better in the quarter, how does that trail off in the second half and then can you quantify the impact on that space fixed price program and is there a milestone needed to ensure that.
Speaker Change: Net neutral to earnings.
Speaker Change: Let's start with yes, sure on civil and they hit the space program. Go ahead, you are going to tag team go ahead program.
Speaker Change: Ola.
Speaker Change: On a big picture civil actually saw a little bit of margin expansion in Q1 relative to Q1 of last year and we expected that trend to continue over the course of the year. In addition to that the team has done I think an admirable job.
Speaker Change: Getting fuller control of our cost baseline.
Speaker Change: As you know the vast majority of our TNF in fixed price work is in our civil business. So the team's doing a pretty good job and we expect to continue to see the ramp there I think Q1 EBITDA margins were up 30 to 40 bps compared to Q1 of last year and the business grew 7% or 8% in Q1, so they've done what one would have thought would be a harder.
Speaker Change: A combination of things to accomplish which is top line growth as well as margin expansion I think on the space side.
Speaker Change: I would say, it's about a $3 million to $5 million impact from that single program.
Speaker Change: In addition to that we had cost overruns relative to the very active proposal activity that we had in Q1. So we view the second the latter of that to be more timing.
Speaker Change: So I think between the two of them, we probably had about a 50% to 60 basis point impact for the quarter, which would normalize back to about the 9%, which coincidentally happened to be the 9% that we started last year's Q1 as well so apples to apples I think we see a bridge back to nine at Q1 normalized for this end.
Speaker Change: And on the space business as we said we are expecting get into the Sustainment phase of this program in the coming weeks, we do have the option periods extended and therefore, we do expect to get healthy on the program starting in Q2, but definitely over the course of the year.
Speaker Change: Thank you for your time.
Speaker Change: Yes that was it thank you.
Speaker Change: Sure.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Tobey Sommer from tourists.
Speaker Change: Thank you.
Tobey Sommer: Wanted to ask for your early perspective on an element of the Def sect memo that was out recently, how do you think about the <unk>.
Tobey Sommer: The risk to yourselves and the industry that the federal customers.
Tobey Sommer: Presumably may contract.
Tobey Sommer: Directly from a service provider whereby.
Tobey Sommer: Contractor is not an integrator consultants in quotes.
Tobey Sommer: Hey, Kevin good to hear from you Yeah Fair question, obviously, we're all trying to assess the most recent communications that are coming out of DSD look I think initially.
Tobey Sommer: The conversation there was relative to management consulting and and we have gone through a pretty extensive audit in conversation with the dose infrastructure as well as many agency leaders and I personally engage with customers understanding what the work of SAIC is in that it is in fact not.
Tobey Sommer: Management consulting as it was defined similarly, as you hear words on integration and sort of the middle person or middle man role the reseller role there.
Tobey Sommer: There are very few areas in our portfolio, where we play that type of role in fact, we are a direct provider of solutions and capabilities and what we will call.
Tobey Sommer: Hands on keyboard kind of capability and our customers are very much aware of that and we have reconfirmed that through our most recent months in our through our GSA audit and are Reconfirming that now with the customer set so I think things will shake out I'm sure. There's a lot of language that's been parked right now.
Tobey Sommer: Role, we play and even some of the recent awards that we've announced and some we will announce I think indicate not only the mission criticality of our work, but how we deliver that work in more and more commercial models. We have software as a service kinds of capabilities, we can sell our capabilities right off of marketplaces that exist and our customer.
Tobey Sommer: I understand the commercial nature of what we do and quite frankly, I think we will qualify us in the in the group that has been perceived as the approach that <unk> is trying to take going forward. So of course, we're not we're not pollyanna share we're keeping our ears open and obviously trying to make sure we understand any signals coming.
Tobey Sommer: From the department of defense, but at this point, we don't see significant risk as a result of recent communications.
Speaker Change: Thanks for that answer one follow up for me and sort of how has your the development of those and now the.
Tobey Sommer: The budget process and priorities with the skinny budget and what's going on in Congress, how has that informed how you think about future.
Tobey Sommer: New business capture in your bid and proposal activity.
Tobey Sommer: Does that.
Tobey Sommer: Has that led to sort of a.
Tobey Sommer: Refinement as you look out 12, 24 36 months.
Tobey Sommer: <unk>.
Tobey Sommer: To change at all the posture of what <unk> been looking at.
Tobey Sommer: That's a great question Tobey and I appreciate it at many levels I would I would suggest to you going back to the strategy. We put in place just just over 18 months ago that strategy. Prior to this administration was pivoting our portfolio towards more enterprise and mission it.
