Science Applications International Corp Q3 FY2023 Earnings Call

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the SAIC Third Quarter Fiscal Year 2023 Earnings Conference Call. Thank you.

Good morning and thank you for joining SAIC’s third quarter fiscal year 2023 earnings call. My name is Joe DeNardi, Vice President of Investor Relations and Strategic Ventures. And joining me today to discuss our business and financial results are Nazzic Keene, our Chief Executive Officer, and Prabu Natarajan, our Chief Financial Officer. Today, we will discuss our results for the third quarter of fiscal year 2023 that ended October 28, 2022. Earlier this morning, 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 and a copy of management’s prepared remarks. These documents, in addition to our Form 10-Q to be filed later today, 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. The non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP. It is now my pleasure to introduce our CEO, Nazzic Keene.

Thank you, Joe, and welcome to those joining us today. This morning, we reported solid third quarter results, which reflect revenue ahead of plan and strong business development activity, both of which contributed to the improved outlook for fiscal year 2023 and further builds momentum as we enter fiscal year 2024. Before I review the quarter, however, I would like to continue a practice we began last quarter. I want to recognize a member of the SAIC team whose accomplishments reflect the values of our organization and contribute directly towards executing our strategy to drive long-term value for shareholders. In October, SAIC was recognized by Frost & Sullivan as a JADC2 company to watch and is one of only three companies named as being a provider of both services and products in support of the JADC2 effort and the only company in IT services. Katie Sheldon Hammler, our leader in Industry Analyst Relations, continues to ensure that our unique offerings are well understood by the market. She played an important role in our recognition by Frost & Sullivan, a resource relied upon by many of our customers. The recognition highlights the unique role SAIC can play as a trusted integrator and builds upon other successes in recent years in executing on our JADC2 campaign, which is summarized on slide six of the presentation. Two recent accomplishments serve as solid platforms for further JADC2 related growth: the first being one of two IT solutions providers named to the five-member ABMS Digital Infrastructure Consortium, and the second, a key $100 million JADC2 related award won in September. With this momentum, we are very proud of our leadership position in the JADC2 mission area as this is critical to our national security and an integral part of our growth and GTA strategy. Now, on to a review of our third quarter financial results. We reported revenues of $1.9 billion, approximately 1% growth as compared to the prior year. We were able to overcome pressures from contract losses with new business wins and a continued focus on driving on-contract growth. Our revenue performance year-to-date contributes to our ability to increase guidance for this year, as outlined on slide 12 of the earnings presentation. I am pleased with our program execution year-to-date, which contributed to the solid margin performance in the quarter. We remain on track to meet our full-year margin guidance of 8.9% and expect to see modest margin improvement in fiscal year 24 with further progress in fiscal year 25 and beyond. Our focus remains centered on driving long-term value for our shareholders, which we believe can be best accomplished by positioning the business to deliver sustained organic growth, improving margins, and deploying capital based on the highest ROIC. Given the importance we place on capital allocation as a strategic priority, I’d like to spend a few minutes reviewing our approach to capital deployment. Our first priority for cash flow is to invest internally to support future growth. Over the past 24 months, we have continued to refine our process to ensure that our internal investment dollars are allocated to markets and strategies that will produce the best long-term return for our shareholders. We see evidence of this priority in our pipeline as represented on slide 11, which continues to expand with disproportionate growth in our GTA area of focus. With the excess free cash flow generated, we will then deploy capital in ways that maximize long-term ROIC amongst various options, including our share repurchase program, dividend, debt reduction, and M&A. Over the last few years, our capital deployment has skewed more towards M&A with roughly two-thirds of capital going towards acquisitions, with the remainder returned through dividends and share repurchases. Based on the current market conditions and competitive landscape, we expect capital deployment to be focused more on returning capital to shareholders while opportunistically leveraging M&A to add capabilities, solutions, or technologies where and when we can accelerate our growth strategy. Our April 2021 acquisition of Koverse is a good example of this as the capabilities acquired have produced true differentiation in our solution and served as a key contributor in winning over $300 million in total contract value since we closed the transaction. Our current pipeline includes over $6.5 billion of contract value, where we expect Koverse to serve as a key differentiator in our AI solution. As I said in our earnings release, aligning capital allocation with long-term shareholder value creation is our focus. Our results year-to-date and outlook for the next year reflect our commitment to this strategy. As I close out my remarks and reflecting upon the season, I would like to take a moment to extend my sincere appreciation to our SAIC family. Your contributions as demonstrated every day with your dedication to our nation and customers’ missions, your engagement in the communities in which you live and work, and your support to each other are never taken for granted. I thank you all for what you do for SAIC. And to all of you that continue to take an interest in SAIC and participating in our call today, I wish you a very happy and healthy holiday season. I will now turn the call over to Prabu to discuss our financial results and increased guidance.

