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.

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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.

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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.

As you look at our incentive comp, improving margins, generating more earnings growth is a key part of the incentive comp metric for the team. And we are going to push as hard as we need to push recognizing that where we are right now allows us to meaningfully think about the balance between investing in the business for additional future growth relative to delivering upsized margins that may be a little more temporal in the near-term. So we’re trying to get that balance right, but recognize where we’re sitting right now is sort of near the top end of our current updated guide of about 9.4%, but we obviously have our work cut out for us over the next couple of quarters, and we are committed to doing the best we can, but recognize that we are thinking about this on a multiyear journey as a multiyear journey.

And to the latter part of your question around margin rates for FY ’25 and ’26, I recognize that we’re off to a really strong start, and it obviously puts us in a good position relative to those targets, but I wouldn’t want to get ahead of the transition we have ahead of us and our first earnings call with Toni next quarter, as well as our guidance call in March of next year, and we’ll get you guys appropriate to calibrate on where we see margins for next year, recognize we’ve actually done a really good job, and I’m just incredibly proud of the performance we’ve delivered, and we’ve got work to do here for the next half of the year.

Jason Gursky: Okay, great. And then maybe just one quick follow-up. This is kind of wrapped up into bidding and book-to-bills. But just the availability of labor and the cost of that labor, what that’s doing to your rates and just kind of just what you’re seeing in the general competitive environment, how you and others are reacting to what’s been a few years of escalating costs and the success that you’re all having and passing on those rates to the customer?

Nazzic Keene: Yes, Jason, let me talk a little bit about the macro environment on labor, and then Prabu can provide some color. I think as we sit here today, it’s a very different place than as we sat here a year ago. And so we’re seeing some great progress in the labor market and our ability to hire. I think we’ve got a very compelling value proposition as we hire employees. Our retention rates are higher than they’ve been in some time. So we’ve seen a reduction in our turnover rates. And we’ve certainly seen our ability to hire and increase over the course of the last year. So I feel very good about our position and our posture. We’ve implemented some new tools and practices and several things internally to help us advance that.

On the cost side, certainly, we’re seeing some minor escalation, but I would say, and Prabu can provide some color. We’re not seeing it as a significant headwind as we continue to navigate our contract base, and certainly, we have to and will always pay at market and ensure that we can attract and retain the best talent in the industry. But I sit here in a much better and more confident place than I was probably a year ago, just looking at our results on the labor — the broad category of labor attraction, hiring and retention. Prabu, do you want to add some color?

Prabu Natarajan: That was perfect, Nazzic. Thank you. Jason, what we’re assuming for merit increases is sort of in that 2% to 4% range, I think towards the higher end of that range for certain categories of employees that we believe have skill levels that are going to require us to pay a little more. So to me, that’s how we’re calibrating it. As a reminder, approximately 60% of our business is cost-plus. So while inflation has been a factor over the last couple of years, we’ve also had the mix of contracts working in our favor that has allowed us to pass on somewhat higher cost. That’s not infinite math. At some point, labor costs will catch up, but we’ve actually managed that problem, if you will, pretty effectively over the last couple of years.

We’ve estimated the pressure from labor-related inflation as costing the company, maybe 10, 20, 30 basis points of margin over the last couple of years. And therefore, as we look ahead with the improving labor environment, we would expect some of that to endure to the benefit of margin rates, and that’s where the balance conversation comes in around investing for growth versus investing to drive additional margin rate improvement in the business, and we’re laser-focused on the dynamics, but recognize really big picture. Things are looking better now on the inflation front and labor front. And we’ve got room in our rates. And candidly, one of the things we’ve really focused on over the last couple of years, and we’re starting to see the benefit of this in the margin rates we’re delivering is we’ve undertaken a significant number of cost-related initiatives that has really allowed us to manage our wrap rates, if you will, for overall competitiveness.

That includes facility costs and all of the other sort of if you will, fixed indirect costs that we have in running the business. And therefore, to the extent we continue our efforts to manage those costs effectively and assertively, I would expect that the naturally sort of turning environment around labor pressure and inflation pressure is going to be a little bit of a tailwind to margins. But again, recognize we’re trying to balance the equation here and stay calibrated.

Jason Gursky: That’s great. Thank you very much. [Indiscernible]

Prabu Natarajan: Of course. Thank you.

