Science Applications International Corp Q4 FY2024 Earnings Call

Hello and welcome to the SAIC Fiscal Year 2024 Q4 Earnings Conference Call. All lines have been muted to avoid background noise. After the speakers' remarks, we will have a question-and-answer session. I will now hand the conference over to Joseph DeNardi, Senior Vice President, Investor Relations, Treasurer. Please proceed.

Good morning. And thank you for joining SAIC's fourth quarter fiscal year 2024 earnings call. My name is Joe DeNardi, Senior Vice President of Investor Relations and Treasurer. And joining me today to discuss our business and financial results are Toni Townes-Whitley, our Chief Executive Officer; and Prabu Natarajan, our Chief Financial Officer. Today, we will discuss our results for the fourth quarter of fiscal year 2024 that ended February 2, 2024. 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. 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, Toni Townes-Whitley.

Thank you, Joe, and good morning to everyone on our call. My prepared remarks this morning will focus on a review of our fourth quarter and full-year results as well as an update on the implementation of our corporate strategy. Prabu will then discuss our results and outlook in more detail before we take your questions. I am proud of the financial performance we delivered in the quarter, as our focus on providing value to customers and a favorable funding environment contributed to our strong revenue growth. For the full year, we increased pro-forma revenue by over 7%, highlighting the potential of this business to achieve market level rates of profitable growth. While our margin rate and earnings per share were primarily impacted by higher incentive compensation accruals in the quarter, excluding this, we were able to increase EBITDA margins by 50 basis points over last year, and free cash flow per share grew by 11%, indicating that our underlying execution remains very strong. We continue to manage the business in fiscal year '25 to maximize EBITDA and free cash flow while accelerating key investments in portfolio differentiators, market-proven business development talent, and upskilling initiatives to drive growth and long-term shareholder value. Relative to the framework we provided last year at our 2023 Investor Day, we now expect fiscal year '25 adjusted EBITDA and free cash flow to be higher despite a roughly 20 basis points incremental investment to drive profitable growth. We expect this investment to generate returns in fiscal year '26 with more meaningful impact in fiscal year '27 and beyond. Importantly, we will align incentives appropriately to drive these outcomes, which I will discuss in more detail shortly. Now, I will provide an update on the execution of our corporate strategy since we last spoke. As I discussed on our third-quarter earnings call, the leadership team’s focus is on four strategic pivots related to our solutions portfolio, our go-to-market approach, our culture, and our brand. The ultimate goal of these four pivots is to create a more differentiated, efficient, and valuable SAIC in the future by becoming the premier mission systems integrator for the government market, focusing specifically on five national imperatives: undersea dominance, border of the future, citizen experience, all-domain warfighting, and next-generation space. All four pivots will contribute to our success in these areas, and we have made strong progress against each in recent months. Regarding our brand, we recently hired a new Chief Communications Officer and SAIC’s first Chief Marketing Officer to ensure that SAIC’s capabilities are well-known across our markets and that our solutions are effectively presented to our customers. On our portfolio pivot, we have completed the reorganization of our Innovation Factory under our new Chief Innovation Officer, focusing on scaling and systematically deploying our technical differentiators in secure multi-cloud, digital engineering, operational AI, secure data analytics, and systems of systems integration. To support this, we will increase our investment in the Innovation Factory in fiscal year '25, while implementing new performance metrics to ensure we achieve our targeted return on invested capital. This is important, as we have recognized a correlation between higher win probability and year-over-year growth in accounts leveraging our Innovation Factory solutions. Our new enterprise operating model outlines required contract delivery processes, bid rubrics, and performance metrics at both the Account and Business Group levels to drive greater accountability and adherence to our strategy. We expect this investment will deliver increased value to our customer programs and pipeline opportunities, resulting