Thank you, Nazzic, and good morning everyone. I am once again proud of the financial results we delivered for our shareholders in the third quarter. Our team’s focus on on-contract growth and new business wins resulted in 1% organic revenue growth. Our results to date contribute to our increased revenue guidance for FY 23 and to our confidence in being able to deliver organic growth, improve margins, and drive 10% free cash flow growth in FY 24 despite over $100 million revenue headwind from fewer working days next year. I will discuss our outlook in more detail shortly. For the third quarter, we reported sales of $1.91 billion, representing organic growth of 1%, with results ahead of our plan, largely due to stronger on-contract revenue performance, which enabled us to overcome a roughly 3-point headwind from recompete losses. Third quarter adjusted EBITDA of $170 million resulted in an adjusted EBITDA margin of 8.9%. Adjusted diluted earnings per share in the quarter of $1.90 represents growth of 3% year-over-year. We reported free cash flow in the quarter of $122 million and returned approximately $81 million of this to shareholders via share repurchases and dividends. We delivered third quarter awards of $2 billion, 72% of which represent new business, resulting in a book-to-bill of 1.1 times in the quarter and on a trailing 12-month basis. On a year-to-date basis, roughly one-third of our total bookings are in our GTA area of focus. Note that third quarter awards do not include the roughly $900 million DCSA One IT program, which we were previously awarded as this remains with the customer following a competitor’s protest. We are particularly encouraged by our business development success in the quarter and highlight the diversity of awards that contributed to the $2 billion total, with the largest award representing roughly $240 million in our classified space business. We believe this reflects our ability to drive strong awards and growth without a reliance on large orders. Our pipeline of submitted proposals remains healthy at over $20 billion on a trailing 12-month basis. Based on expected submissions over the next few quarters, we expect this to increase in FY 24, a good indication of growth we are seeing in our addressable end markets. On slide 13, we provide an initial outlook for fiscal year 2024. We expect to deliver revenue growth of approximately 1.5% at the midpoint despite pressure in the first quarter from contract transitions and at least $100 million headwind in our fiscal fourth quarter from five fewer working days compared to this year. This should translate into the second and third quarters providing the strongest growth rates for the year. Adjusting for the working days headwind, we are encouraged by the 3% to 3.5% growth expected from the business and is a trend we believe can be sustained beyond FY 24. We remain confident in our ability to return recompete win rates to historical norms and are encouraged by the financial performance that should contribute when paired with our recent success in new business capture. We expect to see modest margin improvement to approximately 9% in FY 24 as benefits from mix and other initiatives are partially offset by reinvestment into the business. We continue to see opportunities to further narrow the margin differential between SAIC and peers and expect to show additional progress again in FY 25 and beyond. We are expecting FY 24 free cash flow of approximately $560 million, driven by earnings growth, a continued focus on working capital efficiency, and a $50 million year-over-year benefit from having made our final payroll tax deferral payment in FY 23. These tailwinds are expected to be modestly offset by higher cash taxes based on our current planning. As Nazzic indicated, we are focused on ensuring that the free cash flow we generate is deployed effectively. We currently expect to allocate the majority of our deployable cash to our share repurchase program in FY 24, but can adjust this based on changes in the interest rate environment and broader market conditions. Our view that the repurchase program represents the best ROI for our excess free cash flow is informed by three factors: one, the confidence we have in our ability to deliver earnings and free cash flow in excess of market expectations over the next several years; two, our belief that stronger financial performance versus our peer group will drive improved relative valuation; and three, recent transactions which indicate still robust demand from the private markets for businesses with our end market exposure and cash flow durability. As you can see on slide 13 of our earnings presentation, the strength of our expected free cash flow in FY 24 should allow us to return significant capital to shareholders. While we maintain the flexibility to adapt this based on interest rate trends and market conditions, our current expectation is to sustain our dividend, use a minimum of $125 million to pay down debt with the remainder going towards our share repurchase program. This scenario will result in net leverage declining to just under 3 times by the end of FY 24 and allow us to have returned approximately $1 billion of capital through dividends and share repurchases to shareholders between FY 22 and FY 24. Beyond FY 24, we have good visibility into continuing to increase free cash flow despite manageable cash tax headwinds expected in FY 25 and FY 26. On slide 14, we provide an illustrative view of our free cash flow potential over the next few years, which assumes roughly 2.5% revenue growth and 10 basis points of annual margin expansion. To be clear, this is not intended to be guidance, but rather show our ability to offset the roughly $30 million in total cash tax pressure between FY 24 and FY 26 with fairly modest core earnings growth. As shown on slide 15, our cash tax assets beyond FY 26 remain fairly stable through the mid-2030s. Before turning the call over to the operator to begin Q&A, I want to echo Nazzic’s sentiment and extend my thanks to my colleagues at SAIC for their dedication to our customers and our shareholders. I wish all of you happy holidays.

