Q2 2026 Science Applications International Corp Earnings Call

Speaker #1: Good day, and thank you for standing by. Welcome to the SAIC Fiscal Year 2026 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode.

Operator: Good day and thank you for standing by. Welcome to the SAIC Fiscal Year 2026 Second Quarter 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 the session, you'll need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Joseph DeNardi, Senior Vice President, Investor Relations and Treasurer. Please go ahead.

Speaker #1: After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press *11 on your telephone.

Speaker #1: We will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. Please be advised, today's conference is being recorded.

Speaker #1: I would now like to hand the conference over to your speaker today, Joseph DeNardi, Senior Vice President, Investor Relations and Treasurer. Please go ahead.

Speaker #2: Good morning, and thank you for joining SAIC's second quarter fiscal year 2026 earnings call. My name is Joe DeNardi, Senior Vice President of Investor Relations and Treasurer.

Joseph DeNardi: Good morning and thank you for joining SAIC's Second Quarter Fiscal Year 2026 Earnings Call. My name is Joseph DeNardi, Senior Vice President of Investor Relations and Treasurer. Joining me today to discuss our business and financial results are Toni Townes-Whitley, our Chief Executive Officer, and Prabu Natarajan, our Chief Financial Officer. Today we will discuss our results for the second quarter of Fiscal Year 2026 that ended August 1, 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 Factors section of our annual report on Form 10-K.

Speaker #2: And joining me today to discuss our business and financial results are Toni Townes-Whitley, our Chief Executive Officer, and Prabu Natarajan, our Chief Financial Officer.

Speaker #2: Today, we will discuss our results for the second quarter of fiscal year 2026 that ended August 1, 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.

Speaker #2: I refer you to our SEC filings for a discussion of these risks, including the risk factors section of our annual report on Form 10-K. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

Joseph DeNardi: We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures. The non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP. It is now my pleasure to introduce our CEO, Toni Townes-Whitley.

Speaker #2: In addition, we will discuss non-GAAP financial measures and other metrics. Which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures.

Speaker #2: The non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP. It is now my pleasure to introduce our CEO, Toni Townes-Whitley.

Speaker #3: Thank you, Joe, and good morning to everyone on our call. Overall, our results in the quarter were mixed, with revenue below our expectations, declining 2.7% year-over-year, but profit margins rebounded well from the first quarter due to strong program execution.

Toni Townes-Whitley: Thank you, Joe, and good morning to everyone on our call. Overall, our results in the quarter were mixed, with revenue below our expectations, declining 2.7% year-over-year, but profit margins rebounding well from the first quarter by strong program execution. In addition, we delivered a second consecutive quarter, the book-to-bill comfortably over 1.0, driving our year-to-date book-to-bill to 1.4. Our qualified pipeline, plan submit levels, and backlog of pending awards all remain strong, and we believe the investments made and business development processes implemented in recent quarters position us well to capitalize on a rich set of opportunities. As you can see from our revenue performance in the quarter and our updated outlook, we are seeing a more challenging environment than we had previously forecasted.

Speaker #3: In addition, we delivered a second consecutive quarter, the book-to-bill comfortably over 1.0, driving our year-to-date book-to-bill to 1.4. Our qualified pipeline, planned submit levels, and backlog of pending awards all remain strong.

Speaker #3: And we believe the investments made, and business development processes implemented in recent quarters, position us well to capitalize on a rich set of opportunities.

Speaker #3: As you can see from our revenue performance in the quarter, and our updated outlook, we are seeing a more challenging environment than we had previously forecasted.

Speaker #3: There are three drivers behind this. First, slower conversion of on-contract growth opportunities into revenue. Second, an increase in the impact from program disruptions. And third, delays on our new business awards.

Toni Townes-Whitley: There are three drivers behind this: first, slower conversion of on-contract growth opportunities into revenue; second, an increase in the impact from program disruptions; and third, delays on our new business awards. As we highlighted on our first quarter call, our prior revenue guidance for the year of 2 to 4% growth assumes several points of contribution from a combination of on-contract growth and new business wins ramping up within a certain timeframe. While recent new business, including 10-cap HOPE with the Air Force and a key program with the Navy valued at approximately $350 million, will contribute modestly to this year and further ramp in Fiscal Year 2027, on-contract revenue growth has been impacted by funding uncertainty, added scrutiny related to efforts to reduce government spending, and a government workforce dealing with increased turnover.

Speaker #3: As we highlighted on our first quarter call, our prior revenue guidance for the year of 2% to 4% growth assumes several points of contribution, from a combination of on-contract growth and new business wins ramping up within a certain timeframe.

Speaker #3: While recent new business, including 10-CAP hope, with the Air Force and a key program with the Navy, valued at approximately $350,000,000, will contribute modestly to this year and further ramp in fiscal year 27, on-contract revenue growth has been impacted by funding uncertainty and added scrutiny related to efforts to reduce government spending, and a government workforce dealing with increased turnover.

Speaker #3: These headwinds have been more pronounced at customers working through particularly meaningful transformation, or facing greater budget uncertainty. As you will recall from our first quarter call, we indicated that delays in new business awards would require a greater contribution from on-contract revenue in order for us to meet our plan for the year.

Toni Townes-Whitley: These headwinds have been more pronounced at customers working through particularly meaningful transformation or facing greater budget uncertainty. As you will recall from our first quarter call, we indicated that delays in new business awards would require a greater contribution from on-contract revenue in order for us to meet our plan for the year. Based on trends we have seen in recent months, we now see that as unlikely to materialize, and we've updated our guidance for Fiscal Year 2026 and Fiscal Year 2027 accordingly. Our revised outlook for Fiscal Year 2026 revenue assumes that current trends continue through the remainder of the year with very little contribution from additional new business or on-contract growth.

Speaker #3: Based on trends we have seen in recent months, we now see that as unlikely to materialize, and we've updated our guidance for fiscal year 2026 and fiscal year 2027 accordingly.

Speaker #3: Our revised outlook for fiscal year 26 revenue assumes that current trends continue, through the remainder of the year, with very little contribution from additional new business or on-contract growth.

Speaker #3: While we believe that much of the revenue headwind we are facing is temporary, and will normalize over time, we are taking purposeful action to align our cost structure with the more challenging revenue environment expected over the next several quarters.

Toni Townes-Whitley: While we believe that much of the revenue headwind we are facing is temporary and will normalize over time, we are taking purposeful action to align our cost structure with the more challenging revenue environment expected over the next several quarters. As we highlighted on last year's Q3 call, our cost structure is variable, and the preparation we have taken in recent quarters positions us well to respond appropriately with cost efficiency initiatives to mitigate the impact on EBITDA and free cash flow from lower revenue. While some of these initiatives are already underway, we will discuss the specifics in greater detail on our third quarter call. The savings resulting from these initiatives give us greater confidence in our ability to continue to deliver margin improvement while investing appropriately for growth and value creation in the coming years.

Speaker #3: As we highlighted on last year's Q3 call, our cost structure is variable, and the preparation we have taken in recent quarters positions us well to respond appropriately with cost efficiency initiatives to mitigate the impact on EBITDA, and free cash flow from lower revenue.

Speaker #3: While some of these initiatives are already underway, we will discuss the specifics in greater detail on our third quarter call. The savings resulting from these initiatives give us greater confidence in our ability to continue to deliver margin improvement while investing appropriately for growth and value creation in the coming years.

Speaker #3: Given the relative magnitude of our revision to revenue, I want to be very clear that the revised outlook assumes that impacts from on-contract growth and new business award delays continue, which we believe is a prudent assumption given the current market.

Toni Townes-Whitley: Given the relative magnitude of our revision to revenue, I want to be very clear that the revised outlook assumes that impacts from on-contract growth and new business award delays continue, which we believe is a prudent assumption given the current market. As a result, we see the updated guidance range as appropriately de-risked based on our current assessment of market conditions. Now, while the current market volatility and the impact it is having on our near-term revenue is disappointing, I'm encouraged by the signs of progress we're seeing in the execution of our strategy. When I became CEO approximately two years ago, the strategy review we completed indicated that substantial changes were needed across many facets of the business in order for SAIC to regain a position of leadership and maximize long-term value for our employees, customers, and shareholders.

Speaker #3: As a result, we see the updated guidance range as appropriately de-risked based on our current assessment of market conditions. Now, while the current market volatility and the impact it is having on our near-term revenue is disappointing, I'm encouraged by the signs of progress we are seeing in the execution of our strategy.

Speaker #3: When I became CEO approximately two years ago, the strategy review we completed indicated that substantial changes were needed across many facets of the business in order for SAIC to regain a position of leadership and maximize long-term value for our employees, customers, and shareholders.

Speaker #3: We knew that the path towards regaining leadership would not be linear. While this quarter's results, revised outlook, and recent market volatility have been challenging, we are addressing them head-on. I will draw your attention to factors that are most relevant for our success beyond this period of revenue softness and over the long term.

Toni Townes-Whitley: We knew that the path towards regaining the leadership would not be linear. While this quarter's results, revised outlook, and recent market volatility have been challenging, and we are addressing them head-on, I will draw your attention to factors that are most relevant for our success beyond this period of revenue softness and over the long term. Our year-to-date recompete win rate is in line with our target, and our planned recompetes over the next 12 months are fairly typical, with a handful of programs in the 1 to 3% of revenue range. We expect to show continued progress over time in sustaining our recompete win rate at current levels. Our win rate on new business is also roughly in line with our target, as we have been successful on two of the six larger pursuits adjudicated year to date.

Speaker #3: Our year-to-date recompete win rate is in line with our target, and our planned recompetes over the next 12 months are fairly typical, with a handful of programs in the 1% to 3% of revenue range.

Toni Townes-Whitley: As I indicated earlier, our pipeline of expected awards in the coming quarters remains solid. Restoring our recompete win rates to our target range and winning our fair share of new business pursuits while increasing our submit levels is a good formula for sustainable growth over the long term. We are encouraged by the political support to provide solid levels of funding in areas including border security, FAA modernization, and homeland missile defense. However, we expect this administration's focus on efficiency to continue and suspect that budget timelines are likely to be dynamic in the coming quarters. We remain confident that our strategy and business model position us well to adapt and win by delivering outcomes at speed for our customers. We are seeing increased opportunities to drive greater efficiency across our business as we leverage artificial intelligence for core operations.

We are encouraged by the political support to provide solid levels of funding in areas, including border security FAA modernization and home land missile defense.

However, we expect this administration's focus on efficiency to continue and suspect that budget timelines are likely to be dynamic. In the coming quarters. We remain confident that our strategy and business model position as well to adapt and win by delivering outcomes at speed for our customers.