in sustained organic growth, increasing EBITDA, and free cash flow in the coming years. In terms of go-to-market strategy, our focus so far has been both organizational and operational. Organizationally, we centralized our business development and capture functions, reporting them to a Senior Vice President who directly reports to the Executive Leadership team. Additionally, we are increasing investment in fiscal year '25 in our business development teams to upgrade talent as needed. Operationally, we have implemented a new enterprise model to leverage our Innovation Factory investments and further standardize our business development and delivery functions across the company. We expect these efforts to result in earlier and more consistent engagement with our customers throughout the procurement lifecycle, allocating business development resources more heavily toward our high-growth markets, and ensuring accountability to confirm that identified opportunities are qualified and ready for bidding. Concerning our culture, I have spent significant time in recent months meeting with senior government customers and employees. The strength of SAIC’s commitment to our customers is evident and provides a strong foundation upon which we can build. In line with the investments we are making in our Innovation Factory and business development functions, our cultural pivot will align with positioning SAIC for profitable, differentiated growth over the long term. We will focus on adopting a one-enterprise mindset to promote the sharing of best practices, talent, and cross-functional collaboration to deliver the best of SAIC to our customers. We aspire to accelerate our growth by taking ownership of outcomes, driving accountability for results, and providing differentiated rewards for exceptional performance. Regarding our incentive design, we recently recommended to our Board of Directors that we increase the relative share of performance stock units to restricted stock units in our equity compensation to motivate our senior leaders to drive our portfolio toward sustainable and profitable growth vectors. We have also broadened the use of Total Shareholder Return as a metric to ensure we incentivize performance that meets or exceeds our peers. As I started with, the guiding force behind these pivots is to position SAIC to maximize profitable, organic growth in the future. We have observed a lower than targeted recompete win rate in recent years affecting our book-to-bill ratio. Although we have been able to offset this with positive new business wins and capitalizing on our large backlog with continued on-contract growth, it's crucial we improve our retention of existing work. Our efforts to standardize best practices across the enterprise will enhance our overall business development and capture functions, but we will specifically focus on two outcomes: first, retaining our current business by improving our recompete win rate, and second, increasing our yearly bid rate with more strategic selection to drive higher book-to-bill ratios above 1.0. For our current programs, we are implementing new processes and rigor to drive innovation and progress toward additional as-a-service offerings. We are expanding the scope of our customer satisfaction process to obtain broader and more objective feedback throughout program delivery. Our improved enterprise processes will enable us to monitor, inform, and influence our bid selections to ensure our portfolio aligns with our strategy and growth objectives. Given the longer procurement cycles inherent in our business, we anticipate realizing the full impact of our efforts on business development results over the next 12 to 18 months. While Prabu will provide our updated guidance in more detail, we expect FY25 pro forma revenue growth to be around 2.5%. This is notably off a higher base than previously considered and assumes a still healthy, but more normalized funding environment. We expect to deliver EBITDA of approximately $690 million with free cash flow per share of approximately $10, which excludes potential benefits from changes to Section 174 legislation. We are off to a strong start, and I am encouraged by the enthusiasm and cohesion I see across my new leadership team. We are building momentum following three peak performance quarters, achieving the best financial results SAIC has seen in the last decade. I look forward to meeting many of you in New York on April 11 for our 2024 Investor Day, where we plan to provide updated multiyear financial targets and greater detail into our growth strategy, including showcasing technical differentiators from our Innovation Factory. I’ll now turn the call over to Prabu to discuss our financial results and improved outlook.