Nazzic Keene: Thanks, Jason.

Operator: Your next question will come from the line of David Strauss with Barclays. Please go ahead.

David Strauss: Good morning, thanks and Nazzic, congratulations and best wishes.

Nazzic Keene: Thank you very much.

David Strauss: Could you just run through the current kind of landscape on the recompete side, how you’ve done year-to-date, what the rest of the year looks like and updates as well, kind of the balance of work to be recompeted over the forecast period? Thanks.

Nazzic Keene: Yes. Let me touch on a couple of things. So we — as we discussed probably a year ago, we have seen some challenges in the recompete space. I think the team has done an exceptional job of focusing on that and improving the overall metric in our underpinning of the business. So I would say I’m very confident with where we are in our recompete win rate. Clearly, we lose some — we’re always going to lose some business, and it’s just the nature of the way that the government acquires and the way that competitors step into new opportunities. But I feel we’re in a much better space than we were a year, 1.5 years ago. as we look at recompetes. We don’t really go through the big significant moving pieces as much for competitive reasons as anything else.

But certainly, the significant deal that everybody is aware of as it sits on our portfolio is the Vanguard, the Department of State Vanguard deal that is being transitioned to evolve. And so that is something that everybody is aware of. It’s a significant part of our portfolio. And we’re going through that process. It will probably become clearer sometime into next year as to how all that plays out. As a reminder, they are taking different pockets of work inside of NASA and putting it into multiple award streams. And so we’re looking at — that’s certainly what makes the most sense for us. But — and we expect to win our fair share of that work. In the meantime, I just want to take a shout out to the team that’s delivering, because it’s always a distraction when there’s a lot of procurement activity.

But this team is laser-focused on delivering to the mission delivering to the Department of State and ensuring that we don’t miss a beat and continue to innovate and accelerate our position supporting this customer. Prabu, do you want to add some color?

Prabu Natarajan: Thank you, Nazzic. That was perfect. David, here’s what I would add. We’re growing this business at the midpoint of our updated guide about 4.5%. And as we noted in the prepared remarks, that is the highest growth rate we’ve posted organically since the separation. So in spite of the headwind from the recompete loss, Oms notably, which we’re assuming we’ll cycle out of the portfolio beginning in Q4, we are delivering approximately, let’s call it, mid-single-digit growth rate. Since the last quarter, we’ve also won some new work, which will start to backfill the loss that we have, but the timing of the Oms project program exiting the portfolio and the timing of the new work sliding into the portfolio is what impacts the cadence of the revenue growth but recognize that we are laser committed to delivering consistent growth rate consistent with the 2% to 4% that we outlined at Investor Day, but recognize that Oms is probably the biggest one worth calling out for the year.

And if you really think about the performance of this business, you would expect about a 1% to 2% growth rate impact on an annual basis from recompete losses, that’s just the nature of the business, I think, and we are looking at something a little bit higher than that this year, but recognize 4.5%, 5% growth is just really solid growth and right in line with where the peer set is, and we’ve got our work cut out for us for next year, and that’s what the team is committed to doing.

David Strauss: That was great color. Thanks. And then on cash, I wanted to get an update on working capital and what you see there, Prabu, I think year-to-date, it’s been a slight drag, kind of what’s embedded for the second-half of the year and just an update kind of on the working capital tailwind that you have embedded your fiscal ’26? Thanks.

Prabu Natarajan: Appreciate the question. First-half of the year was actually really good performance and relative to the first-half of last year. And the momentum that we began to see in the business at Q4 of last year. And as a reminder, we collected more than $2 billion of cash in a single quarter or Q4 of last year. So that momentum has actually continued into the first half of the year. Historically, if you think maybe three to five years back, the cadence of collections tends to be about, let’s call it, 45% in H1 and 55% in H2. Last year was actually flipped. We actually had more to collect — a lot more to collect in H2 than H1. And this year is actually more normalized relative to the historical pattern here. So we actually have good visibility into getting to the midpoint of our guide range as we sit there now, but recognize that our guidance range is $20 million, which happens to be about a day’s worth of DSO, really big picture.