Your first question comes from the line of Gavin Parsons from Goldman Sachs. Your line is open.

Hey, good morning guys.

Good morning.

Good morning, Kevin.

Appreciate all the detail in the slides. That’s really helpful. I just wanted to ask about the 3% to 3.5% growth rate that you think you can achieve over the next few years; what does that assume in terms of a budget? What does that assume in terms of book-to-bill? And just what kind of visibility do you have there?

Gavin, Prabu here. Thank you for the question. In terms of our view of the growth rates here, the way we think about this is we’ve delivered about 2.5% organic growth last year, about 5% total growth. We’re on pace to deliver somewhere between, let’s call it, 2% to 2.5% organically again this year, and that includes about 3% in headwinds from recompete losses. So as we project out into next year and beyond, we believe that this is a sustainable rate of growth for a business like this. In terms of the budget environment, sort of more narrowly the question, I would say we’re not assuming some dramatic improvement in the underlying budget condition. We do expect things to remain as tight as they are right now. We do see budget growing in the low single-digit area, again, depending on which areas you’re referring to specifically. But that’s sort of the budget setup that we see. So we’re not assuming a suddenly burgeoning scenario on the budget front, and that’s sort of the baseline assumption that we have right now in the projections out there.

Got it. And then maybe just in terms of backlog duration, that’s expanded. You’ve got much more visibility, though that has led to a bit of a disconnect between backlog growth and revenue growth. Are you at a more kind of level backlog duration on the go forward such that backlog growth should translate more directly to revenue growth?

Yes. And I think maybe a couple of caveats there. As we think about our pipeline, one of the key elements we look to inside of the pipeline is the period of performance of the works that we were bidding. And that has tended to grow over the last couple of years; our average period of performance has been roughly between 4 and 5 years, depending on kind of the programs and the specific mix you see inside of a particular quarter. I think our focus as a team is to not get too concerned about the specific period of performance inside of a quarter but to think about this qualitatively over a period of time to make sure that we are lengthening the period of performance as much as possible. So I would not necessarily think of a direct correlation between the period of performance and revenue growth translation. But I’d say we’re starting to see a stronger connection between what’s in the backlog and the revenue growth that we are translating specifically through the on-contract growth that the teams have been able to deliver. Nazzic, would you want to add to that?