Thank you, Toni, and good morning to everyone on the call. My remarks will focus on our financial results in the quarter and updated guidance. We reported strong fiscal fourth quarter results with revenue of $1.74 billion, an increase of nearly 8% on a pro forma basis. Revenue growth in the quarter was driven by ramp-up on new and existing programs, the timing of certain materials revenue, and favorable labor and funding trends which helped offset expected headwinds from program transitions. Adjusted EBITDA margin in the quarter was 7.3%, it was impacted by higher incentive compensation accrual given our strong financial performance. For the year, higher incentive compensation accruals impacted margins by approximately 30 basis points with the 9.3% margin adjusting for this in line with our guidance and reflecting continued strong program performance. Adjusted diluted earnings per share of $1.43 was in line with expectations. Full-year adjusted diluted earnings per share of $7.88 was ahead of prior guidance when adjusting for the aforementioned incentive compensation accrual, which reduced EPS by $0.34 due to our stronger performance in the fourth quarter and a lower tax rate. Free cash flow adjusted for transaction fees and other costs related to the sale of our supply-chain business was $119 million in the quarter and $486 million for the year as we continue to see good momentum in maintaining our industry-leading rate of cash conversion. As Toni indicated, we delivered an 11% increase in free cash flow per share in FY '24, representing our third straight year of double-digit pro forma cash flow improvement. Net bookings of $1.4 billion resulted in a book-to-bill of approximately 0.8 in the quarter and roughly 0.9 on a trailing 12-month basis. Subsequent to the close of the quarter, we were awarded several new bookings, including a $444 million contract with the U.S. Space Force. We remain encouraged by a healthy and growing pipeline of opportunities in the coming years and expect proposal submission volume to increase by at least 25% in FY '25, consistent with the strategic focus to improve our overall process, including the quality and volume of our submissions. Our pipeline has a healthy mix of larger needle-moving opportunities and strategic pursuits in areas such as ABMS, CJADC2, and Data Analytics and Operational AI, which will leverage our enterprise solutions. As Toni mentioned, our long-term focus is on building a more differentiated pipeline and capturing a greater share of markets, which value differentiated and more profitable outcome-based work. I'll now discuss our updated guidance for fiscal years 2025 and 2026. We are increasing our fiscal year '25 revenue guidance to a range of $7.35 billion to $7.5 billion, which represents pro forma organic growth of approximately 2.5% at the midpoint. This outlook assumes a more typical outlay environment than we saw in FY '24 and incorporates our expectation for an approximately 4% to 5% headwind from contract transitions spread ratably over the course of the year. Consistent with our comments on the last earnings call, we expect roughly flat to low-single-digit organic growth in the first half with higher growth rates in the second half of FY '25 as we ramp on the strength of our new business wins and see more funding clarity for our customers. We expect FY '25 adjusted EBITDA of approximately $690 million at the midpoint of our guidance, as increased revenue and underlying margin improvement are partially offset by an approximately 20 basis points investment predominantly in our Innovation Factory in business development function, as Toni discussed. FY '25 adjusted earnings per share are expected in a range of $8 to $8.20 and assume an effective tax rate of approximately 23% and further benefits from our share repurchase program. I would note that every 1% of our tax rate impacts earnings per share by approximately $0.10. We are increasing guidance for fiscal year '25 free cash flow by $10 million to a range of $490 million to $510 million with increased earnings and working capital efficiency helping to offset higher cash taxes and cash outlays related to FY '24 incentive compensation. We expect to deliver approximately $10 in free cash flow per share in FY '25 and approximately $11 in free cash flow per share in FY '26. Our outlook for free cash flow does not assume any favorable change related to Section 174 legislation. Should this occur, we would expect the recovery of approximately $125 million from FY ‘23 in FY ‘24 payments already made, and our fiscal years ‘25 to ‘27 free cash flow should improve by approximately $45 million, $20 million, and $5 million, respectively. Please note that if Section 174 change is enacted, our FY ‘25 effective tax rate could be higher than our guidance of approximately 23%. In fiscal year 2024, we deployed $357 million to repurchase $3.3 million in shares, reducing our weighted average share count by just over 4% year-over-year. Over the past three years, we've repurchased over 8 million shares, representing about 15% of our total outstanding shares at prices representing a substantial discount to our intrinsic value. We accomplished this while reaching our target net debt over EBITDA leverage of approximately 3.0. As reflected on slide 11, our solid cash generation gives us options for additional value creation. For fiscal years 2025 and '26 at this time, we expect to allocate approximately $600 million to $650 million in total to our repurchase program, while reducing leverage to roughly 2.5 times and remain opportunistic given ongoing budgetary or market dislocations in an uncertain election year. Our perspective on the M&A market is largely unchanged as we prioritize capability-focused acquisitions that can differentiate our portfolio and accelerate the execution of our long-term strategic roadmap. We believe our bias towards organic initiatives with a discerning eye towards M&A is the correct posture for our long-term shareholders. Lastly, I want to thank our treasury team for their outstanding work in managing the seven-year extension of our Term Loan B, which strengthens our maturity profile and provides us with an improved rate compared to our prior term Loan B. The transaction represented the tightest seven-year loan pricing on a non-investment grade-rated facility in over two years. More importantly, it has generated additional flexibility with respect to our near-term debt maturities and has positioned us to take advantage of potentially lower interest rates in the future. I am proud of the financial performance we delivered in FY '24 and I'm confident that we can sustain our ability to deliver value for shareholders over the long term. I will now turn the call over to the operator to begin Q&A.