Tobey Sommer: Solutions that are delivered in a number of commercial models directly to our customer set in many ways. We've been looking to refine that and expedite our ability to further package and and and offer that capability again with within the construct and the confines if you will.
Tobey Sommer: Where we feel differentiation occurs particularly in our digital engineering capability, our data platforms, our operational AI and in our secure cloud.
Tobey Sommer: Been able to do that with sprint if you will what we call desk tech ops, but different forms of sprints that we've been able to sell commercially directly off marketplaces, where.
Tobey Sommer: Not only with customer sets have appreciated the speed with which we've been able to do mission critical work. So if you think about the strategy is the horizon. One we said for the next in fact for the first three years, which now we're halfway through we are probably speeding up our efforts in the path that we were already on rather than select.
Tobey Sommer: <unk>, a new path, we were already moving in the commercializing of our it.
Tobey Sommer: Capability and embedding of that across our Sustainment contracts.
Tobey Sommer: And other types of work that we do for Intel and civilian customers I think the other areas. We're looking to refine where we are heavy into as you know we've been expanding our venture program, so bringing in new technologies through ventures, as well as partnering very strategically with new players or existing players.
Tobey Sommer: As we've always said, we've been able to embed technology very quickly and we've got great. Examples for that so I would argue that the strategy that was in place was directionally correct slightly independent of political.
Tobey Sommer: <unk> or <unk>.
Tobey Sommer: That we are in fact aligned particularly in areas of lethality areas that the administration has shown for Dod.
Tobey Sommer: Mission critical work.
Tobey Sommer: We've not only survived but I think we've come through an audit of our work with GSA that is exemplified the mission criticality of it and I think right now expediting our efforts to get to more and more commercial solutions.
Tobey Sommer: Over the next year or so so in many ways we feel we.
Tobey Sommer: We feel like we're on the right path, we just have to go faster.
Tobey Sommer: Thank you very much.
Tobey Sommer: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Colin Canfield from Cantor Fitzgerald.
Colin Canfield: Hey, Thank you for the question.
Speaker Change: Following up on <unk> and a little bit of what got them are questioning on but can you just level set us on how we should think about defense and civil margin trajectory versus the multi year targets I think Tony you said civil margins get better from here and it sounds like <unk> should be trough in defense.
Colin Canfield: But just maybe understanding essentially kind of what are the big moving pieces within the segment level margins versus your targets.
Colin Canfield: Thank you.
Colin Canfield: Particulars okay.
Colin Canfield: Can you kind of call and I will take that one first year on the on the civil side I think as we said, we do expect margins to improve from here on out given the number of things we have going on inside of the business and and candidly their performance in Q1 is consistent with the commentary we've shared for a couple of quarters now that we do expect margins to pick up.
Colin Canfield: On the defense and Intel side, I think we tend to think about this in the context of our bid thresholds and we have different thresholds here for cost plus TNF in fixed price work inside of the defense and Intel business and we are continuing to see bid volumes increased with higher then.
Colin Canfield: Bid thresholds and obviously, we're putting a lot of energy into execution cases here to ensure that the teams are continuing to execute at levels higher than the bit thresholds and obviously the vast majority of the work there is cost plus work inside of the defense and Intel business. So.
Colin Canfield: So we are banking on the team's performance.
Colin Canfield: Demonstrate that on execution, we can actually continue to improve margins. The other thing that parts of our defense business has been able to do is actually look at their recompete win rates relative to the margins that they're bidding on those re competes and they actually it was a lot of discipline continued to move margin rates.
Tobey Sommer: Up let's call. It 10 2030 bps every single time, a program comes up for Recompete, which is.
Tobey Sommer: It is almost counterintuitive you would.
Tobey Sommer: Zinc of margin rates coming under some pressure with re competes with the team has actually been able to do the opposite of that when you then compare civil margins improving from a trough defense continuing to bid higher over longer periods of time, and then Tony mentioned.
Tobey Sommer: Sort of a commercial factory offerings that we are continuing to offer to our customers last year was a really good year for the commercial operating segment for us.
Tobey Sommer: As we said on the last earnings call. We expect the commercial sales from our business and I'm going to say commercial margins.
Tobey Sommer: To go to all the way to about $100 million of topline in FY 'twenty eight from about $35 million. So when you put the three factors together that actually does create the portfolio to grind up 10 to 20 bps annually now of course as we win more work. If there is a pressure on margin rates. That's a first world problem we'd loved.
