Science Applications International Corp Q3 FY2020 Earnings Call

Please standby. Good day. And welcome to the SAIC Fiscal Year 2020 Q3 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Shane Canestra, SAIC’s Vice President of Investor Relations. Please go ahead, sir.

Good afternoon. And thank you for joining SAIC’s third quarter fiscal year 2020 earnings call. My name is Shane Canestra, Vice President of Investor Relations and joining me today to discuss our business and financial results are Nazzic Keene, SAIC’s Chief Executive Officer; and Charlie Mathis, our Chief Financial Officer. This afternoon, 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. Both of these documents, in addition to our Form 10-Q to be filed soon, should be utilized in evaluating our results and outlook along with information provided on today’s call. 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 and quarterly reports on Form 10-Q. 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. It is now my pleasure to introduce our CEO, Nazzic Keene.

Thank you, Shane, and good afternoon. SAIC’s third quarter results reflect strong program performance and customer confidence in our ability to deliver solutions that advance their most critical mission priorities. We are pleased to report solid results, while we look towards a future with a refreshed strategy that takes advantage of our expanded portfolio positioning us for sustained profitable growth. In our September call, I communicated three areas of my immediate focus and they are unchanged: the successful integration of Engility, accelerating profitable revenue growth, and winning the war for talent. All three are integral parts of our refreshed strategy and we made progress on these imperatives during the quarter. As we near the one-year anniversary of the Engility acquisition, I am very pleased with the progress and success of our integration efforts and the exciting opportunities that our stronger business presents. We accelerated and achieved all of the year-one net cost synergies of $38 million earlier this year and we are well on our way to achieve the year-two target. We expect to achieve 85% of the full net cost synergy target of $75 million by the end of this fiscal year, well in advance of our initial plan. Employee fringe benefit harmonization and a successful conversion of our financial system, as well as several other back-office systems have been completed. Facility consolidation is the last significant cost synergy milestone to be achieved. I would like to emphasize that our integration efforts and cost synergy achievement are being completed ahead of schedule and our combined workforce is focused on a single mission: serving our customers under the SAIC banner. SAIC is leveraging our increased capacity, capabilities, and customer access which has resulted in greater pipeline development, stronger recompete bids, and new contract wins. During the quarter, SAIC was awarded a task order for $85 million from the U.S. Navy’s Naval Surface Warfare Center; that is a great example of our revenue synergy as a result of the combined company. Through the acquisition of Engility, SAIC obtained the DoD’s IAC MAC IDIQ Vehicle that provided contract access to new customers. This vehicle combined with legacy SAIC technical capabilities allowed us to jointly compete for and win this task order. This is just one proof point of our successful expansion of growth opportunities as we go-to-market together, leveraging each company’s capabilities and customer access as one team. With program operations and the business development organizations fully integrated, SAIC’s enhanced pipeline reflects our expanded addressable market and contract opportunities enabling the acceleration of profitable revenue growth. Our value of submitted proposals increased to $16 billion, up $2.7 billion from the second quarter. While our contract proposal activity increased, we also continued to invest in innovative and differentiating capabilities to drive growth. We have recently garnered accolades from Washington Technologies Industry Innovation Awards for one of our solutions: SAIC’s Internet of Battlefield Things. This innovative, state-of-the-art solution integrates a variety of commercial technologies including sensors, mobile broadband, networking, cloud, high-performance computing, and power management. An expeditionary command center could now fit into a vehicle, giving our military forces an anywhere platform, arming them with real-time information and informing situational awareness targeting another battlefield action. With investments in differentiating technologies and an expanding business pipeline, I continue to have confidence in accelerated revenue growth next fiscal year and beyond. As a people-centric business, winning the war for talent is vital and has our attention at all levels. A top priority will always be to attract and retain the best talent by fostering a purpose-driven, inclusive, and flexible working environment while encouraging our employees to make a difference outside the workplace through citizenship and community programs. Our employee benefit programs reflect our emphasis on flexibility. We are investing in programs that provide options in how our employees manage their work schedules and leave time. We are proud that SAIC was recently named one of the top five companies in 2020 for flexible jobs based on a study of over 52,000 companies. This recognition reinforces our commitment to provide remote and flexible work options to improve the well-being of our employees and their families while providing world-class talent in support of our customers. We also know that today’s employees want to work for an organization that reaches outside their walls to give back and positively impact their communities. Throughout the month of September, SAIC raised over $200,000 in employee and corporate contributions in support of Feeding America’s Hunger Action Month, providing over 2 million meals to America’s hungry. SAIC desires to have a tangible and positive impact on targeted communities, populations, and the environment. To that end, we have a focus in four areas to achieve this goal: military and veterans, STEM education, community well-being, and environment and sustainability. Our employees are dedicated to our nation and our communities. As SAIC was recently named by the Washington Business Journal as one of the largest corporate philanthropists as measured by volunteer hours. SAIC’s culture of exceptional service both in and outside the office makes it a rewarding place personally and professionally. Now turning to the market environment, our customers continue to operate and make their investment decisions despite a continuing resolution. While a CR is not ideal, government fiscal year 2019 budgets were strong and operating at those levels allows most customers to continue executing their important missions. As I conclude, I would like to follow up on the strategy review that I highlighted in our September call. The successful integration of the Engility acquisition and market dynamics uniquely positions SAIC for opportunities that leverage our scale, expansive portfolio, and strong customer relationships to accelerate profitable revenue growth. We will prioritize the most compelling opportunities by focusing on a few market-driven areas that include base systems and mission engineering that takes advantage of SAIC’s leadership in this market and the continued focus on ensuring our nation’s dominance and resilience in space. Mission engineering and integration across DOD systems modernization communities to ensure our nation has the most advanced solutions to stay ahead of our adversaries, and modernizing and managing our nation’s critical IT and enterprise infrastructure to gain efficiencies, improve cybersecurity, enable increased analytics, and improve the citizen experience. Going forward, these areas will be the catalyst for growth at SAIC. This is not to say that we will forsake other areas of contract opportunity, but these areas will draw increased focus and investment in order to drive profitable revenue growth over the long term. While M&A always seems to draw increased attention and speculation, SAIC will continue to take a disciplined approach in this area to fill gaps in our portfolio, accelerate penetration of an underserved customer, or gain differentiated capabilities we do not have today. SAIC will always approach M&A as one of the many tools in our toolbox that we use to deliver shareholder value creation. As part of our strategy refresh, our goal is to disproportionately invest in technologies, talent, and infrastructure that will enable long-term growth in these strategic areas while preserving predictable growth from our core markets. We also know our market is dynamic and our customers need a partner that can be agile, so we will continue to measure our strategy against milestones and adjust as needed. I’d like to ask Charlie to share our business development and financial results before we take your questions.