Toni Townes-Whitley: We expect this to materialize as an incremental tailwind to margins and savings for our customers in the coming years. I want to conclude by thanking our employees for their dedication and focus. During our recent quarterly review of the business, I emphasized to our teams the importance of culture, leadership, and employee engagement as we continue to navigate a dynamic market and more challenging near-term revenue outlook. I am proud of how we've shown up for our customers and each other over the past several months. Our culture, anchored around our dedication to the mission of national security, positions us well to grow and create long-term value for all of our stakeholders. I'll now turn the call over to Prabu.

We are seeing increased opportunities to drive greater efficiency, across our business. As we leverage, artificial intelligence, for core operations. We expect this to materialize as an incremental, Tailwind to margins and savings for our customers in the coming years.

I want to conclude by thanking our employees, for their dedication and focus during our recent quarterly review of the business. I emphasize to our teams, the importance of culture leadership and employee engagement, as we continue to navigate a dynamic market and more challenging near-term Revenue Outlook

Prabu Natarajan: Thank you, Toni, and good morning to those joining our call. Second quarter revenue declined 2.7%, driven mainly by a 3% year-over-year headwind related to Cloud 1, Compute and Store revenue not fully offset by new business volume. The variance, when compared to our first quarter growth rate and prior expectation, is primarily a lesser contribution from on-contract growth, which slowed to 3% in Q2 from 8% in Q1, and a modest increase from the impact of program disruptions. Second quarter adjusted EBITDA was $185 million, resulting in an adjusted EBITDA margin of 10.5%. Results benefited from strong program execution and a favorable legal settlement, which was offset by an impact to state taxes related to the One Big Beautiful Bill Act.

I am proud of how we've shown up for our customers and each other over the past several months. Our culture, anchored around our dedication to the mission of national security, positions us well to grow and create long-term value for all of our stakeholders. I'll now turn the call over to Prabu.

Thank you, Toni, and good morning to those joining our call. Second quarter revenue declined 2.7%, driven mainly by a 3% year-over-year headwind related to Cloud 1 computer and store revenue, not fully offset by new business volume. The variance when compared to our first quarter growth rate and prior expectations is primarily a lesser contribution from on-contract growth, which slowed to 3% in Q2 from 8% in Q1, with a modest increase from the.

Impact of program disruptions.

Prabu Natarajan: The underlying margin adjusting for these two items of 10.2% reflects improved profitability across our contract portfolio and represents an increase of 180 basis points quarter to quarter and 80 basis points year over year. Adjusted diluted earnings per share of $3.63 benefited from a favorable tax settlement and increased adjusted EBITDA in the quarter. Second quarter free cash flow improved meaningfully from first quarter to $150 million, though we continue to see some challenges related to the timing of invoice payments across a small set of contracts. As Toni indicated, we are updating our guidance for FY26 and FY27 to reflect a more challenging revenue environment. We are lowering FY26 revenue to a range of $7.25 billion to $7.325 billion, representing organic contraction of 2% to 3%. We expect organic revenue to decline by approximately 5.5% and 4% in Q3 and Q4, respectively.

Second quarter adjusted EBITDA was $185 million, resulting in an adjusted EBITDA margin of 10.5%. Results benefited from strong program execution and a favorable legal settlement, which was offset by an impact of state taxes related to the 1 Big Beautiful Bill Act.

The underlying margin adjusting for these 2 items is 10.2% reflects. Improved profitability across our contract portfolio and represents an increase of 180 basis points quarter to quarter and 80 basis points year-over-year

Earnings per share of $3.63 benefited from a favorable tax settlement and increased adjusted EBITDA in the quarter.

Second quarter free cash flow, improved meaningfully from first quarter to 150 million though. We continue to see some challenges related to the timing of invoice payments across a small set of contracts.

Estonia indicated that we are updating our guidance for FY 2026 and FY 2027 to reflect a more challenging revenue environment.

We are lowering FY, 26 Revenue to a range of 7.25 billion to 7.325 billion, representing organic contraction of 2% to 3%.

Prabu Natarajan: Our revised FY27 revenue guidance of 0% to 3% assumes a more subdued contribution from on-contract growth of 2% to 3%, a modest benefit from new business, and a more typical headwind from contract transitions. Note that we will annualize the headwinds related to the NASA EAST laws and the Cloud 1 Compute and Store program in our third and fourth quarters, respectively. FY26 adjusted EBITDA margin guidance is being lowered due to the one-time impact from Section 174 changes to our state and local taxes, which represents a 10 basis points headwind this year. We are reiterating our FY27 adjusted EBITDA margin guidance of 9.5% to 9.7%. As Toni indicated, we will look to mitigate the impact of lower revenue with cost efficiency initiatives, which increase our confidence in the year-over-year margin improvement plans we've outlined.

We expect organic Revenue to decline by approximately 5.5% and 4% in 3Q and 4q respectively. Our revised FY. 27 Revenue, guidance of 0% to 3% assumes a more subdued contribution from on contract growth of 2 to 3%. A modest benefit from new business. And a more typical headwind from contract, transitions note that we will annualize the headwinds related to the NASA east law.

And the cloud 1 computer and store program in our third and fourth quarters respectively.

FY, 26, adjusted ibida margin. Guidance is being lowered, due to the 1-time impact from section 174 changes to our state and local taxes, which represents a 10 basis points headwind this year.

We are reiterating our FY27 adjusted earnings guidance, but our margin guidance remains at 9.5% to 9.7%.

Prabu Natarajan: We will update you on our Q3 and Q4 calls regarding the implementation of these plans and the potential upside to our margin targets they could drive. We are increasing our FY26 adjusted EPS guidance to a range of $9.40 to $9.60, which benefits from the tax settlement in Q2 and a revised full-year effective tax rate assumption of 14%. Our revised FY27 EPS guidance of $9.00 to $9.20 assumes a more normalized effective tax rate of approximately 23%. We are increasing our FY26 free cash flow guidance to greater than $550 million, which reflects a reduction in cash flow due to lower expected EBITDA offset by lower cash taxes due to Section 174, and we are assuming a similar dynamic in FY27.

As Tony indicated, we will look to mitigate the impact of lower Revenue with cost efficiency initiatives, which increase our confidence in the year-over-year margin Improvement. Plans, we've outlined

Upside to our margin targets. They could drive.

We are increasing our FY 2026 adjusted EPS guidance to a range of $9.40 to $9.60, which benefits from the tax settlement in Q2 and a revised full-year effective tax rate. Our assumption of 14% for our revised FY 2027 EPS guidance of $9.00 to $9.20 assumes a more normalized effective tax rate of approximately 23%.

Prabu Natarajan: We are still finalizing our planning and the relative impact on cash taxes between FY26, FY27, and FY28, but expect the three years combined to see a reduction in cash taxes of approximately $200 million. We are on track to deliver nearly $12 in free cash flow per share in FY26 and between $13 and $14 in free cash flow per share in FY27, both higher than prior estimates. Our capital deployment plans over the next few years remain focused on driving long-term value for shareholders, with sufficient capacity to support this with both share repurchases and capability-focused M&A. I will now turn the call over for Q&A.

We are increasing our FY, 26, free cash flow guidance to greater than 550 million, which reflects a reduction in cash flow due to lower expected ibida offset by lower cash taxes due to section 174 and we are assuming a similar dynamic in FY 27. We are still finalizing our planning and the relative impact on cash taxes between FY 26 FY, 27 and FY 28. But expect the 3 years combined to see a reduction in cash taxes of approximately 200 million.

We are on track to deliver nearly $12 in free, cash flow per share in FY 26, and between 13 and 14 in free cash flow per share in FY 27 both higher than prior estimates.

Our Capital deployment plans over the next few years remain focused on driving long-term value for shareholders with sufficient capacity to support this with both share repurchases and capability focused m&a.

I will now turn the call over for Q&A.

Operator: Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press *11 on your telephone. If your question has been answered and you wish to move yourself from the queue, please press *11 again. We'll pause for a moment while we compile our Q&A roster. One moment for our first question. Our first question comes from Jonathan Stevens with Stifel. Your line is open.

Thank you, ladies and gentlemen, if you have a question or a comment at this time, please press star 1, 1 on your telephone. If your question has been answered, you wish to move yourself from the queue. Please press star 1 1 again, we will pause for a moment while we compile, our Q&A roster.

1 moment for our first question.

Our first question comes from Jonathan Sigmund with Stifel. Your line is open.

Prabu Natarajan: Good morning, Toni, and Prabu, and Joe, thanks for taking my question.

Good morning, Tony a problem and Joe thanks for taking my question.

Toni Townes-Whitley: The disaggregation, how you broke down the revenue outlook change is helpful. Specific to on-contract growth, can you comment a bit more on what type of work or customers you're seeing the greatest impacts? Does the loss of this mid-single-digit on-contract growth represent a share shift to someone else or a deferral of that potential work, or is this a real efficiency the government is driving? Thank you. Let me take both the first and second part of your question.

The disaggregation.

Um, how did you break down the revenue outlook? Change is helpful. Specific to contract growth, can you comment a bit more on what type of work or customers you’re seeing the greatest impacts from?

And does the loss of this mid single digit on contract. Growth represent a share shift to someone else, uh, or a deferral of that potential work. Or is this a real efficiency? The government is driving. Thank you.

Toni Townes-Whitley: In terms of, as I mentioned in the script, in some of the areas for on-contract growth where we've seen the challenge in converting that to revenue, the delays and the environmental, if you will, conditions, we've seen that in areas where there's great transformation across government, particularly in the Army, where we have the Army Transformation Initiative, which was launched earlier this year, which represents a double-digit cut to the Army. In specific areas, some areas where SAIC is supporting in programs like S3I for us in Huntsville, in these areas, we see a slowdown, if you will, a delay in our ability to grow and present new capabilities and opportunities to our customers, timing, switch turnover in personnel, new processes, new norms, new reviews, and that is creating some of this delay.

Yeah, let me take both, uh, both the first and second part of your question, in terms of as we. So, so as I mentioned in the script and some of the areas for on contract growth, where we've seen the challenging converting that to revenue, the delays and the environmental. Uh, if you will conditions, we've seen that in areas where there's great transformation across, uh, across government particularly in the Army, where we have the Army transformation initiative, which was launched earlier this year, which represents the double digit cut to the Army and in specific areas some areas where sic is supporting in programs, like s3i for us in Huntsville and these areas, we see a Slowdown. If you will a delay, uh, in our ability to grow and prod present, new capabilities, and opportunities to our customers timing, uh, switch, uh, turnover in Personnel, uh, new processes, new Norms, uh, new reviews and

Toni Townes-Whitley: Other areas in some parts of the civilian space, where, for example, the Department of Treasury, where we have a large pCloud program, that too has experienced significant delays in our ability to increase our on-contract position. I could offer up a couple of other programs maybe in the Space Force arena. We're seeing it across government. Is it related to a share battle with competitors versus an efficiency of the government? I would argue for the latter. The efficiency, which in many ways, we have to acknowledge that the government, OMB, and other parts of government, GSA, have been very diligent in driving government efficiency efforts, many to the benefit of the U.S. taxpayer. We have to applaud many of those efforts. The day-to-day reality on the ground is that it has caused delays. As we navigate those delays, our ability to convert revenue from those opportunities has stalled.

and that is creating some of this delay. Um other areas in some parts of the civilian space where for example the Department of Treasury where we have a large pcloud program that too has experienced significant delays in our ability to increase our our on contract position.

