Science Applications International Corporation Common Stock 2027 Q2 Earnings Call

Good day, and thank you for standing by. Welcome to the SAIC Fiscal Year 2027 Q2 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jon Raviv, Vice President of Investor Relations.

Please go ahead. Good morning, and thank you for joining SAIC's second quarter fiscal year 2027 earnings call.

My name is Jon Raviv, Vice President of Investor Relations, and joining me today to discuss our business and financial results are Jim Reagan, our Chief Executive Officer, and Prabu Natarajan, our Chief Financial Officer and Executive Vice President of Enterprise Operations. Today, we will discuss our results of the quarter ended July 31, 2026. 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. In addition, we will discuss non-GAAP financial measures and other metrics which we believe provide useful information for investors.

These non-GAAP measures should be considered in addition to, and not a substitute for, financial measures in accordance with GAAP. A more fulsome explanation of these measures can also be found in our SEC filings. It is now my pleasure to turn the call over to our CEO, Jim Reagan.

Thank you, Jon, and good morning to everyone joining our call. I want to start by saying how proud I am of this team. Our results this quarter are a testament to our employees' relentless commitment to our customers' most critical missions. Let's take a look at slide 3 for our key messages. We built on our momentum this quarter with performance once again ahead of our expectations. These results reflect our team's focus on driving program performance and operational efficiency, resulting in organic growth, double-digit margins, and robust free cash flow. While award activity reflected some unevenness in the procurement environment, we remain encouraged by the strength of our qualified pipeline, our submission plan, and the performance of our business development team.

We continue to see healthy customer engagement, and we believe that we are well-positioned to convert those opportunities into growth as we align with our customers' clear demand signals for more capability and capacity. We also believe our base is more secure with a recompete win rate of over 90% this quarter, creating an easier path to on-contract growth and building momentum to capture the benefits of new business where our win rates are well within our target range. These results reflect our more disciplined bidding approach as we focus on fewer mission-oriented pursuits. It also underscores our commitment to execution excellence and the trust our customers place in us. Several wins over the last few months highlight our role in supporting critical national security missions. We booked over $1.6 billion of Intel Space awards in the first half of this fiscal year, well ahead of our recent trends.

This high-value engineering work demonstrates our domain expertise and long-standing commitment to the space superiority market. We also secured a recompete win to support hardware, software integration, and interoperability to help the U.S. Army deploy new technologies onto the battlefield. After the quarter closed, we won a significant recompete of a critical border security program. Combined with last quarter's successful DHS recompete, this latest win extends our long-standing role in delivering innovation with an integrated software hardware solution to secure our country's borders. These wins share a common thread across our intelligence, defense, and civilian markets. Each requires integrating advanced technology with deep domain expertise to deliver mission-critical outcomes. This is what SAIC does best. This is who we are. We continue to build on this identity with investments supporting enhanced capability, capacity, and speed.

For instance, our investments in quantum solutions bridge the gap between critical technologies and practical mission applications. It is still early in the journey, but like AI, we expect quantum to create new mission challenges we are prepared to address as we help our customers sense, decide, and act across their domains. Turning to operations, as we previously mentioned, we are transforming our enterprise to build a stronger, more agile company that supports growth-oriented investments and sustained margin improvement. Project ORBIT, or Optimizing Resources for a Better Impact Tomorrow, is moving into its implementation phase. I am encouraged by our employees' dedication and enthusiasm for driving a foundational shift so we can clear what I call the gunk out of our systems and processes. Let me give you a sense of what structural change looks like in practice.

In procurement, a new acquisition system can bring more rigor to how we buy, analyzing our spend, consolidating suppliers, and managing demand so we buy smarter, not just spend less. In our recruiting function, a new onboarding system is designed to shrink the time between recruiting a candidate and putting them on a contract, protecting revenue, and serving our customers faster. In mission delivery, Agentic AI tools can scale capacity without adding headcount whether it is training air traffic controllers or generating actionable intelligence. With ORBIT, we expect to book some quick wins at the start to fuel the investment for bigger changes, with momentum building over the three-year time horizon. The most transformative ideas will take the most time, such as fundamentally rethinking our procurement process.

AI will play a role as we responsibly deploy relevant tools to achieve specific outcomes, rather than just directing people to consume more tokens. We are excited to do this while our customers are making fundamental changes to increase capacity, drive speed, and more effectively shepherd taxpayer dollars. We look forward to partnering with them on these efforts as we both lean forward to transform our organizations. I want to update you on another piece of our transformation efforts, the portfolio and strategy review we announced last quarter. We have spent the last few months identifying the intersection of our strongest right to win and our greatest growth potential. I do not expect a sharp turn in who SAIC is or what it does, but I do expect to emerge with a sharper sense of where we want to go.

I want to emphasize, we are already doing a lot of things well, so this review is as much about doubling down and investing to grow those critical mission areas as it is about pursuing new ones. This includes M&A, as we evaluate portfolio opportunities that are key to implementing our strategy. We will act on those opportunities as they arise, and we expect to share more on our December earnings call. I appreciate that we are asking a lot of our employees, and I am proud that the team has embraced these new efforts while maintaining strong operational performance. As a result of our improved performance and outlook for the year, we are raising our FY27 guidance for revenue, EBITDA, and EPS. As I have repeatedly said, FY27 is a year of commitment as we set targets that we are confident we can achieve.

We look forward to making FY28 a year of implementation as the ORBIT and strategy projects roll out. We see significant opportunities to create value for all of our stakeholders and continue the mission of supporting our customers and our country. With that, I will turn the call over to Prabu.

Thank you, Jim, and good morning to everyone joining our call. I will review our second quarter results, updated guidance, and share more detail on the financial impact of Project ORBIT. Turning to our results on Slide 4. We reported second quarter revenue of $1.9 billion, representing organic growth of approximately 5%. The quarter benefited from solid growth across our markets and our team's focus on converting backlog into revenue across our existing contracts in an improving outlay environment. We reported adjusted EBITDA of $193 million in the quarter and margins of 10.3%, reflecting strong program execution and continued benefit from our cost efficiency efforts. This result is up modestly year-over-year, excluding the prior year's favorable legal settlement. Adjusted diluted earnings per share of $3.01 is down year-over-year due to a favorable settlement in the prior period, offset by lower share count.

Free cash flow was $131 million in the quarter, another strong result as we maintain peer-leading cash conversion. Net leverage fell to 3.0x this quarter as we continue to naturally de-lever as EBITDA improves. Going forward, we have flexibility to de-lever incrementally or actively shape the portfolio to support the strategy. Please turn to Slide 5 to review our forward indicators. We are responding to clear customer signals for the services we deliver, but we've seen some large opportunities slip to the right as procurement offices try to do more with less while implementing new guidelines, including fixed price directives. This resulted in a quarterly book-to-bill of 0.6 or 0.8 on a trailing 12-month basis. We would have been closer to 1.0 if not for a delay in a large recompete award we booked two days after the quarter closed.