Thank you, Nazzic. SAIC has delivered results that reflect consistency in the business while gaining momentum in contract awards and business development activities that will drive future revenue growth and create value for our shareholders. First let me cover our business development results. Net bookings for the third quarter were approximately $2.2 billion, translating to a quarterly book-to-bill of 1.4. As a testament to our diversified portfolio, net bookings were strong across all of our business segments, as well as being very balanced between winning new work on new awards, growing existing contract value through own contract growth, and retaining our recompetes. On a pro forma basis, SAIC’s trailing 12-month book-to-bill is 1.1. Included in this quarter’s booking were a total of $582 million in contracts to support space and intelligence community customers. These contracts serve customers in the intelligence community and classified space domain that rely on SAIC for highly specialized expertise and technology integration, engineering, IT modernization, and mission operations. Notable in these awards was a previously announced National Geospatial Intelligence Agency award for the Innovative GEOINT Application Program. Other notable awards in the quarter included a U.S. Army awarding over $41 million to modernize its IT infrastructure by migrating enterprise applications to a cloud environment. Approximately 24% of the total year-to-date gross contract awards of $6 billion has been for new business, and, as Nazzic mentioned, we have $16 billion of submittals awaiting award, with 75% being for new business opportunities. I would also like to point out that over $2 billion of new business contract value has been awarded to SAIC through our third quarter and has been protested by competitors. The favorable resolution of these new business awards before fiscal year-end, which is expected based on normal timing for protest resolution, would significantly increase our contract award bookings and book-to-bill for the fourth quarter. We are also awaiting a decision on our largest recompete this year, the Department of Justice Asset Forfeiture contract, which was slowed by a pre-award protest. At the end of the third quarter, SAIC’s total contract backlog stood at approximately $14.5 billion with funded backlog up 11% on the second quarter. Let me now turn to financial results for the quarter. Third quarter performance on revenue, margins, and adjusted earnings per share were in line with the first two quarters of the year, consistent with our previous communication. Our third quarter revenues of approximately $1.6 billion reflect total revenue growth of 38%, which were due to revenues associated with the Engility acquisition. Organic revenue contracted 1.5% year-over-year, although, after adjusting for about $30 million of revenue dissynergies in the quarter, organic revenues grew approximately 1% compared to the prior year quarter. As a reminder, we have previously communicated an approximate $120 million of revenue dissynergies for the full fiscal year, equally impacting revenue throughout the year due to elimination of prime-sub relationships, lower volume on cost-plus contracts due to cost synergy achievement, and other factors. This approximate 2% headwind to growth will not exist in our next fiscal year. Third quarter adjusted EBITDA margins were 8.3% as a percentage of revenues, consistent with the previous two quarters of the year, reflecting continued strong program performance and the favorable effect of accelerating our net cost synergies. Year-to-date adjusted EBITDA margins have increased 90 basis points over the last year due to the blending of the Engility portfolio, strong program performance, and the net cost synergies achieved. Third quarter adjusted EBITDA was $135 million, a $37 million increase from the prior year. Adjusted EBITDA excludes $9 million of net integration-related costs in the quarter. Net income for the third quarter was $55 million and diluted earnings per share was $0.94. Excluding the $9 million of net integration costs as well as amortization of intangibles, our adjusted diluted earnings per share was $1.39 for the third quarter. The effective tax rate for the quarter was approximately 24%, consistent with our previously communicated and reaffirmed today expected full-year rate of 22% to 24%. Our expected cash tax rate is also unchanged at 13% to 15%, benefited by the tax assets acquired from Engility. Third quarter free cash flow was $160 million, an increase from the second quarter and attributed mostly to a lower partial payroll cycle and reduced capital expenditures. On a year-to-date basis, free cash flow has increased by $237 million over the first three quarters of last year. We have achieved approximately 88% of our full-year target to date. Day sales outstanding at the end of the quarter were 62 days. We finished the quarter with cash on hand of $162 million. Since the acquisition of Engility, our net debt to adjusted EBITDA leverage has decreased from 3.7% to 3.4%, and we remain on track to be below 3 times by the end of our next fiscal year, reflecting our deleveraging commitments at the time of the acquisition. During the third quarter, we deployed $24 million of capital consisting of $21 million in dividends and $3 million of mandatory debt repayment. We did not repurchase any shares in the third quarter directly or in the open market, as the direct repurchase in the second quarter was an acceleration of activities planned later in the year. Additionally, we repaid $100 million that was placed on our revolving credit facility in the second quarter to facilitate the execution of share repurchase from one of our private equity shareholders. I should note that our Board of Directors will meet in mid-December and we will consider capital deployment opportunities going forward, including our next quarterly dividend that is typically payable to shareholders in January. Now turning to our forward outlook. Our expectations for the second half of the year are unchanged from our previous communication. We continue to expect second-half revenues to be consistent with our first-half revenues of approximately $3.2 billion. As a reminder, our fourth quarter typically is a lower revenue volume quarter due to holidays and associated employee vacation time. We continue to expect full-year adjusted EBITDA margins to increase about 80 basis points from the prior year standalone, SAIC adjusted EBITDA margin of 7.5%, which is at the middle to upper end of our previously communicated range of 8.1% to 8.4%. Additionally, we expect to meet or exceed $425 million of free cash flow this year, with the fourth quarter being impacted by an additional payroll cycle as compared to the third quarter. And finally, as I mentioned earlier in my remarks, we expect bookings to be stronger in the fourth quarter due to the factors I discussed, which will favorably impact our fiscal year '21 growth projections. Operator, we are now ready to take questions.

