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

Hi. Good morning, everyone. This is Jon Raviv. I'm Citi's U.S. Aerospace & Defense analyst. Thank you very much for joining us for our Global Virtual Industrials Conference. Obviously, sucks not to be in Miami, but I do have a nifty space background behind me, so that's worth something, right? Anyway, we're going to get started here. We're going to have a conversation with SAIC. We're very pleased to be joined by CEO, Nazzic Keene. And also CFO, relatively new CFO, Prabu Natarajan, who are joining us for the next 40 minutes. We'll have a bit of a conversation, Q&A format. There should be a question window in the venue you're viewing in right now, and those questions will get to me, and I can include those as well. But in the meantime, I'll quickly turn it over to Shane Canestra, who heads up the IR effort over at SAIC with a quick disclaimer.

Thank you very much, Jon. SAIC is very pleased to participate once again in Citi's Virtual Industrials Conference. Appreciate the opportunity to speak. As Jon mentioned, we have Nazzic Keene, our CEO; and Prabu Natarajan, our CFO -- our new CFO, are present with us today. I will just mention that we are in the process of closing out the fourth quarter of our FY '21, which ended January 29, and we were reporting those results and issuing our forward outlook. We anticipate at the end of March 25 in the evening, to be specific, so an item for your calendar there. But -- so again, thank you for having us, and I'll turn it back over to Jon to talk with our execs.

Sure. Thank you very much, Shane. So I look forward to that March 25 report. In the meantime, I'm sure there's a lot to talk about right here. So we'll get started. So first, Nazzic, I mean, you -- we used to be able to call you the new CEO, but you're not so much the new CEO anymore because now you have a new CFO.

But -- so a 2-parter here. Nazzic, talk about some of the changes that you have made over the years that you've been CEO, and then we'll shift, and I'll pivot into Prabu, and to sort of hear from you, what do you bring to this job for your past experiences in the defense industry. So a little one-two punch here from Nazzic, then Prabu.

Okay. Great. Thanks, Jon. And I too wish I was in Miami. It would be great to see you in person. But hopefully, we can plan on that for this time next year. I look forward to that. So yes, I think it feels like just yesterday, I was CEO, but then it feels like I've been in the seat for a long time with this past year we've had. But very pleased with the progress we've made. I'll touch on a couple of key things that we've done, but I do want to give Prabu a chance to want to introduce himself a little bit, but also talk a little bit about why he joined SAIC and what he's saying. So as you're aware, when I stepped into the seat, one of the first things that I did was to take a fresh look at our strategy and to ensure that we're focused on the right things that we're going to drive profitable organic, sustained growth over the course of the next many years. And so we made a few choices. One was to exit the platform integration business in the way that we were executing that business. We still do some interesting engineering-type work in support of those missions, but less on the manufacturing side, and redirect some of those investments in dollars. We also took the opportunity then to look at the broad leadership team and make sure that we have the people focused to the right areas. And we made a couple of key hires, a couple of key additions. So we brought on Dee Dee Helfenstein, midyear last year. She also assimilated during a pandemic, which seems to be the new way that execs simulate, probably is doing the same. And she joined us to help drive our organic strategy, to help drive our solution differentiation and to really help us focus on profitable organic growth. So very pleased with the work that she's been able to do. And she's been leading our continuous, which it is. It's an agile continuous strategy refresh to ensure that we're focused on the right things. And then, of course, with the announcement of Charlie's retirement late last year, we had the opportunity to look in the industry and bring on -- and we looked at a lot of really, really fabulous CFO candidates. But really pleased that Prabu elected to join us. And I'll touch on a little bit of our rationale for Prabu. But we were looking for a CFO that not only could do what needs to get done internally, running the organization. We have a very, very solid and strong financial organization. But I was looking for a true strategic partner, and somebody who could help me, help the leadership team drive the strategy of the company, driving profitable organic growth and bring that strategic lens to how we operate. And so very pleased that with Prabu's background, across multiple disciplines, across multiple areas of business in our industry, really brought that strategic focus and lens. So I'm going let Prabu provide a little bit of color as well.