I think the only thing I’ll reinforce, and I think Prabu captured it well, is as we sit here today and reflect back on the last seven quarters, give or take, and we look into the future, I think we believe strongly that the strategy we’re executing against is working. It’s demonstrating sustained, profitable organic growth, and we’ve got certainly proof points coming into this particular quarter. And as we look out into the future by looking at the pipeline, by looking at the balance between GTA and core, and we just continue to execute on the fundamentals of the business, we do feel we’re in a good position to be able to continue to deliver on the strategy that we’ve been operating under the last couple of years.

Got it. Thank you, both.

Thank you.

Your next question comes from the line of Bert Subin from Stifel. Your line is open.

Good morning, Nazzic. I wanted to follow up with a near-term question. People have been observing outlays, and we noticed strong progress in August and September, but it seemed to decrease in October. I expect some fluctuations during the continuing resolution. Your fiscal quarter ends in October, so I'm curious if you could share your observations regarding customer activity and your ability to capture opportunities throughout the quarter.

Yes. Let me start a little bit and then if Prabu wants to add some color always. But I think in general, we haven’t seen a very significant change in buying behavior over the course of the last year or so. And given the elections, given the CR, and given the future, as we sit here today, we don’t see anything that is radically different in the future either. So for us, it’s very much been business as usual. There is always some short-term opportunities and some contracts to do some pickups, but that’s really a normal practice for us. So from my perspective, I haven’t seen anything that’s really fundamentally different over the last few months nor do we see it going into the next few months. Prabu, you’ve got anything to add?

Thank you, Nazzic. The only other thing I would add, Bert, is that our book-to-bill was our 1.1 times, our trailing 12-month book-to-bill has been 1.1 times. I think we are demonstrating that there is a way to a robust, healthy book-to-bill metric that does not rely overly on large awards. And I think in this environment, if you’re relying on large awards, I think you’re likely to see some delays there. And thankfully, we’re not in that boat. And I think that’s probably the other source of a healthy book-to-bill trend.

Yes, good point.

Yes, that’s great color. Thank you, both. Maybe just for my follow-up question on the margin side, I appreciate all the color you gave on your initial outlook for next year. Prabu, as we think about the 9% range relative to where the peer group is probably closer to 10%, do you think there is something that you guys can do to narrow that range? And could you maybe just walk us through what you think the largest contributors to margin expansion are going to be when you start to see that perhaps in the next year or so?

Yes, I appreciate the question, Bert. And I think we reflected on this particular topic on our last earnings call and acknowledge the fact that we do see that difference between us and our peers on margin rates. We’ve been consistent in the way we thought about margin and communicated that story to say that we do see, over time, a path for us to continue to bridge the gap between where we are and where our peers are. Now having said that, we do see that as a substantial opportunity to create shareholder value over time, and we do expect to make progress against this target over time. Our incentive comp and our metrics are aligned to improving the margin performance from the underlying business. Look, it’s early days for FY 24. We wanted to get a baseline view for where we see margins for next year. And we are always seeking to balance improving margins against the needs of the business to make sure that we are taking a balanced view of that investment potential against the backdrop of improving margins over time. So I think that’s the balance we’re striving to always, I think, bring into the equation. And the last but not least, I’d say over the last maybe one year to two years, inflation has been maybe more of a factor. While it hasn’t improved or it hasn’t impacted the margin performance of the business, the reality is it is keeping a little bit of a check on underlying margin improvement because we are seeing escalating costs on the labor side. So if you sort of combine all of these factors together, we do see the potential for margin to improve. And what you have there is our initial baseline view for FY 24 and recognize that Nazzic and I are committed to improving the underlying margin performance of the business, and that’s where the focus is going to be for the team.

Yes. Just to clarify something, I guess I could ask better because I know I’ve sort of asked about margins before. Do you think the opportunity is more to get rid of overhead load, or is it portfolio mix shaping or is it the combination? I’m just curious if there is one thing that stands out as this is going to be an easy opportunity for us to get margin expansion?

