Science Applications International Corporation (SAIC) Earnings Call Transcript & Summary

Great. Thank you to everybody joining us on the webcast. I'm Joe DeNardi, Stifel's Defense & Government Services analyst. Really happy to have SAIC with us today for the fireside chat. We have Charlie Mathis, SAIC's CFO; and Shane Canestra, the Head of IR on the call with us today. I'm going to turn it over to Shane for some introductory remarks, just going through the quarter. And then he'll turn it back over to me before -- to start the Q&A. If folks have questions that they would like to get answered, feel free to e-mail me at [email protected] and I'll do my best to get it answered. Charlie, over to you.

Okay. Thanks, Joe. So Q1 highlights. We just reported last Thursday evening, so all of this is very fresh. We had only a slightly, I guess, modest impact from COVID-19. Our quarter ended at the end of April, so we had about a 9 weeks impact of COVID-19 in here. We have a very resilient business and market during this time frame. And very closely correlated to this, we completed the acquisition of Unisys Federal, a $1.2 billion acquisition focused on IT modernization. Integration is on track, going well and we'll be discussing this later on, I'm sure, in the Q&A. Total revenue growth in Q1 was 9%. Organic revenue, 3% growth in Q1. If you exclude the COVID-19 impact, we grew at 5%. Q1 adjusted EBITDA margin, 7.8%, had an impact of about 30 basis points from COVID-19. Then again, I'm sure that we will discuss in greater detail related to recoverable -- recoverability of [ fee ] [Audio Gap] and some of the [ Intel ] portfolio, very strong free cash flow in the quarter, generated $158 million. [Audio Gap] of free cash flow. In March, when we announced our year-end, we said that we were going to suspend voluntary debt repayments at an abundance of caution until we had greater clarity and to. [Audio Gap] the COVID-19 impact. As you can see, with the strong free cash flow generation, we did end up making a $125 million voluntary debt payment just a couple of weeks ago. Our bookings were very strong in the quarter. We had a book-to-bill of 0.9, which represents contract awards. But in addition to the contract awards, we had $4.6 billion of single-award IDIQ value, and these don't go into our bookings and backlog although they are the gift that keeps giving over the next 5 to 6 years, of which roughly we would be booking the annual revenue when the task awards are awarded during those periods. So that's the largest single quarter ever of single-award IDIQs. And so it's a very resilient business in this environment with organic revenue growth. And we can turn it back to you, Joe, for Q&A. Happy to take questions.

Yes, that's great. Thanks, Charlie. And again, yes, for those listening on the line, if you have a question you want to get answered, feel free to e-mail me at [email protected]. Charlie, can we just talk about the -- I think the folks that are bullish on SAIC believe that you all can sustain a higher level of rate of organic growth over the next couple of years than you have in recent years. And some of that, I think, showed up in the first quarter, if you adjust for COVID and the guidance implies that it can continue through the year. But I'm wondering if you could just speak to kind of confidence in your ability to sustain that beyond maybe 9 months. And in the context of that, like this big single-award IDIQ value that you have, how much of that flowed into backlog in bookings in the quarter? How much of that flows through periodically? And did you have a sense for kind of what a comparable book-to-bill would be if you actually included the portion of that, that you think you'll actually recognize? Sorry for asking 4 questions.