Thank you. We will go first to Jon Raviv with Citi.

Hey. Good afternoon, everyone. Charlie, you just mentioned the stronger bookings in Q4 that are good for FY ‘21 growth. Could we just think about some of the moving pieces into fourth quarter and into FY ‘21? Reiterated $3.2 billion this year implies low-single digits organic growth in Q4. Can you sort of speak to that? And then, I think, Nazzic you also mentioned your increased confidence in the acceleration of ‘21. If you lose 200 basis points of the dissynergies that would suggest potentially 4% to 5% in ‘21. How should we frame the acceleration of growth here after it’s been a couple of tough quarters here? Thank you.

Yeah. Hey, Jonathan. Thanks for the question. And let me give a little color just around the forward guidance because I think that’s the essence of the question that you are asking about going forward or that’s what we are anticipating the questions will be. But right now, going through the annual planning cycle and we will communicate our expectations for fiscal '21 in the March timeframe as we historically have done so. But as I said in the remarks, the year-to-date bookings and the expected contract awards in Q4 give us great confidence in revenue growth going into next year and beyond. And we also expect to achieve 85% of the net cost synergies by the end of the year and realize the benefits over the course of the year. And I would add that we are focused on organic revenue growth and want to make sure we have the right balance of investments, especially in the strategic growth areas that now Nazzic mentioned, and that’s what we are going to in the planning cycle right now. I hope that addressed your question.

