Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time I’d like to welcome everyone to the SAIC Fiscal Year 2024 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. I’d now like to turn the conference over to Joseph DeNardi, Vice President of Investor Relations and Strategic Ventures. Please go ahead.

Good morning and thank you for joining SAIC's second quarter fiscal year 2024 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 second quarter of fiscal year 2024 that ended August 4th, 2023. 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. 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. Additionally, 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 good morning to those joining our call. Earlier today, we reported another quarter of strong financial results with revenue growth of over 8% and adjusted EBITDA margins of 9.8%, an increase of 70 basis points year-over-year, both of which speak to our ability to deliver solid organic growth at improving margins going forward. Before I discuss our financial results, I would like to once again recognize members of the SAIC team who continue to have an outsized impact on their communities. September is Hunger Action Month at SAIC where we look to do our part to help end hunger through our partnership with Feeding America. This campaign is one of our largest at SAIC, having raised over $350,000 in 2022 and $2.2 million over the past decade. This translates to providing 22 million meals to those in need. Our goal is to set a new company record in 2023 with employee and SAIC matching contributions resulting in another 3.6 million meals being provided to people facing hunger in the United States. I want to personally thank Maria Bishop, Jeff Raver, and Jennifer Love Bruce for their leadership in this important mission. Now, onto a review of our financial results and our outlook. SAIC delivered strong financial results in our second quarter reflecting solid program execution, continued progress driving on-contract growth, and the ramp up of new business. Looking back over these past few years, I’m incredibly proud of the progress we’ve shown on better leveraging our talented people, building on our excellent brand, and innovating on our industry-leading solutions to drive profitable organic growth. Our updated FY ‘24 guidance calls for SAIC’s best year of organic revenue growth and highest EBITDA margin since the separation, demonstrating our ability to convert a strong pipeline of opportunities into value for shareholders and opportunities for our employees. Our strong start in FY ‘24 positions us well to deliver on the multi-year targets we outlined at our investor day. Importantly, we will accomplish this while increasing margins and return on invested capital, staying true to our asset-light business model, and returning substantial cash to shareholders. Going forward, we believe that over the long-term, we can sustain and improve upon the gains in relative performance we have shown, while adhering to a business model and financial strategy that is working. Portfolio actions we have taken in recent years, including the acquisitions of Unisys Federal, Koverse, and Halfaker and the divestiture of our Logistics & Supply Chain Management business will contribute to our ability to deliver sustained, profitable growth in line with or better than the market. Following Prabu’s discussion on our financial results and increased guidance, I will briefly discuss my upcoming transition. Over to you, Prabu.