Yes. No, no those are great questions. And if -- remind me if I don't cover it all here. But let me first just address the organic revenue growth. This has been one of the tenets of Nazzic, our CEO: profitable, sustained revenue growth. We provided at the end of the year -- in mid-March the -- our pre-COVID guidance, which implied an organic revenue of 3% to 6%. That's what we were seeing going into the year. But because we were in the depths of COVID there in March, we decided not to give the full guidance, evaluate what the impact of COVID would be on our business. Last week, we updated that guidance to reflect organic revenue growth of 1% to 4% with about 2% headwind from the COVID-19 impact related really to 3 areas, the -- our FAA controller training contract. This is where we actually train controllers for the FAA and some of that training, due to the demand for air traffic controllers, was delayed or canceled, and that has an impact on our revenue growth for the full year. Operational tempo at our supply chain business related to really just the overall tempo of military forces having a stop-movement order in mid-March impacts us on our supply chain business as well as some of the Intel business, the ability not to charge fee on our cost-plus contract. So that all equated to this 1% to 4% organic revenue growth. Now I think Joe's question was really how long can this be sustained? Or can we actually do better? And the momentum that we see in the business development, I don't think it's ever been higher. It is -- where we've had tremendous success over the last quarter or 2 in new business wins and actually maintaining recompetes. So that momentum actually carried into Q2 where we're able to hold on to one of our largest contracts, the AMCOM contract. It was a contract award of $2.9 billion that actually will hit the bookings in Q2. So the focus has been to be a lot more aligned and strategic on where we're investing opportunities [ that we go after, ] capabilities that we have that will allow us to win. And I think that our whole BD team and the customer groups are extremely excited about our recent wins. The submittals are very robust. The qualified pipeline that we have is close to $9 billion, of which we believe that we will be able to bid on in the future, and that's grown tremendously based on the enormous capabilities that SAIC had plus the addition of Engility and Unisys Federal. So a combination of that as well as bringing in tremendous talent. We recently hired and has [Audio Gap] named is [ Nazzic's senior ], Chief Growth Officer, focused on strategic growth, Dee Dee Helfenstein, who came from Booz Allen. She was Executive VP on our team, leading that effort. And I think that she will add tremendously for our future organic growth success, and we couldn't be happier to have her on board and have that -- win that war for talent in that area. The single-award IDIQ is very large in the quarter. I mean if you take the $4.6 billion and then you said [Audio Gap] we would book it all, maybe some of our peers do that. Not exactly sure. But obviously, that would translate to a little over 3x book-to-bill so it was all booked at that point in time. Next quarter, book-to-bill will be very strong based on that $2.9 billion of contract award value for AMCOM. That is also our largest single-award contract value -- contract award, not an IDIQ but a contract award, largest ever for SAIC as a standalone basis will hit in Q2. So all of that, I believe, gives us confidence and growth going forward, certainly more robust growth than we had in the past. And very happy we're -- the Unisys Federal acquisition, I should, maybe just talk just a second about this. We did close that right as -- middle of March right when the COVID hit. The integration has gone tremendously well, and we have done a lot to work with them to understanding -- to understand their winning formula to growing because they were growing double digits for the last couple of years. They had a big win subsequent to the end of the quarter as well with the Air Force TADS contract where they're providing support to the Air Force's weather operations. And all of that [ build the pieces ] of them continuing to grow double digits for the next couple of years. So there's also impact with those wins. So anyway, that took up a lot of time there, Joe. So hopefully, I covered that.

Yes. No, that was great. Just to clarify, so second quarter bookings should include the AMCOM award and then a portion of the IDIQ value? Is that right?

Yes. That would be correct. Right.

Okay. Okay. Can you just talk about whether it be -- what you just discussed in terms of learning from the Unisys business in terms of how they've been able to grow? And then on top of that, [Audio Gap] bringing in Dee Dee. First of all, what are you learning from the Federal Unisys acquisition? And then where do you think Dee Dee spends her -- what's her primary focus is -- on making sure you're aligned with the right end markets? Is it improving your win rate? What do you think she brings to the organization?

Yes. So first, let me -- sorry, what was the first part of that question?

Yes, sorry. It was long-winded, Charlie. What are you learning from the Unisys acquisition in terms of how they've been able to grow? Yes.

Yes. Yes. So we've had a lot of working groups focused on that, what is it that you guys have seen over the last 2 months coming in SAIC of how we do things differently. And not surprising, some of those answers were SAIC is a lot more bureaucratic. [ We used ] to submit proposals with 5 people. [Audio Gap] it takes you 50, you're slower. We're faster. We make decisions quicker. That is our culture to [Audio Gap] certain business development incentive compensation type of plans. They were real -- what they brought a lot of and we knew this for them coming over was this commercial mindset. They operated like a commercial company. They were very aggressive as far as looking for new contract wins, they would work proposals for years in advance. [Audio Gap] capture efforts and bringing in solution architects and going to the customers and asking what is it you really need. And what is it that would you like to be different. And years later, come up with a win. That was very much the case with the recent Air Force TADS win, which they worked this thing through for many, many years. So we're trying to capture all this and look to implement this. We want to keep that culture, that winning formula for high growth intact. And we're making all the steps to try to do that as much as possible, given the fact that we're a 25,000-person operation. Dee Dee coming on board, I think, is tremendous for the company, not only the solutions, the technical group that she'll be heading up, and really partnering, the way I see it, partnering with Nazzic on these strategic growth initiatives to deliver on what she believes that she's bringing in [Audio Gap] promise to the Street and to our investors and shareholders about the robust growth. So I think she will be a tremendous partner for her and add tremendously to our focused efforts on growing as fast as our peers.