Your first question comes from Seth Seifman with JPMorgan. Your line is open.

Hey, thanks very much, and good morning.

Good morning, Seth.

I guess a couple of questions, maybe on the investments that you're making. I guess you guys have talked a lot over time about having kind of a capital-light business model. I know this is CapEx, sorry, this is R&D or other investments that you're making. It's not CapEx. But can you talk about kind of the investments that you're making and how we think about that as being different? Are these investments in people that you're making in hiring people or are in developing new technologies? How do we think about what these investments are?

Hey, good morning Seth, it's Toni. Let me start by saying that Prabu will provide additional details. We have three main areas of investment in the business. First is our Innovation Factory, where we've identified some unique features in our enterprise, particularly related to AI, secure data, and digital engineering. Our investments here are mainly in people, but also involve tools and capabilities we aim to expand. This will ensure our unique features can be systematically integrated across all our programs into customer environments. We are making approximately $15 million in these investments, which we will elaborate on during Investor Day, including demos of how these are applied in customer settings. Second, regarding our business development, we're focused on enhancing our capacity to bid—both in terms of volume and strategic quality for our pipeline, as well as securing our existing business. We face challenges in these areas, so we're investing in upgrading talent in key positions and making significant investments in business development, particularly in capture and solution architecting. This is aimed at creating more value for our customers in ongoing programs and ensuring we bid effectively with higher talent in specific areas. Lastly, our third investment area is upskilling to ensure our ability to deliver services at customer locations meets evolving talent needs and customer expectations in the solutions we provide. These are the three key investments we are making in the business, and we anticipate that over the next 12 to 18 months, these will enhance our bidding capabilities, win rates, recompete rates, and overall customer satisfaction. Prabhu, would you like to add anything?

Thank you, Toni. Good morning, Seth. Appreciate the question. I'm going to zoom out a little bit and a really big picture, Seth, we're investing about 20 basis points of margin. That's the $15 million that Toni referred to. We have a chart in our earnings package that shows that operationally, we're poised to deliver mid-9 margins, 9.5% consistent with the guidance that we previously provided, and the $15 million that Toni refers to effectively brings the midpoint of the new guide down to about 9.3%, which is what we're communicating this morning. I think you picked up on something else that I think is really important to emphasize. This is operating expenses primarily. We are not expecting our capital-light model to change fundamentally as a result of these investments. We are committed to remaining capital light. And I think just as important as making the investment is to ensure that we're generating an adequate return on the investment. And therefore we are laser-focused on delivering good ROIC on the investments we are making right now. And as Toni said, we're 18 to 24 months out, but we are dialed into ensuring that we are delivering an appropriate return for the investments we're making. Hopefully that was responsive.