So we’re dialing the forecast down to within a day of what our full-year cash performance is going to be. But I’m really just pleased with where we are for the first-half of the year. It is ahead of where we expected to be from an internal plan perspective, but recognize we’ve got six more months of collections and disbursements we have to worry about. Really big picture on FY ’25 and ’26. The performance we’ve had in the first-half of the year gives us continued comfort that we can get to the targets that we laid out at Investor Day, approximately $10 of free cash flow per share in FY ’25 and $11 in FY ’26, recognizing that we are addressing the headwinds from the Section 174 that’s slowly starting to burn off in the system here. But obviously, from a working capital perspective, really big picture, I continue to see good level of opportunity, we’ve dialed the process down where we could see working capital accretion and dilution, if you will, at the individual program level and we have program managers taking responsibility for working capital.

That’s the level of traction we wanted to see two years ago, and that’s exactly what we’re seeing right now. So I continue to see that and capital deployment as a multiyear opportunity as we sit here in the second half of FY ’24.

David Strauss: Perfect. Thanks very much.

Prabu Natarajan: Sure.

Nazzic Keene: Thanks.

Operator: Your next question will come from the line of Matt Akers with Wells Fargo. Please go ahead.

Matt Akers: Hey, good morning. Thanks for the question, and Nazzic good luck [Indiscernible].

Nazzic Keene: Thanks, Matt.

Matt Akers: I just wanted to follow-up on the commentary on sort of the bookings delays and you mentioned like year-to-date, it’s sort of been a little bit slower than you thought, and it sounds like some of in the back half, maybe to shift into 2025. And what do you think is driving that, I guess? Are customers kind of more cautious given the budget environment? Is it just kind of a few large award that lift? Is it protests — just kind of curious what you think is kind of driving that dynamic?

Nazzic Keene: Yes, I Matt couple of comments, and then I’ll let Prabu provide some detail. On the book-to-bill, as Prabu mentioned in the prepared remarks, it certainly was below where we had planned for it to be. And I think if it was where we planned, we would be having a very different call here today and things would look different. But I wanted to give you my little bit of context on that. So book-to-bill, as we all know, is an indicator, but not the indicator for growth. And there are so many components that go into it. Prabu touched on one of them, which is how anybody books their IDIQ, single award or multi-award going into book-to-bill period of performance, that can have an impact as well, how much of the bookings is new business versus recompete business.

So there’s so many aspects that go in that just don’t get captured in a metric in and of itself. Now that being said, obviously, we had planned for and anticipated a higher book-to-bill. As Prabu also mentioned, we’ve had incredible bookings for the first month of this quarter. And in the world of what could a should, if it happened last quarter, again, a very different metric, a very different conversation. So I don’t think there’s anything that’s systemic in the delays. Delays is good, better and different is a part of how this ecosystem operates. We do our absolute best to forecast with as much diligence as we can, when things will close, when they’ll clear the protest cycle. But of course, much of that is not in our hands. That’s in the customer’s hands.

So with all that being said, I don’t believe there’s anything systemic in our portfolio that’s an issue. I don’t believe there’s anything that’s really a big difference in the customer’s buying behavior. Obviously, the headwinds around budget and CR, I’m sure, weigh on people’s minds. But I don’t see anything that would cause — at least doesn’t cause me considerable alert or concern as I look to the future. And as Prabu has mentioned, even with this book-to-bill, even with some of these delays, we’ve got new business coming online, and we have a very strong and healthy pipeline. So that’s my view of it, but I want to make sure, Prabu can address some of the specifics.

Prabu Natarajan: Thank you, Nazzic. Let me add a couple of color here, and I’m going to take us up one level up. As we think about where this business is positioned relative to the pipeline, we have a pipeline that’s — I’m going to say circa $100 billion. And to me, that’s really where I start. And then I think as we think about the multiyear growth objectives we’ve laid out the 2% to 4%, certainly, hopefully, at the midpoint, about 3%. We have to then work our way from where the pipeline is to how much of it is qualified and then how much we are submitting as a fraction of that pipeline. As we work our way down the funnel, I want to reassure folks listening to this that we have sufficient pipeline to go prosecute the growth objectives we’ve identified.

