Welcome to SAIC's First Quarter Fiscal Year 2022 Earnings Call. 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 First Quarter Fiscal Year 2022 Earnings Call. My name is Shane Canestra, Vice President of Investor Relations. And joining me today to discuss an exciting announcement and our business and financial results are Nazzic Keene, SAIC's Chief Executive Officer; and Prabu Natarajan, our Chief Financial Officer.

Thank you, Shane, and good afternoon. We appreciate you joining us today to discuss SAIC's strong start to fiscal year 2022 and our positive outlook for the rest of the year. We have a lot of good news to share today, including the exciting announcement that we've entered into a definitive agreement to acquire Halfaker & Associates, expanding our reach in the public sector health market. We will also discuss our solid first quarter financial performance and strong business development results as we continue executing on our strategy for long-term shareholder value creation. But I would like to start with the acquisition announcement. We've often talked about our strategic interest in profitably growing our business in the public sector health market, further expanding opportunities for long-term value creation. The acquisition of Halfaker & Associates does exactly that. As outlined on page 5 of the supplemental presentation, Halfaker & Associates, founded in 2006, is a mission-focused pure-play health IT company. This acquisition fills a frequently discussed gap in our portfolio, immediately accelerating our strategy in the very attractive growing public sector health market. This combination will immediately increase SAIC's customer and market access and directly aligns with our strategic focus and capability expansion in IT modernization, digital and cloud transformation, and data accountability and analytics.

Thank you, Nazzic, and good afternoon, everyone. As you can see on slide 6, the Halfaker and Associates transaction has an attractive financial profile that continues SAIC's upward progress in multiple financial areas. They generated approximately $166 million of calendar 2020 revenues and are expected to grow in the mid to high single-digit growth rates in the current year. Margins run in the low double-digit EBITDA range due to the entire portfolio being fixed price and time and materials contracts. Halfaker and Associates has good cash generation that will be additive to SAIC's attractive profile. And as Nazzic mentioned, they have high visibility into their future revenue stream with over four times their 2020 revenues and backlog and relatively low recompete risk for the next few years, providing confidence in continued growth. Please turn to slide 7. Let me provide a financial overview of the transaction with an all-cash purchase price of $250 million, including about $30 million to $35 million in tax assets. SAIC is acquiring this business at under 10 times calendar 2021 adjusted EBITDA after adjusting for the tax assets. This acquisition is accretive to our fiscal 2022 revenue growth rate, adjusted earnings per share, and free cash flow. We have not included any cost synergy assumptions in the acquisition model.

Thank you, Prabu. Let me briefly discuss our results for the quarter. As reported in our press release today, SAIC's first quarter results reflect strong performance across the board. The team delivered strong revenue and profitability, excellent cash flow, and outstanding business development results. Organic growth for the first quarter was 2.6%, and adjusted EBITDA margin was 9.8%, an all-time high. SAIC continues to deliver strong cash flow, and we are allocating capital for value creation. We have a balanced customer portfolio that allows us to remain agile when government priorities change. With a third of our annual revenue coming from federal civilian customers, we are well positioned in several agencies targeted for increased investment through this recent budget request. SAIC is responding to the increased investments proposed by the administration and the enduring long-term technology needs of our nation. Our balanced portfolio, further strengthened by this acquisition, bolstered by our refreshed strategy, will continue to produce long-term sustainable value creation. Prabu will now discuss the details of our first quarter results and financial outlook for the rest of the year.

Thank you, Nazzic, and good afternoon, everyone. SAIC delivered a quarter of strong performance across all business development and financial measures. I see the foundation being laid for future success through strong financial alignment and execution in line with our strategy. SAIC's results for the first quarter of fiscal year 2022 reflect robust contract awards, increased organic revenue growth, strong profitability, and free cash flow.