Thank you, Nazzic and good morning everyone. I am proud of the financial results we delivered in the second quarter as we continue to execute with focus and intent. I’ll discuss our results in greater detail and then discuss our improved outlook for the year. We reported strong fiscal second quarter results with revenue of $1.78 billion, an increase of 8.3% when excluding revenue related to our Logistics and Supply Chain Management business and FSA joint venture from the prior year. Revenue growth in the quarter was driven primarily by the ramp up of work on new and existing programs, improved labor productivity, and favorable timing of materials sales. We had minimal contribution from our $900 million DCSA One IT program in the quarter, whose ramp is expected to begin predominantly in the second-half of the year. Adjusted EBITDA margin in the quarter was 9.8%, an increase of 70 basis points year-over-year driven by strong program performance, cost efficiency initiatives, and the timing of certain planned strategic investments shifting to later in the year. Adjusted diluted EPS of $2.05 represents an increase of 17% year-over-year, driven primarily by the strong operating performance in the quarter and a roughly 4% decline in our diluted weighted average share count. Free cash flow, adjusted for transaction fees and other costs related to the sale of our supply chain business was $143 million in the quarter and $219 million year-to-date as we continue to see good traction on our working capital improvement efforts. Net bookings of $700 million resulted in a book-to-bill of 0.4 times in the quarter and 0.8 times on a trailing twelve month basis. Due primarily to the timing of expected awards, our bookings and book-to-bill are below where we had planned to be at the beginning of the year. As a reminder, our net bookings in the second quarter do not include any value from our $1.3 billion T-Cloud program, which cleared protest in the second quarter. Consistent with our practice, we expect to book awards as we receive task orders under this important program. In fact, over the past three years, we have been awarded approximately $8 billion in single award IDIQ work, of which 40% is new business. This is not reflected in our backlog beyond the task orders funded in any given year. Given that approximately 50% of our annual revenue comes from these IDIQ contracts, our practice tends to understate bookings and backlog versus one which recognizes the full or partial value of an IDIQ at time of award. None of this is to take away from the fact that we need to continue to sequentially build our backlog. As we show on slide 10 of our earnings presentation, we continue to see a strong and growing pipeline of opportunities and expect the value of both award activity and award submissions to improve materially in the second-half of the year. In fact, since the beginning of the third quarter, we have won approximately $1.1 billion of work, roughly 60% of which is for new business across multiple domains. Included within these awards are a Hypersonics Advanced Concepts program, the Multi-Vehicle Fielding program in support of the Navy, and the Ground Based Radar Maintenance and Sustainment Service contract, known as GMASS, in support of the Space Force. These wins need to clear the customary protest window, but I want to highlight the important role that the solutions developed within our Engineering Innovation Factory played in these captures. Favorable customer feedback related to these programs reinforces our view that the returns we generate from our internal investments drive long-term shareholder value. I’ll now discuss our updated outlook for fiscal year 2024. Please note that we have provided additional directional guidance for our fiscal third and fourth quarters to assist with your modeling. We are increasing our revenue guidance at the midpoint by $50 million to a range of $7.2 billion to $7.25 billion, which represents pro-forma organic growth of approximately 4.5% and our highest growth rate since the separation in 2013. We are reaffirming our revenue plans for FY ‘25 and FY ‘26 and are encouraged by our strong start thus far against meeting our three-year targets. While we continue to have strong visibility into our FY ‘25 revenue plan, the impacts from previously discussed contract transitions and assumed delays in award timing are likely to make the cadence of revenue growth weighted to the second-half of fiscal year 2025. Currently, we expect the first-half FY ‘25 revenues to be roughly flat year-over-year pro-forma for our Logistics & Supply Chain Management divestiture before inflecting to more meaningful growth in the second-half of FY ‘25. We have visibility into this growth given recent wins and opportunities in our pipeline. Of course, we will provide a more detailed update on our FY ‘25 outlook during our third quarter earnings call. As a result of strong performance year-to-date, we are increasing our adjusted EBITDA margin guidance to a range of 9.3% to 9.4%. We have provided additional detail regarding the drivers of first-half to second-half margins on slide 11 of the presentation. While our plan for FY ‘24 calls for low-9% margins in the second-half, our performance to start the year, both in terms of program execution and the impact of other margin improvement initiatives, drives increased confidence in our ability to reach our FY ‘26 margin target of 9.5% to 9.7%. As we have communicated, our objective is to consistently and profitably grow the company and balance near-term margin improvement against our objective to invest and drive long-term value. We are increasing FY ‘24 adjusted EPS guidance to a range of $7.20 to $7.40 driven mainly by improved operating results and a lower planned effective tax rate. We are maintaining our free cash flow guidance at a range of $460 million to $480 million and our performance year to date has put us in a good position to grow our transaction adjusted FCF by approximately 10% for a third consecutive year. Finally, we continue to expect share repurchases of $350 million to $400 million this year with similar levels in FY ‘25 and FY ‘26. Before turning the call over to Nazzic, I want to thank her for her leadership in recent years. Nazzic’s ability to create an inclusive culture and opportunities for all our stakeholders, employees, customers, and shareholders is unmatched across the industry.

Thank you for the kind words, Prabu. As we discussed on last quarter’s earnings call, I will be stepping down as CEO and transitioning to a special advisor role on October 2 at which time Toni Townes-Whitley will assume the role of CEO. As I reflect on these past few years, I took a moment to look back at the commitments I made to you on my first earnings call as CEO. I outlined three key priorities then and am proud of our team’s ability to deliver on our commitments. I discussed the immediate focus on the effective integration of Engility. SAIC effectively integrated its acquisition of Engility quickly followed by Unisys, Koverse, and Halfaker. All these transactions contributed to a stronger portfolio for SAIC and supported or accelerated our strategy. I discussed our immediate focus on driving profitable organic revenue growth. Our team has done exactly that in a consistent and disciplined way providing returns to our shareholders, delivering greater value to our customers and career opportunities for our people. And last, but certainly not least, our talent strategy was paramount to accomplishing any aspect of our strategy. I feel confident that as I step down, SAIC is in a strong position with an exceptional leadership team. Across the entire enterprise, we have raised the bar and continue to win the war for talent. I am proud of what SAIC has delivered over these last several years, but I also recognize our work is never done. I am very confident in Toni’s ability to lead SAIC. She is committed to advancing on these priorities in the future through innovation and differentiation, ensuring SAIC remains a leader in our industry. We have worked closely together in recent months and will continue to in order to ensure a smooth transition for all our stakeholders. I want to close by recognizing and thanking my friends and colleagues at SAIC for their contributions to our company, their communities, to each other and to our nation. It has been an honor to lead a company so focused on our purpose to leverage technology to serve and protect our world. SAIC is clearly driven by mission, united by purpose, and inspired by opportunities. We can now open the call for Q&A.