Toni Townes-Whitley: We have tried to show a prudent framework for how we look at the rest of the year, assuming that that environment continues. We believe that it'll normalize over time with the next few quarters, which is why we've tried to de-risk, if you will, our guidance to you at the street relative to assuming little to no improvement on the on-contract growth or in a fundamental change in the award of new business over the next two, three quarters. That's what's represented in our call.

Continues. Uh, and we believe that it'll normalize over time with the next few quarters, which is why we've tried to de-risk, if you will our our guidance to you at the street, uh, relative to assuming little to no improvement on the on contract growth, or in a change of fundamental change. In the excuse me, in the award of new business over the next 2, 3 quarters. So that's that's what's represented in our call.

Operator: Thank you. One moment for our next question. Our next question comes from Seth Seifman with J.P. Morgan. Your line is open.

Thank you.

1 moment for our next question.

Our next question comes from Seth Saipan with JP Morgan. Your line is open.

Prabu Natarajan: Hey, thanks very much, and good morning. I wanted to maybe follow up on that a little bit. Do you think, you know, you're talking about some changes in the customer approach here? Does that, Toni, how do you think that should affect the structure of this industry over time and the number of players and what type of returns that people can expect?

Okay. Um, thanks very much, and uh, good morning. Um,

wanted to, to

Maybe follow up on on that a little bit. Um, do do you think, you know, you're talking about some changes and, and the customer approach here, um, does that

Tony, how do you think that should affect kind of the, the structure of this industry over time and and the number of players and uh you know what, type of returns that that people can uh can expect?

Toni Townes-Whitley: Yeah, let me take a first thing, and I'd like Prabu also to respond as well. Look, I think we have all acknowledged the volatility in the market over the last few quarters with changes, a fundamental reduction in the government personnel, and I would say a disproportionate impact on government acquisition personnel, which is the channel to the private sector. Hence, delays and changes in process, escalations for approvals, I think that should be anticipated, should have been anticipated. We brought that forward, and I'm sure our peers have brought that to you. In terms of whether that resets the market in any structural way, A, I would say it would be very, it would be too soon to tell. B, I would suggest to you that I think all are trying to react to this new environment.

Yeah, I let me take a, a first swing, and I like probably also to to respond as well. Look, I think uh we have all acknowledged the the volatility in in the market over the last few quarters with changes of fundamental reduction in the government personnel. And I would say a disproportionate impact on government acquisition personnel, which is the channel to the private sector and and hence, um, delays and changes in process escalations for approvals, I think that should be anticipated. Should have been anticipated. We've brought that forward and I'm sure our peers have brought that to you in terms of whether that resets the market in any structural way a, I would say it would be very, it would be too soon to tell, but B, I would suggest to you that.

Toni Townes-Whitley: Delay does not mean that we don't expect things to normalize over time. As we look into Fiscal Year 2027 for us, which would be in the next few quarters, we are starting to see signals of, I would say, normalization. Does anyone have a crystal ball exactly when that will convert to, you know, revenue as we've seen in the past? No, but I would say things have started to settle, and we are expecting that they will in Fiscal Year 2027. We're actually encouraged in some of the clarity we have on where the government is putting budget and priorities that line up with some of the investments in areas of our capability. We are also encouraged that we see reform of acquisition that we think will be positive for many parts of our market as well.

I think all are trying to react to this new environment, um, and delay does not mean, uh, that we don't expect things to normalize over time. Whereas we look into fiscal year, 27 for us, which would be in the next few quarters. We are starting to see signals of I would say, normalization, uh, do does anyone have a crystal ball exactly when that will convert to, you know, Revenue as we've seen in the past? No, but I would say things have started to settle and we are expecting that they will in fiscal year 27. We're actually encouraged in some of the clarity, we have on where the government is putting budget and priorities that line up with some of the, uh,

Investments in areas of our capability. And we are also encouraged

Toni Townes-Whitley: I don't want to suggest to you that this is a durable effect over time, but I would suggest to you that organizations like ourselves who want to be prudent and want to be conservative in our view are going to try to explain and express this environment, I'd say, for the next two to four quarters. Prabu, any other thoughts?

that we see reform of acquisition that we think will be positive for many parts of our Market as well. So I I don't want to suggest to you that. Um, this is a a durable effect over time, but I would suggest to you that, uh, organizations like ourselves who want to be prudent and want to be conservative in our view, are going to uh try to explain and express this environment. I say, for the next 2 to 4 quarters,

Prabu Natarajan: Yes, thank you, Toni. That was perfect. Seth, on the structural question, I sort of break this down into two components. One is sort of players in the industry. Clearly, we are seeing new entrants in the market, non-traditionals with more commercial orientation to them. I then would break down the other component of change being more commercial-like terms and conditions, maybe a little more expectation that contractors bear a little more risk on fixed-price programs. I'd bifurcate the structural changes potentially underlined as being in those two buckets. Obviously, we've talked about the benefit of having more fixed price in the portfolio. Our civil business is predominantly fixed price in T&M, and obviously, we're delivering very healthy margins from that business. I think we are almost welcoming the change to more fixed-price orientation, more outcome-based orientation to our programs.

Probably any other thank you. Tony. That was perfect. Seth on the structural question, I, I sort of sort of break this down into 2, components, 1 is sort of players in the industry. Clearly, there we are seeing, you know, new entrance in the market non-traditional with more commercial orientation to them and I then would break down the other component of change. Being more commercial like terms and conditions. Maybe a little more expectation that contractors bear a little more risk on fixed price programs. So I'd sort of bifurcate the structural changes. Potentially underlined, um, as you know, being in those 2 buckets. Um, you know, obviously we've talked about the benefit of having more fixed price in the portfolio. Our civil business is predominantly fixed price in tnm and obviously we're delivering very healthy margins from that business. So I think we are almost uh, welcoming the change to more fixed price orientation more outcomes.

Prabu Natarajan: As far as the structural change with new entrants, I think we welcome newcomers in the industry as a mission integrator. I think we believe sincerely that the offerings from commercial vendors still will require mission integration at its core to be able to operate inside of a government environment. We welcome the competition in the industrial base, and we are looking forward to the change. Last footnote, I would say we're not really seeing any significant changes in the terms and conditions yet. Therefore, I would say there's probably more rhetoric than reality right now on the expectation for terms and conditions to change dramatically. While we're watching the change and we're navigating as best as we can in an uncertain environment, our fundamental focus is growing EBITDA and growing cash for our shareholders and remaining shareholder-friendly.

Expectation for terms and conditions to change dramatically. So while we're watching the, the change and we're navigating, as best as we can, in an uncertain environment. Our fundamental focus is growing ibida and growing cash for our shareholders and remaining shareholder friendly.

Prabu Natarajan: Okay, that's very helpful. Thanks. Maybe just to follow up on that, I think during the earlier discussion, you mentioned Huntsville, and I kind of think of that as an area where, due to the Army Missile Command being there, a place where we should be seeing a lot more resources flowing into given the focus on missiles and missile defense. Is that something where you see, maybe, some temporary disruption there and a place where you see opportunity over time?

That's very helpful. Thanks. Um and and then maybe just to follow up on that, I think during the

Um, uh, earlier you mentioned Huntsville and, um, you know, I kind of think of that as an area where, uh, due to the the Army Missile Command, uh, being there, uh, a place where we should be seeing a lot more resources, uh, flowing into given the the focus on, um, missiles and and missile defense. Um, so so is that something where you see? Um, maybe some temporary uh, is, is that more of a temporary uh, disruption there and and a place where you see opportunity, um, over time.

Toni Townes-Whitley: No, I think that's fair. I think there is a mixed reaction there temporarily, and what we have sort of guided to, we do have challenges on the day-to-day changes there. There has been quite a bit of transformation happening there, as you know, within the Army, particularly within the Army Transformation Initiative or the Missile Command. As you've also heard, Space Force moving to Huntsville, there's a lot of opportunity moving in that direction as well. We are very well positioned, as you know, with a significant footprint there and engagement in that community. We see upside, but I think, again, it's prudent for us to at least communicate to you that the environmental day-to-day experience is one that has challenged our ability to convert revenue from our existing contractual footprint. We expect that to improve over time.

No, I think that's fair, I think there is a mixed uh, reaction there temporarily. And, and what we have sort of guided to, we do have challenges on the day-to-day changes there. Uh, there's been quite a bit of transformation, uh, happening there, as you know, within the Army, but particularly within AIC or the Missile Command. But as you've also heard space force moving to Huntsville. There's a lot of opportunity moving in that direction as well and we are very well positioned as, you know, uh, with a significant footprint there.

Toni Townes-Whitley: Obviously, we'll come back to you with any updates to guidance as we see greater improvement on our on-contract growth.

And engagement in that community. So we see upside, but I think again, it's prudent for us to, at least, uh, communicate to you that the environmental day-to-day experience is 1, that has challenged, our ability to convert revenue from our existing contractual footprint and we expect that to improve over time and obviously we'll come back to you with any updates to guidance as we see uh greater Improvement on our on contract growth.

Prabu Natarajan: Right. Okay. That's very helpful. Thank you.

Right. Okay.

Uh, that's uh, that's very helpful. Thank you.

Operator: Moment for our next question. Our next question comes from Toby Summer with Truist. Your line is open.

Moment for our next question.

Our next question comes from, Toby summer with truist. Your line is open.

Toby Summer: Thank you. I was wondering if you could talk about the cost efficiency measures that you cited to allow you to get year-over-year margin expansion, and maybe speak to the tension between doing something on a cost side now when the revenue, you know, top line is sort of tepid as long as you think that's transitory and not sort of, you know, a multi-year in nature. Thanks.

Thank you. Um, I was wondering if you could talk about the

cost efficiency.

Measures that you said, cited.

Uh, to allow you to get year-over-year, margin expansion and and maybe speak to the tension.

Between doing something on a cost side. Now, when the

Revenue top you know, Top Line is is sort of uh tepid uh as long as you think that's transitory and that sort of you know, multi-year in nature thanks.