Tobey Sommer: Because we do believe that we're going to end up generating more EBITDA dollars here, but I think thats the thats the path to grinding up margins overtime.
Alan: Alan the only thing I would add to that would be because I think probably got it left to right correct there.
Alan: One of the in the correlation of what creates margin risk for this organization.
Alan: Not only bidding correctly and bidding within thresholds will increase our margin, but executing correctly. If you will within the stated sort of standard standardized.
Alan: Standardized templates.
Tobey Sommer: We will ensure that we don't erode margin in one of the areas that we're focusing on because we have so much more bid activity. We expect to win our fair share is making sure that the transition of large programs.
Tobey Sommer: Those exceedingly well because when you start to look at margin pressure. It generally starts with a poor transition is doesn't doesn't bode well for the future of the program and so we are putting not only our factory capabilities or some of our deeply technically trained individuals in our factory, but across our organization with a very.
Tobey Sommer: <unk> focus on solid solid transitions of every major program that we win so that the first six months are indicative of a very solid margin path for the program going forward. So that's a risk mitigated that.
Tobey Sommer: Added to our sites here and I think executive team is all in monitoring that transition activity as well.
Tobey Sommer: Got it got it thank you.
Tobey Sommer: Maybe focusing on we've had a lot of noise with one have run government efficiency.
Speaker Change: All the Handwringing, it's not the only nominal right. If you think of like that.
Speaker Change: That's like $25 with Apple to bill them in 'twenty, six requesting pretty far off what both head of pharma services ahead of appropriations to think so.
Speaker Change: Maybe talk us through the commentary that you said at the start around the multi year growth expectations, and then maybe kind of thinking through like.
Speaker Change: How does like what is the best outcome for SAIC to the extent that we still get a trillion dollars defense.
Speaker Change: But perhaps the mixes.
Speaker Change: Theres different outcomes, so maybe walk us through kind of your your high level expectations of the different outcomes of mix within the different scenarios and what I think the theme would considered to be the best outcome for SAIC.
Speaker Change: So let me just make sure I'm clear on the question. If the question is relative to the mix of our portfolio median across Intel defense and civilian.
Speaker Change: Over the next couple of years I would suggest to you that our as we laid out in our strategy, we fully expected not only to pivot our portfolio towards mission enterprise solutions, but we were looking to grow our civilian business.
Speaker Change: And grow it disproportionately and we see that effect already in place so that that business right now, it's about 20% to 22% of our current revenue and our expectation that that may inch up to something like 25% of our revenue over the next few years I think is still intact, obviously operating.
Speaker Change: But notwithstanding.
Speaker Change: That business continues to click along and again I think thats based on our footprint. If you look across our are busy.
Speaker Change: Business I would suggest there may be some shifts we mentioned some of the.
Speaker Change: Pressures on the Army business, we've mentioned some of the opportunities across our space.
Speaker Change: Business in Air Force business, but again I think we're lined up to take advantage of the current budget environment, even through a CR. This year. We've said, it's a flexible CR they've identified priorities. We've looked against the 17 defense priorities coming out of D. O D and as you saw on the earnings statement, we're lined up against more than half.
Speaker Change: Half of those directly with the work that we do so we feel pretty solid there and then I think there is a very real opportunity for us to improve our positioning on the Intel side as we have a larger Intel pipeline than we've had for many many years and we've got some great opportunities going forward in the Intel space. So when I look at the.
Speaker Change: Mix right now I don't see a structural reason why we can't grow in the guidance that we've offered.
Speaker Change: For the next couple of fiscal years, even given the budget environment that we find obviously anything draconian that would occur we would have to go back and reassess, but based on what we see line of sight I think we've got enough budget in the right direction, and we're positioned well enough to capture that to underpin our call Hey, Collin the only thing I would add tactic.
Colin Canfield: <unk> is that if we have to grow lets call. It 5% next year I think we do need to get book to Bill to one two that will support the growth rates. We've got out there and I think we are assuming that defense budgets.
Speaker Change: Or are not going to be healthy relative to the preceding five years. So in other words that we will continue to see some pressure on budgets. So think of that as sort of flat to 3% growth, but we do think that not having some headwinds that we've had over the last few years is going to offer a little bit of tailwind for us.
Speaker Change: US and our new business win rates are actually pretty good.
Speaker Change: We've remained pretty good over the last three or four years, and therefore that combination should get us to that four 5% growth rates. So we don't need.
Speaker Change: A sort of a high growth.
Speaker Change: Defense budget for us to be able to grow the company for a 5% we think the things we're doing should help us grow.