Our first question will come from Seth Seifman with JP Morgan. Please go ahead.

Hey, thanks very much and good morning, everyone. And Nazzic congratulations, great job, and all your work at SAIC and also it seems preparing the company for future success as well. I wanted to ask…

Thank you, Seth. I appreciate that.

Sure. Of course. I wanted to ask about the growth outlook, you know, if we look at what you're forecasting for fiscal ’25 and ‘26, it looks a lot like fiscal ’22 and ‘23. And I would assume that, given changes at the company, the strong budgets we've seen, that there might be opportunity for more there. So can you tell us kind of what keeps you at that level for right now, and how you think about what we should look for and what it might take for that growth to be a little bit faster?

Hi, Seth. It's Prabu here. Good morning, and appreciate the question. A couple of comments here. Obviously, good strong trajectory on growth to start the year. And as we've indicated in a couple of different places in the script, we are expecting that trend to look more flat as we exit the year. Given the book-to-bill performance year-to-date, we are expecting some of that along with maybe difficult operating conditions on the budget to continue into the end of this fiscal year and then on to next year, but recognize that the team's done a fantastic job delivering real growth this year. And we are going to grow off of a higher base than we had projected about a quarter or so ago. And so to me, that's what gives us ultimately confidence that we can keep the trajectory of growth at 2% to 4% recognizing we're always going to push the team harder internally than we're committed to right now. But the signs are good, but we have to go execute with the intent that we've demonstrated the first six months of the year.

Yes, Seth, the one thing I'll add is, we're it's early days still. So we're giving you our best view as we sit here today, taking into consideration some of the budget challenges that Prabu indicated and certainly take into consideration where we sit today and the performance we've had. I will tell you this team is laser focused on driving profitable organic growth. And we'll always look for the opportunity to outperform, that's the way they're engineered. That’s the way they're wired, but we just believe it's in our best interest and your best interest to share what we think today, recognizing that, as we get closer and as you hear from Toni and Prabu in the next earnings call. We'll have one more quarter of visibility and we'll continue to provide those updates.

Great. Thank you. And maybe just to follow up on this topic real quick. The delays you've talked about, in terms of awards and the impact on book-to-bill and the difficult operating conditions you've described, you know, when we were just speaking about expected growth. Can you talk a little bit more about that environment there? Are these delays mostly things that are behind you, or are you anticipating that you'll see more delays ahead in terms of the timing of awards?

Sure. Hey, Seth. Prabu here, I'll take that one. I think in terms of the budget environment, we expect Q3 fiscal as well as Q4 to be tight on the hill. We've all followed the dynamics on the hill here, and we expect that sort of environment to persist into the second-half of our year. Hopefully we get the resolution on some of those topics, get appropriations done, and have a budget to operate with, but we are presuming right now, cautiously proceeding into the second-half of the year, recognizing things will remain tight on the legislative side. On the backlog and the new business front, as we pointed out in the script, since the end of the second quarter, we won approximately $1.1 billion of work, of which roughly 60% is actually new work for us. We will have to wait for all of that to get through the customary protest cycle here over the next quarter plus. And therefore, we're just proceeding cautiously recognizing we've got DCSA that is starting to ramp in the second-half of this year. We'll have very early signs of growth from T-Cloud. Obviously, AOC partner is continuing to grow along with hopefully GMASS and a couple of other things that are won but haven't cleared the protest. So by and large, I would view those as things that are hopefully in the bag, but we won't know that for another quarter plus. And therefore, we're just proceeding cautiously given how difficult the environment is going to be in the second-half of the year, presuming that there's going to be some delay in the cadence around recognizing awards and obviously converting awards into revenue. Really big picture, we are encouraged by where the outlay environment is and it has been strong. And therefore, I think the team is up for the challenge relative to what's implied for top line growth in the second-half of the year, as well as the first-half of the year, but it's easy to get ahead with a PowerPoint chart, much harder to actually execute in practice, and that's what the team's committed to doing.

Great. Thank you very much.

Thanks, Seth.

Your next question will come from the line of Jason Gursky with Citi. Please go ahead.

Yes. Probably I may have missed it. I'm sorry, wait, let me start. Nazzic, congratulations, and I wish you the best in retirement.

Thank you, Jason.

So I may have missed it. You gave a little bit of color on revenue expectations in the first half of next year. We'll be exiting the year at a lower adjusted EBITDA margin than we generated here in the first-half. So maybe you could talk a little bit about the margin trajectory in '25 as well?