Thank you, Prabu. I want to take a moment to thank all of our 26,000 employees for their dedication to our customers through an incredibly unique and challenging year. We, at SAIC, are optimistic about our future. Hopefully, you hear that from both Prabu and myself. We have worked to capture that energy and optimism in our new branding campaign titled, 'Bring on Tomorrow.' We are excited about the future and what we can and will do to advance our customers' missions, support our talented employees, and drive value for our shareholders. Our optimism lies not only in what the future will bring to SAIC, but also with what SAIC will bring to the future. We are excited to Bring on Tomorrow. Operator, we're now ready to take questions.

Your first question is from the line of Sheila Kahyaoglu with Jefferies.

Good evening, everyone. Thanks for the time, Nazzic, and Prabu, and Shane, of course. So I guess, to start off on your core business, your profitability was really good in the quarter, 9.8% EBITDA margins. Your guidance for the full year is $7 million high is basically, why does everything get worse from here outside of Q2 seasonality?

Thanks for the question, Sheila. As I mentioned in my prepared remarks, there were some non-recurring but favorable items that benefited Q1. We specifically referred to the settlement of prior year indirect rates, as well as an under run on our overall indirect spend at the first quarter. And as you step back and adjust our operating performance in the quarter for those items, we get to an operating margin rate that's in the high 8% range. I'd say that's roughly in line with where we ended Q4 of FY 2021. So I’d say in line with that, what that would imply for the rest of the year is EBITDA margin rates of roughly in the mid 8%. I'd say there's a first quarter here behind us. We have three quarters left. And our guidance today is a balanced view of the risks and the opportunities ahead of us for the rest of the year. As I've often said, the team is incentivized to do better over the course of the year. I think we're pleased with the strong performance to start the year, and hopefully, we're poised to have a really good year.

Okay. Yeah, we saw some of those incentives come out in the proxy. And then just in terms of the acquisition, was $166 million in revenues enough to make a dent in the health business for BOP?

Yeah. I missed the last part enough to make a...

No, in terms of the Health acquisition, $166 million in sales, I think you mentioned, Nazzic, in your remarks. Is that enough to actually build a health business with that sort of scale?

Yeah. My take is and our take is that this was a perfect acquisition at the right time at the right price. It is an extremely strong cultural fit to SAIC, a very mission-focused, very purpose-driven organization. When we marry it with our modest health business, it will give us a very strong position in a couple of key customers as well as some very compelling contract vehicles. So we're very pleased with this acquisition and very excited about the opportunity to bring this company into SAIC.

Okay. Thank you very much.

Thank you.

Your next question is from the line of Joseph DeNardi with Stifel.

Thanks. Good evening. Maybe just one on the acquisition. It looks like that T4NG contract is a substantial portion of that business. So can you talk about what you all expect to be able to do with that contract that Halfaker couldn't do on their own? Should we expect greater market share from you all? And do you think kind of the current dynamics affecting the health market right now result in that contract being larger than expected over time? Is that part of the thesis as well?

Well, a couple of comments that you made are exactly right on. That particular contract, T4NG, is a very important contract in the health space, serving the Veterans Organization. For us, we did not have that vehicle, obviously. So it was a very important part of the acquisition thesis and allows us great access for the next several years to be able to cross-sell SAIC services into that vehicle. So that was a very important part of this acquisition. We believe that the two companies coming together position us well. Halfaker has great market access, great relationships, and compelling solutions and services. But then when you layer in the breadth of SAIC's capabilities in the sales domain and the solution domain, we believe that it creates a great opportunity for us to expand our presence.

Okay. That's helpful. And then probably maybe just on the labor market. Can you talk about what you're seeing there in terms of productivity and what your expectations are for that over the next few quarters as employees are able to take time off and do that sort of thing to an extent that they weren't able to the past year or two? Thank you.

Yes. As you've noted, we're all looking at what the future looks like as we come out of what we hope to be the backside of this particular pandemic cycle, and we're all very optimistic. We're seeing a couple of things. We did have great productivity, and a lot of folks put in a lot of extra hours, and I'm very appreciative to the SAIC employees that did that over the course of this last year. But we are seeing things come back to a more normalized environment, and we're very pleased for that. Any expectations we would have in leave and time off are put into our guidance and are already factored in. We're not seeing a significant shift in behavior. For our normal business, Q2 tends to be an opportunity for employees to take more time off as it falls across holidays and vacation cycles. Again, that's factored into our guidance as well. We're very pleased with the performance of the SAIC employees and look forward to a more normative environment over the course of the next many months.