Can you clarify the relationship between the accelerated synergies and the investments? Is there a change from when you initially set the 9% target, or is that target still attainable and possibly achievable sooner given the accelerated benefits? Thank you.

Yeah. So, first of all, going back to where we are to date, we are up 90 basis points over last year, a blending of the Engility portfolio and the cost synergies achieved so far. By the end of the year, we are anticipating 85%. That will reflect margin increases next year. And but as I said, we are going through the planning cycle now and we will be able to communicate more detail about the next year’s full-year outlook in the March timeframe.

Okay. Thank you. I will hop back in the queue.

And we will go next to Matt Akers with Barclays.

Yeah. Hi. Thanks for the question. I want to ask about the sort of customer demand you saw in the quarter. Last quarter, you talked a little bit about delays at a couple of customers around the CR. Is that something you are still seeing or has that loosened up a little bit?

Yeah. This is Nazzic. Thanks for the question. Yeah. So, certainly, we are operating under a CR, and there are a couple of specific cases where the customer cannot expand the work based on the CR situation. But it’s very minor. We don’t see a significant impact to the portfolio. We will continue to navigate it. We have navigated CRs many times in the past, so we don’t see it as a significant risk. But there are a couple of clients where it does provide a little bit of a headwind, and we will just continue to work through that as we go forward.

Okay. Got it. And then, I guess, you talked about the Asset Forfeiture contract. Are there any other big sort of recompete contracts coming up, which we should keep an eye on that could be a risk?

The two key points I highlighted are the Asset Forfeiture, which has been delayed, and we are hopeful for an award in the next couple of months. We are actively working under a bridge contract and are in a strong position there. The other point worth mentioning is the AMCOM portfolio of works we manage for the army. This portfolio consists of multiple contracts rather than a single task order. Over the next 12 to 18 months, it will enter a recompete cycle, which we will navigate. The positive aspect for us is that as they refine their acquisition strategy, there is an opportunity for SAIC to expand its work with this customer, though we must also go through the recompete process. That is the most significant item for next year. However, it will likely have limited impact on next year's financials, as we expect most of that work to be recompeted in the next 12 to 18 months.

Okay. Got it. And I guess maybe last one just, what’s the right level of CapEx to think about going forward? It’s actually, obviously, come down a little bit this year?

Yes. This is Charlie. So we are still looking at $8 million to $10 million of CapEx per quarter. But this quarter, there was minimal CapEx; some of that had to do with the timing of our systems conversion. And I would also say that, our new CIO is taking a different approach as far as what goes to the cloud. There will be more that goes to the cloud and so there could be lower CapEx going forward, not dramatically lower, but I would say in that $8 million to $10 million range per quarter kind of a normal CapEx.

Got it. All right. Thank you.

And we will go next to Seth Seifman with JP Morgan.

Hi. Thanks very much and good afternoon. I wanted to ask maybe a follow-up little bit on Jon’s question as we think a little bit about some of this investment that you are talking about. What specifically might that be? Is this going to show up as kind of internal R&D expense or might it be future CapEx? How is this going to show up in the financials going forward? What specifically is it?

We are currently in the annual planning cycle. I want to clarify that we are on track to achieve the $75 million in total cost synergies that we discussed. As we consider investments in areas with potential for stronger revenue growth, as mentioned by Nazzic, we will evaluate these opportunities for next year and aim to make the right decisions for our shareholders, ensuring we maintain a good balance between margin growth and revenue growth.

Yeah. This is Nazzic. The other thing I will add is, certainly, we talked about investing to drive growth. In many cases, it’s really focusing our dollars in a very focused and strategic way. So in some cases, it’s just making sure that we are focused on the right acquisitions, the right business development efforts, the right solution development. And so, as Charlie referenced, we will certainly look at the opportunity. We will always weigh what we think is the right investment profile for us as a company. But also in addition to that analysis, we also want to ensure that we are investing the dollars that we spend today in the absolute right areas consistent with our strategy to drive profitable growth. All right. No. Okay. Thanks and that’s helpful. I guess, there’s a kind of looking to get a sense of is it that you might need a facility at some point, is it that you might have to invest in developing a certain type of software application or technology, what type of investments you are talking about?