I can say that I wouldn’t describe it as easy, but I will say that we are focused on all aspects. You are right that there are several levers to consider. We are consistently evaluating our cost structure to ensure that we are investing our resources in areas that support our strategy for sustained organic growth. This is an ongoing process that must be part of our discussions. Regarding the portfolio, GTA generally enhances profitability. As we advance our strategy in GTA alongside our core offerings, we see that as an opportunity as well. Additionally, in our existing business, we are looking for chances to cross-sell solutions and incorporate higher value work into current contracts to drive on-contract growth. It’s fair to say that we examine every lever and we do not remain complacent, assuming our overhead structure or pipeline is optimal. We are continually seeking opportunities to drive consistent with our strategy of sustained profitable organic growth, and we are considering all these levers.

Thank you very much.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open.

Good morning, everyone. Thank you for the time. Referring back to Gavin’s question, I would like to discuss your thoughts on budget growth over the timeframe outlined on slide six to slide fourteen. Additionally, could you elaborate on how you view growth across your different verticals and the significant opportunities in Intel awards? What factors are driving this?

Yes, a couple of comments. On the budgets, obviously, we will enter with the CR. It’s a little early to tell. But I think in general, we assume low single-digit budget growth at the macro level and in some areas growing more than others. And then obviously, the federal government is dealing with the same challenges that industry is and looking at inflation, which creates some headwinds on the budget as well. So I think, Sheila, in general, we’re not looking for any dramatic change in the budget environment. To the extent that good things happen, that’s good for industry. And to the extent that there are challenges, obviously, we will navigate that. But I think it’s just fair to say, stepping back, looking at the macro view, we’re not seeing anything that we view as very significant to change our approach to our strategy. As it relates to our end markets, we do see modest growth opportunities across the portfolio. So obviously, increased focus at the federal level on DoD improves our access to the DoD market, the balance of some of the civilian programs obviously helps as well and then, of course, Intel. And so I would say it’s relatively balanced across the macro verticals that we operate in. But obviously, there are some pockets of the business that we expect more growth out of than others. And we’ve made reference to that as we think about the GTA areas as it relates to core. We expect and we position the company to grow across the board, but disproportionately over the next several years, we look for growth to come out of the GTA part of our portfolio. Prabu, do you want to add anything?

That’s perfect.

Yes, no, that does. And then maybe going to free cash flow, if I could ask about working capital efficiencies, how you think about those? And then I’ll stop there because I’m being greedy, and I’ll get back in the queue.

Sure. I appreciate the question, Sheila. So on free cash flow, look, we outlined that we’re going to grow free cash flow by about 10% this year. And we said we are intending to grow free cash flow by another 10% next year. I think for better or for worse, there has been a view out there that we are over-earning on our cash tax assets. And Chart 15 is intended to I think address the specific question on are we actually over-earning on our tax assets or not? As you could see, it’s just a modest level of deprecation, if you will, on the cash tax side, and there is good visibility on the cash tax assets inside of the portfolio. As we think about specifically working capital, there are a handful of things that we are doing coming into this year and that we are going to continue to focus on that includes everything from DSO management to DPO management to inventory management to terms and conditions on our prime contracts to terms and conditions on our contracts with our subs to make sure that we are getting as much benefit out of the working capital management side of this as we can. At the end of the day, as you think about the free cash flow potential growth for this company over the next several years, we think working capital tends to be less of a driver to improving free cash flow in the outer years. We do believe that based on just the demonstrated growth that we’ve shown over the last couple of years into next year that if the business grew between 2% and 3% a year and we had modest margin improvement of about 10 basis points. There is plenty of potential for us to offset and grow free cash flow, offset the headwinds from the tax assets and grow free cash flow. So as we think about it with a very nominal set of assumptions, we think we can continue to grow the free cash flow, recognizing, of course, as we caveat it, this is not intended to be free cash flow guidance for the next three or four years, but it’s a directional view for where we think the potential for this company is in terms of being able to generate free cash flow and then deploy the cash flow effectively over the next several years.

Great. Thank you so much.

Of course.

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

Thanks. Good morning.

Good morning.

