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

Good afternoon, everyone. My name is Sheila Kahyaoglu, with the Jefferies Aerospace and Defense Equity Research team. Thanks so much for being here. We have the SAIC team up, while we have Nazzic Keene who's CEO of SAIC and Joe DeNardi, who joined about a year ago as VP of Investor Relations and also strategic ventures. So thank you, Nazzic for being here. I know you're not at conferences often, so we appreciate you making the effort and learning more about SAIC.

So I think one of the things with IT services companies is how you guys differentiate yourselves versus peers. And I think SAIC has a lot of unique capabilities that are starting to come out. So if you could talk a little bit about that.

Absolutely. So privilege to be here and hello, everybody. So I think a couple of things I would comment on differentiation. One is we have the privilege of being a 50-plus year old company and the brand that goes with that. We have a very strong brand. We have a brand that's been recognized in the federal market space as providing solutions to very complex national issues. And so that brand helps us in many regards with our customers and with our employees. But having that strong basis, strong past performance is a hallmark of SAIC. Certainly, our people, we foster an inclusion workforce and really focus on making sure that we are an inclusive workforce, and we hire just tremendously talented individuals from across the nation and very privileged to have the ability to lead and partner with such a great workforce. And the third is our focus, and you touched on this, we've been really focused these last couple of years of refining our strategy in refining those areas that we want to disproportionately invest to drive growth, and we've been very focused on driving sustained profitable growth for the company as well as ensuring shareholder returns and shareholder value. And so that focus for us has been something that we have -- we've been highlighting and talking about and really trying to be more transparent about as well.

And one of the things you disclosed, I think it was last quarter or the quarter prior, was your growth in technology accelerators or GTA, which represents 27% of your sales, and you're planning to grow that to 35% of the business over the next 3 years. Can you talk about what's in those buckets, what it represents and how you're going to expand that business?

So as I mentioned as it related to our focus, we have done some work these last couple of years in refining our strategy and then the discussion around GTA is an effort to share with investors and with the analysts and with our employees and our customers, those areas where we believe we can drive disproportionate growth. And so the GTA includes secure cloud, enterprise IT and systems integration type efforts. As we think about that now, as we shared, it's about 27% of our portfolio today going to -- our goal is to get it to 35% over the course of the next 3 years. And if you think about what's in there today, it's roughly about 50% in the Secure Cloud, 30% in enterprise IT and 20% in the systems integration. But again, all of those areas, we believe, are enduring for our federal government, our areas of national importance in areas where SAIC cannot just bring incredibly talented people, but also bring differentiated solutions as we think about areas like CloudScend, where we can bring our solution to mitigating the risk that's associated with going to the cloud as well as accelerate that transition.

And when you think about that growth CAGR from 27% to 35% of the portfolio, what's really driving it? Are there new contracts coming out more positioned on this? Or are you going to gain more share with your existing customer base?

Our goal is to expand it in both dimensions. One is to continue to drive on contract growth, which we do on all aspects of the business, but in contracts where we have the opportunity to infuse new technology, infuse some of the GTA inspired type work streams. We absolutely intend to do that. And we've got some good pattern recognition happening with that today, but also to look at new opportunities in the market. And as if you think about the government's certain focus, certainly focused on driving more applications to the cloud and use of the cloud, there'll be new programs that come out as well. And there'll also be components of recompetes that will enter the market. So it's a combination of on-contract growth as well as winning new business in that area.

And can you maybe flesh out some of the growth CAGRs you have, whether it's for GTA versus your core business? How do you think about that re-acceleration of growth from the 1% in, I think, fiscal '23 to mid-single digits?

So we touched on one area, certainly driving GTAs from 27% to 35% over the course of the next 3 years will drive growth. Of course, we always look to protect the core business and to also grow where it makes sense in that part of the business as well. And so we have not provided long-term guidance at this juncture, but we certainly are laser-focused on continuing to drive profitable organic growth over the course of the next several years.

That makes sense. Can we talk about your space business? I believe it represents 20% of the portfolio, but I could be wrong. What are the sort of key opportunities, key offerings you have there and upcoming opportunities?

So all aspects, you're right, the space business is about 20% of our portfolio today. And we service the space business across really multiple dimensions. So whether it's Space Command, whether it's some of the intelligence agencies focused on space, or whether it's a civilian NASA-related space market as well. And so we have the opportunity to take all of the areas I touched on in the GTA as well as some of the non-GTA core business into the space market. So whether it's accelerating the use of technology for -- whether it's IT or mission-related technology, leveraging the cloud, but we also do quite a bit of work in our space portfolio in the CETA arena, where we bring just really, really talented engineers working hand in glove with the government to be able to service the space missions.

And then you recently announced the Koverse data platform 4.0. Maybe can you tell folks a little bit about what that is, first and just like the pipeline for it.

Yes. So Koverse was a small acquisition that we made a year plus ago, I guess, at this point. And it brought us some unique capabilities in AI and data analytics really being able to navigate across multiple data layers and clearance levels. And so although a small acquisition, it has been an asset and a solution that's differentiated us in many aspects of our pipeline and really has crossed the entire company as it relates to whether it's civilian type work, with some recent work that we won in the DOJ as well as certainly in our space portfolio and even in the DoD. So it's been a great acquisition. It is early days, only a year or so into it, but we are seeing the ability to take the solution and differentiate our solution offering in competitive procurements.