We’ve got to get our submit volume higher, some of that is seasonal. Some of that is timing, and we’re seeing some of that this year. And some of that is recompete losses, which do impact book-to-bill. And therefore, to me, as I put the macro with the micro, I think about it as over time, we have enough pipeline and therefore, we get our submits up higher, and our win rates are actually pretty competitive on the new business front. We’ve shared over the last 1.5 years or so, that our new business win rates are tracking a lot higher than they have been tracking historically. And I don’t need to go through the list of new programs that we’ve won just in the last 18 months, but recognize that there’s enough pipeline here and the award activity has slowed a little bit in the first-half of the year, but some of that is transitory, I think — and the reality is we feel good about where the overall portfolio sits, but we’ve got to get to submit volume up, and we are holding our share of recompetes as Nazzic said earlier on the call.

But to me, that’s the macro and the micro together.

Matt Akers: Okay. Great. That’s helpful color. And then I guess I wanted to ask on T-Cloud and how fast you kind of see that program ramping up. I assume that’s kind of been calculated in the guidance you’ve given over the next couple of quarters, but to how fast is a pretty sizable program?

Prabu Natarajan: Sure. I’ll take that one. At this point, what our guidance reflects is a nominal amount of contribution from T-Cloud. We’ve received the first task order on the program, and we are expecting a fraction of that to convert into sales this year. One way to think about it is probably less than one-half of 1% this year, ramping to somewhere between 1% to 1.5% of enterprise sales next year and hopefully, higher than that the year after. But we are assuming that the ramp is going to be methodical. We’ve got to get through some initial design gates that we are working with our customers actively. And — but we do expect that program to ramp. At this point, there is very minimal amounts of revenue contribution assumed in the guidance for FY ‘24.

Matt Akers: Great. Thank you.

Prabu Natarajan: Sure.

Nazzic Keene: Thanks.

Operator: Your next question comes from the line of Bert Subin with Stifel. Please go ahead.

Bert Subin: Hey, good morning and Nazzic I’ll echo my congratulations. And actually, I have my first question for you. As you reflect on your time at — just maybe just a high-level question, sort of thinking through your tenure. Just as you reflect in your time at SAIC, where do you think we are in the evolution toward sustaining that profitable organic growth that you mentioned? And what in your view has changed at the company in your time that you think sets SAIC up well to just to increase growth as we think into the future?

Nazzic Keene: Yes. Thanks for the question. So as I look forward, as I look at the company today and I reflect on what I believe it looks like going forward, and Toni and I are in lockstep on so much and so focused on profitable organic growth. So I do think the company is well positioned to keep this drumbeat going forward. Now as we all know, any given quarter, you could have 8% or you could have less than 8%. But I think the ingrained in the DNA of the company at this juncture is really focused on driving profitable organic growth. And we see it across the board. Over the course of my tenure, we have done substantial work at the leadership levels of the organization, ensuring that we have leaders that have a growth mentality and a growth mindset, we have done significant work in changing out our sales organization, our go-to-market organization and certainly the investments in the innovation areas that differentiate us.

So I’m very proud of what the team has been able to accomplish. The good news is, although I’m stepping down, the team that does the heavy lifting every day is here every day. And so that mindset, that focus and that energy will continue and even accelerate under Toni’s leadership. So I feel very confident in the company as it sits today with this as an underpinning of what gets done, what gets measured gets done and where we focus each and every day. So I think that’s how I would answer the question around how do we sit today, what have we accomplished and how does that look forward. And hopefully, that addresses the highlights of your question. Bert if anything?

Bert Subin: No, no, that’s it.

Nazzic Keene: Sure, thanks.

Bert Subin: And maybe just as a follow-up for you for Prabu. You provided some great commentary on the pipeline and your view towards the macro setup for the company or just the broader business. If we’re thinking through current dynamics, what success is the company having when it comes to growth within contracts where you already have a current book of work just given what you noted on favorable hiring, retention and outlays trends? And how much of a tailwind do you think on contract growth can be in these next couple of quarters? Is that something that potentially pushes you towards the higher levels of the guidance levels you’re looking at?