Thank you for the question, Jason. The performance in the first half of the year was excellent, and being at 9.5% gives us a good indication of where we expect to end up. That said, as noted in some additional materials we've shared, we anticipate making further investments in the second half of the year, which may slightly impact our operating performance. Additionally, there are expectations that the first half's outstanding performance may not be matched in the second half. Regarding our incentive compensation, focusing on improving margins and generating more earnings growth is crucial for our team. We aim to find the right balance between investing for future growth and delivering improved margins, which might be somewhat temporary in the short term. Currently, we are at the upper end of our updated guidance of around 9.4%, but we know we have challenges ahead in the coming quarters. We are dedicated to doing our best while keeping in mind that this is a long-term journey. As for your question about margin rates for fiscal years '25 and '26, we are starting strong, which positions us well relative to our targets. However, I want to be cautious about making predictions before our first earnings call with Toni next quarter and our guidance call in March. We will keep you updated on our margin expectations for next year. I am very proud of the results we have achieved, and we still have work ahead of us for the remainder of the year.

Okay, great. And then maybe just one quick follow-up. This is kind of wrapped up into bidding and book-to-bills. But just the availability of labor and the cost of that labor, what that's doing to your rates and just kind of just what you're seeing in the general competitive environment, how you and others are reacting to what's been a few years of escalating costs and the success that you're all having and passing on those rates to the customer?

Yes, Jason, let me discuss the labor macro environment, and then Prabu can share more details. Today, our situation is quite different compared to a year ago, and we are witnessing significant improvement in the labor market and our hiring capabilities. We offer an appealing value proposition to prospective employees, resulting in higher retention rates than we've experienced in a long time, which has led to reduced turnover. Our hiring capacity has also improved over the past year. I feel very optimistic about our current position and approach. We have introduced new tools and practices internally to further our progress. Regarding costs, we are experiencing slight increases, but I wouldn't classify this as a major obstacle as we manage our contracts. We will always aim to pay competitive market rates to attract and keep the best talent in the industry. Overall, I feel much more confident now compared to a year ago when evaluating our labor attraction, hiring, and retention results. Prabu, would you like to add anything?

That was perfect, Nazzic. Thank you. Jason, what we're assuming for merit increases is sort of in that 2% to 4% range, I think towards the higher end of that range for certain categories of employees that we believe have skill levels that are going to require us to pay a little more. So to me, that's how we're calibrating it. As a reminder, approximately 60% of our business is cost-plus. So while inflation has been a factor over the last couple of years, we've also had the mix of contracts working in our favor that has allowed us to pass on somewhat higher cost. That's not infinite math. At some point, labor costs will catch up, but we've actually managed that problem, if you will, pretty effectively over the last couple of years. We've estimated the pressure from labor-related inflation as costing the company maybe 10, 20, 30 basis points of margin over the last couple of years. And therefore, as we look ahead with the improving labor environment, we would expect some of that to endure to the benefit of margin rates, and that's where the balance conversation comes in around investing for growth versus investing to drive additional margin rate improvement in the business. And we're laser-focused on the dynamics, but recognize really big picture. Things are looking better now on the inflation front and labor front. And we've got room in our rates. And candidly, one of the things we've really focused on over the last couple of years, and we're starting to see the benefit of this in the margin rates we're delivering is we've undertaken a significant number of cost-related initiatives that has really allowed us to manage our wrap rates, if you will, for overall competitiveness. That includes facility costs and all of the other sort of if you will, fixed indirect costs that we have in running the business. And therefore, to the extent we continue our efforts to manage those costs effectively and assertively, I would expect that the naturally sort of turning environment around labor pressure and inflation pressure is going to be a little bit of a tailwind to margins. But again, recognize we're trying to balance the equation here and stay calibrated.

That's great. Thank you very much.

Of course. Thank you.

Thanks, Jason.

Your next question will come from the line of David Strauss with Barclays. Please go ahead.

Good morning, thanks and Nazzic, congratulations and best wishes.

Thank you very much.

Could you just run through the current kind of landscape on the recompete side, how you've done year-to-date, what the rest of the year looks like and updates as well, kind of the balance of work to be recompeted over the forecast period?

We have encountered some challenges in the recompete sector, but the team has been outstanding in addressing these issues and enhancing our overall business metrics. I am quite confident in our current recompete win rate. While we will inevitably lose some business due to government acquisition processes and increased competition, I believe we are in a much stronger position compared to a year or a year and a half ago regarding recompetes. We don't frequently highlight significant changes for competitive reasons. However, a notable aspect of our portfolio is the Vanguard deal with the Department of State, which is currently being transitioned. This is an important part of our portfolio, and the process will likely become clearer next year. They are reorganizing various projects within NASA into multiple award streams, which aligns with our strategic interests, and we expect to secure our fair share of that work. I also want to acknowledge the team for their hard work during this busy procurement period. They are focused on fulfilling our mission for the Department of State, ensuring we maintain momentum and continue to innovate in our support of this customer.