Yes, as Charlie pointed out, we haven't finalized every detail of our investment plan for next year. However, our focus is largely on investing in our talent and our people. When I mention infrastructure, I mean it in a broader sense, aimed at effectively capturing and pursuing a business that aligns with our strategy. I think about our investments in segments like BNP and pre-BNP, which are essential for driving growth. Since we are primarily a services business, while we can't rule anything out, our strategy does not involve investing in facilities or infrastructure in that traditional sense. Did that clarify things?

Great. Great. Yeah. Absolutely. No. That’s what I thought. Thanks. And then just to put kind of a fine point on it, by fiscal ‘22 we are still looking for 9% adjusted EBITDA margin?

We have not changed our three-year outlook and maintain strong confidence in the value proposition established during the Engility acquisition. The projected $500 million in free cash flow remains unchanged. Any investments we consider will aim to enhance the value proposition we previously outlined.

Great. Thank you very much.

We will go next to Edward Caso with Wells Fargo.

Hi, good evening. I want to clarify the three-year outlook. You mentioned approximately $425 million for $480 million and around $500 million in free cash flow. Is that accurate? Additionally, could you explain what the expectations are for shareholder returns and how that compares to mergers and acquisitions? If you pursue M&A, will that impact the company’s share repurchase plans?

Yeah. So let me just go back and say that in general on average and over time, you are correct with the endpoint as far as the free cash flow goes. And I wouldn’t say that its $480 million next year will give you a better indication of what our free cash flow outlook is in the March quarter. I can say that, we always look to manage the cash flow effectively. The achievement of the $425 million of free cash flow was a tremendous accomplishment of our commitment that we made a year ago and we are still focused on this going forward. But I don’t want to commit to any numbers right now. Things do change after a year and will give you a better sense in the March timeframe.

And help us understand the return.

Yes. And so, as far as the capital deployment, returning cash to our shareholders is always our priority absent M&A opportunities. So that's been the consistent theme for the last five to six years and that's consistent going forward. So that has not changed.

Okay. And then the other question, there is a significant amount of items in protest. Can you remind us the big pieces, I guess, including the one? I assume the one that tripped up your guidance last quarter is in that number?

We have a couple of billion dollars in awards and protests, with the key ones being the CPE or Cloud One contract, which we expect to clear the normal protest cycle by the end of this calendar year. Another significant one is EDIS, which has been in various stages of protests since the very beginning of this year. Additionally, we have seen a few pre-award protests, including one related to the DoJ, which is currently going through its cycle as mentioned earlier.

So none of the ones that are in protest have happened favorably yet, you are just hopeful that they will fall your way this quarter?

That’s exactly right. Based on the standard timings that we would expect.

Great. Thank you.

You are welcome.

And we will go next to Sheila Kahyaoglu with Jefferies.

Hi. Good afternoon, everyone, and thank you. Nazzic, you mentioned that the pipeline is $16 billion, which is a 25% increase quarter-over-quarter. Can you discuss your win rate for the current quarter and what contributed to that significant growth? Are the wins distributed across large programs or smaller ones? I also have a follow-up related to that.

We will address your questions. We are seeing strong pipeline activity across all areas. As mentioned, new business opportunities continue to contribute significantly to our pipeline, which is enabling growth for us, especially given that our recompete levels are relatively low. This situation provides us with opportunities to invest in our pipeline and pursue initiatives that will support growth in the future. While we don't usually provide specific win rates, we are confident in our ability to win recompete contracts and believe we are among the leaders in the industry in that aspect. In terms of new business, our win rates are also competitive, and we are focusing on contract growth. We seek opportunities to collaborate with customers and utilize contract vehicles to expand our presence and offer more comprehensive solutions, and we are seeing positive momentum in contract growth as well.

Okay. Could you remind us what impact the continuing resolution and the protest had on the current fiscal year? Also, was there any effect on revenues due to the slight shift with payroll? How do we expect these factors to influence fiscal year 2021 and the organic growth, specifically how much revenue might be delayed?

So, hey Sheila, this is Charlie. Regarding the continuing resolution, my comments from last quarter have proven accurate about the very few customers who remain cautious. We are operating under the continuing resolution until December 20th. We do not anticipate any further impact this year from the continuing resolution; however, if it extends longer and becomes a more prolonged process, there is a possibility of revenue impact, but it is too early to determine how that will unfold. Concerning the protests, I believe we have addressed most of those issues and we expect them to be resolved during the quarter. This expectation contributes to our forecast that our book-to-bill ratio will surpass any previous ratio for this quarter. We are seeing an increase in momentum, moving from 0.9 to 1.2, and then to 1.4. We anticipate that our fourth-quarter book-to-bill ratio will be even stronger. I believe this reflects a high level of confidence in revenue growth as we approach next year.