Thank you.

Your next question is from the line of Matthew Akers with Wells Fargo.

Yes, hi guys. Good afternoon. Congrats on the deal. I wanted to ask, I guess, kind of the bid process for this deal? Were there any other competitive bidders here? Looks like you got a pretty reasonable price on it. And then I guess, also on Halfacre, are there any other than T4 NG that you mentioned, any big contracts that are either potential recompete coming up or kind of big drivers of growth here that we should watch going forward?

Terrific. This is Nazzic. It was a competitive process. As most acquisitions are in our space. We're very, very pleased to have been selected by Halfaker to go forward. In addition to the price, which is always important, we also look very heavily at cultural fit and are very pleased with the culture of the organization. I had the privilege of meeting with the CEO, and we've met with a senior team. The cultural fit is important in the services business; it's a purpose-driven, mission-oriented culture that is very consistent with SAIC. So, very pleased with that and very happy that they've selected us to continue their journey. As it relates to the contracts, T4NG is a critical contract. As I mentioned in my remarks, we have about four years of revenue in backlog, so I'm feeling very good about our position. There isn't near-term any significant recompete that would cause any material change in the revenue profile of the business. Does that answer all your questions?

Yes. That's great. Thank you. And I guess, if I could do one more, on the COVID impact to revenue.

Yes. I think that's still the right way to think about this, Matt. Taking the first quarter number and prorating it across the year would not get you to $150 million, obviously. But within the updated expectation of $150 million, I think we still notionally see some element of risk there in the supply chain portfolio. While the quarterly impact was lower than prior quarters, there's still some uncertainty around the sustainability of the buying patterns at these levels. Previously, we talked about thinking about weekly revenue for this business in that $10 million to $15 million range a week. When we provided guidance a few months back, we were probably near the bottom of that range; a little over $10 million. Presently, we are about the middle of the range. So, still a long way to go to get to the top of the range here, but that gives us an element of caution as we think about the full year. This virus seems to be one step ahead of us at a return, it seems like. We're cautious about the way we're thinking about it. That's why we've lowered our expectation for the full year, but we're still holding about $150 million for the year.

Got it. Okay. Thank you.

Your next question is from the line of Gavin Parsons with Goldman Sachs.

Good afternoon.

Hey, Gavin.

Hi.

Hey guys. If organic growth was 2.6% in the quarter, the midpoint of your updated guidance implies just 1% for the rest of the year. This is your toughest comp trailing book to bills of 2.0. The COVID headwind diminishes going forward. So I guess, what drives the slowdown in organic growth over the rest of the year? And were there any one-time items or pull-forward that you had this quarter?

Gavin, thanks for the question. If you think about Q1, there's clearly seasonality in the revenue pattern here. Q1 tends to be one of our stronger quarters along with Q3; Q2 and Q4 tend to be weaker quarters due to the holidays within those quarters. I would advise a little caution on annualizing Q1 across the four quarters to get to a total year number exceeding $7.3 billion. The immediate impact we saw for the year was on the COVID side. We reflected that in the updated guidance. We continue to see some progress as we go through the year. We do anticipate ramping in growth rates in the second half, primarily associated with our AMCOM, now called SDI contracts, as well as the Army rich contract. We are expecting that ramp to continue in the second half of the year. There's a fair amount of variability as we sit here right now in Q1. I'd love to be having this conversation over the course of the next several quarters, but it's still early in the year, and we have three quarters to go.

Okay. So it sounds like there's still some variability that could drive you to the higher or low end of the range outside of COVID?

Correct.

