Science Applications International Corporation (NYSE:SAIC) Q2 2024 Earnings Call Transcript

Science Applications International Corporation (NYSE:SAIC) Q2 2024 Earnings Call Transcript September 7, 2023

Science Applications International Corporation beats earnings expectations. Reported EPS is $2.05, expectations were $1.6.

Operator: Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time I’d like to welcome everyone to the SAIC Fiscal Year 2024 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] I’d now like to turn the conference over to Joseph DeNardi, Vice President of Investor Relations and Strategic Ventures. Please go ahead.

Joseph DeNardi: Good morning and thank you for joining SAIC’s second quarter fiscal year 2024 earnings call. My name is Joe DeNardi, Vice President of Investor Relations and Strategic Ventures, and joining me today to discuss our business and financial results are Nazzic Keene, our Chief Executive Officer, and Prabu Natarajan, our Chief Financial Officer. Today, we will discuss our results for the second quarter of fiscal year 2024 that ended August 4th, 2023. Earlier this morning, we issued our earnings release, which can be found at investors.saic.com, where you will also find supplemental financial presentation slides to be utilized in conjunction with today’s call and a copy of management’s prepared remarks. These documents, in addition to our Form 10-Q to be filed later today, should be utilized in evaluating our results and outlook along with information provided on today’s call.

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. In addition, the statements represent our views as of today and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. 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, Nazzic Keene.

Nazzic Keene: Thank you, Joe and good morning to those joining our call. Earlier today, we reported another quarter of strong financial results with revenue growth of over 8% and adjusted EBITDA margins of 9.8%, an increase of 70 basis points year-over-year, both of which speak to our ability to deliver solid organic growth at improving margins going forward. Before I discuss our financial results, I would like to once again recognize members of the SAIC team, who continue to have an outsized impact on their communities. September is Hunger Action Month at SAIC where we look to do our part to help end hunger through our partnership with Feeding America. This campaign is one of our largest at SAIC having raised over $350,000 in 2022 and $2.2 million over the past decade.

This translates to providing 22 million meals to those in need. Our goal is to set a new company record in 2023 with employee and SAIC matching contributions resulting in another 3.6 million meals being provided to people facing hunger in the United States. I want to personally thank Maria Bishop, Jeff Raver, and Jennifer Love Bruce for their leadership in this important mission. Now, onto a review of our financial results and our outlook. SAIC delivered strong financial results in our second quarter reflecting solid program execution, continued progress driving on-contract growth, and the ramp up of new business. Looking back over these past few years, I’m incredibly proud of the progress we’ve shown on better leveraging our talented people, building on our excellent brand, and innovating on our industry-leading solutions to drive profitable organic growth.

Our updated FY ‘24 guidance calls for SAIC’s best year of organic revenue growth and highest EBITDA margin since the separation, demonstrating our ability to convert a strong pipeline of opportunities into value for shareholders and opportunities for our employees. Our strong start in FY ‘24 positions us well to deliver on the multi-year targets we outlined at our investor day. Importantly, we will accomplish this while increasing margins and return on invested capital, staying true to our asset-light business model, and returning substantial cash to shareholders. Going forward, we believe that over the long-term, we can sustain and improve upon the gains in relative performance we have shown, while adhering to a business model and financial strategy that is working.

Portfolio actions we have taken in recent years including the acquisitions of Unisys Federal, Koverse, and Halfaker and the divestiture of our Logistics & Supply Chain Management business will contribute to our ability to deliver sustained, profitable growth in line with or better than the market. Following Prabu’s discussion on our financial results and increased guidance, I will briefly discuss my upcoming transition. Over to you, Prabu.

Prabu Natarajan: Thank you, Nazzic and good morning everyone. I am proud of the financial results we delivered in the second quarter as we continue to execute with focus and intent. I’ll discuss our results in greater detail and then discuss our improved outlook for the year. We reported strong fiscal second quarter results with revenue of $1.78 billion, an increase of 8.3%, when excluding revenue related to our Logistics and Supply Chain Management business and FSA joint venture from the prior year. Revenue growth in the quarter was driven primarily by the ramp up of work on new and existing programs, improved labor productivity, and favorable timing of materials sales. We had minimal contribution from our $900 million DCSA One IT program in the quarter, whose ramp is expected to begin predominantly in the second-half of the year.