Toni Townes-Whitley: No, I appreciate the question and the two dimensions of the question. First, in terms of what we're doing, and then the balance that should be there that is not reactive, but actually part of a strategy that we are still committed to and continuing to invest in certain parts of our value creation for the business. If I was to describe sort of broadly, and I think we said in the script that we would come back to you next quarter to give some more specifics. At this stage, I'd like to characterize we're leveraging our enterprise operating model, which was part of our strategic input over the last two years to really build rigor in a full-scale enterprise operating model to accelerate the adoption of artificial intelligence across our core functions.

Toni Townes-Whitley: That's really one of the areas that we think has the ability to have margin improvement, both what we can provide for our customers, but also, quite frankly, for our shareholders. That said, we have a pretty full-scale program of how that's being rolled out across the organization. We can give some more detail there. It is important to suggest that that has been part of our strategy throughout. I believe the market across the market companies are looking at this kind of capability. Whether that be agentic or generative or various forms of artificial intelligence and automation, we're building that into our core infrastructure and expect that to have some results over the next few quarters.

No, I appreciate the question. Uh, and the, the 2 dimensions of the question first, in terms of what we're doing and then the balance that should be there, that is not reactive, but actually part of a that we are still committed to and continuing to invest in certain parts of our our value creation for the business. You know, if I was to describe sort of broadly and we, I think we said uh, in the script that we would come back to next quarter to give some more specifics. But at this stage, I'd like, to characterize. We're leveraging our Enterprise operating model, which was part of our strategic input, over the last 2 years, to really build rigor in an in a full-scale Enterprise operating model to accelerate the adoption of AI across our core functions. That's really 1 of the areas that we think has the ability to have uh margin Improvement, uh both what we can provide for our customers, but also quite frankly for uh our shareholders. And that said we we have a pretty full-scale program of how that's being rolled out across the organization.

Toni Townes-Whitley: To the extent that we can continue to do that, have that as a lever as we go forward, it gives us greater confidence that we can meet the expected EBITDA expectations of the street if revenue continues to be compromised on the top line.

And we can give some more detail there, but it is important to suggest that that has been part of our strategy. Uh, throughout I, I believe the market across the market companies are looking at this kind of capability and whether that be agentic or generative or various forms of AI. And automation, we're building that into our core infrastructure and expect that to have some results of the next few quarters. And again, to the extent that we can continue to do that, have that as a lever.

Prabu Natarajan: Hey, Toby, the only thing I would add to that is that the actions have begun. We are sort of on our way there. The reality is, I think we're going to take the rest of the year to calibrate against expectations for next year. The one area, and I want to be really clear about this, in the PowerPoint charts that we attached to the earnings release, we said there are two variables here. We don't really want to impact the submissions that we are committed to making for this year and next year. I think if there's a bias, there's a bias towards ensuring that we don't decelerate on the submission volume because we are continuing to put in good bids. We're winning our share of recompetes anew.

As we go forward, it gives us greater confidence that we can meet the expected EBITDA expectations of the street. If revenue continues to be compromised on the top line,

Prabu Natarajan: The focus is to keep that up while we get efficiencies elsewhere in the business to be able to fund and pay for that. The reality is that's where the focus is right now. We are continuing to be very specific about our expectations on recompetes for margin, our expectations for new business margins, as well as execution margins. The operating model is allowing us to spend a little more time with the program teams on generating more margin from the portfolio that we have today. I will simply call out the civil business that is really delivering mid to high 13% margins now, up nearly 100 basis points year over year. We have some real opportunity.

Um we don't really want to impact the submissions that we are committed to making for this year or next year. So I think, I think if there's a bias there's a bias towards ensuring that, we don't decelerate on the submission volume because we are continuing to put in good bids, we're winning our share of recompete is a new, so the focus is keep that up while we get efficiencies elsewhere in the business to be able to fund and pay for that. And the reality is, that's where the focus is right now and we are continuing to be very specific about our expectations on. WE competes for margin um our expectations for new business margins, as well as execution margins and the operating model is allowing us to spend a little more time with the program teams on generating more margin from the portfolio that we have today and I will simply call out the Civil business. Uh that is really delivering you know mid to high 13% margins. Now up nearly

Prabu Natarajan: What you're hearing from us is a lot of focus around where the attention should be spent and what we expect to get out of the portfolio we have instead of hoping for a portfolio we don't have. The focus is running the business effectively day to day.

100 basis points year-over-year. So we have some real opportunity.

But what you're hearing from us is a lot of focus on where the attention should be spent and what we expect to get out of the portfolio. We have instead of hoping for a portfolio we don't have. So, the focus is on running the business effectively day to day.

Toby Summer: I wanted to ask a follow-up on a previous question with respect to industry composition, consolidation, portfolio shaping, not just from an SAIC perspective, but broadly, this experience with DOGE and a change in the way the market has historically operated. Do you think that management teams in the industry have had enough time with it to develop action plans for composing the business in a portfolio of exposures in a way that they have a direction for the longer term, or are we still in a wait-and-see and information-gathering phase?

and I kind of wanted to ask a follow up on a previous question with respect to,

Industry composition.

Consolidation portfolio shaping. Um not just from an sic perspective but broadly um this experience with Doge and uh a change in uh the way the market has historically operated

Do you think that their, uh, that management teams and the industry have had enough time with it to develop action plans for, uh, sort of composing the business in a portfolio of exposures in a way that, uh,

that they, they have a direction for the the longer term or

Are we still in sort of a a wait and see and information gathering phase.

Toni Townes-Whitley: I think we see it's a very fair question. I think I would kind of find a midpoint between your two bookends there. Have we seen some information? Has there been clarity on budget in terms of budget priorities? Has there been indication of going commercial, commercial direct, and the type of demand signals that are being sent? I think we've seen those, and we've started to collate. I think as all companies are in this market, we've adapted to those demand signals. Where we're encouraged, I would suggest to you is in the nature of the work we do. I mean, we call ourselves a mission integrator. We are encouraged when the market also acknowledges that as a need across various government agencies.

I think I would I would kind of find a midpoint between your 2 uh your 2 bookends there. Uh have we had have we seen some information has there been Clarity on budget?

Toni Townes-Whitley: As we've seen with an award we mentioned last quarter with FDA or the state agency as part of looking for a mission integrator to help with the management of the satellite program. We've seen that in the recent requirements from the Department of Defense as they've revised their requirements process to ask for mission engineering and mission integration as the key touchpoint to the private sector for new capabilities being brought. We've seen that even in the conversations with FAA as they look to modernize what they've asked for as integration. In many ways, we feel like what we do and what we've said we do well is showing up in demand signals across the government. That part and the prioritization of programs has become clear. To Prabu's earlier statements, there are new entrants. There is a clear signal for commercial capability.

In terms of budget priorities. As there have been indication of going commercial commercial direct and and the type of demand signals that are being sent. Uh I think we've seen those and we've started to collate and I think as, as all companies are in this market, we've adapted to those demand signals where we're encouraged. I would, I would suggest to you is in the nature of the work we do when we call ourselves a mission integrator, we are encouraged when the market also acknowledges that as a need of various government agencies, as we've seen with a with an award, we mentioned last quarter with FDA or the state,

Uh, agency, as part of, um, uh, looking for a mission integrator to help with, um, the management of the satellite program. We've seen that in the recent requirements from the Department of Defense as they've, uh, revised their requirements process to ask for mission engineering and mission integration as the key touch point to the private sector for new capabilities being brought. And we've seen that even in the conversations with the FAA, as they look to modernize, what they've asked for is integration. So, in many ways, we feel like what we do and what we've said we do.

Toni Townes-Whitley: As an integrator of commercial capability, we see that as a tailwind, not a headwind. Notwithstanding the current environment where we have some challenges in revenue conversion, we still see, I would argue, still feel bullish about the portfolio we have. To Prabu's point, being conservative in the frame of how we speak to on-contract growth and new business over the next few quarters doesn't suggest that as we start to see new signals, we can't adjust that guidance back to the street.

Uh well is is being is showing up in demand signals across the government. So that part and the prioritization of programs has become clear to problems earlier. Statements there are new entrance. There is a clear signal for commercial capability and as an integrator of commercial capability. We see that as as a, a Tailwind, not a headwind, uh, notwithstanding the current environment, where we have some challenges in Revenue conversion, we still see I, I would argue still feel bullish about the portfolio. We have to probably lose point.

Prabu Natarajan: The only thing I would add to that is I think DOGE and sort of the related disruptions, in fairness, I think would be a good wake-up call for industry. I do think that there are parts of the market where if you're focused on pure labor-based services without differentiation in either enterprise IT or mission IT that is hard to differentiate, you are vulnerable for recompetes. I think that has been our experience. It would be a crisis that's wasted by industry if we don't step up and change the way we go to market, approach labor-based models, and frankly, convert more of labor-based into differentiated tech offerings for our customers. I think that is what the new entrants are promising. Now, you know, query, can anyone new deliver at scale in the way that the traditional, I'm going to say, players deliver?

Prabu Natarajan: I think to me, that's the challenge for industry. We are determined to not waste this crisis.

Toni Townes-Whitley: The good news, I'll just add as the final codicil, is that we started this conversation 18 to 24 months ago. We started in the conversion of our portfolio towards differentiated mission and enterprise IT. You see our venturing has increased in all things that we've been doing commercial. Not only is a crisis one thing you don't want to waste, but we want to be ahead of that in terms of not just reacting, but really driving our and maybe accelerating parts of our strategy that we put in place, as I said, about 18 to 24 months ago.

Ation in sort of either Enterprise it or Mission it that is hard to differentiate. You are vulnerable for Recon computes and I think that has been our experience and I think it would be a crisis that's wasted by industry. If we don't step up and change the way we go to market approach, labor, based models and and frankly, convert more of Labor based into differentiated Tech offerings for our customers. And I think that is what the new entrance are promising. Now, you know, query can anyone new deliver at scale in the way that the traditional I'm going to say players? Uh deliver I think to me that's the challenge for industry and we are determined to not waste this crisis and the good news I'll just add is the Final Cut of all is that we started this conversation, 18 to 24 months ago. We started in the conversion of our portfolio towards Mission differentiated Mission and Enterprise it. You see our venturing as increased in all things that we've been doing commercials. So uh, not only is

A crisis 1 thing. You don't want to waste but we want to be ahead of that in terms of not just reacting, but really driving our and maybe accelerating parts of our strategy that we put in place as I said about 18 to 24 months ago.

Prabu Natarajan: Thank you.

Operator: One moment for our next question. Our next question comes from Colin Canfield with Cantor Fitzgerald. Your line is open.

Thank you. 1 moment for our next question.

Our next question comes from Colin. Canfield with character Fitzgerald, your line is open.