Okay, great. Maybe a similar question on margins. Given you didn't adjust the one-time benefit out of the first quarter, I assume that's in guidance for the year. But you only raised the margin guidance by the change of the COVID impact. Does that imply you see a worse margin for the rest of the year than you were previously expecting?

What this implies for the rest of the year is margin rates in the mid-8%. I'd say on the indirect rate benefit that we booked in Q1, some of that was in our forecast for the year. It ended up occurring a quarter or two earlier than we expected. We don't expect the indirect rates to under-run on a full-year basis. We expect that to trend back up. While thinking about pressures on margin rate, if you align that with the supply chain business, as it continues to recover, it brings in margin at a lower rate than the rest of the portfolio. Considering all those factors together, we end up with a little more pressure on margin rates in the back half of the year. That's why we're holding the increase to margin rate guidance to about 10 basis points at the low end.

Got it. And one more quick one, if I could. You mentioned that 60% of the submitted pipeline is new business. Do you have a sense of how much of what you've won over the last year or so has been new versus recompete, as the call-outs in the press release were pretty heavily recompete tilted?

Yes. We typically refer to high levels of recompete win rates, and I'd leave it there for now. Our win rates are competitive and they're good, but we typically don't disclose them.

Your next question is from the line of Tobey Sommer with Truist Securities.

Thank you. I have a question for you about book-to-bill. A long time ago, a decade or more ago, it was a very good modeling tool to forecast future revenue growth, and that relationship has sort of been decoupled, not just at SAIC, but in the group. How do you use that in your planning and forecasting so that we can utilize what in the quarter is a very robust number seemingly and make it more accurate?

You're absolutely right. Book-to-bill is an indicator, and it's a reasonable leading indicator to assess the bookings you're bringing in. Certainly, as you dissect it, it can be informative as you think about the period of performance and things like that. But it is not a dollar-for-dollar indicator for future growth. We do pay attention to it and report on it. However, factors like the period of performance on sizable contracts can materially affect your book-to-bill. We've seen this with some of our bookings, especially in the S3 where they've been longer, but that doesn't necessarily have a direct correlation with growth rate. I agree with your assessment: it is something we monitor as an indicator but until you layer in all your contracts and your backlog, it essentially becomes one part of that analysis. We're very pleased with our book-to-bill, which has been running strong over the last year. We have a solid pipeline; we have good confidence in our ability to sustain a strong book-to-bill moving forward. But again, it's just an indicator, certainly not the sole indicator.

Thanks. Could I get a sense of what the margin profile looks like in the bid pipeline and in recent wins, including the AMCOM recompete wins? I want to use that color to inform the margin outlook going forward.

The margin rate implied in the pipeline aligns with our business right now. However, we are always striving to create differentiation in what we're bidding to continue to push up the margin rate curve as we pursue new work. Specifically for new work with a development period, we typically see lower rates early on in the program, which ramp up over the contract duration. We think about it broadly through the life of each contract. I expect our BD efforts to continuously drive us upstream on margin rate so we're taking on more accretive work as we proceed.

Your next question is from the line of Seth Seifman with JPMorgan.

Thanks very much, guys. Good afternoon, everyone.

Good afternoon.

I was wondering if you could talk about what's the level of exposure that you have to Afghanistan that's baked into the guidance for the year?

Yes. We have very minimal exposure in Afghanistan. So, nothing material.

Okay. Great. And then when you look at the pipeline for the remainder of the year, I guess, would you see a reasonable opportunity to – putting aside the acquisition and reasonable opportunities to exit the year with a larger backlog than you have right now?

Yes. I would agree with that assessment. We have a very strong pipeline. We have secured solid win rates, and we have a good combination of recompetes as well as new business. So I would agree with your assessment.

Your next question is from the line of David Strauss with Barclays.

Thanks. I know it's still early days here, and we've got to go through the markup process. But can you comment a little bit on how you thought the budget looks for you all? I guess, both from a DoD perspective and a civil agency perspective?