Got it. That's very helpful. Charlie, I think when we spoke a few weeks ago, a month ago, you had talked about or Nazzic talked about kind of the ability to get to the low end of that growth guidance that you had talked about even with COVID. How do you reconcile that with kind of the 1% to 4% guidance that you provided on the call? Does the lower end of that, the 1% assume that this impact is prolonged? Like maybe what are some of the moving parts between the low end and the high end of that, do you think?

Yes. I think that you're right. It would have -- the low end, I believe, is if things don't modestly improve in the second half the way that we believe that they will improve, operational tempo gets to a better state. On the other hand, the -- moving to the upper end of that range, I think the way that we do that is with these [Audio Gap] new contract wins that we had been able to transition faster, turning those new contracts into revenue as fast as possible will help us get to a faster ramp-up on the upside there. And then continue this robust submittals and pipeline and with the greater capabilities that we have together with these acquisitions, to go after big contract wins. And as I said, there's about $9 billion qualified pipeline out there, submittals are very high. I think Q2 we'll probably see even higher submittals than we had in the past. [Audio Gap] people are extremely busy. And so we're very, very focused. And I think that things are beginning to come together for us to be able to hit those revenue projections that we laid out.

Got it. So you think kind of the near term, the business and revenue is a little bit more sensitive to op tempo than it would be to the FAA controller training returning to a more normal pace?

Yes.

Op tempo is more important?

Yes. I think it is on the scale side. I mean the FAA controller training contract, that's a smaller amount of revenue than in our supply chain business, which is more sensitive to that operational tempo. So if we see that progressing faster and we see more movement there or this thing could be back-end loaded. I mean this is one of which there's not a whole lot of constraints as far as the -- being able to increase the revenue the way it might be in providing bodies or services, since we're really talking about a large amount of materials here. So this could turn really at any moment. We've been somewhat conservative in the assumptions there about the operational tempo, just modestly improving in the back end. But the changes there would improve that revenue score, for sure.

Got it. And then just in terms of AMCOM, can you maybe just remind us kind of the size of that and in terms of what you've been able to win into this point, how much of that, I guess, revenue hole you've been able to fill and kind of visibility into filling the rest?

Yes. So AMCOM is one of biggest contracts customers. And it's a bundle, it's not just one contract. It's about $600 million a year in revenue. This first contract award, that $2.9 billion that I keep referring to is known as the software life cycle development. It's 5.5 years period of performance. It contained about $300 million for battlefield systems, so about $30 million of the total amount that's in that number in addition to new scope of work that's been added to do that. So part of this is a recompete, part of this is new business. And then there are follow-on contracts that we are actually working on and be -- we'll be submitting within the next few weeks. The second one could be larger than that on size. That would contain part of our other contract, [ the Air Force ]. So far, we're in good shape as far as AMCOM goes, but we're not out of the woods yet. We still need to win at least one more of these in order to maintain the revenue, I believe, and hopefully to increase it from that baseline that we're talking about. We have extremely talented teams and groups that are working on this. The second one did get slowed down a little bit because of the demos on the first contract were done in person in a room with 40 or 50 people who've had to move to virtual, they've had to change some of the way they're doing the assessing of the assessment. So that's changed a little bit and slowed down the demos and the oral presentations. But we think we're in good shape. Certainly good to win the first one, and we got a few more shots on [ the air force one ] to even improve our AMCOM situation.

Okay. And there have been no protests on any of the AMCOM awards, I guess, that you're aware of? So that shouldn't be a headwind?

No. Yes. The $2.9 billion cleared the protest period as well as the Air Force TADS contract, which was that new business win [Audio Gap] $630 million, I believe. Shane, is that right? $630 million? That amount?

Correct. Yes.

Both of those cleared protests which last year, as you remember, Joe, it seemed like every new contract we won was being protested and being protested again and again, and then it finally, I don't know, cleared at the end of the year. So far fortunate that these haven't been protested, and we've cleared those and now it's -- particularly in the new business just get ramped up as fast as possible.

Okay. When we think about the 3% revenue CAGR target that you provided, I mean, obviously, COVID wasn't considered in that. But maybe offsetting that headwind, you've been very successful, particularly recently in winning maybe some of the bigger risk contracts to the portfolio. So like how do those 2 factors offset one another in terms of your level of confidence in being able to get to the 3% by next year, that CAGR?