Adjusted EBITDA margin in the quarter was 9.8%, an increase of 70 basis points year-over-year driven by strong program performance, cost efficiency initiatives, and the timing of certain planned strategic investments shifting to later in the year. Adjusted diluted EPS of $2.05 represents an increase of 17% year-over-year, driven primarily by the strong operating performance in the quarter and a roughly 4% decline in our diluted weighted average share count. Free cash flow, adjusted for transaction fees and other costs related to the sale of our supply chain business was $143 million in the quarter and $219 million year-to-date as we continue to see good traction on our working capital improvement efforts. Net bookings of $700 million resulted in a book-to-bill of 0.4 times in the quarter and 0.8 times on a trailing twelve month basis.

Due primarily to the timing of expected awards, our bookings and book-to-bill are below where we had planned to be at the beginning of the year. As a reminder, our net bookings in the second quarter do not include any value from our $1.3 billion T-Cloud program, which cleared protest in the second quarter. Consistent with our practice, we expect to book awards as we receive task orders under this important program. In fact, over the past three years, we have been awarded approximately $8 billion in single award IDIQ work of which 40% is new business. This is not reflected in our backlog beyond the task orders funded in any given year. Given that approximately 50% of our annual revenue comes from these IDIQ contracts, our practice tends to understate bookings and backlog versus one which recognizes the full or partial value of an IDIQ at time of award.

None of this is to take away from the fact that we need to continue to sequentially build our backlog. As we show on slide 10 of our earnings presentation, we continue to see a strong and growing pipeline of opportunities and expect the value of both award activity and award submissions to improve materially in the second-half of the year. In fact, since the beginning of the third quarter, we have won approximately $1.1 billion of work, roughly 60% of which is for new business across multiple domains. Included within these awards are a Hypersonics Advanced Concepts program, the MultiVehicle Fielding program in support of the Navy, and the Ground Based Radar Maintenance and Sustainment Service contract, known as GMASS, in support of the Space Force.

These wins need to clear the customary protest window, but I want to highlight the important role that the solutions developed within our Engineering Innovation Factory played in these captures. Favorable customer feedback related to these programs reinforces our view that the returns we generate from our internal investments drive long-term shareholder value. I’ll now discuss our updated outlook for fiscal year 2024. Please note that we have provided additional directional guidance for our fiscal third and fourth quarters to assist with your modeling. We are increasing our revenue guidance at the midpoint by $50 million to a range of $7.2 billion to $7.25 billion, which represents pro-forma organic growth of approximately 4.5% and our highest growth rate since the separation in 2013.

We are reaffirming our revenue plans for FY ‘25 and FY ‘26 and are encouraged by our strong start thus far against meeting our three-year targets. While we continue to have strong visibility into our FY ‘25 revenue plan, the impacts from previously discussed contract transitions and assumed delays in award timing are likely to make the cadence of revenue growth weighted to the second-half of fiscal year 2025. Currently, we expect the first-half FY ‘25 revenues to be roughly flat year-over-year pro-forma for our Logistics & Supply Chain Management divestiture before inflecting to more meaningful growth in the second-half of FY ‘25. We have visibility into this growth given recent wins and opportunities in our pipeline. Of course, we will provide a more detailed update on our FY ‘25 outlook during our third quarter earnings call.

As a result of strong performance year-to-date, we are increasing our adjusted EBITDA margin guidance to a range of 9.3% to 9.4%. We have provided additional detail regarding the drivers of first-half to second-half margins on slide 11 of the presentation. While our plan for FY ‘24 calls for low-9% margins in the second-half, our performance to start the year both in terms of program execution and the impact of other margin improvement initiatives drive increased confidence in our ability to reach our FY ‘26 margin target of 9.5% to 9.7%. As we have communicated, our objective is to consistently and profitably grow the company and balance near-term margin improvement against our objective to invest and drive long-term value. We are increasing FY ‘24 adjusted EPS guidance to a range of $7.20 to $7.40 driven mainly by improved operating results and a lower planned effective tax rate.

