Release Date: June 03, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Science Applications International Corp (SAIC, Financial) reported solid financial results with 40 basis points of pro forma organic growth.
- First-quarter adjusted EBITDA of $166 million resulted in an adjusted EBITDA margin of 9%, reflecting increased investment in the business.
- Transaction adjusted free cash flow of $21 million was ahead of plan, showing good momentum on working capital efforts.
- SAIC's multi-year growth strategy focuses on five national imperatives and four key growth vectors, positioning the company for long-term profitable growth.
- The company submitted proposals with a total value of over $8 billion in the first quarter, aiming for $22 billion in FY25, with two-thirds representing new business.
Negative Points
- SAIC faced a roughly five-point headwind from previously discussed recompete losses, impacting overall growth.
- First-quarter revenue was affected by a $30 million year-over-year headwind due to non-recurring material sales from the prior year.
- The company expects second-quarter revenue to be roughly flat year over year, with a 5% to 6% headwind from recompete losses.
- Margins are expected to improve in the second half of the year, indicating current pressure on profitability.
- The company is cautious about the potential impact of normalizing government outlay trends on revenue growth.
Q & A Highlights
Q: Could you give us some update in terms of the Vanguard recompete and other recompetes we're still looking at over the second half?
A: On Vanguard, we are in process right now. Our expectations for the timing of the award and potential revenue impacts have not changed. We see minimal impact this year from any recompete on Vanguard. Another significant recompete might be our Army S3I program, which could be a Q4 this year or Q1 of next year. (Prabu Natarajan, CFO)
Q: Could you give us some sense of the timing of when you might expect to go sitting on Vanguard and S3I?
A: We expect the timing to be towards the end of the fiscal year for both Vanguard and S3I. (Prabu Natarajan, CFO)
Q: You mentioned that the margin in your backlog is stronger than the margin you're booking. Can you give any kind of quantification or color on the increment?
A: We are seeing positive impacts from stringent bid thresholds, with margin rates inflecting higher than the numbers indicated in your question. This trend is observed across all contract types, including cost-plus, fixed price, and T&M work. (Prabu Natarajan, CFO)
Q: Could you talk us through what the M&A strategy is at this point?
A: Our M&A strategy remains focused on technology-based and capability-based tuck-ins. We are disciplined in our approach, given the seller-oriented market, and are aligning our pipeline with our strategy. (Prabu Natarajan, CFO; Toni Townes-Whitley, CEO)
Q: What are you seeing for the company on the opportunity side in Europe?
A: Our opportunities are closely aligned with customer priorities. We follow our strategy and pipeline to identify specific capabilities that will differentiate us in that market. (Prabu Natarajan, CFO; Toni Townes-Whitley, CEO)
Q: How do you think of the right mix between defense and intel versus civilian going forward?
A: We expect both segments to grow over the long term. The civilian business, with its higher mix of fixed price and T&M work, is likely to grow as a relative share. However, we aim to improve margins across the entire portfolio. (Prabu Natarajan, CFO; Toni Townes-Whitley, CEO)
Q: How do we think about the profitability profile longer term for the defense and intelligence segments?
A: We expect margins to improve in both segments over the long term. The civilian business, with its mix of T&M and fixed-price work, has higher EBITDA and EBIT margins, but we aim to improve margins in defense and intel as well. (Prabu Natarajan, CFO; Toni Townes-Whitley, CEO)
Q: Can you talk about the drivers of organic growth outside of timing of recompete losses?
A: Key drivers include the ramp-up of programs like DTAMM, T-Cloud, GMASS, and a recent Air Force win. We also expect on-contract growth to be about 3% to 5% incremental to last year. (Prabu Natarajan, CFO)
Q: How do you go about pushing for more on-contract growth above the 3% to 5% levels you mentioned?
A: We have a playbook for on-contract growth across each business group, focusing on introducing differentiation and leveraging existing contracts. We aim to systematically drive differentiation into all our bids. (Toni Townes-Whitley, CEO; Prabu Natarajan, CFO)
Q: Can you speak to any changes in historical seasonality we should expect to see in '26 and '27?
A: We expect recompete losses to normalize to about 2% by Q4, which should support our 2% to 4% growth guidance. Our robust pipeline and new business wins will also contribute to growth in '26 and '27. (Prabu Natarajan, CFO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