Absolutely. As a follow-up, could you explain a bit more about your strategy regarding the bid rate? I assume you’re looking to increase the bid rate, but I also believe you want to prioritize certain areas and focus on value-added solutions. This suggests that you may want to be selective about where you place bids. How do you reconcile being selective in higher value areas while also increasing the bid rate?

You’re going to start that and…

Yes, I'll take that one first, Seth. Look, I think we're taking a longer-term view of the pipeline to ensure that the pipeline reflects the priority areas we've got out there. As you probably observed, we're holding our top line multi-year guide at the 2% to 4% range, recognizing that we are not chasing calories, but we're chasing vitamins. Our incentive comp is focused on delivering more EBITDA from the business, as well as generating cash out of the EBITDA we're delivering. And therefore, I think of this as the right kind of top line for the business that will differentiate this portfolio. And one of the benefits of having a more differentiated portfolio downstream is that you actually improve your incumbency win rates. Because it is less gladiatorial in that part of the market. And candidly, that's why I think we're trying to get the equation calibrated between improving growth rates, which I think is a must, but also making sure that we're delivering good value for the top line. Toni?

No, I think that's exactly on point where Prabu is. And acknowledging that we spent some time putting a strategy together to identify specific growth vectors. So when we talk about bid rate, we want to make sure that we talk about strategic bid selection, because that's also, as Prabu has talked about, correlated with our ability to win a recompete, it's also about bidding the right work the first time, work that is in fact differentiating that we bring value from the first day of a contract that is let. And so we are looking at, and we quite frankly, historically our bid rate, our bid volume has dropped over the last couple of years. We want to return back to a higher bid volume and not do that at the expense of a win rate. So we're doing both at the same time, and that will be why the investments we're making now we believe will pay off over the next 12 to 18 months.

Great. Thank you very much.

Great. Thank you.

Thank you, Seth.

Your next question comes from the line of Jason Gursky with Citi. Your line is open.

Yes. Good morning, everybody. Thanks for taking the question.

Good morning, Jason.

Toni, could you and Prabu share your insights on the analysis of the recompete losses and what has caused them? Have you identified any common trends? I am trying to determine if this is related to pricing or performance issues. Generally, what lessons can we take away from this?

Yes, look, there are probably about three areas that we have learned going across the various losses. Specifically, and it's tied to our investments, we want to make sure that we differentiate on our technical proposals when we submit in our solutions and the differentiated offerings that we have. And so we know that we have gotten feedback at times that our technical volumes, our proposals have not been evaluated as positively. And so one area that we have got to make sure is that our solution differentiation is not only clear, but also well presented in the proposals and is systematically part of all things that we bid across our factory. The second area in terms of is making sure that our processes are standard across. And that means that how we run bid and capture has to be a systematic standardized in the DNA, no compromise approach at the enterprise level, which is why I centralized and put under one, one human, quite frankly, and with direct reporting into the executive team, how we run those with the appropriate forward metrics, not only backward looking, for the appropriate forward-looking performance metrics to really look at the health of our pipeline and understand. Look, I think the last piece is, as we've heard, we've expanded our understanding of our feedback throughout a program. When we're delivering a program, you think of a recompete, you win the recompete day one of delivering a contract. And we've got to make sure our listening mechanisms are in place across multiple customer sets that we deliver to. That's generally not one set of customers. And so we are expanding that to make sure that we're getting the feedback throughout and that we are training our teams on the ground to add value in every aspect of the contract delivery. Value into as-a-service offerings, value into integrated solutions, increasing capabilities that we're adding all throughout the contract. That is how you ensure that you are not only the provider for the current business, but that you are the provider for the future business. So we've learned in those three areas, and that's where we're placing some bets and having some mitigations. Prabu, any other thoughts there?