Okay. Thank you.

Thanks a lot.

Oh! Yeah. I am sorry. There was a question on payroll and that has no impact on the revenue or the cash flow for the year. It’s merely syncing up the SAIC and the Engility payroll cycles, so that we are all on the same payroll now. So the overall quarter-to-quarter cash flow impact is a bit pronounced; the differences are because it was somewhat blended between SAIC and Engility, and now we are all synced up. So that’s why we have somewhat more of an impact in Q4 than the previous quarters.

Okay. Thank you very much.

And we will go next to Cai von Rumohr with Cowen & Company.

Yes. Thank you very much and nice job. So, obviously, you have got a lot of bookings coming in from the protests, but sometimes protests take longer to clear than one expects. If none of those protests clear, those $2 billion, what kind of a book-to-bill can you still do, 1.0?

Yeah.

Yeah. Hi. This is Nazzic. So you are absolutely right. Most protests go through a pretty standard cycle, but you are absolutely right; some can be elongated and we certainly are seeing that the EDIS is a great example of that. So what we are trying to do is give you some insight based on our best guess of what may happen, but certainly we can’t be 100% certain as the customer makes the ultimate decision. So, with that being said, we have a very strong pipeline, as we referenced; we have very high submits as we referenced. And so to the extent that those decisions stay on track and stay in the quarter, I do believe that we should demonstrate a strong bookings quarter. But you are absolutely right; when it comes to bookings, the customer makes those decisions and so we will continue to navigate and watch that.

Okay. And then you referenced $75 million run rate, 85% by year-end; that’s the $16 million run rate you did $10 million of synergies in the third. Should we look for like $14 million, $15 million something, I mean, does that sort of seem to be the trend line to get us to the $16 million?

Sorry, Cai; I am trying to follow you here on the numbers. I think…

Well, what you mentioned $75 million is your kind of synergy target, and you expected to be at 85% of your target by year-end.

Yeah.

85% is $64 million. And if we do a quarterly run rate of that, is $16 million and yet you did $10 million of synergies in the third quarter. So the question is, does that mean we should guess you do something like $14 million of synergies in the fourth quarter to get you to that run rate?

If that’s the calculation you’re coming to, Cai, I would agree with you. We will reach 85% of the $75 million by the end of the year. I’m not exactly sure how you arrived at that specific number, but if you are correct, then we are indeed on track to achieve that.

Yeah.

The remaining 15% of the net cost synergies will be achieved over fiscal year '21, with the full benefit realized the following year. These synergies are particularly related to the facilities, as mentioned by Nazzic, and some of this will carry over into next year until the full benefit is achieved.

Got it. And last one, so you mentioned AMCOM as an opportunity. If I recall correctly, you have got like $650 million in AMCOM business. So I assume you got a lot to kind of defend against. So can you give us a little color in terms of how is this going to be chopped up, how much business is available and so that we get some understanding as to how this is an opportunity for you?

Yeah. So, Cai, this is Nazzic. So you are right. We do about $600 million-ish a year right now under various task orders with AMCOM. And the customer is still working through their acquisition strategy, but what we know to be true is they are going to be acquiring through multiple acquisitions much greater than that run rate because they are going to put together some other scopes of work and acquire in a bit different manner. So the way that we are looking at it is, first and foremost, we are going to protect the work that we have today. But we also have the opportunity to expand our footprint because of their acquisition strategy over the course of the next 12 months to 18 months.

Got it. I mean…

That’s exactly right.

Yeah. That’s exactly right.

Okay. Great. Thank you very much.

We will go next to Joseph DeNardi with Stifel.

Yeah. Good evening. Charlie, sorry, to beat this to death. But if the protests resolve favorably via the Asset Forfeiture contract comes through, how much of that in total would you guys reflect in bookings and backlog just given your treatment of that? Thank you.

I believe the Asset Forfeiture is a single award IDIQ, and just to refresh your memory, we don’t consider that a full booking. That’s just our approach. We would only record it as it pertains to the book-to-bill ratio, based on whatever task order comes with it. The amount depends on how much the customer wants to allocate to the task order, but it’s around $100 million to $140 million a year. However, the customer could obtain it in various ways depending on the task order structure they choose to establish. Does that help?

And then in terms of what’s in protest, would the whole $2 billion come in?