Colin Canfield: Hey, thank you for the question. Maybe following up with Tina's question, could the team maybe quantify the kind of the bridge for FY27 growth? Essentially, like the three buckets of on-contract growth, new program growth, and efficiency headwinds. Maybe if you could break that out quantitatively, or maybe just high level, what are the big moving pieces FY26 to FY27? Thank you.

Hey, thank you for the question. Maybe, following up to see this question because the team may be quantify the, uh, kind of, uh, the bridge for 27 growth. So essentially, like the 3 buckets of on contract growth, new program, growth and efficiency has maybe if you could break that out,

Quantitatively kind of or maybe just high level like what are the kind of big moving pieces? 26 to 27. Thank you.

Prabu Natarajan: Yeah. Hey, Colin, I appreciate the question. I'll take a first crack at it here. The big picture, you know, flat to 3% is our guide, and I'm going to try and bridge us to the midpoint of that number, about a 1.5%. I think we are generally assuming that growth will come out of backlog. We expect to end the year with, I'm going to say, roughly between, you know, 70% and 90% in backlog that's going to convert into revenue next year. I would say on top of that, we are assuming about, I'm going to say, 1% to 3% of on-contract growth more in line with where we expect to be this year. In other words, our baseline assumption is that, you know, things don't get worse, that they remain stable.

Prabu Natarajan: Obviously, to the extent on-contract growth recovers next year, then obviously there's potential for us to do better inside of that range at this point on the 3% to 3% on new business. All we are sort of factoring right now are wins that we already have in our midst and that we expect to convert to revenue. Those are a couple of programs that Toni referenced in her script that have been slow to ramp this year. We are hoping that those programs begin to ramp up. The only other note I would make here is that, you know, since the end of the quarter, we have about another $1 billion of wins that have not cleared protest windows. We're sort of out there, but it's another $1 billion potentially to our bookings in Q3.

Yeah. Hey Colin appreciate the question. I'll take a first crack at it here. Um, a big picture. You know, flat to 3% is our guide and I'm going to try and Bridge us to the midpoint of that number about a 1 and a half percent. I think we are generally assuming that growth will come out of backlog. So we expect to end the year with I'm going to say roughly between, you know, 70 and 90% in backlog. That's going to convert into Revenue next year. Um, and and I would say on top of that we are assuming about I'm going to say 1 to 3% of on contract growth, more in line with where we expect to be this year. In other words, our Baseline assumption is that, you know, things don't, um, get worse that they remain stable and obviously, to the extent on contract growth recovers next year. Uh, then then obviously there's potential for us to do better.

Prabu Natarajan: A combination of those three things, but fundamentally a, you know, clear-eyed conservative view of, I would say, what growth looks like with no expectation that things dramatically improve on contract growth. Toni.

Toni Townes-Whitley: Yeah, the only thing I would add there are the levers that are in place. We've tested these levers, and obviously, we've had conversations with the street about these levers. I think, as Prabu Natarajan mentioned, we have a way to understand whether this condition, this environmental condition is changing and when we can make any changes to update this guidance. When I look at our underlying levers for book-to-bill, obviously, we feel good about where we are this year. We had mentioned 1.2 by H1. We still see line of sight to that within this fiscal year. Our submits holding and sustaining, our win rates at target for both recompetes and new business, which was a question we had, I would say, a couple of years ago that we feel good that we've turned that corner. A pending award backlog that still hovers at the $20 billion.

Inside of that range at this point on the 303% on new business. All we are sort of factoring right now, are winds that we already have, uh, in uh, in our, in our midst and that we expect to convert to revenue. And those are a couple of programs that Tony referenced in her script that have been slow to ramp this year. And, uh, we are hoping that those programs begin to ramp up. Um, the only other, uh, note I would make, uh, here is that, uh, you know, since the end of the quarter, we have about another billion dollars of winds that have not cleared protest windows. So we're sort of out there, uh, but it's another billion, uh, potentially to our bookings in Q3. So combination of those 3 things. But fundamentally a, you know, clear? Eyed, conservative view of, I would say what growth looks like with no expectation. That things dramatically improve on on contract.

With Tony. Yeah, the only thing I would add there are the levers that are in place. We we've tested these levers. And obviously, we've had conversations with the street about these levers and I think, as probably mentioned, we have a way to understand whether this condition, this environmental condition is changing. And when we can make any changes to, to update this guidance, when I look at our, our B, our underlying levers for book to Bill, obviously, we feel good about where we are this year. We had mentioned 1.2 by by H1, uh, we still see line of sight for that within this fiscal year, uh, our submits holding and sustaining

Toni Townes-Whitley: I think those are the levers that are there that suggest that when we can address the delay environment, we have enough in the kitty, if you will, to start to drive to within the range we've offered, as well as hopefully be able to improve upon it.

Or win rates at Target for both reconvening new business, which was a question we had, I would say a couple of years ago that we feel good that we turned that corner, and a pending award backlog that still hovers at 2000. I think those are the levers that are there that suggest that when we can address the delayed environment, we have enough in the kitty, if you will, to start to drive to within the range we've offered, as well as hopefully be able to improve upon it.

Colin Canfield: Got it. Thank you. Maybe focusing on leverage, I appreciate the kind of commentary in the earlier presentation around three times. You've gone above that in the past, and obviously, shares are off today. Given the kind of Section 174 benefits, I think it's like a 14% free cash flow yield on 2027, free cash flow per share. How do you think about going above three times net debt to EBITDA to do something like an accelerated share repurchase or more repo?

Given the kind of sexual 174 benefits. I think it's like a 14% free cash flow yield on, on 27th, Street cash flow per share. So how do you think about going above 3 times? Net debt to IBA to do, you know, something like an accelerated share repurchase or or more recap.

Prabu Natarajan: Yeah. Hey, Colin, fair question. I mean, look, I think what we've signaled in the past is targets above 3, that we don't mind being a little bit over or a little bit under 3 times. Obviously, you know, we approach our share repurchases with a grid in place, and we get to update the grid every quarter. To the extent, you know, price reacts negatively, we have the capacity to buy more shares. Fundamentally, no change to the capital deployment. I think given the compression we've seen in our EBITDA, I think it's only fair to ensure that we don't run leverage up to a place where we are not comfortable in an uncertain environment. I think that's the balance.

Prabu Natarajan: I would say big picture, you know, we're on our way to buying between $350 million and $400 million this year, and we'll probably end up retiring more shares at these prices than what we previously contemplated. I'm cognizant of leverage.

Yeah. Hey Colin fair question. I mean, look, I think what we've signal in the past is targets about 3 that we don't mind being a little bit over or a little bit under 3 times. Um, obviously, you know, we approach our share repurchases, um, with uh, with a grid in place. And, uh, we get to update the grid every further and to the extent, uh, you know, price reacts negatively. We have the capacity to buy more shares so fundamentally no change to the capital deployment. I think given the compression we've seen in our ibida. I think it's only fair to ensure that we don't run, uh, leverage up to a place where we are not comfortable in uncertain environments. So I think that's the balance. Uh, but I, I would say a big picture, you know, we're on our way to buying between 350 and 400 this year and, uh, we'll probably end up retiring more shares at these prices and then, uh, what we previously contemplated but I'm cognizant of Leverage.

Colin Canfield: Got it. Maybe one more. A lot of focus on efficiency on this call, but I think it's probably worth differentiating between what I would call one-half calendar efficiencies, which is, you know, folks ripping up contracts or trying to rip up contracts and then posting it on Twitter, and then kind of second-half efficiencies, which is, you know, government officials trying to kind of shape the FY26 budget process and that taking some kind of slowness dynamics that are, you know, the public view administration. Maybe just digging into it, can you differentiate how much of the efficiency dynamics you're seeing are called what we would call kind of, you know, one-half disruptive efficiencies or more kind of second-half FY26, FY27 shaping efficiencies? Thank you.

Got it, I just did 1 more, um, a lot of focus on efficiency on this call, but I think it's, you know, probably worth differentiating between like what I would call is 1/2 calendar efficiencies, which is, you know, folks ripping up contracts or trying to rip up contracts and then posting it on Twitter and then kind of second half, as you should see is, which is, you know, the government officials trying to kind of shake the FY, 26 budget process and that taking some, some kind of slow to dynamics, that are, you know, that come with new Administration, so so maybe just digging into it. Could you maybe differentiate?

How much of the efficiency Dynamics you're seeing are are called what we what we would call. Kind of you know 1/2 disruptive efficiencies or more kind of second half FY. 26 FY, 27 shaping efficiencies thank you.

Prabu Natarajan: Yeah, I'm going to maybe take a first crack at this. I would say, by and large, the disruptions have been to our current fiscal year. We, I think, are expecting that the flavor of the disruptions probably continue into the end of the year for us in our end of our fiscal year. I would say not yet disruptions that we believe are about FY27. More of a '26 flavor to it, which is why I think we are of the view at this point that the environment is stable, though we would love for it to improve. That has not actually happened. The trades that our customers are making, frankly, are trades with respect to the current government fiscal year that ends at this end of September, and our expectation is that we're going to be in a CR to start the new fiscal year.

Yeah, I'm going to maybe try take a first crack at this. I would say by and large the disruptions have been to our current fiscal year. Uh, we we, I think are expecting that the flavor of the disruptions probably continue into the end of the year for us in our end of our fiscal year. Um but I would say it's not yet disruptions that we believe are about FY 27. So more of a 26 flavor to it, which is why I think we are off to view at this point that the environment is stable. So we would love for it to improve that has not actually happened and the trades that

Prabu Natarajan: I think that's our assumption, but it's mostly '26 focused.

Toni Townes-Whitley: Yeah, I would say I agree on the '26 and would suggest that don't see improvements, also don't see a decline. When we say stable, this is why we're holding to, again, a prudent view of '26 and carried into '27 in terms of what gives stability and, quite frankly, some of the signals on the ground for efficiency. I want to make sure when we speak to that, while it has had volatility on our day-to-day with our customers, we do see progress the government is making towards overall increases in efficiency across the various agencies. We're partnered with the government to that outcome.

That our customers are making frankly our trades with respect to current government fiscal year that ends at this end of September. So and our expectation is that we're going to be in a crescent to start the new fiscal year. So I think that's our assumption, but it's mostly 26 focused. Yeah, I would say I agree on the 26th and would suggest that don't see improvements. Also, don't see a decline when we say stable. This is why we're holding to again, a prudent view of 26 and carried into 27 in terms of what this stability and and quite frankly, some of the signals on the ground for efficiency and I want to make sure when we speak to that, while it has had volatility on our day-to-day with our customers. We do see progress, the government is making towards overall increases in efficiency across the various agencies, and we're partnered with the government to that outcome.

Colin Canfield: Got it. Thank you for the color. I appreciate the multiple questions. Thanks.