So the 3% to 3.5% growth that you’re mentioning for after 2024 suggests that you expect to exceed the basic budget. How do you see your growth compared to your peers? Do you believe you can surpass your peer group? Does that 3% to 3.5% indicate growth that is above your peer group?

Let me address that. Looking at the broader picture for next year, we believe our growth rate could be around 1.5% at the midpoint. When we take into account the five fewer working days next year, specifically four days in the fourth quarter, we estimate a growth rate of approximately 3% to 3.5%. There are two main factors we need to consider: first, we need to continue recovering our recompete win rates to their previous levels, which is a crucial assumption. We're seeing positive progress internally regarding our recompetes, which both Nazzic and I find encouraging. Second, we have been successful in securing a higher percentage of new business pursuits this year, and it's essential for us to maintain that momentum. The fundamentals are functioning effectively. Regarding the budget and peer comparisons, we view this as a relative comparison. We assess the projections from some of our peers along with various models available. Our target growth rates are in the range of 3% to 3.5%. With the right investments, a robust pipeline, and strong execution, there is no reason we cannot achieve 3% to 4% or 3% to 3.5% in underlying organic growth. It's important to note that this won't be a straightforward path. There will always be recompetes that may hinder progress and new business wins that provide additional growth. Overall, stepping back from the fluctuations in recompete results and new business victories, we are focused on our targeted growth rate. We are optimistic about the progress we’ve made, but we acknowledge that it requires consistent effort quarter by quarter to maintain high execution standards.

Thank you for the information. You mentioned an improved win rate on recompetes. Can you provide an update on where we stand regarding recompetes and what portion of the upcoming pipeline is subject to recompete? How do you view the trends in recompete win rates?

Our recompetes, they always tend to be lumpy depending on what’s in the mix. I would say, in general, we have said 10% to 20% of the portfolio comes up for recompete in a given year. And we see next year is no different from that. Obviously, the timing of Vanguard and PVMRO is going to have some level of outsized impact on those percentages, but that’s nominally what we are seeing in this business.

And your next question comes from the line of Matt Akers from Wells Fargo. Your line is open.

Yes. Hey. Good morning, guys. Thanks for the question.

Good morning.

I wanted to ask about some of your comments on M&A. In the prepared remarks, it sounds like it’s going to be less of a focus. Can you just talk about what you are seeing in the market there? And I mean are assets kind of more expensive, or are there more bidders? And to the extent that you still do maybe smaller deals, are there specific areas that you think are sort of focused areas you would look at?

Yes. Let me tackle a couple of those and then Prabu can add some color. I think in general, the M&A market continues to be active. So, there are certainly assets that come to market. We certainly look at some. We don’t look at some. Interest rates, obviously, have the potential of creating some volatility in the M&A market, but we haven’t seen it to date. So, I would say the market for the most part is pretty much what we have seen in the last couple of years. With that being said, as I think about SAIC’s interest, it would be along the lines of the GTA areas of focus that we have highlighted. So, as I mentioned in my prepared remarks, if an asset were to come to bear that accelerates our ability to drive profitable organic growth in those areas of our portfolio where we have decided we believe it is in our best interest to grow. Those would be of interest to us. Obviously, anything we do, we go through in a very intense process to make sure that it’s not just good for the company and the employees, but also for our shareholders. But those would be the types of assets that we would be interested in, and we would be very, very selective as we looked at M&A right now.

Okay. Great. Thanks. And then I guess I want to ask about Counter-UAS. I know there was the demo the other day. But if you could talk about maybe how big kind of that potential market is and any kind of big opportunities you see coming up in that market?

Yes. We are very excited about the market. As we mentioned in our last call, this is an area where we have provided services for several years. Currently, we have developed what we believe is a very compelling solution, which we had the chance to demonstrate to many of you last week. I visited a month or two ago and saw it as well, and it’s truly exciting. This solution set is relatively new, and we are working closely with the DoD to position ourselves effectively. We are proud to be one of the three recognized solutions by the Army for providing comprehensive, end-to-end solutions. However, it’s still too early to determine where we believe the market is heading. We are conducting a lot of work to evaluate that. Currently, it represents a relatively small revenue stream for us, but we see it as a growth opportunity. This aligns with our strategy, particularly in systems integration, and we recognize significant market potential not only with the U.S. government but also in supporting other governments. We will share more information as we learn more, and we are very excited about it and proud of our team's accomplishments in this area.