Yeah. So let me clarify as well, Joe. So, because there is a difference between the contract awards and the single award IDIQs. The contract awards are the cloud one, the Cloud Computing Environment; that’s a $728 million. That’s a contract award. The EDIS is a single award IDIQ. FSA, as Nazzic said, a single award IDIQ, of which we get some of the task orders. And there was one other one that was a supply chain at DLA FSG 80; it was close to $1 billion over seven years. A competitor protested this and the customer themselves is handling the protest resolution; we expect a resolution in the next few weeks, but that one is also a single award IDIQ. The task order of that would get booked as well. Does that help? I kind of clarified some of that.

Yeah. A little bit. Charlie, you also mentioned something to the effect of, if the CR continues for any longer, I think it could have an impact on revenue outlook. Were you referring to this year or more kind of next year? Maybe just clarify what you meant by that? Thank you.

Yeah. That would be next year. We don’t see any impact this year. It’s really, if it’s longer, I mean, a much longer CR, something like that may impact the revenue, but it’s too early to tell right now how that’s going to work out.

Okay. And then, Nazzic, just kind of high level, when you look at your organic growth even adjusting for some of the dissynergies compared to maybe where the market is or some of your peers are. Could you just maybe provide your perspective on the bridge between where you are and where they are as kind of end-market differences? Is it win rates and maybe when you think you can get to a level like that? I mean, it sounds like the strategic review that you guys have ongoing is part of that, but maybe you just share your perspective on that? Thank you.

No. Absolutely. You are absolutely right. The strategic review is not just a part of it; it is absolutely our intent to step back and take a look at the opportunities that are in the industry to ensure that we are very, very well aligned to the areas that we can drive growth for the enterprise. And so, certainly, I am not going to speak to our competitors and their strategy. But at this point, I feel very good about the choices we are making, the investments in people and talent, and pipeline development and customer access that we are making and it is for that absolute purpose that you just mentioned and that is to drive profitable revenue growth as we look forward in the months and years to come. And so that’s our intent. That’s absolutely one of the top three priorities that I mentioned earlier. The strategy refresh and the implementation of that strategy and the focus on the areas that I mentioned will drive the growth in the out years.

Thank you.

We will go next to Tobey Sommer with SunTrust.

Thanks. This is Jasper Bibb on for Tobey. I wanted to ask if you could provide any additional color on the Air Force CCE takeaway that was protested in late September, and could you size of award relative to previous cloud contracts?

Yeah. That’s one we touched on earlier, so it is still under protest and we look for it if it goes its normal cycle to come out of protest as we get towards the end of this calendar year, and that’s really all I can say about the opportunity.

Okay, no worries. So I was just wondering, yeah.

The size of it was roughly a $700 million contract.

Okay. Do you have any way to think about the timeline as it did seem like a pretty strong one for the company?

Is it a strong what for the company?

Yeah. Sure.

Yeah. We feel very confident.

I was wondering how you are considering additional M&A activity at this point. Do you see the company waiting until Engility is fully integrated before getting back into the market?

Well, at this point, as Charlie mentioned and I referenced as well, we feel very good about the success of the Engility acquisition to date. And for almost all of the major milestones that we put in place about a year ago as we were going into the acquisition, we have either met or exceeded our expectations along the integration path. So we have good confidence in the Engility acquisition. The integration has gone well; the cost synergies we touched on, and so but with that being said, we have recognized there’s still some work to do, and we touched on the real estate consolidation that will take place and provide the additional cost synergies next year. And then on the revenue synergy side, we are seeing good momentum as we touched on with regard to the pipeline development, some of the key wins, and we will continue to certainly put priority and navigate that. Now, with that being said, we do want to keep the options open. We are very selective in our approach to M&A. We always have been. We do not look to be a serial high-volume acquirer of doing many transactions. But if there was a transaction that brought capabilities or market access or customer access that would support our strategy and support our priority of organic profitable revenue growth, we certainly would look at that. And so I think that that’s the best way to frame it. We believe we are in a good position; we’ve got a good balance sheet, and we want to make sure that we capitalize on the market opportunities ahead of us, but certainly continuing to work the Engility acquisition is top of mind.

Okay. That’s helpful. Just last question from me: I believe you had a press release last week that announced almost $600 million in space and intelligence contract wins. Could you kind of highlight how the capabilities acquired in the Engility deal have been leveraging your recent bid and proposal activity?

Yeah. So certainly in that portfolio of wins, the themes were around space, and the acquisition of Engility has strengthened the SAIC portfolio serving our space customers. We have got a great position in the space missions across both the civilian, the Intel community, and the DOD. That combination of what Engility brought to the table, what SAIC had already in place has really strengthened our position in space. So I would say that was certainly one thing. And then the broader Intel community, the acquisition of Engility gave us great access to broader customers in the intelligence community and we continue to see excellent pipeline development and submits and now beginning to see the wins that come with that in that particular area as well, and I think those are probably the two themes of that bundle of announcements.