Thank you, Nazzic. That was perfect. David, here's what I would add. We're growing this business at the midpoint of our updated guide about 4.5%. And as we noted in the prepared remarks, that is the highest growth rate we've posted organically since the separation. So in spite of the headwind from the recompete loss, Oms notably, which we're assuming we'll cycle out of the portfolio beginning in Q4, we are delivering approximately, let's call it, mid-single-digit growth rate. Since the last quarter, we've also won some new work, which will start to backfill the loss that we have, but the timing of the Oms project program exiting the portfolio and the timing of the new work sliding into the portfolio is what impacts the cadence of the revenue growth but recognize that we are laser committed to delivering consistent growth rate consistent with the 2% to 4% that we outlined at Investor Day, but recognize that Oms is probably the biggest one worth calling out for the year. And if you really think about the performance of this business, you would expect about a 1% to 2% growth rate impact on an annual basis from recompete losses, that's just the nature of the business, I think, and we are looking at something a little bit higher than that this year, but recognize 4.5%, 5% growth is just really solid growth and right in line with where the peer set is, and we've got our work cut out for us for next year, and that's what the team is committed to doing.

That was great color. Thanks. And then on cash, I wanted to get an update on working capital and what you see there, Prabu, I think year-to-date, it's been a slight drag, kind of what's embedded for the second-half of the year and just an update kind of on the working capital tailwind that you have embedded your fiscal ’26?

Thank you for the question. The first half of the year has shown really strong performance compared to the same period last year, building on the momentum we saw starting in Q4 of last year. Just as a reminder, we collected over $2 billion in cash during that quarter. This momentum continued into the first half of this year. Historically, we see collections trend around 45% in the first half and 55% in the second half. Last year was an exception, with significantly more collections expected in the second half compared to the first. This year appears to be returning to a more typical pattern. We feel confident in reaching the midpoint of our guidance range, though it's important to note our guidance has a variance of $20 million, roughly equivalent to one day's worth of DSO. We're refining our forecast to closely align with our anticipated full-year cash performance. Overall, I'm happy with our progress in the first half of the year, as we are ahead of our internal expectations, although we still have six more months of collections and expenditures to monitor. Looking forward to fiscal years '25 and '26, our strong performance so far gives us confidence in achieving our targets set during Investor Day, approximately $10 of free cash flow per share in FY '25 and $11 in FY '26, while also accounting for the challenges posed by Section 174, which are gradually diminishing. From a working capital standpoint, I see significant opportunities ahead. We have refined our processes to enhance working capital management at the program level, with program managers now accountable for it. This level of engagement is what we aimed for two years ago, and we're finally seeing it. I remain optimistic about capital deployment as a long-term opportunity as we approach the second half of FY '24.

Perfect. Thanks very much.

Sure.

Thanks.

Your next question will come from the line of Matt Akers with Wells Fargo. Please go ahead.

Hey, good morning. Thanks for the question, and Nazzic good luck.

Thanks, Matt.

I just wanted to follow up on the commentary on sort of the bookings delays and you mentioned like year-to-date, it's sort of been a little bit slower than you thought, and it sounds like some of that may shift into 2025. And what do you think is driving that? Are customers kind of more cautious given the budget environment? Is it just kind of a few large awards that lift? Is it protests? Just curious what you think is driving that dynamic?

Yes, Matt, I have a few comments and then I'll let Prabu provide more details. Regarding the book-to-bill, as Prabu mentioned, it was indeed lower than we had anticipated. If it had met our expectations, we would be discussing this in a very different context today. I want to provide some context on this matter. Book-to-bill is an indicator of performance but not the sole measure of growth, and many factors influence it. Prabu highlighted one such factor, which is how contracts are booked, whether they are in the form of IDIQ, single award, or multi-award contracts, which can impact the book-to-bill period. Additionally, the ratio of new business to recompete business also plays a significant role. There are many elements at play that aren't reflected in a single metric. That being said, we had indeed expected a higher book-to-bill ratio. Prabu also noted that we've had strong bookings in the first month of this quarter. In terms of what could have happened last quarter, it would reflect a different metric and conversation altogether. I don't think there's anything fundamentally wrong causing the delays. Delays can be good, and variations are just part of how this ecosystem functions. We strive to forecast accurately regarding closure timelines and the protest cycle, but much of that is beyond our control and lies with the customers. Overall, I don't believe there are systemic issues in our portfolio or significant changes in customer buying behavior. While concerns over budgets and continuing resolutions might weigh on minds, I don't find anything particularly alarming as I consider the future. As Prabu mentioned, despite the book-to-bill situation and some delays, we have new business opportunities arising, along with a robust pipeline. That's my perspective, and I’d like to ensure that Prabu addresses some specific details.