That was great, Toni. Jason, I'd like to add that our new business win rates are higher than we anticipated, and this increase is due to how differentiated we are when bidding for new work. There's a natural excitement within the organization around new business captures. The key challenge is figuring out how to replicate this success across our recompete efforts. We need to foster a culture that embraces best practices consistently. We're implementing several changes regarding bid thresholds, profit expectations, and differentiation requirements as we execute and deliver programs. We genuinely believe these adjustments will lead to improved recompete win rates over time, while also celebrating the positive developments happening in our new business initiatives. The focus is on extending that success across our entire program portfolio.

Okay. Great. And then just as a follow-on, I just want to make sure I understand this. You get more focus here on recompetes and having a better win rate on that, you're increasing the pipeline by 25%, and yet we're still looking at 2% to 4% growth coming out the back end of things. It seems to me is maybe just a general comment you can comment on, but that the risk would be that, that 2% to 4% moves higher over time given the count you're successful in these first two things. So first, I just want to confirm that. And then secondly, if you are successful with this pipeline, you're growing at 25%, and your win rates end up being as good or better than they have been historically, do you have the people in place, the ability to scale? Can you grow fast? And will you be able to actually fulfill all of that demand should it come in? And maybe that's an indication that you're kind of you've got some underutilized people around today, and we ought to see some really nice OpEx leverage that comes with it. So just kind of generally, you win all of this, then what happens? How do you execute on it? What happens to margins when you do? Thanks.

Great question, Jason. I'll take the first part and defer to Toni on the second one. On the first part, look, I think the expectation is that the investments we are making will translate to better returns in the out years. And obviously, as you probably noticed, we provided FY ‘25 and FY ‘26 guide. We've held back on providing FY ’27, that's obviously a topic of discussion at our Investor Day in April, but I think it seems to make sense to assume that we would expect a higher level of EBITDA growth and cash growth from the investments we're making than there is currently. The 25% comment that you referred to, that was really an improvement in the submission number as opposed to improvement in the pipeline number. Our pipeline is, as you think about kind of a TCV here of the pipeline, we're in that circa $80 billion to $100 billion. But we are explicitly talking about submission rates improving by at least 25% in FY '25 and relative to FY '24. And so to me, I just want to make sure we're clear on exactly what we're improving, but I think it's a fair comment that you should expect our EBITDA and cash performance to improve relative to what we've got out there in the long-term. Toni?

Yes. And Jason, let me take the second part of that question in terms of the human capital supply, meeting the demand, increased demand as a function of prosecuting all of this new pipeline in a positive way for SAIC. So really, there's sort of two responses there. First, in terms of talent acquisition, SAIC relative to the market, is in a leadership position in talent acquisition, with days to fill and our ability fill open requisitions. In fact, it was underpinning some of our average performance in Q4 was a positive labor market and our ability to execute very well on talent acquisition and quite frankly, the lowest attrition we've had in the company over the last couple of years. So in that regard, our ability to go get talent from the market and retain top talent, I think, has been proven, and we obviously have to sustain that. Secondarily, you heard my investment relative to upskilling. And that is the conversation that we have got to in each one of our business groups is engaging in upskilling initiatives even across our various functions in the company to ensure that we can't just acquire all of the talent we need. We have to incubate that talent. And so we are upskilling in critical areas. Those upskilling areas generally align with where our differentiation is in our portfolio. So upskilling in a cloud area, upskilling and data analytics, upskilling in AI. Those are all the support the actual enterprise differentiation that we are investing in and expect a significant return in from our portfolio. Hopefully, that answers your question on human capital.

Great. I appreciate it. Thanks everybody.

Your next question comes from the line of Greg Konrad with Jefferies. Your line is open.

Good morning, thanks for the question.

Good morning, Greg.

Maybe just to kind of follow-up on the last question. But you mentioned a 12- to 18-month cycle, but also that an increase of at least 25% in submitted bids in fiscal year '25. Just thinking about the strategy that you laid out, I mean how much of that is maybe market growth versus early returns on going after green space and expanding the aperture of what you bid on? And then with that, how do you kind of think about that number trending forward as you execute on the strategy?