Thanks a lot for that needless introduction, Nazzic, and excited to be here this morning, Jon, and too bad we could not do this in person. First of all, I have to say, I'm just incredibly honored to have joined SAIC. After some careful consideration, it was clear to me that SAIC provided an opportunity to join a best-in-class government services company, a true technology company and a top-notch management team. I was attracted to the company because of just the heritage and the legacy of strong program performance. And where I grew up, this was important. We always look for that culture of excellence and execution. That was important to me. To me, it was just as important to have a real strategy and a pipeline that's aligned with the strategy and the opportunity to be a true strategic partner to the management team. And so to me, I think that's what got me to SAIC. Obviously, my experience at my prior roles, including having been a financial leader in a large IT segment of another prime, obviously gives me the ability to understand and get up to speed a little bit quickly on the portfolio. But candidly, lots of priorities. I think it's really important to be selective, take a long-term perspective on the priorities and ensure that we have a plan to execute. I'd say, obviously, we're going to talk a lot about all of our financial metrics. And we're going to continue to make improvements across the financial metrics. It is really important to balance, I think, growth, profitability and cash flow. And always be tuned into a conversation of our shareholder value. To me, I think, I expect to bring a little more to the conversation here. And truly engaging with the team, with our growth officer and the rest of the management team on the long-term strategy, taking a long-term view of the business as part of that team to help guide this company through the next set of decisions over the next several years. So truly an exciting time at SAIC, and I'm truly honored, as I said, to be part of the team to help contribute here.

Okay. One -- no, it's good. It's a great kickoff here. So Nazzic, the changes you've made and the talent you brought in, you keep talking about sustainable differentiated, but really profitable organic growth. So let's talk about the growth side for a little bit because that's been on folks' minds for -- a little bit on SAIC. So could you touch upon perhaps what accounts for some of that organic growth having fallen, if I may say, short for a few quarters or even year or a couple of years here and there versus peers? They are doing mid single-digit to high single-digit. You've been a little bit lower. I suspect some of that is the exit from platform integration. But we've seen that gap close. So what's closing that gap right now and going forward? And maybe touch on a little bit of the COVID impact that's hit your '20 year, fiscal '21 and maybe '22?

Absolutely. So I'll address the first part a little bit, and you captured some of that as well, and I'm going to let Prabu give some specifics on the impact of COVID. So as I mentioned, when I became CEO 1.5 years or so ago, we did take a fresh look at strategy because, to your point, we were not seeing the profitable organic growth that the industry was seeing. And so it was incumbent on us to take a look to understand why and more importantly understand what we could do to change that trajectory. And so we did that. We did make some pivots. As I mentioned, the -- we were making pretty significant investments in the platform business. We believe -- and I was part of that team as well, we believe that, that would be a catalyst for growth for us, didn't end up turning out that way. It was a big bet and they don't always pay off. But we did have the opportunity then to re-pivot those dollars and reinvest some of those monies into our now-strategy and our go-forward strategy. And as said, we all know, in this industry, it takes some time. It takes 12, 18, sometimes 24 months to see the fruits of those decisions and to see the success. Now the good news is we have seen some of that. We have seen -- certainly, this last few quarters, we've seen the -- what's a good leading indicator in being able to drive a strong book-to-bill, to retire much of the recompete risk that exists in the portfolio and even to be able to add and build on some new programs. So we are seeing some of that. And that really -- that's -- that early success is really driven by the organic strategy refresh, the focus in investing in those areas organically that we believe are going to drive our success, as well as the successful integration of both the Engility and the Unisys Federal acquisition. So I feel very good about. So I'm not going to promise long-term growth rates today. We are going to provide some guidance in March. But I will say that we are seeing the early signs of our decisions. We are seeing early success. And I feel optimistic going into this next year and the years to come because Prabu will continuously remind me and remind the team this is a long-term journey. Now with that being said, I'll let Prabu provide a little bit of a color on COVID. But had it not been for COVID this year, and I haven't seen -- I wish we could say would have, could have, or should have, we would have had a very -- a much more compelling growth year than we've seen in our history over the last few years. And so -- but we all have to navigate this together. And it is what it is. And Prabu will provide a little color on that.