Great. Thank you.

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

Yes. Thank you so much and nice results again.

Thanks, Cai.

Could you provide more details on some of the outstanding bids, such as the One IT protest? What is the current status of Evolve, including the number of pieces and the timing of the bids, as well as the PVRO?

Yes. The One IT has returned to the customer and is currently undergoing their review process. The formal protest period has ended, and it is now back with them. I don't have additional details at this time, as they will set the timeline and manage their award process. Regarding our Vanguard initiative, we expect to continue developing their procurement strategy as we move into next year. I see this as relatively low risk for us in the early part of the year, particularly as they progress through their procurement options and decide on the awarding methods. We will gain more clarity as we enter next year, but they are currently navigating through some changes. I'll let Prabu provide any further details.

Cai, the only other comment on DCSA One IT is we do expect some clarification perhaps before the end of our fiscal year. And then we will take it from there. AOC Falconer, which was under protest a quarter or two quarters ago, that’s fully underway now, and we are under contract, and the teams are executing to what they need to do there. So, we have got some good momentum on the new business front, but I would say DCSA One IT has probably got the biggest impact potentially on FY 24.

Great. Thank you very much. And then you made the comment that you see stronger growth in the second half of the year. And am I correct that the kind of the five-day fallout is basically in the fourth quarter, which would suggest that that’s going to be a tougher compare. So, maybe walk us through the quarterly pattern and some of those factors?

Yes. Got it. Appreciate the question, Cai. So, for next year, as we sit here today, recognizing with all of the health warnings that that calendar brings on us. Q2 and Q3 of next year is where we see the greatest level of growth potential for this company. Q1, we are likely to still see some headwinds from the NASA NEX program fully rolling off. It turns out, if you will, at the end of Q1. And Q4, of course, is sort of where we see the headwinds potentially from having five fewer working days relative to Q4 of this year. As we sort of estimated at the start of this year, we said Q1 would grow, Q2 and Q3 maybe small levels of contraction and Q4 will be growth. What this team has done and Nazzic and I are just incredibly proud of the work the team has done this year is for us to go out there, and make sure that we can do a little bit better every quarter and then keep up that level of intensity. So, as we sit here, that’s our estimate for next year, but recognize we have got three months left to the end of this year. And of course, we have got a whole bunch to next year. So, we will continue to focus on making sure we are delivering ahead of internal plans, but that’s truly risks and opportunities driven and making sure we are doing as much as we can to ensure that we are delivering a smooth year for us and our shareholders.

Perfect. Good answer. Thanks so much.

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

Thanks. I was wondering if you could provide some insight on where your space business fits among your potential growth areas. Nazzic, you mentioned moderate-to-modest growth opportunities across the portfolio, but how would you describe the space segment in relation to the overall business?

Space is as we have mentioned before, is certainly part of our growth strategy. And if we think about the intersection of our space business with the areas, the GTA areas that we focus on, it’s a great combination and a great opportunity for us to expand in both dimensions. So, certainly, in the systems integration and delivery space that area, that GTA, we see the opportunity to drive that in space. Obviously, as more applications, whether they are mission, especially mission go to the cloud, we see the opportunities there as well. So, I would just reiterate that space is an important domain for us. It is part of our growth strategy, and it is very complementary and directly interlocks with our GTAs.

My follow-up, how do you juxtapose in sort of reconcile your strategy, which is focused on the sort of existing contract portfolio and extracting as much as you can out of that and revitalizing organic growth with what seems to be a pretty steady externally and internally driven growth strategy among some of your industry competitors and at the end of a multiyear period of focus on sort of just more organic growth and less external? Is there any risk that the portfolio kind of won’t be positioned as you want it in three years, four years, five years?