Prabu Natarajan: I appreciate the question, Bert. And we’ve signaled for a couple of years now for a company with between $22 billion and $23 billion of backlog, there’s oodles of sealing left that we can go deliver growth on. One of the things that we’ve been laser focused on over the last couple of years is instead of chasing the shiny rabbit, let’s focus on the things that have ceiling that are right in front of us because the P-win on filling up the ceiling is far greater than the P-win on any new business or any sort of new ventures out there. So to me, that’s been the focus. It has proven to be a source of tailwind to organic growth over the last couple of years. I would characterize that tailwind as between 1% to 3% higher than our initial plan expectations for any given year.

And I recognize that there’s always a balance between more on contract growth, offset by maybe less in the way of new business growth. And therefore, when you sort of work your way through the dynamics of new business competition and your win rates are higher. And on top of that, you’re beginning to deliver better on contract growth organically because you have ceiling ahead of you that actually does create a pretty favorable dynamic. Again, it’s our commitment that we need to go fill out the ceiling, and that’s what the team is laser focused on doing. And I would say, hopefully, the team’s going to continue to execute the way we’ve done it in the first half of the year and deliver some upside here for the full-year and hopefully next year as well.

But we’ve got work to do. And we — as we always remind the team internally, dialing it up in our PowerPoint chart is good, but that’s just the first step of actual real execution with focus and intent and that’s what we’ve done.

Nazzic Keene: Yes. I want to add a little color on that because I think that’s a great question. It’s one of the areas that as I look back and reflect on where we sit today and where we sat even two or three years ago, the focus on on-contract growth is actually oddly enough, relatively new. And so as we looked at opportunities to strengthen our culture and to look, again, ingrain the drive for profitable organic growth really ensuring that we have the people, the talent, the leadership at the program, the portfolio level that can focus on this was paramount. And so a lot of work has been done to actually accomplish great success in the on-contract growth. Again, I think it’s an area we can continue to focus on. But that’s an area to your earlier question, Bert, around where I’ve seen changes. That is absolutely an area that I believe is fundamentally different and better than it was just a few years ago.

Bert Subin: Great. Very helpful. Thanks and congratulations again, Nazzic.

Nazzic Keene: Thanks so much.

Operator: Your next question comes from the line of Cai von Rumohr with TD Cowen. Please go ahead.

Cai von Rumohr: Yes. Thanks so much and Nazzic, again, I’d like to join everybody a job well done. Probably not to beat a dead horse, but historically, Q3 is your biggest book-to-bill quarter. And certainly, I think unobligated O&M funds are kind of at an all-time high. And so the outlays have been strong. So — and you mentioned you got $1.1 billion of bookings. So what are we looking for book-to-bill as a range in this quarter. You got a $1.1 billion, certainly not all of that was — is under — in — still in the protest window. What should we be looking for the bookings book-to-bill in this quarter?

Prabu Natarajan: Yes, Cai. So let me try and answer it a little bit differently. Maybe in response to earlier question, in order to support the growth aspirations of this organization, as outlined at Investor Day, which is 2% to 4%, we said we want book-to-bill to be comfortably over 1.0. It’s not a great indicator any one quarter. We’re off to a really good start at Q3, but I would expect that number to be 1.0 or better in Q3, but recognize that we don’t always control the timing of things like protests that may be out there. And therefore, we’re just going to navigate it one quarter at a time, but recognize that, on average, over time, we want book-to-bill to be comfortably over 1.0. That’s the objective for the team.

Cai Von Rumohr: Okay. And then so the pattern you’ve laid out for the third and fourth quarter. So the first — the second quarter, you beat consensus on revenues by $100 million. And if we look at the third quarter, actually, your revenue number is higher than I would have guessed. And then we get a very big stepdown in the third, and I recognize you have $135 million impact from five fewer days. But help us understand why is it so sharp? You mentioned that Oms kind of drops out. How big is the sequential drop in Oms from the third to the fourth. I mean, I would assume with T-Cloud and with One IT building that you would not have had such a severe drop off sequentially?

Prabu Natarajan: Right. Thank you, Cai. I appreciate the question. And look, I think it was important for us to give you all a perspective on how we think sitting here today, the second-half to play out. And we’ve signaled approximately mid-single-digit growth rate in Q3 and roughly flat in Q4. Our assumption right now is that Oms will exit the portfolio at the very end of the third quarter. So to me, the obvious bridge from Q3 into Q4 is predominantly Oms-driven, big picture. The second variable is that Q4 tends to be the weakest revenue quarter in a year, just given seasonality, not just the working days, component of this but also just the productive labor hours that we typically calculate in Q4. So to me, those are probably the two variables.