Thanks, Nazzic. As you know, Jon, our fiscal year-end ended at the end of January. So we are currently in the process of closing our books. Certainly, we'll talk about how Q4 ended, but also about FY '22 on our guidance called in March. Now through the third quarter of FY '21, COVID impacted the business by about $170 million, let's say, around -- on the revenue side, and about $25 million of EBITDA. And the quarterly pace of the COVID impact has been relatively stable. So let's call it 60 to 80 a quarter. And we probably won't see a material change to that in the fourth quarter. But obviously, we'll know more in a few weeks. We previously communicated that the anticipated full year impact was about $250 million for FY '21 and about $35 million of EBITDA, which equates to, let's call it, 3% to 4% of organic growth. So to me, I think, as Nazzic reminded us, COVID's still here with us. Query, how long? It continues over the course of the year and candidly what buying patterns look like in the second quarter to second half of FY '22, and we'll have to be thoughtful about how we think through the pieces. And obviously, we'll be very clear about what the assumptions are as we provide guidance at the end of March. But I'd say we probably want to hold our horses for another month, and we'll be out there with some real numbers.

That sounds about right, Prabu. If I might just on the COVID-19 and just thinking about it, what is the difference between how you're operating now and how are you operating? And I guess that will be your first fiscal quarter or second fiscal quarter of '21. So I'm just thinking about how has the customer been able to get you more on-site now versus 10 months ago, for example because you mentioned that, that impact has been relatively steady in the entire period. So I'm just trying to understand where is there room for improvement? And is there -- can there be some kind of, I don't want to call it a snapback, but a reengagement with things that you're just not able to do?

So let me touch on -- I think I understand the question. If I miss it, please correct me. But right now, we had -- we had seen as -- I'm going to -- in the fall of last year, I don't remember exactly when it was, we've seen some early indications that in some of the national intelligence community that some folks were able to come back to work and so we were cautiously optimistic. Unfortunately, then we also saw a spike across the nation in COVID cases. And so some of that slowed down and reversed itself. So I think as we go into where we sit today with still the -- we had the height of COVID cases over the holidays. We're seeing a little bit of softening, so we might see some bounce back. But we tend to see the same behavior. It really -- I believe until vaccines are widespread, that we're not going to see significant change in our ability to do -- to really move the needle on COVID. There might be some cases where one customer brings some folks back or one stays on what's called the blue and gold schedule. But if you think about our 3 significant pockets, it -- one is in the supply chain, which is just the ability for -- to support the troops and troop movement and certainly, COVID has hampered some of that. The other is the FAA, where it's a bit dependent on air traffic and being able to train air traffic controllers and air traffic volume, and that tends to still be lagging. And then, of course, the intelligence community. So we may see a little bit of pickup, but I truly believe that until the vaccines are widespread, we're not going to see what I would consider a return to whatever normal is. Prabu, I don't know if you can certainly add some color there.

Those are the right drivers, Nazzic. I just say there are parts of the business where it really is tied to OPTEMPO. When we see OPTEMPO returning to normal, I'd say we probably start to see volumes return to normal. I don't know that we are expecting that volumes will bounce back sort of a V-shape recovery, if you will, because I don't reasonably think that's going to happen in this case. And some of that volume may just, in fact, be lost volume from FY '21. But we are on a path, as we think about it, to ensure that when we get to a place where COVID is out there and sort of the inoculations of the vaccines are out there, it puts us in a place where we can more predictably talk about the cadence of the business.

Understood. And just to be -- and just to put a fine point on it, OPTEMPO is not number of people deployed in Afghanistan, for example. It's literally how much the military is moving around the world and because of COVID, there are still large number of restrictions on that ability just to move in the normal course of data. The same way that I'm sitting here at home, I don't know where you are, but considering we are not landing, also military is not traveling nearly as much as it needs.

That's right. Exactly.

Okay. So we'll see how that pans out over FY '22, but clearly a lot of businesses still seeing COVID impacts continuing in 2021 and year FY '22.

And Jon, I will say that on that topic, we will provide some color in the March time frame. We're going through our annual cycle of planning. And obviously, we'll provide some of that conversation in March. And one of the things that we're trying to do as best we can, as clear as a crystal ball can possibly be, is make some assumptions on how long we think it will take us to get back to that, and we'll share some of those assumptions with you.

Looking forward to it, for sure. Bigger picture, in this environment, how should we think about how you're aligned to customer priorities? A little bit about what those priorities are, how they've been impacted by COVID? And then also by -- quite frankly, the sunburst attacks or whatever you want to call them, but a very significant cyber intrusion over the past year, quite frankly.