Prabu Natarajan: You bet.

Got it. Thank you for calling. I appreciate that the multiple questions. Thanks.

Operator: One moment for our next question. Our next question comes from Gautam Kanda with D.A. Davidson. Your line is open.

You bet.

1 moment for our next question.

Our next question comes from got some condo with cow and your line is open.

Gautam Kanda: Thanks. Good morning, guys.

Thanks. Good morning, guys.

Toni Townes-Whitley: Good morning, Gaut.

Good morning guy.

Gautam Kanda: Two questions. One, I was just curious if you could frame what your expectations are for the government fiscal year on flush, if we have one. Secondly, if you could speak to exposure and your contingencies if we do go into a shutdown of some protracted length, call it a month or two, how would that show up and how would that impact the P&L? Thanks.

2 questions 1. I was just curious. If you could frame, what your expectations are.

For the government, fiscal year end flush. If we have 1

and then secondly, if you could speak to

Exposure and your contingencies. If we do go into a, a shutdown of some protracted length, call it a month or 2, how would that show up? And how would that impact the p&l?

Toni Townes-Whitley: Yeah, let me take the first part of that on the flush environment and have Prabu speak to expectations relative to or contingencies relative to a CR environment. Look, I think we all talk about sweeps and flush at the end of a government fiscal year. I would suggest to you that it has been irregular relative to prior fiscal years, given the Reconciliation Act and all that has happened with budget reconciliation. In many ways, what might have been a flush environment might portend increasing on-contract growth for various organizations that have actually gone in very specific line items relative to the reconciliation. We have not seen significant opportunity in that environment towards the end here of the government fiscal year. Relative to the CR, Prabu, you want to highlight?

Thanks.

Act and and all that has happened with budget reconciliation in many ways. Uh what might have been a flush environment uh might portend increasing non-contract growth. For various organizations have actually gone in very specific line items relative to the reconciliation and so

Prabu Natarajan: Yeah, Gautam, fair question. I think we have a few different precedents over the last handful of years. I would say the longest was, if I recall, 38 or 39 days. The revenue impact that year was a little less than 1% for a full month, if you will. I think query, if that scenario plays out, would you be able to recover that in the fiscal year? I think our assumption is we're going to have a CR at year-end. To the extent we end up with a shutdown that's lengthy, we will have to talk about it on the December call. CR is our base case. There was an impact to cash, but generally, cash tends to recover within a couple of billing cycles. I would not really expect a material impact to cash.

We have not seen uh significant uh opportunity in in that environment uh towards the end here of the government, fiscal year relative to the Crescent. Uh, but you want highlight? Yeah. Gotham fair question. I think, you know, we have a few different precedents over the last, you know, handful of years and I would say, the longest was, if I recall 308 or 39 days and the revenue impact that year was up a little less than 1% for a full month, if you will. And, uh,

Prabu Natarajan: I would say marginal impact on revenues and probably little to no impact on cash if it's a traditional shutdown, if you will.

And, you know, I think query, if if that scenario plays out, would you be able to recover that in the fiscal year? I think our assumption is we're going to have a CR at the end and to the extent it. Uh, we end up with a shutdown, that's lengthy then. Um, there's certainly, we'll, we'll have to talk about it on the December call, but Crescent is our base case, uh, there was an impact of cash. But generally cash tends to recover within a couple of billing Cycles. So I would not really expect a material impact, uh, to cash. So, I would say, you know, uh, marginal impact on revenues and probably little no impact on cash if it's a traditional shutdown, if you will.

Gautam Kanda: Thank you.

Operator: One moment for our next question. Our next question comes from Gavin Parsons with UBS. Your line is open.

Thank you.

1 moment for our next question.

Our next question comes from Gavin Parsons with UBS. Your line is open.

Max Miller: Morning. This is Max Miller on for Gavin.

Morning. This is Max. Miller on for Gavin.

Toni Townes-Whitley: Good morning, Max.

Good morning, Max.

Max Miller: A two-part question for you. A, has there been an incremental change in the customer's attitude towards procurement over the past 90 days specifically that led you to revisit the guide? B, looking forward, it's clear you expect the back half to be stable, but not necessarily improve. What would it take for you to become more constructive on the outlook and that recovery in on-contract growth? It sounds like there are some signals of normalization that you're already seeing.

Uh, a 2-part question for you. Um, a has there been an incremental change in the customers attitude towards procurement over the past 90 days specifically, um, that led you to revisit the guide and then B, you know, looking forward, it's clear. You expect the back half to be stable but not necessarily improve. What would it take for you to become more constructive on the Outlook and that recovery and on contract growth? It sounds like there's some you know, signals of normalization that you're already seeing.

Toni Townes-Whitley: Yeah, fair questions. I think on the front end with the question about on-contract growth, actually, remind me of the first question. I'm sorry. Come back one more time on your first part of your question.

Max Miller: Just if there's been an incremental change in the past 90 days, specifically, that led you guys to revisit the guidance.

Yeah, fair questions. Um, I think on the front end was the question about contract growth. Uh, actually remind me of the first question. I'm sorry to come back one more time on your first part of your question.

Toni Townes-Whitley: Yeah. Yeah. I wouldn't say an incremental change over the last 90 days. I think we started in the last quarter speaking to a roughly 1% impact on program cuts and that we could track that. We're still tracking to something in that range in terms of program cuts. I think what we started to see in the environment was the effect of delay. Delay in our interaction with our customers, our ability to add to our current contract footprint. On-contract growth was the first sort of big signal for us that we were going to have revenue compression. We also had mentioned in our first quarter earnings call that our guide and our call were going to be particularly dependent on new business landing in a specific timeframe. We still see delays in that new business, as you can see in our pending award backlog.

Just if there's been an incremental, change in the past, 90 days specifically, um, that led you guys to revisit the guidance. Yes. Yeah.

Toni Townes-Whitley: Third, I think we also mentioned and have seen now slow in the ramp of new business that we have won. We mentioned a program like TENCAP and others where we have new business wins. We assume a ramp on that, and those ramps have also been slower. Those three indicators, I think, are what we've seen that have adjusted our revenue guide. Would I say they all came to fore in the last 90 days? No, I think some of the root probably efforts were there, root causes were there, but they started to show up across our various programs. We felt it prudent to obviously address that. I think the second part of your question was, what would it take, what would be the indicators in the second half and/or as we look forward to adjust guide in a more constructive manner?

I wouldn't, I wouldn't say an incremental change over the last 90 days. I think we started in the last quarter speaking to, uh, a roughly 1% impact on programs, uh, program cuts and that we could track that and we are still tracking to something in that range. In terms of program Cuts. I think, what we started to see in the environment was the effect of delay, the delay, in our interaction with our customers, our ability to add to our current contract footprint. So on contract growth was the first sort of big signal for us that we were going to have Revenue compression. We also had mentioned in our first quarter, uh, earnings call that our our guide and our call were going to be particularly dependent on new business, Landing in a specific time frame, and we still see delays in that new business. As you can see, in our pending award, uh, backlog third, I think we also, uh, mentioned and had and, and have seen now slow in the ramp of new business that we have 1. And so, we mentioned a program, like,

10 cap and others where we have new business wins, we assume a ramp on that. And those ramps have also been slower. So those 3 indicators, I think are what we've seen that have adjusted our Revenue guide. Uh, would I say they all team to 4 in the last 90 days? No, I think some of the root root probably efforts were there at root causes were there. But, we started to show that they started to show up across our various programs. And so, we felt it prudent to obviously address that, um, it when you I think the second part,

Toni Townes-Whitley: I think it's the same, the same indicators are there. On-contract growth and the engagement that we have with our customers, our ability to convert to revenue on existing contracts would be a very significant indicator for us. Improvements in that environment, improvements on the timing and the conversion of that revenue would be an indicator in a direction up on new business award, getting awards actually adjudicated. We always put in some understanding of some timeline relative to protests, given our protest environment. Even with that, getting awards actually adjudicated would be, and again, assuming that win rates hold as we've seen at target level, that would portend that we would have potential upside to the guidance that we've offered.

Part of your, uh, question was, what would it take? What would be the indicators in the second half? And or as we look forward to, uh, adjust guide uh, in a more constructive manner. Look, I think it's the same, the same indicators are there on contract growth and the engagement that we have with our customers, our ability to convert to revenue, on existing contracts will be a very significant indicator for us and improvements in that environment, improvements on the timing and the conversion of that Revenue would be an indicator, an Direction up on new business and what getting Awards actually, um, uh, adjudicated.

Protest environment. But even with that getting Awards actually adjudicated would be. Uh, and again, assuming that win rates, hold, as we've seen at Target level, that would that would? Portend that we would have

Toni Townes-Whitley: Getting those awards adjudicated, and then quite frankly, the third would be being able to increase our ramp and our velocity on existing programs that are new, and we've mentioned a couple of those. Those will be the indicators that help us understand if we can, if you will, improve upon the guide that we've offered.

Uh, potential upside to the guidance that we've offered getting those awards adjudicated. And then, quite frankly, the third would be being able to increase our ramp and our velocity on existing programs that are new. And we've mentioned a couple of those. Those will be the indicators that help us understand if we can, if you will, improve upon the guidance that we've offered.

Max Miller: Got it. That makes sense. Thank you. For 2027, it sounds like the base assumption is that the funding environment is mostly similar to this year. Is there any assumption that it improves later on in the year, or is the assumption right now that it's similar for the majority of 2027?

Got it, that makes sense. Thank you. And then for for 2027, uh, it sounds like the base assumption is that the funding environment is mostly similar to this year? Um, is there any assumption that it improves, you know, later on in the year or is, uh, the Assumption right now that it's it's similar for the majority of of 27.

Prabu Natarajan: There's probably, Max, a glide path here where, you know, the latter half of 2027 probably does improve if we are in a CR. I think that's just math would tell you that it has to improve. I think our baseline assumption, I don't want to get into the cadence of providing quarterly just yet for FY27. We'll do that on the December call. I do expect that, you know, the second half of 2027 will be smoother than the first half of 2027, but that is with the health warning that we don't know everything we need to know in order to provide that guidance crisply.

There's probably maximum a glide path here where, you know, the latter half of FY27 probably does improve. Um, if we are in a continuing resolution (CR), I think the math will tell you that it has to improve. I think our baseline assumption – I don't want to get into the cadence of providing quarterly just yet for FY27; we'll do that on the December call – but I do expect that, you know, the second half of FY27 will be smoother than the first half of FY27. But that is with the health warning that we don't know everything we need to know in order to provide that guidance.

Max Miller: Got it. Thank you very much. One moment for our next question. Our next question comes from David Strauss with Mark Leisure. Line is open.

Crispy.

Got it. Thank you very much.

1 moment for our next question.