Thank you, Nazzic. Let me provide some additional insights and take a higher-level view. When considering the position of our business in relation to the pipeline, we currently estimate it to be around $100 billion. This is my starting point. As we look at our multiyear growth goals of 2% to 4%, ideally around 3%, we need to navigate from where the pipeline stands to how much of it is qualified and the portion we are submitting from that pipeline. I want to assure everyone listening that we have enough pipeline to pursue the growth objectives we've set. We need to increase our submission volume, which is influenced by seasonal factors, timing, and some recompete losses that affect our book-to-bill ratio. In considering both macro and micro aspects, I believe we have sufficient pipeline, and as we increase our submissions, our win rates on new business are actually quite strong. Over the past year and a half, we've seen our new business win rates exceed historical levels. I won’t list all the new programs we've secured in the last 18 months, but it's important to note that despite a slight slowdown in award activity in the first half of the year, some of this is temporary. We feel positive about our overall portfolio, but we need to boost our submission volume, and we are maintaining our share of recompetes, as Nazzic mentioned earlier. This is how I see the interplay between the macro and micro factors.

Okay. Great. That's helpful color. And then I guess I wanted to ask on T-Cloud and how fast you kind of see that program ramping up. I assume that's kind of been calculated in the guidance you've given over the next couple of quarters, but how fast is a pretty sizable program?

Sure. I’ll take that one. Our guidance currently indicates a small contribution from T-Cloud. We have received the first task order for the program, and we expect only a small portion of that to translate into sales this year. To put it in perspective, it’s likely to be less than half of 1% this year, increasing to around 1% to 1.5% of enterprise sales next year, with the hope of exceeding that the following year. However, we anticipate that the growth will be gradual. We need to navigate some initial design milestones with our customers. Nonetheless, we do expect the program to grow. At this time, there is only a minimal revenue contribution factored into the guidance for fiscal year 2024.

Great. Thank you.

Sure.

Thanks.

Your next question comes from the line of Bert Subin with Stifel. Please go ahead.

Good morning, Nazzic, and congratulations. I have my first question for you. As you reflect on your time at SAIC, could you share your thoughts on where we are in the journey toward maintaining the profitable organic growth you mentioned? In your opinion, what changes have occurred at the company during your tenure that you believe position SAIC well for increased growth moving forward?

Yes. Thanks for the question. So as I look forward, as I look at the company today and I reflect on what I believe it looks like going forward, and Toni and I are in lockstep on so much and so focused on profitable organic growth. So I do think the company is well positioned to keep this drumbeat going forward. Now as we all know, any given quarter, you could have 8% or you could have less than 8%. But I think the ingrained in the DNA of the company at this juncture is really focused on driving profitable organic growth. And we see it across the board. Over the course of my tenure, we have done substantial work at the leadership levels of the organization, ensuring that we have leaders that have a growth mentality and a growth mindset, we have done significant work in changing out our sales organization, our go-to-market organization and certainly the investments in the innovation areas that differentiate us. So I'm very proud of what the team has been able to accomplish. The good news is, although I'm stepping down, the team that does the heavy lifting every day is here every day. And so that mindset, that focus and that energy will continue and even accelerate under Toni's leadership. So I feel very confident in the company as it sits today with this as an underpinning of what gets done, what gets measured gets done and where we focus each and every day. So I think that's how I would answer the question around how we sit today, what have we accomplished and how does that look forward.

No, no, that’s it.

Sure, thanks.

And maybe just as a follow-up for you for Prabu. You provided some great commentary on the pipeline and your view towards the macro setup for the company or just the broader business. If we're thinking through current dynamics, what success is the company having when it comes to growth within contracts where you already have a current book of work just given what you noted on favorable hiring, retention and outlays trends? And how much of a tailwind do you think on-contract growth can be in these next couple of quarters? Is that something that potentially pushes you towards the higher levels of the guidance levels you're looking at?