Yes. As you noted, it is early days for certain. We pay attention to the requests being put forward in the conversation. At this juncture, we don't see any material impact on our business from the budget. We certainly see some positive trends, such as the continued focus on IT modernization and some of the work being accelerated across the federal government. We believe that focus is a positive sign for us, as is the conversation around operations and maintenance.

Okay. And Prabu, a question given the deal. Could you talk or could you give us kind of how we should expect deleveraging to go from here? I think your prior target was 3x at the end of the (inaudible) standpoint?

Thanks for the question, David. At this point, we don't see any material impact on our ability to continue in the market to buy shares. We had committed to getting our leverage ratio to about 3x. In a low interest rate environment, we're comfortable running that leverage ratio a little higher if needed. This particular acquisition increases our leverage by 0.2 of a turn, and it's incredibly cheap. I'd say we're comfortable with where it stands now. Regarding our plan to delever, we expect to reach that roughly 3x sometime in FY 2023; and growing earnings quickly is the best way to achieve that. We’re committed to getting there, likely in the second half of FY 2023.

Okay. And last one I had. The 10% of revenues that were expected to be up for recompete this year. Where does that percentage stand now?

It's a little bit lower now. There is one re-compete that's still pretty material, NASA NICS. We're expecting to have more clarity in the summertime frame on that one. That's the FY 2022 look for this year.

All right. Thanks very much.

Okay. Thank you.

Thank you.

We have a follow-up question from Gavin Parsons with Goldman Sachs.

Thanks. Just wanted to ask an update on the three contracts we used to talk about all the time, EDIS, CCE, and FSG 80. Are those at full run rate? Have those ramped up, or are those still contributing growth drivers?

I think at this juncture, they're all ramping up and on track to do exactly that. I don't think they're at full capacity yet.

Okay, great. And then probably you mentioned the guidance in the second half depends on the ramp-up of SDI and RITS. Is there any cushion in there for that, or do you have a good amount of confidence in the pace of the ramp-up of those?

It's a good question, Gavin. The way we think about the planning process is to be thoughtful regarding things that will require a ramp, especially if there's a lot of hiring involved. We want to ensure that we can execute a plan starting from day one. We've encapsulated the range of possibilities around the ramp time for these programs and are therefore comfortable with the schedule for the rest of the year.

Okay. Thanks again.

Your next question is from the line of Cai von Rumohr with Cowen.

Okay. Good try. Thanks. So I apologize for joining a little bit late, but if you gave it, could you give again the bids awaiting decision?

$18.2 billion, Cai.

$18.2 billion. Thank you very much. And then a number of folks in the last quarter basically sort of complained about the transition of the administration and kind of delayed bookings. Obviously, you had good bookings. What are you seeing for the next two quarters? Are we going to have like a super flush? Are we going to see the normal seasonal pickup? What should we look for?

What we're seeing today is really just a normal environment. We're not seeing anything that is overly flush or anything that's overly aggressive. We're encountering a normal cadence of RFPs, processes, and awards from our customers.

If I look at history, normal, I would say, comfortably above one in Q2 and Q3, yes?

I'm not going to give guidance on book-to-bill. We're very pleased with the bookings and the book-to-bill that we've been able to appreciate these past four quarters and before. We're comforted by where we stand today. I'm very pleased with the performance of the organization in business development and pursuing bids. As we all know, book-to-bill can be lumpy. Predicting anything at a quarter level is challenging as it becomes contingent on customer decisions and schedules. However, looking at the pipeline, submissions, and past performance makes me comfortable with our ability to maintain a strong book-to-bill going forward.

Great. And then could you comment on protests? I believe you had four contracts you lost toward the end of the year, and two of those were in protest. Did you win those protests? Do you have any other protests either on the offense or the defensive side?

Nothing unusual. There was one where the protest was sustained, and it's back into a cycle of competition again. We're watching this along with everyone else, but that's the only update we have since year-end. One of the protests was sustained.

Thank you very much.

And I would like to turn it back over to the company for any closing remarks.

Thank you very much for your participation in SAIC's first quarter fiscal year 2022 earnings call. This concludes the call, and we thank you for your continued interest in SAIC.