I wanted to spend a few minutes talking about each of your customers. I know we just talked about space, but maybe for Army, the portfolio was previously focused a lot on AMCOM and defending it. How do you think about the Army portfolio growing from here? And what steps you're taking for that?

The Army for us is certainly one of our largest customers. And as you noted, we successfully positioned ourselves with the -- at this point, 1.5 years, 2 years ago with the successful recompetes of the -- what was the AMCOM portfolio, now D3I. And we're seeing continued opportunities to either drive on-contract growth with those vehicles or to look at new opportunities. And one I'll just highlight -- we're doing quite a bit of work across rapid capability engineering, prototyping, experimentation. And one of the opportunities that we're pursuing is in this space is the unmanned UAS arena. And we're competing very well. We've -- we're working obviously with the customer. They're going through some competitive fly-offs. And we continue to compete very well in that arena. But that's just a really great example of some of the work we're doing in the systems integration space, where we're taking best-in-class technologies and being able to integrate them to serve a mission where we may not bring the particular asset to bear. It's the integration and that allows us to bring best-of-breed and best in class.

I think Sheila, that's maybe one way that we think we're kind of strategically different than our peers as being able to identify the best technologies in the market, integrate them into a solution that's easy to use and adds value to our customers. We're not wed to certain capabilities necessarily that we've developed. We can really bring the best that's out there in the market to our customers, whether it be in counter UAS or cloud migration or space. And I think that's an advantage that we have.

Great point.

You mentioned cloud migration. So turning to the Air Force customer. What do you guys primarily do for the Air Force? I think Cloud One is one of your bigger contracts. Can you talk about how that's developing over the next few years?

Yes. We're very excited about the Cloud One contract and it's developed well, and we see a lot of great opportunities as the government, of course, across all aspects of whether it's DoD or civilian agencies are looking to leverage cloud technologies as they modernize and further secure their applications. And so this is a great opportunity for not just the Air Force, but for potentially others to use this vehicle as well as they do the cloud migration. It allows us also to bring our suite of solutions as in CloudScend and be able to further secure and provide differentiation for the Air Force.

Great. And then just thinking about upcoming recompetes, I think there's a few that have might have passed already. But can you just talk about how we think about your portfolio as 5-year contracts by nature, we compete 20% of the portfolio every year? Are there notable recompetes we should be looking at out for?

I think we've highlighted a couple. Certainly, we go into every year, assuming around, like you said, 20% of that portfolio will be up for recompete that year. And then more times than not, certainly the last year or so, things get delayed. And so as we've looked at this year, we've seen some delays in a couple of key areas. We've talked a bit about the State Department, the Vanguard contract and without going into a lot of details, that's obviously a big one that we're all keeping our eye on. And then some of the work in our supply chain portfolio is another area where we're certainly keeping tabs on, don't want to go into a whole lot of details of the contract by contract level, but those would be ones I think just that we all pay attention to. And certainly, you would as well.

That makes a lot of sense. And then I wanted to talk about some of the acquisitions that you've done, you acquired Engility, obviously, you have Halfaker, but can you talk about how SAIC is structured internally just given several acquisitions? And has the GTA versus core portfolio delineation changed any of that?

Yes. So we've been organized kind of the primary sort order in the way we go to market is by customer. And so if you think about the kind of the major customers, the Army, the Navy, civilian agencies, some of the intelligence agencies, Air Force, we have a leader that manages those accounts those customer base. And so that has been the way we've been structured since we spun out from our former parent, and we have sustained that model through all the acquisitions. And so most of the time, whether it's Engility is a great example. We just integrated into the existing model, and that served us very well. The GTA is kind of that focus in GTA is where we make investments in our solutions and capabilities. And we do have a focused organization that's connected in driving those that we call the innovation factories where we have dedicated resources helping us develop, helping us put the thought leadership into these areas so that we can differentiate ourselves in the market with our customers.

That makes sense.

Did I miss anything on that, Joe?

No. Not at all.

Okay. No, it's -- I've met some of your go-to-market leaders. So it always helps to know how you guys interface, but it makes sense that you would interface with the customer lead. Can you talk a lot -- a little bit about hiring, hiring is an issue across the base? How you plan on your revenue growth? Is it based on your headcount adds, if you could expand upon that?

Well, hiring in the technology industry in general, whether it's the federal space or the commercial space, certainly, post COVID has had its challenges and the challenges in the sense that -- for most of us, we have more openings than we have people. The good news is we haven't had any significant areas of concern or risk and the team has been laser-focused on this. And so although the environment is what I'd call a tight labor market, we've been able to hire where we've needed to hire when we needed to hire. The other thing I would comment on is post COVID, there's more flexibility in some of the hiring models. And so sometimes we can hire in other parts of the country or the geography with a more flexible work schedule or work type and so we've looked to leverage that so that we can, in fact, hire the best of the best across the industry. As we think about how hiring links to our revenue growth, we really drive our revenue planning based on our backlog, based on the pipeline, based on our ability to win new work as well as retain our existing work that drives our revenue profile and then, of course, we develop a hiring plan based on that.

And maybe since you mentioned that there's some going to throw it in there, revenue planning is based on backlog and pipeline. In terms of the pipeline, how do you -- how big is the pipeline right now? How do you guys decide what you're bidding on and what your target go get rate is?

I don't know that we disclosed the size of the pipeline.