Hi there. Prabu here. Maybe I will take this part of the question. Part of what’s in our space business is our restricted space work that is also a fair amount of SETA work that we do for the government. We think about growth inside of the space business in these two buckets, kind of the SETA work and the non-SETA work. The non-SETA work has the potential to grow at higher growth rates than the SETA work, not surprisingly. And therefore, the way we think about it is how do we sort of bring sort of legacy capabilities onto the development side in a way that allows us to gather market share on the non-SETA side, and that’s sort of how we think about the space market. And having said that, the SETA work is really good work, and it’s the legacy of this company. And it gives us a fair amount of ability to allow us to continue to invest in the business and grow the business. But I would say overall, we think about the non-SETA business as sort of the area where there is real growth. And as we have disclosed over the course of the last year or so, we have won some restricted work on the development side of our space business, not SETA that has allowed us to continue to grow our market share. It is a solution-based offering that we are hopeful we can take to other parts of the market where we are not impacted by our SETA positioning. So, that’s how we think about the positioning inside of the portfolio. Now, where it ranks relative to the peers and all the folks that have 100% development work, that’s I think proof’s going to be in the pudding, and we will see that over the course of the next several years.

Thank you very much.

And your next question comes from the line of Seth Seifman from JPMorgan. Your line is open.

Hi. Thanks very much and good morning.

Good morning.

I just wanted to ask one quick question to clarify the growth expectation. When you mention the underlying market expanding at a low-single digit pace, we noted that the overall budget increased slightly more than that in 2022. We'll find out what Congress decides this month, but there’s a fair chance it might grow even faster in 2023. So, is the low-single digit outlook based on the fact that much of the budget growth is directed towards weapons accounts, while your perspective on your specific end markets and those of your close competitors aligns more with that low single-digit range amid this robust overall budget growth environment?

Yes. Seth, Prabu here. That’s a fair way to think about it. I would say the other dynamic that we are working our way through is there are sort of nominal growth rates in the budgets and sort of real increases in the budget ex-inflation. And so we tend to think about the world in sort of a qualitative way as well as a quantitative way. In real terms, we think of budget growth as being in that low single-digit growth rate, nominally, it’s a little bit higher, as you just mentioned. And the reality is, we are also seeing some element of, I would say, bias would probably be a harsh way to describe it, but certainly directionally, a view that it’s tending to go towards the hardware side more than the services side or the system side recognizing that there is an incredible amount of demand for these underlying services on the services side. But that’s sort of our view of where the budgets are trending at least as we sit here right now.

Alright. Okay.

I think one thing I will add is, we touched on this earlier. Certainly, the government is dealing with some of the impacts of inflation as well. So, we are continuing to watch that. And I know that Prabu reminded all of us early in the call, but we have tried to provide some early guidance into next year, but we look forward to the opportunity in March to further develop that. And certainly, there are some things that can change the guidance up or down, as always, that Prabu pointed out, but there are some very, very great opportunities. We have great pipeline that supports our ability to grow, and we have demonstrated the last couple of years to be able to grow in the low-single digits. So, we certainly wanted to put forth an early view of what we think next year looks like, but we will provide more color and more dimension on that as we get to the March timeframe.

Okay. Thanks very much. And then maybe as a really quick follow-up, Prabu, I think you mentioned in the press release year-on-year there were some headwind EACs. Was that because they were exceptionally high in the year ago period, or is there anything about any particular contract performance in this period to be aware of?

Yes. Fair question. I think we had about negative 6% in EAC adjustments for the quarter. Most of it was related to a single program where the period of performance has ended. So, I would say not a recurring thing, but it’s in the process of cleaning up these things that we had the adjustment, but that was it.

Thanks. Okay. Thanks very much for taking my question.

Sure. Thank you.

Thank you.

And there are no further questions at this time. Mr. Joe DeNardi, I will turn the call back over to you for some closing remarks.

Great. Thank you, Rob. Thank you to everyone for joining us on the call today. If you have any further questions, please feel free to reach out, and have a great day.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.