Yes. So I think it gives us a great opportunity in order to do that. So I guess, it was January last year when we laid out the deal thesis for Engility acquisition. And we laid out that 3% compound annual growth rate through FY '22. And because of some the revenue dissynergies that we had last year, and we weren't able to hit in the first year that growth rate. So therefore, the growth then becomes even larger numbers in order to achieve. So we think that we're on track given the guidance that we've given, given the wins and the business development momentum that we laid out. Now when we gave this guidance, we didn't contemplate Unisys Federal acquisition as well. And as I mentioned, Unisys Federal is growing double digits. So you have to really layer on another 1% onto that compound annual growth, at least in the back years to -- for it to be whole and still [Audio Gap] [ going to look ] at this thesis. So that's a great momentum. We think there's the opportunity to do that. We obviously haven't gotten into our FY '22 annual plan and guidance, but we are seeing a great deal of momentum in our BD efforts, [indiscernible] in our pipeline and in our submittals and then the talent that we're bringing [Audio Gap] well forward to help us achieve that. So I think feeling like we're in pretty good shape. But we'll keep you updated on that as we go forward.

Yes. I mean, like, Charlie, in the context of your book-to-bill now and I mean really the book-to-bill should be quite a bit higher if you include some of the single-award IDIQ, is there anything in terms of big recompetes left over for the next 18 months that we should consider as kind of maybe an offset to this book-to-bill?

Well, I think the AMCOM -- one of the pieces the AMCOM I mentioned about is something that we need to clear at least for the next 12 or 18 months. It's not going to really impact us this year. Pretty much derisked this year as far as recompetes go. That's why I would tend to say that in that revenue forecast range that we laid out there, I think that there's probably more upside than downside to be able to achieve that number just because usually, the downside is because of a recompete loss or something there. And we've had a lot of new business wins. So hopefully, that's what we're looking at, more potential for an upside than for downside. And, yes.

So if normal -- and maybe Shane has this, since it's probably something you get asked a lot more than something Charlie focuses on a whole lot. But if the normal course of business is maybe 15% to 20% is up for recompete the next couple of years, just given what you've been able to win recently for the next couple of years, are you still within that range? Or is it lower than that or higher?

Yes, I don't mind fielding this one, Charlie, if that's okay.

Go ahead, absolutely.

This year was -- yes, this year was kind of in that normal threshold of 20% to 25%. Next year, it's slightly above that. We had some larger recompetes in our federal civilian market portfolio. But there's an interesting kind of dynamic going on right now. We are seeing customers request more bridges or proposals for bridge contracts or extensions as well as there is a little bit of maybe some sole source renewals being requested. So that might bring that number down just a little bit if that comes to pass.

Okay. But you don't see that necessarily, Shane, applying to the, I guess, the larger contract that's driving the higher recompete next year? That's not something that's going to be extended, but other stuff could be?

It could. It could. Some of the larger ones in the federal civilian portfolio could receive extension.

Okay. Okay. Charlie, just -- since we're out of time, I just want to ask you one question maybe on the portfolio. A few years ago, you guys obviously made a pretty good run at CSRA. I would imagine you've been able to fill some of the capability that you wanted from that business with Unisys. But is that true? Is that requirement that you guys were looking to get, has that been satisfied with Unisys? Or is there still more in that market that you'd like to look at? And should we think about SAIC -- I know the focus is kind of acquire, delever, acquire -- is the focus on kind of larger deals? Or do you look at smaller stuff as well?

Yes. Well, I won't confirm those rumors about who is looking at what there. But we're very happy about the corporate development focus and what we've done by bringing on these capabilities. I think there are gaps in the portfolio still that, perhaps at some point in time, that we would look to fill. That SAIC doesn't have to round out and have a completely balanced portfolio and health care is one of those that we don't have, as you know. And -- but right now, the focus of capital deployment is to pay down debt as quickly as possible, delever, and get back to that 3x leverage ratio that we're most comfortable with.

Got it. That's great. Charlie and Shane, thank you very much for the time. Always helpful discussions. Thank you for taking the time.

Yes. Thank you.

[Audio Gap] enjoyed it. Thank you, Joe.

Yes. Thank you, Charlie. With that, I think we'll wrap up. Thanks for everybody listening in. Enjoy the rest of the conference.