Yes. Hey Greg, I'll take the first part of it here. So in terms of just the aperture, we see these as less about green space development. I think this is core to the pipeline we've built over the last few years. I think they are maturing to a place where I think we're actually in a place to more readily bid these things with the right solutions inside of the factories. So I would say less in the way of new adjacencies, more in the way of where kind of the core capability investments are being made inside the company.

And we've already been able to confirm we have a significant addressable market. So before we need to look to any sort of adjacency, we've got the ability to bid. We're going to lay out sort of those growth vectors in our Investor Day to show what's driving the strategic bid thesis. But that's the way we are looking to drive this additional bid volume is not only, as Prabu will speak to, this is about vitamins and not calories. It's not just bidding for bid's sake. High bid, high strategic bids and, quite frankly, processes that can monitor that we are bidding on strategy in a routine manner.

And then maybe just one quick follow-up. Thinking about those differentiators, I appreciate that. When you think about those vectors, how much of this is based on or how aligned is where you think you can compete better versus maybe where the market has the most growth? I mean, are those two areas aligned when I think about things like AI or is it more about where you think you compete? Or is that about where you think the markets may be going the most?

That's an excellent question. It gives me the chance to explain how our strategy is developed and how we identify areas for growth. This involves a combination of our established presence and capabilities, current contracts, and solutions that meet the specific needs and demands of our customers, along with recognizing the segments of the market that are expanding. All these factors come together in a complex equation for us to find growth opportunities. For instance, when we consider secure multi-cloud, a major advantage for us is holding one of the largest cloud contracts with the Department of Defense and another significant one in the civilian sector at the Treasury. Our presence and capabilities in cloud services, combined with our unique offerings in cloud brokerage and security, not only set us apart but also place us in one of the fastest-growing markets in both defense and civilian sectors of the federal government. These elements are both critical in determining how we identify growth vectors, which excites us about our potential to gain market share in these areas.

Appreciate it. Thank you.

Appreciate it.

Thanks Greg.

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

Hey good morning, Prabu and Toni. Thank you for the questions.

Good morning.

Good morning.

Maybe just sort of focusing on the internal investment strategy. If we think about the life cycle of winning new meaningful government contracts, that can be a multiyear process from the initial solicitation to a point where it's actually contributing to revenue. So as I think about ramping internal investment, the payback period is probably a couple of years out. With that in mind, as we contemplate Prabu, what seems to be a little bit of a lower buyback assumption and a lower projected leverage ratio, is that a function of SAIC positioning to be more acquisitive to perhaps accelerate some of that internal growth return?

Yes. Great question, Bert. In terms of share repurchases, we're guiding between $600 and $650 million over the next couple of years. Compared to the multiyear view we provided about a year ago, the stock price has increased significantly. Therefore, we are buying fewer shares than we had initially planned, but the difference is not substantial. This is the overall picture regarding share repurchases. There is no significant change to our strategy, but it is a positive issue to have, as the stock price has performed well, leading to fewer shares being bought. Regarding our financial flexibility, we've always considered the target leverage for running this business to be around 3 times. There will be times when we are slightly below or above this level. We currently assume that due to the potential for EBITDA improvement and the cash generation capabilities, there is a natural process of reducing leverage in the portfolio. This is reflected in the charts showing leverage decreasing to around the mid-2s. This means we have additional capacity to either use proceeds to buy more shares if significant valuation changes occur or to focus on the tech-enabled differentiators in the M&A market to enhance our capabilities. We are particularly focused on the make-buy decisions within our innovation strategy, ensuring we do not have to invest internally for innovation if we can acquire it externally at a lower cost. Our main focus remains on making well-calibrated make-buy decisions to determine the best return on investment. Fundamentally, there isn't a significant change in our M&A strategy. Toni?

Correct. No, I think you nailed it there, Prabu.