All right. Thanks for the color.

We will go next to Gavin Parsons with Goldman Sachs.

Hey. Thanks. Good afternoon, everyone.

Good afternoon.

Maybe just following up on the situation a year after the Engility acquisition. Some of your competitors have engaged in large-scale mergers and acquisitions, which can disrupt their booking processes. A significant amount of time is spent ensuring that pre-integration work is done to prevent such disruptions. The book-to-bill ratio is experiencing some fluctuations, but these can vary based on the addition of new contracts, which has actually been quite robust this year. So my question is, has the Engility acquisition affected your bookings at all, or are they aligning with your expectations prior to finalizing the Engility acquisition?

Great question. So I think the short answer is it is not disrupting bookings at all. As you mentioned, we did the early work to ensure that we had a very cohesive go-to-market strategy. The day that we closed, we had a very cohesive set of teams focused on the customers in the pipeline development, and so we have seen the fruits of that over the course of the last couple of quarters really come to be. With the increase in submits, the increase in our pipeline, and certainly a strong bookings quarter this quarter and the opportunity to have a strong one next quarter, we believe that we are seeing the momentum that came from the integration and the acquisition of Engility and will continue to do so.

Yeah. So revenue synergies there are still momentum going forward that hasn’t been captured in bookings, but are in the pipeline that you spoke about?

That’s exactly right.

Got it. Thanks. And then just what’s the total percentage of revenue that’s up recompete next year?

This is a normatively range 20% to 25%.

Okay. Thank you.

You are welcome.

We will go next to Jon Raviv with Citi.

Hey. Thanks for the follow-up. Charlie, can you just clarify the expectations for fourth quarter organic and is this level first with the acquired sales or it looks like for Engility, I think, in fourth quarter last year you maybe had some added sales, so should the run rate for Engility’s contribution in fiscal fourth quarter be mainly closer to $400 million?

We don’t break out any longer the Engility portfolio versus the SAIC. So I couldn’t really tell you. I could just go back and give you an update on our guidance for the full year and that the second half is going to be similar to the first half. If you look at the first three quarters of the year, they were all right in that $1.6 billion range as far as revenue goes and that translated into about a 1.5% revenue contraction. If you take out the revenue dissynergies you get to about 1% revenue growth and fourth quarter should be fairly similar to the first three quarters.

From a total sales number perspective or from an organic growth perspective similarly, is that what you are saying?

Total sales are organic, and it's important to note that the fourth quarter is typically the lowest revenue quarter because of holidays and vacation time.

As well as in terms of dollars because then you could just suggest that $1.6 million each of the four quarters?

Yeah. I’d say in terms of dollars.

Nazzic, regarding AMCOM, I understand it underwent a recompete process a few years ago. Can you compare that to the current process? Was the previous one mainly about replacement and recompete, or does this one provide more opportunities to expand and capture more? It seems that back then it was seen as riskier, whereas now it is viewed more as an opportunity.

Yes, I will attempt to answer your question, but please feel free to ask again if I miss anything. Your connection is a bit unstable. The recompetes three to four years ago were more typical; we were competing for our work, but the acquisition strategy has changed since then. Generally, it involved recompeting our existing work without many new projects in that cycle. What we are indicating now, as you pointed out, is that there will be opportunities over the next 12 to 18 months. This will unfold over the next year to year and a half, and we understand that several acquisitions will take place, offering us the chance to expand our footprint based on our bidding strategy. Did I address your question?

Yeah. No. I appreciate that. And then just very last for me, appreciate the follow-up here. Just on the low CapEx that you guys posted, I mean, it is below peers. How do you think about that from a strategic perspective?

It was an unusual situation with the minimal CapEx spending in the quarter, so that is something to consider. We anticipate returning to a more typical level in Q4 and beyond. However, as I previously mentioned, we are strategically aiming to increase our investment in cloud-related IT CapEx compared to the past, which should reduce our CapEx spending in the future.

Okay. Thank you.

And at this time I will hand the call back over to Shane Canestra for any additional or closing remarks.

Thank you, Vicky. Thank you very much for your participation in SAIC’s third quarter fiscal year 2020 earnings call. This concludes the call, and we thank you for your continued interest in SAIC.

That does conclude today’s conference. We thank you for your participation.