Our next question comes from David Strauss with Barklay. Your line is open.

Prabu Natarajan: Thanks, Maureen.

Thanks, good morning.

Prabu Natarajan: Hey, David.

Toni Townes-Whitley: Good morning, David.

Prabu Natarajan: Just wanted to ask about the cautious cost efficiency measures you're contemplating. I wasn't clear, but I think you're saying that those are not contemplated in your updated EBITDA margin, EBITDA guidance. Is that correct that you haven't actually included those potential cost efficiencies?

Hey David. Good morning, David.

Just wanted to ask about the, um, the cautious cost efficiency measure you're contemplating. I wasn't clear, but I think you're saying that those are not contemplated in your updated EBA margin EBITDA guidance. Is that correct? That you haven't actually included those, uh, those potential cost efficiencies?

Prabu Natarajan: That is correct, David.

That is correct David.

Prabu Natarajan: Okay. If you look at your sales relative to your large peers, certainly some of your large peers have highlighted impacts from budgets and all the things that you're saying today, but it looks like you're seeing a larger relative impact. What would you attribute that to? I know there's business mix plays into this, but what would you attribute the extent of the impact you're seeing relative to your peers?

Okay.

Um, and then if you look at your Soul's relative to your large peers, I mean, certainly some of your large peers, have highlighted, an impact from, uh, Doge and budgets, and all all the things that you're saying today, but it looks like, um, you're seeing a larger relative impact. Um, what would you attribute that to? I mean, I know there are different, you know, business mix plays into this but but you know, what would you what would you attribute? The you know the the extent of the impact you're seeing relative to your peers?

Toni Townes-Whitley: I would really call out a couple of things. First, I think as we talk about on-contract growth, that is particularly program-based. Where we have footprint with specific customers on specific programs, and I mentioned in the earlier script that where we see large transformation occurring or where there's great budget uncertainty, we see a higher correlation of the on-contract growth environment being more challenged. We can compare footprint to footprint, but I think it is more meaningful and profound to suggest that the market is experiencing some of these delays. Where we see the greater challenge is where our customers are, quite frankly, in the highest volatility. As you talk about new business awards, I think, again, the entire market is experiencing some delays on the new business awards. We have some large awards, and we see a longer delay relative to large transformative awards.

So, I look, I would I would really call out a couple of things. First, I think, as we talk about on contract growth, that is particularly program based. So where we have footprint, with specific, customers on specific programs. And we've mentioned, I think I mentioned in the earlier script that where we see large transformation occurring, or where there's great budget uncertainty, we see a higher correlation of the on contract growth environment, being more challenged. So we could compare footprint to footprint, but I think it is more meaningful. And profound to suggest that, that the market is experiencing some of these delays. And where we see, uh, the greater challenge, uh, is where our customers are quite frankly in the highest volatility. Um,

Toni Townes-Whitley: To the extent that that populates your pipeline, I think you're going to experience that maybe disproportionately. I would suggest to you, program ramp, I don't think that is particularly unique for us as well on new programs. To the extent that we are also trying to, as we have historically, give a very unvarnished position, a fairly prudent position on what we think the environmental conditions are, how long we think they will be in place, and the impact that they're having, I think that is probably how I would take away how we are communicating versus or in relation to some of our peers.

as you talk about new business Awards, I think, again, the entire Market is experiencing some delays on the new business Awards. Uh, we have some larger Awards and we see a, a larger, a longer delay, uh, relative to large transformative Awards. And so, to the extent that that populates your pipeline, I think you're going to experience that maybe disproportionately. So I would, I would suggest to you, uh, program ramp. I I would, I don't think that is particularly unique for us as well on on new programs, but to the extent that we are. I think also trying to as we have, I think historically give a very unvarnished position, uh, fairly prudent position on what we think. The environmental conditions are

How long we think they will be in place and the impact that they're having. I think that is probably, you know, how I would take away how we are communicating versus, uh, versus or in relation to some of our peers.

Prabu Natarajan: Okay. My last question on the recompete side, I think you mentioned that you have a number of recompetes kind of in the 1% to 3% range. Could you just size what your total recompete bucket is in fiscal 2026 and fiscal 2027 and what you've kind of assumed within that in terms of recompete win rates, that's baked into your revenue guide for both years?

You know what your total recompete. Uh, you know, the recommended bucket is in fiscal, 26 and fiscal 27, and what you've kind of assumed within that. In terms of we recompete, win rates, uh, you know, that's baked into your Revenue guide for for both years.

Prabu Natarajan: David, I'll take that one. In terms of, maybe I'll start with the second part of it first. In terms of our assumptions around recompete, we would say if you think about it, 80% to 90% would be a pretty good recompete win rate for next year. New business, we would say 30% to 40%. That's probably the going-in assumption right now. In terms of what is specifically factored in, we traditionally don't get into the eaches on the recompetes. That's why we've sort of called it out as a handful of programs that are in the 1% to 3% range, which is pretty normal. If I had to zoom out a little, I would say 10% to 15%, which is typically our run rate. I would note that our recompete win rates have stabilized pretty significantly in the last couple of years.

Prabu Natarajan: We are back to what is assumed to be a traditional industry standard of about 90%. As we sit here, the only known headwind is AFEMS, which is the Air Force, where we had a pre-award protest a couple of months ago. That is the only known recompete headwind because NASA East laps out at Q3. PLAB 1, where we walked away, frankly, from going out for that program, also laps out at about Q4. Only one known program right now is probably worth about 0.5% to 1% for next year, but that is really the only known headwind.

David. I'll take the take that 1 um in terms of maybe I'll start with the second part of the course in terms of our assumptions around recompete. Um, we would say you know, you know if you think about it 80 to 90% would be a pretty good recompete, wind rate for next year and new business. We would say 30 to 40%. That's probably the going in Assumption right now. Uh, in terms of what is specifically factored in, you know we traditionally don't get into the each is on the recompete. So that's why we've sort of called it out as you know a handful of programs that are in the 1 to 3% range which is pretty normal. If I had to zoom out a little I would say 10 to 15% which is typically our run rate. Um I would note that our recomp complete win rates have you know, stabilized pretty significantly in the last couple of years and uh we are back to what is assumed to be a traditional industry standard of about 90%. And as we sit here, uh, the only known headwind um, is uh, Athens which is the Air Force where we have.

Toni Townes-Whitley: Vanguard is.

Prabu Natarajan: Vanguard has been extended for a couple of years. I'd say it looks cleaner than it has looked in the last couple of years.

Had a pre-award protest, a couple of months ago. That is the only known recompete headwind because NASA east laps out at Q3 and Cloud 1, where we walked away frankly from from you know, going after that program. Uh that also laps out of our Q4. So only 1 known program right now. Um that is probably worth about a half a percent to 1% for next year. But that is really the only known headwind and Vanguard has been extended for a couple of years. So so I I say it looks cleaner than it has looked in the last couple years.

Prabu Natarajan: Great, thanks very much.

Operator: One moment for our next question. Our next question comes from Noah Papanek with Goldman Sachs. Your line is open.

Great. Thanks very much.

1 moment for our next question.

Our next question comes from Noah, Papa with Goldman Sachs line is open.

Colin Canfield: Hey, good morning, everyone.

Hey, good morning, everyone.

Toni Townes-Whitley: Good morning.

Prabu Natarajan: Hopefully, you can hear me okay. A little background music where I am. I guess this has sort of been asked a little bit, but the biggest question for me is just duration of what's happening in your end markets. Is it temporary or is it structural and multi-year or something in between? It seems like the customer is clearly wanting to go through a major reprioritization across government spending within DOD, within FedSIF, whether that's Department of Treasury, the 2026 request, the DOD memos. Toni, you gave an example of programs actually being reduced in size, not just delayed. Government moves slow. Other spending downturns historically can be fairly long. I'm a little surprised that you're still referencing this as delays and timing and change in administration.

Good morning. Now.

Hopefully, you can hear me. Okay. I have a little background music where I am, but um,

you know I guess this is sort of an ask a little bit but the the biggest question for me is just duration of what's happening in your end markets and is it is it temporary or is it structural and and multi-year or something in between and I guess

Um, it seems like the customer is clearly wanting to go through a major reprioritization across government spending within DOD, within Fed Civ, whether that's DOE, the 26 requests, or the DOD memos. Toni, you gave an example of programs actually being reduced in size, you know, not just delayed.

Government moves, slow, other spending downturns. Historically are are can be can be fairly long.

I guess I'm a little surprised that.

Prabu Natarajan: Ultimately, the question is, when you're providing multi-year financial outlook and maybe more importantly, how you manage the business and cost and its structural size, how are you thinking about and debating internally this being a three to five-year structural shift versus a three to five quarter temporary issue?

You're still referencing this as delays and timing, and change in administration.

And and and ultimately I guess the question is when you're providing multi-year Financial Outlook and maybe more importantly, how you manage the business and cost and its structural size, how are you thinking about and debating internally? This being a 3 to 5 year? Structural Shift versus a 3 to 5 year quarter. Sorry 3 to 5 quarter uh temporary issue.

Toni Townes-Whitley: I think it's a fair question. Let me go back to where I started the conversation earlier on this call. The strategy that we put forward involved the shifting of our portfolio towards enterprise and mission IT. That was prior to an administration change, the belief that we needed to move to more differentiated capability in stickier revenue and longer-term and more mission-critical environments, and quite frankly, to integrate more commercial technology and introduce more commercial technology into those mission environments. That was in place. In many ways, that continues. There's no signal that we've seen from the current administration that would suggest that that strategy is the wrong one. In fact, if anything, we've probably had to accelerate that.

I think it's a fair question. Let me go back to where I started the conversation earlier on this call. The strategy that we put forward involved the shifting of our portfolio towards Enterprise and Mission IT.

And that was prior to an administration change. The belief that we needed to move to more differentiated capability in stickier revenue and longer term, more mission-critical environments, and quite frankly, to integrate more commercial technology and introduce more commercial technology into those mission environments was in place.

Continues. There's

Toni Townes-Whitley: The other part of our strategy was getting our own go-to-market in place with a business development engine that is, I would argue, delivering at least on the key, getting us back to target on win rate, increasing our submission, improving the accretive nature of our recompete bids, and being able to sustain a pending award backlog. The elements of the business, both the go-to-market as well as our portfolio, I would argue there is nothing structurally that should fundamentally change, if not just accelerate. We've got a temporal, what we would argue to be a temporal condition relative to how we engage with customers on on-contract growth, delays, and how we adapt to an environment that has delays and new changes and new norms. Prabu spoke to the conversation of the demand signal.