Speaker Change: To that level, even in the budget environment, we expect to see a little bit more constraint there and maybe the last five years.
Speaker Change: Got it thank you for the color.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Noah <unk> from Goldman Sachs.
Noah: Hey, good morning, everyone.
Speaker Change: I was hoping to go back to the margin.
Speaker Change: Thanks, So much for the question I was just hoping to go back to the margin discussion, Tony where you were just describing.
Speaker Change: Our contract terms and execution within them and I guess, there is a decent amount of discussion in the industry about the.
Speaker Change: The customer wanting to shift to more outcomes based and perhaps that including fixed price, but other other things.
Speaker Change: I guess theres more opportunity in that.
Speaker Change: Those contract coach can be higher margin.
Speaker Change: I guess that also shifts risks to the contractor.
Speaker Change: And current mix is what it is for a reason so how do you see the opportunity there versus potentially being pushed in places, where it's maybe too aggressive or inappropriate.
Speaker Change: And it can impact margins negatively.
Speaker Change: Yeah. Thanks for thanks for the question look I think there's been a lot of conversation about conversion to outcome based as well as within that outcome based the definition or scope, both fixed price and we've been proactively looking across our portfolio with our customers and to where the best op.
Speaker Change: <unk> on both existing contracts that might be coming up for some form of renewal as well as bidding with looking at the opportunity to shift to a fixed price.
Speaker Change: Wholesale conversion, we haven't seen yet in any significant meaningful way, where entire contracts are coming out or existing contracts are being converted to fixed price. We do see obviously, what we will call contract line items, our stope, some scope of contracts being fixed price being.
Speaker Change: Introduced and that's been historically a pattern that that may increase in this new environment of putting elements and there are some contracts that are better positioned for fixed price a lot of our work and our enterprise our.
Speaker Change: Our it infrastructure, we think is very very prone to fixed price environment does that introduce more risk to the cut to the contractor absolutely. However, if you look at where we've done fixed price most of that work sits in our civilian business and we've been able to hold very solid margins within that.
That business, where we have a mix of TNF time and materials and fixed price. So we do have a track record of being able to deliver on a fixed price environment. We also had been really shoring up internally our standard delivery framework. So that we are delivering our execution isn't a standard repeatable way highly monitored particularly.
Speaker Change: In fixed price and focus on making sure we bring in personnel that have fixed price backgrounds and experience. So in that regard while theres been quite a bit of talk relative to that we haven't seen meaningful new bids that have come in a fixed price conversion or changes, but we are prepared for that and again proactively leaning in.
Speaker Change: With our customers the assumption there, we see that as a tailwind opportunity for the company as it relates to profitability, we take on more risk, but we have the opportunity to drive.
Speaker Change: Greater margin out of those programs, we have that track record, we acknowledged that that may.
Speaker Change: The government will expect most likely some discounts on the top line for that but as we take a greater share of that market. We think we can offset any top line risk with some improved margin.
Speaker Change: And profitability, but again to date other than direct conversations we are having on some unique.
Speaker Change: Programs with customers, we have not seen the procurement engine totally shift in that direction at least not not yet probably coming shows perfect. Okay.
Speaker Change: Okay I really appreciate all the problems.
Speaker Change: The notion of if the new business.
Speaker Change: Adding slightly to the right you would need more.
Speaker Change: On contract growth can you is it possible to put.
Speaker Change: The numbers around that I mean, how much more on contract growth then you get versus what you already assuming or.
Speaker Change: Anything you can put around that in terms of the growth rate or a $1 of revenue.
Speaker Change: Yes, so maybe a little bit of a premier back.
Speaker Change: A few years ago are on contract growth numbers, where I am going to say low single digits that number was the highest it's been last year, where we clicked up to about five or 6% of full year revenue and on contract growth and Thats data, we've shared with folks externally I think Q1 was right in line with that level of on contract.
Speaker Change: Growth, if not even a little bit higher than that and I think to the extent that we can continue to deliver on contract growth upwards of mid single digits, we're going to need less and less of new business to get to the get to that I'm going to say approximately two 5% midpoint of our guide for this year. So that's how we're seeing it.
Speaker Change: And again because of the CR is given a little more flexibility this time around.
Speaker Change: We are seeing that as a second viable path and of course to the extent that some of the new business wins start to ramp sooner than that probably is a difference between whether we get to the low to mid <unk>.
Speaker Change: Point of the guide range or mid to high point of the guide ridge to meet those are the variables.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: This concludes today's presentation. Thank you for participating you may now disconnect.
Speaker Change: Okay.
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