I appreciate your question, Bert. We have indicated for a couple of years that with our backlog of between $22 billion and $23 billion, there is significant potential for growth. Our focus has been on opportunities right in front of us rather than pursuing new ventures, as the likelihood of success in leveraging our existing capabilities is much higher than that for any new projects. This approach has contributed positively to our organic growth over the past few years, adding an estimated 1% to 3% above our initial expectations annually. I acknowledge that there is a trade-off between growth from existing contracts and new business acquisitions. However, if we manage the competition effectively and improve our contract growth, we can foster a positive scenario. Our priority remains to fully capitalize on this potential, and I hope the team will maintain their strong performance from the first half of the year, which could lead to positive results for the remainder of the year and into next year. Nonetheless, there is still work to be done. As we remind our team, putting numbers in a presentation is just the first step; real execution requires focus and intent, which we are dedicated to achieving.

Yes. I want to add a little color on that because I think that's a great question. It's one of the areas that as I look back and reflect on where we sit today and where we sat even two or three years ago, the focus on on-contract growth is actually, oddly enough, relatively new. And so as we looked at opportunities to strengthen our culture and to look, again, ingrain the drive for profitable organic growth really ensuring that we have the people, the talent, the leadership at the program, the portfolio level that can focus on this was paramount. And so a lot of work has been done to actually accomplish great success in the on-contract growth. Again, I think it's an area we can continue to focus on. But that's an area to your earlier question, Bert, around where I've seen changes. That is absolutely an area that I believe is fundamentally different and better than it was just a few years ago.

Yes. Thank you very much, Nazzic, and I want to commend everyone on a job well done. Historically, the third quarter is typically your strongest quarter in terms of book-to-bill. I believe unobligated Operations and Maintenance funds are at a record high, leading to significant outlays. You also mentioned that you secured $1.1 billion in bookings. What are we anticipating for the book-to-bill ratio in this quarter? Considering the $1.1 billion, not all of that is still within the protest window. What should we expect for the bookings book-to-bill this quarter?

Yes, Cai. So let me try and answer it a little bit differently. Maybe in response to the earlier question, in order to support the growth aspirations of this organization, as outlined at Investor Day, which is 2% to 4%, we said we want book-to-bill to be comfortably over 1.0. It's not a great indicator any one quarter. We're off to a really good start at Q3, but I would expect that number to be 1.0 or better in Q3, but recognize that we don't always control the timing of things like protests that may be out there. And therefore, we're just going to navigate it one quarter at a time, but recognize that, on average, over time, we want book-to-bill to be comfortably over 1.0. That's the objective for the team.

Okay. And then so the pattern you've laid out for the third and fourth quarter. So the second quarter, you beat consensus on revenues by $100 million. And if we look at the third quarter, actually, your revenue number is higher than I would have guessed. And then we get a very big step down in the third, and I recognize you have a $135 million impact from five fewer days. But help us understand why is it so sharp? You mentioned that Oms kind of drops out. How big is the sequential drop in Oms from the third to the fourth? I mean, I would assume with T-Cloud and with One IT building that you would not have had such a severe drop off sequentially?

Right. Thank you, Cai. I appreciate the question. And look, I think it was important for us to give you all a perspective on how we think sitting here today, the second-half to play out. And we've signaled approximately mid-single-digit growth rate in Q3 and roughly flat in Q4. Our assumption right now is that Oms will exit the portfolio at the very end of the third quarter. So to me, the obvious bridge from Q3 into Q4 is predominantly Oms-driven, big picture. The second variable is that Q4 tends to be the weakest revenue quarter in a year, just given seasonality, not just the working days component of this but also just the productive labor hours that we typically calculate in Q4. So to me, those are probably the two variables. Again, our performance year-to-date has been very pleasing to us, and the team has done a stellar job. And as we sit here today, we are starting to see that flattening trend, which is really important for us. And for those that have interacted with Nazzic and with me know that we try to be as transparent as we can about the next two or three quarters. It's a little bit unusual for us to talk about forecast into the second-half of this year or even into the first half of next year, typically, but given the transition we thought it was just as important, if not more important, to give you some additional color as we see the second half rolling out here. So to me, that's the sort of the more important drivers on Q3 versus Q4, but recognize that the performance year-to-date has been stellar, and we want to make sure we keep the momentum up because we recognize the exit velocity out of this year is going to inform how we think about H1 of next year. And hopefully, a couple of months from now when we're doing our Q3 earnings call, we'll give you an update on where things are.

Okay, thank you very much.

Your next question will come from the line of Tobey Sommer with Truist Securities. Please go ahead.

Thank you. Can you quantify the impact of changes in employee retention on growth and the acceleration in organic growth? Some of this is due to internal actions, but some is related to changes in the broader labor market. How does employee retention compare to pre-COVID levels, and can you provide some context regarding the current figures?

Certainly. Our employee retention has improved compared to last year and aligns more closely with pre-COVID levels. This increase in retention allows us to maintain our current workforce while also focusing on bringing in new talent for growth. Combined with our ability to attract and retain new employees, we are seizing opportunities to drive revenue. Our turnover rate is currently below the industry average, which is encouraging. Prabu, do you have any specific details to add?