We are maintaining our free cash flow guidance at a range of $460 million to $480 million and our performance year to date has put us in a good position to grow our transaction adjusted FCF by approximately 10% for a third consecutive year. Finally, we continue to expect share repurchases of $350 million to $400 million this year with similar levels in FY ‘25 and FY ‘26. Before turning the call over to Nazzic, I want to thank her for her leadership in recent years. Nazzic’s ability to create an inclusive culture and opportunities for all our stakeholders, employees, customers, and shareholders is unmatched across the industry. With that, I will turn the call over to Nazzic.

Nazzic Keene: Thank you for the kind words, Prabu. As we discussed on last quarter’s earnings call, I will be stepping down as CEO and transitioning to a special advisor role on October 2 at which time Toni Townes-Whitley will assume the role of CEO. As I reflect on these past few years, I took a moment to look back at the commitments I made to you on my first earnings call as CEO. I outlined three key priorities then and am proud of our team’s ability to deliver on our commitments. I discussed the immediate focus on the effective integration of Engility. SAIC effectively integrated its acquisition of Engility quickly followed by Unisys, Koverse, and Halfaker. All these transactions contributed to a stronger portfolio for SAIC and supported or accelerated our strategy.

I discussed our immediate focus on driving profitable, organic revenue growth. Our team has done exactly that in a consistent and disciplined way providing returns to our shareholders, delivering greater value to our customers and career opportunities for our people. And last, but certainly not least, our talent strategy was paramount to accomplishing any aspect of our strategy. I feel confident that as I step down, SAIC is in a strong position with an exceptional leadership team. Across the entire enterprise, we have raised the bar and continue to win the war for talent. I am proud of what SAIC has delivered over these last several years, but I also recognize our work is never done. I am very confident in Toni’s ability to lead SAIC. She is committed to advancing on these priorities in the future through innovation and differentiation, ensuring SAIC remains a leader in our industry.

We have worked closely together in recent months and will continue to in order to ensure a smooth transition for all our stakeholders. I want to close by recognizing and thanking my friends and colleagues at SAIC for their contributions to our company, their communities, to each other and to our nation. It has been an honor to lead a company so focused on our purpose to leverage technology to serve and protect our world. SAIC is clearly driven by mission, united by purpose, and inspired by opportunities. We can now open the call for Q&A.

See also 25 Most Valuable Brands in the World in 2023 and Long-Term Returns of David Einhorn’s Activist Targets.

Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Seth Seifman with JP Morgan. Please go ahead.

Seth Seifman: Hey, thanks very much and good morning, everyone. And Nazzic congratulations, great job, and all your work at SAIC and also it seems preparing the company for future success as well. I wanted to ask…

Nazzic Keene: Thank you, Seth. I appreciate that.

Seth Seifman: Sure. Of course. I wanted to ask about the — so the growth outlook, you know, if we look at what you’re forecasting for fiscal ’25 and ‘26, it looks a lot like, fiscal ’22 and ‘23. And I would assume that, you know, given changes at the company, the strong budgets we’ve seen, you know, that there might be opportunity for more there. So you know, can you tell us kind of what keeps you at that level for right now, and how you think about what we should look for and what it might take for that growth to be a little bit faster?

Prabu Natarajan: Hi, Seth. It’s Prabu here. Good morning, and appreciate the question. You know, a couple of couple of comments here. Obviously, you know, good strong trajectory on growth to start the year. And as we’ve indicated in a couple of different places in the script, we are expecting that trend to, you know, look more flat as we exit the year. And given the, you know, book-to-bill performance year-to-date, we are expecting some of that along with maybe difficult operating conditions on the budget to continue into the end of this fiscal year and then on to next year, but recognize that, you know, the team’s done a fantastic job delivering real growth this year. And, of we are going to grow off of a higher base than we had projected about a quarter or so ago.

And so to me, that’s what gives us ultimately confidence that we can keep the trajectory, of growth at 2% to 4% recognizing we’re always going to push the team harder internally than we’re committed to right now. But, you know, the signs are good, but we have to go execute with the intent that we’ve demonstrated the first six months of the year.