Fundamentally change, if not just accelerate, we've got a temporal. What we would argue to be a temporal condition, relative to how we engage with customers, on, on contract growth, uh, delays and how we adapt to an environment that has, uh, delays and new changes and new Norms then prabu spoke to

Toni Townes-Whitley: How are we listening to the demand signal for direct commercial, hot commercial business models, as well as commercial tech being brought? How do we go into more share as a service offerings or share and savings offerings or, again, more commercial? We are absolutely accelerating those capabilities, fixed price and outcome-based contracting, our ability to deliver. We've had a very solid track record in fixed price and P&M contracts and our ability to deliver that. I would argue that in many ways, we are taking the strategy we had and accelerating it in this environment. We are making more bets on the venture side. We are partnering with non-traditional defense contractors, and we are highlighting mission integration in an open environment with investments in mission labs and the ability to do end-to-end integration with more and more commercial tech.

Toni Townes-Whitley: The strategy itself is a multi-dimensional strategy that would suggest we've got to have, in the short term, the ability to, if you will, bridge this current environment, which is challenging for us. We are doing that both in terms of looking at AI adoption across and other ways that we make sure that we contain and hold our cost structure in place. We are also making sure we continue to invest in the differentiation that Prabu Natarajan spoke to in terms of IP and other capabilities and disrupting in some ways our own labor model, which we believe is going to be a challenge going forward in terms of a market that will look for more product-like capability. All of that was sort of envisioned in the strategy. In many ways, we are accelerating that in this current environment.

The conversation of the demand signal, how are we listening to the demand signal for Direct commercial pots? Uh, commercial business models, as well as commercial Tech being brought. Uh, how do we go into more share, uh, share, uh, as a service offerings or share and savings offerings, or again, more commercial. So we are absolutely accelerating that accelerating those capabilities, fixed price. And outcome based Contracting. Our ability to deliver we've had a very solid track record in fixed price, and tnm contracts, and our ability to deliver that. So, I would argue that in many ways, we are taking the strategy, we had, and accelerating it in this environment, we are making more bets on the Venture side. We are partnering with non-traditional, uh, defense contractors, and we are highlighting Mission integration in an open environment with investments in Mission labs and the ability to do end-to-end integration with more and more commercial Tech. So, the strategy itself is a multi-dimensional strategy

Strategy that would suggest we got to have uh, in the short term.

Toni Townes-Whitley: We see in setting some targets for the future, I would argue that as we move into the second horizon of this strategy, we actually will be lined up with where supply and demand should hopefully intersect and what we built and what the government is asking for. I would say this environment has forced, if anything, has forced us to accelerate our strategy and has forced us to further clarify our efforts and create more levers, if you will, to offset in a revenue-tight environment to offset by holding to our cost structure.

The ability to, if you will bridge this current environment, which, which is challenging for us and we are doing that. Both, in terms of looking at, uh, AI adoption across another ways that we make sure that we contain and, and hold our cost structure in place as well. Uh, we are also making sure we continue to invest in the differentiation is probably spoke to in terms of Ip and other capabilities and disrupting in some ways, our own labor model, which we believe is is a check is going to be a challenge going forward uh in terms of a market that will look for more uh product like uh capability. All of that was sort of envisioned in the strategy in many ways we are accelerating that in this current environment and we see in setting some targets for the future. Uh, I would argue that as we move into the second Horizon of this strategy, we actually will be lined up with where supply and demand should hopefully intersect and what we built and what the government is asking for. So I would say this is the this environment has forced

Prabu Natarajan: Hey, Toni, if I might add to that.

Toni Townes-Whitley: Yeah.

Prabu Natarajan: Noah, the assumption on how we operate the business. I think the budget assumption would be that it's going to be a difficult budget environment. Flat to low single digits would be probably a reasonable assumption. It's probably not a perfect assumption. Even within the flat to low single-digit growth rate, there will be efforts to reprioritize where the budget dollars go. That is the baseline budget assumption. As far as how we manage the business question, I think we have to assume that things get worse before they get better. Part of the focus that Toni's brought to the team around artificial intelligence, around better execution, is really to ensure that we are staying ahead of whatever revenue compression we see in the market.

If anything is forced us to accelerate our strategy and is forced us to further, uh, further clarify, our efforts and and create more levers. If you will, to offset in a revenue type environment to offset by holding to our cost, our cost structure. You tell me if I might add to that, no of the Assumption on, you know how we operate the business. I think the budget assumption would be that is going to be a difficult.

Budget environment.

Prabu Natarajan: That means committed to delivering EBITDA dollar growth consistently to the street, which is why we're holding our guide right now for next year at 9.5% to 9.7%. Our focus is assuming that the disruption continues for longer than three to five quarters, how would you manage this business? That's the conversation we're having, and those are the plans we're making. Importantly, part of the plans will be to see where is the greatest source of compression inside of the portfolio relative to the next two to three years. As Toni rightly said, labor-based models will be disrupted. Maybe not linearly, but in some fashion, they will be disrupted. I think part of our effort is to essentially ensure that we can, if you will, cannibalize our own labor base to ensure we are delivering more differentiation, hence more value, and hence more earnings and cash for our shareholders.

Um, and flat to low. Single digits would be, you know, probably a reasonable assumption—it's probably not a perfect assumption. And that, even within the flat to low single-digit growth rate, there will be efforts to re-prioritize where the budget dollars go. That is the baseline budget assumption as far as the "how we manage the business" question. I think we have to assume that things get worse before they get better. And part of the focus that Toni has brought to the team around AI and better execution is really to ensure that we are staying ahead of whatever revenue compression we see in the market. That means we're committed to delivering EBITDA dollar growth consistently to the street, which is why we're holding our guide right now for next year at $95 to $97 million. So, our focus is assuming that the disruption continues for longer than 3 to 5 quarters. How would you manage this business? And that's the conversation we're having.

and those are the plans we're making. And importantly, part of the plans will be to see where is the greatest source of compression inside of the portfolio of relative to the next 2 to 3 years. And as Tony rightly said, labor based models will be disrupted. Uh, maybe not linearly but in some fashion they will be disrupted. And I think part of our effort is to essentially ensure that we can, you know? So if you will, cannibalize our own labor base to ensure we are delivering more

Prabu Natarajan: That's how we're thinking about operating the business and planning towards.

Differentiation, hence more value, and hence more earnings and cash for our shareholders. So that's how we're thinking about operating the business and planning doors.

Max Miller: I really appreciate the thoughtful and detailed answer there. Prabu, just one more. Can you break out for FY26 and FY27 EPS and free cash flow guidance for each of those four? What's the change in the net income versus what's the change in tax? Sorry, I should say net income from the pre-tax.

I really appreciate the the thoughtful and detailed answer. Their

Probably just 1 more. Um,

can you break out for for 26 and 27 EPs and free cash flow guidance?

For each of those 4. Um, what's the change in the net income versus what's the change in tax?

Prabu Natarajan: Yeah, I'll give you the components of that.

Operator: Noah and Joe can certainly give you a little more detail for FY27. I think the way we're thinking about the updated 27 guide is, you know, we are going to see a reduction in top line relative to our prior assumption, which is going to lower the EBITDA we generate from the business. Think of that as a $30 to $40 million reduction to cash, then offset by Section 174, which is a $110 million offset for next year. The net change is an increase to free cash flow to about $600 million, which is our current expectation for free cash flow in FY27. Similar dynamic for 26, where we are lowering the EBITDA dollars generated from the business, but offsetting it with, I would say, implied $60 million of cash tax benefit from Section 174.

Operator: Right now, the big change on EPS between 26 and 27 is that this year we are going to benefit from an incredibly low tax rate of about 14%. Hence the, you know, $9 change guide for this year. Next year, our current assumption is, though I will have immense confidence in our tax team, our current assumption is 23% for next year. Every point on the tax rate is worth about $0.10. It's a dime. A 9% change to the tax rate is worth nearly a buck in EPS. If we delivered the same tax rate next year as we did this year, we'd be a dollar higher on EPS. Stated differently, if this year were more like next year, we'd be a dollar lower.

Yeah, so I'll I'll give you the the components of it. Um Noah and and Joe can certainly give you a little more detail for FY 27. I think the way we're thinking about the updated 27 guide is, you know, we are going to see a reduction in Topline relative to our prior assumption, which is going to lower the IBA we generate from the business and think of that as a 30 to 40 million dollar reduction, uh, to cash and then offset by um, section 174, which is a $10 million offset for next year. So the net change is an increase to free cash flow to about $600 million, which is our current, uh, expectation for free cash flow in FY 27, similar Dynamic for 26 where we are lowering the ibida dollars generated from the business. But offsetting it with I would say implied 60 million of cash tax benefit from section 174. Um and right now the big change on EPS between 26 and

27 is that this year, we are going to benefit from um an incredibly low tax rate of about 14%. Um, hence the you know $9 change guide for this year. Next year, our current assumption is though I will I will have immense confidence in our tax team. Our current assumption is 23% for next year and every point on the tax rate is worth about 10 cents. It's a dime. So 9% change to the tax rate is worth nearly a buck in EPS so

If we delivered the same tax rate next year, as we did this year, we'd be a dollar higher on UPS stated differently of this year. We're more like next year we'd be a dollar lower.

Joseph DeNardi: That is super, super helpful. The cash tax reversal that you get in 2027, do you hold that for a while, or does that decline over time, or what happens to that over time?

That is super super helpful. The and the the cash tax reversal that you get in 27, do you hold that for a while or does that decline over time or or what happens to that over time?

Operator: Yeah. We expect big picture to get back about, let's call it $200 million, a little over $200 million, which is the Section 174 taxes we've paid up over the last three years. Our current expectation, as we prefaced on the call, is that we'll get about, you know, $60 million back this year, another $110 million back next year, and math would suggest we should get a little more back in 2028. We'd have to come back to you and we'll update for 2028 a little bit later in the year. I think a normal run rate for free cash flow, you should think of that as being in that $530 million, $540 million range for FY28, so kind of more normalized.

Yeah, so we expect big picture to get back about. Let's call it 200 a little over 200 million which is the 174 taxes. We paid up over the last 3 years, our current expectation, as we Preface on the call is that we'll get about, you know, 60 back this year. Another 110, back next year and Matt would suggest we should get a little more back in 28. Um and then we'd have to come back to you and we'll update for 28 a little bit later in the year. Um, but I think, uh, a normal run rate for free cash flow. You should think of that as being in that 5:30 5:40 range for FY, 28.

Joseph DeNardi: Okay, I really appreciate all the detail. Thank you.

So kind of more normalized, okay?

Operator: Sure.

I really appreciate all the details. Thank you.

Toni Townes-Whitley: I'm not showing any further questions at this time. As such, this does conclude today's presentation. You may now disconnect and have a wonderful day.

And I'm not showing any further questions at this time. And as such this stuff conclude today's presentation, you may now disconnect and have a wonderful day.