Great. So the demand for what we do is still robust. We have -- any given day, we have more opportunities than resources to pursue. And we believe we're very well aligned to the areas of national importance where we have the capabilities. And so I feel very good about our position in the market. We're focused on a handful of strategic areas. We've touched on these before. IT modernization, which was the catalyst for the recent acquisition of Unisys Federal to strengthen and accelerate our focus there. The space market and again, these are areas that we believe will get increased investments across our customer base and will drive our sustained profitable growth. And there are large addressable markets that afford us the opportunity. So regardless of what happens with budgets and everybody is speculating on what the budgets may be -- may look like a year from now, 2 years from now, what pockets may get some pressure, what pockets may get some lift. We believe we're exceptionally well positioned. And again, I'll just reinforce the fact that we do have a diversified portfolio, not just in who we serve, but in what we do. So we believe that we're well positioned and can pivot if needed, based on government priorities. Now the pandemic has absolutely forced us to think a bit differently. The -- I think it's the combination of a pandemic as well as, as you touched on, the cyber -- some of the cyber risks that presented themselves over the course of the last many months that if nothing else heightened the awareness for how important it is to have modernized infrastructure and modernized IT systems. And so again, that's an area where we can bring value, we can bridge solutions. And our customers are -- have a heightened awareness and heightened demand for how to think about that going forward. For our business itself, we have not seen an impact -- any kind of significant impact from the cyber attacks. We've obviously done a lot of -- as any company in this space, a lot of looking and ensuring that we're well protected. And we've also supported our customers in doing that as well. Now -- but I will say, I think it's still unfolding as well. I think there's still more to learn, and there's still more to understand from exactly what happened. But it is an area that is getting a tremendous amount of focus for all the right reasons internally, but obviously very concerning as we think about the -- what's happening in the cyber world. So I firmly believe that we're well positioned that these are areas of good focus, they are bipartisan, and I believe they'll continue to get focus from this administration as well.

Nazzic, you -- I think you recently announced some tweaks to your matrix structure. It's a matrix structure, which I think have been put -- those put in place in the company. You've been involved in it for a long time, has put in place in the company, I think, even when at the time of the splits or going on almost 8 years at this point or just over 7, not to date ourselves at all. But how do those tweaks to the -- or how those ongoing tweaks that matrix structure secure or I should say, put you in that position for those future requirements as they come up or put you in a position to dodge and weave to wherever those things might go?

No. It's -- you're right. We did formalize and put together a matrix operating model when we spun from our former parent. Because we believe that, that was the best use of the organizational structure to support our strategy. And so we continue to believe that, and it has served us exceptionally well. We did make some tweaks after we did our strategy refresh, after we took a hard look at where we have strength in the organization, where we had the opportunity to strengthen the organization, we did want to make sure that we stay nimble and we stay agile in how we organize and support our objectives. So what we did is we brought in, as I mentioned earlier, Dee Dee Helfenstein to formally stand up a -- or to build on what was already a horizontal organization, but to build on an organization to strengthen our capabilities, strengthen our focus on organic growth and our capabilities that we can leverage across the portfolio. And so Dee Dee is focused on that. And I just am very optimistic, again, that model has served us well and will continue to serve us well. And we're really focused in that organization in areas that I touched on, digital transformation, IT modernization, digital engineering, artificial intelligence and those assets, solutions and technologies that span the customer-facing organization. And then we have 2 sectors, the national security and space sector and the defense and civilian sector. And we put those together very purposefully to leverage strengths and capabilities that existed inside of the organization to be able to leverage across a broader portfolio. So as an example, we had space previously between 2 different customer-facing organizations, the space-related missions. And bringing those together, we believe, will afford us the opportunity to really focus, strengthen our position and drive growth in that market. And then bringing together defense and civilian, we had a defense portfolio that was very strong in engineering, mission-related engineering work. We had a civilian portfolio that was very strong in digital transformation and IT modernization. And by bringing those together, we believe that we can capitalize on the strengths of both teams and be able to drive growth. So we feel very good about where we are organizationally, the organization is aligned to our strategy, and we believe we're very well positioned.