Nazzic Keene: Yes, Seth, the one thing I’ll add is, you know, we’re — it’s early days still. So we’re giving you our best view as we sit here today, taking into consideration some of the budget challenges that Prabu indicated and certainly take into consideration where we sit today and the performance we’ve had. I will tell you this team is laser focused on driving profitable organic growth. And we’ll always look for the opportunity to outperform, that’s the way they’re engineered. That’s the way they’re wired, but we just believe it’s in our best interest and your best interest to share what we think today, recognizing that, as we get closer and as you hear from Toni and Prabu in the next earnings call. We’ll have one more quarter of visibility and we’ll continue to provide those updates.

Seth Seifman: Great. Thank you. And maybe just to follow-up on this topic real quick. The delays you’ve talked about, in terms of awards and the impact on book-to-bill and the difficult operating conditions you’ve described, you know, when we were just speaking about expected growth. Can you talk a little bit more about that environment there? Are these delays mostly things that are behind you, or are you anticipating that, is there you’re you’ll see more delays ahead in terms of the timing of awards?

Prabu Natarajan: Sure. Hey, Seth. Prabu here, I’ll take that one. I think in terms of the budget environment, we expect, you know, Q3 fiscal as well as Q4 to be tight on the hill. We’ve all followed the dynamics on the hill here, and we expect that sort of environment to persist into the second-half of our year. So hopefully we get the resolution on some of those topics, get appropriations done, and have a budget to operate with, but we are presuming right now, cautiously proceeding into the second-half of the year, recognizing things will remain tight on the legislative side. On the backlog and the new business front, as we pointed out in the script, since the end of the second quarter, we won approximately the $1.1 billion of work, of which roughly 60% is actually new work for us.

We will have to wait for all of that to get through the customary protest cycle here over the next quarter plus. And therefore, we’re just proceeding cautiously recognizing. We’ve got DCSA that is starting to ramp in the second-half of this year. We’ll have very early signs of growth from T-Cloud. Obviously, AOC partner is continuing to grow along with hopefully GMASS and a couple of other things that are, one, but haven’t cleared the protest. So by and large, I would view those as things that are hopefully in the bag, but we won’t know that for another quarter plus. And therefore, we’re just proceeding cautiously given how difficult the environment is going to be in the second-half of the year, presuming that there’s going to be some delay in the cadence around recognizing awards and obviously converting awards into revenue.

Really big picture, we are encouraged by where the outlay environment is and it has been strong. And therefore, I think the team is up for the challenge relative to what’s implied for top line growth in the second-half of the year, as well as the first-half of the year, but it’s easy to get ahead with a PowerPoint chart, much harder to actually execute in practice, and that’s what the team’s committed to doing.

Seth Seifman: Great. Thank you very much.

Nazzic Keene: Thanks, Seth.

Operator: Your next question will come from the line of Jason Gursky with Citi. Please go ahead.

Jason Gursky: Yes. Probably I may have missed it. I’m sorry, wait, let me start. Nazzic, congratulations, and I wish you the best in retirement.

Nazzic Keene: Thank you, Jason.

Jason Gursky: [Indiscernible] Sorry about that. Yes.

Nazzic Keene: No, worries. No worries, I didn’t hear you.

Jason Gursky: Yes. So I may have missed it. You gave a little bit of color on revenue expectations in the first half of next year. We’ll be exiting the year at a lower adjusted EBITDA margin than we generated here in the first-half. So maybe you could talk a little bit about the margin trajectory in ’25 as well?

Prabu Natarajan: Sure. I appreciate the question, Jason. And I think, look, first-half performance was stellar, and obviously, sitting at 9.5% in the first six months of the year gives us a really good insight into where the year is expected to be. Having said that, and we’ve indicated that in some of the supplemental material, we are expecting some additional investments in the second-half of the year things that have shifted from H1 into H2. So that is likely going to be a modest level of headwind to the operating performance of the business. And of course, there’s always factors around performance, that was just stellar in the first-half of the year relative to what we’re assuming right now for second half performance. And I’ll — this is what I’ll leave you with.