Again, our performance year-to-date has been very pleasing to us, and the team has done a stellar job. And as we sit here today, we are starting to see that flattening trend, which is really important for us. And for those that have interacted with Nazzic and with me know that we try to be as transparent as we can about the next two or three quarters. It’s a little bit unusual for us to talk about forecast into the second-half of this year or even into the first half of next year, typically, but given the transition we thought it was just as important, if not more important, to give you some additional color as we see the second half rolling out here. So to me, that’s the sort of the more important drivers on Q3 versus Q4, but recognize that the performance year-to-date has been stellar, and we want to make sure we keep the momentum up because we recognize the exit velocity out of this year is going to inform how we think about H1 of next year.

And hopefully, a couple of months from now when we’re doing our Q3 earnings call, we’ll give you an update on where things are.

Cai Von Rumohr: Okay, thank you very much.

Operator: Your next question will come from the line of Tobey Sommer with Truist Securities. Please go ahead.

Tobey Sommer: Thank you. I was wondering if you could quantify what the changes in employee retention have — how that has impacted growth and contributed to the acceleration in organic growth. I mean some of that, of course, is internal actions, but some of it’s also changes in the labor market broadly? And how does employee retention compare to pre-COVID levels and some context around the current snapshot of figures?

Nazzic Keene: Yes. Tobey, I’ll give you the macro view. So I actually don’t have the specific numbers in front of me, probably who may have them memorized. I’m certainly does. But I will tell you that as we sit here today, our ability to retain the employees, which is the opposite is what’s the turnover rate is certainly a couple of points better than it was at least a year ago, give or take, and probably much more in line with what it was pre-COVID. And so certainly, any impact or movement in our ability to retain people, just helps retain our base and allows us then to focus on hiring for new roles, new talent. And so that, coupled with the ability to — some of the things that I mentioned earlier in our ability to hire, retain and attract new folks has given us really a great opportunity to, as you mentioned, to drive revenue where we can.

And so that’s certainly been a component of that to bring in some new talent in some key areas in which we’re growing the business so we can strengthen our talent base. But it really is the combination of being able to retain the labor that we have as well as some of the great work that the hiring teams have done across the company and being able to add and attract and retain new talent. In general, and we track this on a regular basis, our turnover is below our industry turnover, and we see that as a very positive sign. Prabu, any specifics?

Prabu Natarajan: Thank you, Nazzic. The one thing I will probably tee up is, aside from all of the macro factors driving improved labor conditions across the business, we are probably seeing, for the first time in maybe a little over 24 months. Organic headcount increase that is comfortably better quarter-over-quarter. We’ve signaled for about two to three quarters now that labor conditions are improving. It is directly contributing to higher head count inside the organization. The other thing that the team is doing that is really bearing fruit is to the extent we have some difficult recompete challenges, we are finding ways to redeploy talent that is needed in other parts of the business. This has always been the holy grail for human capital management inside companies, and we’re doing a better job of it now than we did a couple of years ago, kudos to the team.

So we are holding on to critical higher-end talent that we are effectively redeploying in other programs. So instead of seeing the headcount come in and go with programs, we’re actually doing a better job holding on to that headcount, so we can organically drive headcount retention were for a company with that much backlog and that much ceiling, we have enough and more opportunities inside the company to redeploy talent, and that’s an area where we’ve spent some time and investment getting better at, and we’re starting to see the benefit of that inside our headcount numbers themselves.

Nazzic Keene: Tobey, one more thing I’ll add, and you guys have heard me string these words together now for several years, but profitable organic growth creates an environment. So not only does it create opportunity because you’re growing the business, you have to hire people, but people like to be part of a growing organization. And in some of the programs we’ve won, and I probably mentioned several, but in the area of space or the area of cloud or exciting sexy new programs and people want to be associated with a company that are winning these types of programs that are so mission-critical. So I think the goodness in addition to being good for the shareholders, it’s great for an organization to be a growing entity, especially in areas that are exciting and new.

Tobey Sommer: If I could sneak a follow-up then. Outside of Vanguard, are there any sort of chunky contracts that could prospectively be broken apart into multiple procurements over the next couple of years?