Thank you, Nazzic. The one thing I will probably tee up is, aside from all of the macro factors driving improved labor conditions across the business, we are probably seeing for the first time in maybe a little over 24 months. Organic headcount increase that is comfortably better quarter-over-quarter. We've signaled for about two to three quarters now that labor conditions are improving. It is directly contributing to higher head count inside the organization. The other thing that the team is doing that is really bearing fruit is to the extent we have some difficult recompete challenges, we are finding ways to redeploy talent that is needed in other parts of the business. This has always been the holy grail for human capital management inside companies, and we're doing a better job of it now than we did a couple of years ago, kudos to the team. So we are holding on to critical higher-end talent that we are effectively redeploying in other programs. So instead of seeing the headcount come in and go with programs, we're actually doing a better job holding on to that headcount so we can organically drive headcount retention for a company with that much backlog and that much ceiling, we have enough and more opportunities inside the company to redeploy talent, and that's an area where we've spent some time and investment getting better at, and we're starting to see the benefit of that inside our headcount numbers themselves.

If I could sneak a follow-up then. Outside of Vanguard, are there any sort of chunky contracts that could prospectively be broken apart into multiple procurements over the next couple of years?

Vanguard is certainly the largest one and the most visible, as Prabu was mentioned, any given year, about 20% of our portfolio is up for recompete. And so that's just the nature of the business. But Vanguard is one certainly that would have and could have the biggest impact. But again, we expect to win our fair share and we'll continue to deliver on that program until things change.

And one last data point here, as we signaled in the script, there's about $8 billion of IDIQs that we've won over just the last 2 to 2.5 years. That is not fully reflected in the backlog. In addition to that, we are part of multi-award IDIQ wins over the last couple of years that are probably just as big as the single award IDIQ number, if not bigger. So if you think about the labor environment improving, if you think about the work being task order driven and filling out the ceiling inside of contracts, I think the conditions are ripe for organizations that focus on contract growth to deliver outsized on-contract growth over the next few years, especially in the backdrop of a budget environment that's likely to be somewhat difficult. So to me, I think, as I think about the context, that's the environment we're sitting in right now. But on the whole, we're pleased with how we're doing on the labor front.

Nazzic, congratulations on your tenure at SAIC, you left the company in a much better place than when you started on the culture front and you also hired Prabu, Toni and Joe, which were three great additions to the team.

Thanks, Louie.

And for either Nazzic or Prabu, SAIC has shown nice balance between its IT services and mission services, can you talk about your exciting takeaway win from Northrop Grumman for the Space Force ground radar contract that Nazzic just referenced? And I know it's still in the protest window, so you may be limited, but are there significant other space opportunities in the pipeline?

Let me address the first part of that. You are correct that it is still in the protest window, so we're limited in what we can share. However, we are very excited about the win and hopeful that we can book it soon. We always enjoy securing new business, especially against strong competitors, and it's great to discuss this achievement. This situation exemplifies our space strategy and our ability to navigate our current projects while expanding our presence in the broader space domain. Pursuing critical mission programs is essential to our strategy, and it's satisfying to see these examples proving that. Regarding your latter question, we absolutely have greater opportunities in our space-related pipeline, and we look forward to discussing and announcing these in the coming years. This is a crucial aspect of our strategy, and our capability to deliver on mission engineering and IT-centric programs is vital to our overall goal of being a diversified player. This win serves as a strong proof point of that.

Great. And also on the mission front, at the Analyst Day in New York City and previously in Huntsville, SAIC showcased its counter UAS systems of systems solution. Has the SAIC system continued to make progress in demonstrations with the U.S. Army? And is there an opportunity for the system to be deployed in Ukraine and other hot geopolitical areas?

Great question. Yes, we're still very pleased and very proud of the counter UAS business that we have. And I certainly can't speak specifically to Ukraine. I don't think that would be in good context. But I can tell you that we are getting great traction with not just the DoD, the Army as an example, of broader DoD customers, as well as civilian customers. And they certainly see the value in this. We've been able to demonstrate in many ways and are looking to continue to advance our position in posture with this solution. The unique nature of how we've built this solution where we take best-of-breed parts, for lack of a better word, and integrate it to an end-to-end solution, allowing us to tune it to the specific need of the customer is something that has stood out and has been very powerful as we continue to have the conversation and dialogue with our U.S. government customers.

Thanks. That's it for me.

Perfect. Thanks so much.

Sure.

We have no further questions at this time. That will conclude today's meeting. Ladies and gentlemen, we thank you all for joining. You may now disconnect.