Nazzic Keene: Vanguard is certainly the largest 1 and the most visible, as Prabu was mentioned, any given year, 20%, give or take, of our portfolio is up for recompete. And so that’s just the nature of the business. But Vanguard is 1 certainly that would have and could have the biggest impact. But again, we expect to win our fair share and we’ll continue to deliver on that program until things change.

Prabu Natarajan: And one last data point here, as we signaled in the script, there’s about $8 billion of IDIQs that we’ve won over just the last 2 to 2.5 years. That is not fully reflected in the backlog. In addition to that, we are part of multi-award IDIQ wins over the last couple of years that are probably just as big as the single award IDIQ number, if not bigger. So if you think about the labor environment improving, if you think about the work being task order driven and filling out the ceiling inside of contracts, I think the conditions are ripe for organizations that focus on contract growth to deliver outsized on contract growth over the next few years especially in the backdrop of a budget environment that’s likely to be somewhat difficult. So to me, I think, as I think about the context, that’s the environment we’re sitting in right now. But on the whole, we’re pleased with how we’re doing on the labor front.

Tobey Sommer: Thank you. Good luck, Nazzic.

Nazzic Keene: Thanks.

Prabu Natarajan: Thank you.

Operator: Your next question will come from the line of Louie DiPalma with William Blair. Please go ahead.

Louie DiPalma: Nazzic, congratulations on your tenure at SAIC, you left the company in a much better place than when you started on the culture front and you also hired Prabu, Toni and Joe, which were 3 great additions to the team.

Nazzic Keene: Thanks, Louie.

Louie Dipalma: And for either Nazzic or Prabu, SAIC has shown nice balance between its IT services and mission services, can you talk about your exciting takeaway win from Northrop Grumman for the Space Force ground radar contract that Nazzic just referenced. And I know it’s still in the protest window, so you may be limited, but are there significant other space opportunities in the pipeline?

Nazzic Keene: Yes, let me tackle the first part of that. So as you hit the nail on the head, it is still in the window. So we’re not going to say a whole lot. What I will say is we’re very excited, we’re thrilled with the win. And we expect to be able to book this, hopefully, in the near term. But I’m not going to say a lot more than that just because it is going through the process. But we always love to win new business, and we always love to win from a formidable competitor. So that’s — this is — it’s really great to be able to talk about it. What I will provide some color on is the — this is a great example, and we talk about this periodically on the call of our space strategy. And so being able to navigate the work that we have today, being able to expand our footprint in the broader space domain, critically important mission programs as you referenced, has been fundamental to our strategy, and it’s great to see these proof points.

And to your — the latter part of your question is absolutely greater opportunity in our space-related pipeline and we look forward to being able to talk about those and announce those over the course of the next couple of years. So it’s a very important part of our strategy. It’s — to your first part of your question, our ability to deliver on mission engineering programs as well as IT-centric programs is critical to our overarching strategy of being a diversified player. And so this is a great proof point of exactly that.

Louie Dipalma: Great. And also on the mission front, at the Analyst Day in New York City and previously in Huntsville, SAIC showcased its counter UAS systems of systems solution. Has the SAIC system continued to make progress in demonstrations with the U.S. Army? And is there opportunity for the system to be deployed in Ukraine and other hot geopolitical areas?

Nazzic Keene: Great question. Yes, we’re still very pleased and very proud of the counter UAS business that we have. And I certainly can’t speak specifically to Ukraine. I don’t think that would be in good context. But I can tell you that we are getting great traction with not just the DoD, the Army as an example, of broader DoD customers, as well as civilian customers. And they certainly see the value in this. We’ve been able to demonstrate in many ways and are looking to continue to advance our position in posture with this solution. The unique nature of how we’ve built this solution where we take best-of-breed parts, for lack of a better word, and integrate it to an end-to-end solution, allowing us to tune it to the specific need of the customer is something that has stood out and has been very powerful as we continue to have the conversation and dialogue with our U.S. government customers.

Louie Dipalma: Thanks. That’s it for me.

Nazzic Keene: Perfect. Thanks so much.

Prabu Natarajan: Thanks, Louie.

Operator: We have no further questions at this time. That will conclude today’s meeting. Ladies and gentlemen, we thank you all for joining. You may now disconnect.