Yes, that was great. Just a follow-up on Toni, last quarter, asked about the NCAP contract, and you gave some really good color there. I think that's expected to be finalized here in the coming months. I'm just curious, as we think about your guide that now goes through FY '26, how are you factoring in NCAPs and Vanguard? And those just sort of probability weighted at your percentage view of a win. And so if you do weight NCAPs and Vanguard turning to evolve, is a better outcome than you anticipate, those just drive upside to the way you're looking at here guide?

Yes, Bert, I'll take that one first. From a high-level perspective on NCAPs, we are currently waiting for feedback following our pre-award protest. Our guidance for this year, set at a midpoint of 2.5%, factors in some disruption from NCAPs, though we don't expect it to be significant. We believe NCAPs will likely cause more disruption in fiscal year 2026. The 2% to 4% guidance we have for FY 2026 currently accounts for a potential negative outcome related to NCAPs. We consider this risk largely mitigated as we approach FY 2026. Additionally, we are starting to ramp up T-Cloud, which generated minimal revenue last year, and we expect it to contribute approximately 1% to our total growth this year. GMS, initiated in the third quarter of last year, will also continue to grow through the first two or three quarters of this fiscal year. We still have some ramping to do with AOC and DCSA One IT, along with the recent DTAM win that we announced a few days ago, which will ramp up throughout the year. Overall, we feel confident that the 2.5% guidance for this year encompasses all the headwinds and tailwinds, and that the 2% to 4% range reflects the various possible outcomes, including the evolution of Vanguard and potential negative impacts from NCAPs. I hope this provides a clearer picture.

I believe that is a positive point. Additionally, I would like to mention that as we progress with new initiatives, we are aware of and addressing any challenges or obstacles related to contract losses. Our strategy focuses on differentiating our portfolio and highlights the importance of the expected 24-month timeline for new bids, which aligns with the government procurement cycle. For ongoing projects, we have the chance for growth within existing contracts and to reinforce our recompete efforts. Therefore, as we implement our strategy and outline our growth expectations, we are confident that we can achieve on-contract growth through value creation with our clients and that for upcoming recompetes, we can return to our historical win rates by enhancing value in our current contract services. While new business will indeed see a 24-month turnaround, we believe we have the means to leverage our existing programs effectively.

Thank you.

Thank you.

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

Thank you for taking my question. Could you provide an update on where your pending bids stand, as they have decreased sequentially over the last two quarters? Additionally, could you share insights on the book-to-bill ratio or the bookings environment you anticipate in the upcoming quarters? Lastly, I would appreciate an update on the status of NCAP and Vanguard regarding when you expect decisions to be announced.

Right. that's a multipart, let me make sure I get them all. And if I don't, please remind me and I'll certainly go back. On the submission rates, I think, as Toni mentioned, we are submitting less, and the last couple of years have been lower. And I think the expectation is that submit rates will be higher over the course of FY '25, and that should reflect in a higher level of bids waiting final adjudication, if you will. So we do expect that trend to flip this year. Really big picture on book-to-bill. As you probably observed, our book-to-bill was under 1.0 last year. Trailing 12 months is under 1.0. We would expect book-to-bill for a business that's aspiring to grow in that 2% to 4% range to be above 1.0. So think of the objective for FY '25 is sort of in that 1.0 versus 1.1 range. So that to me is the expectation for book-to-bill for FY '25. And then finally, on NCAPs, we're going to see how this process plays out over the course of the next several quarters. But I suspect it probably will not have a significant revenue impact in FY '25 and evolve the customers in the middle of an active procurement cycle and just given how complicated that procurement process is, we would expect minimal disruption to our FY '25 revenues and as I responded to the previous question, I think we've calibrated our position relative to Vanguard as an incumbent on the program astutely as we can as we're providing guidance here. So hopefully, I captured the three-parter.

Actually, there were one, what were the bids awaiting decision at year-end? And then what are the milestones? I guess I missed represented the question. What are the milestones? When should we expect, I guess, it's a multipart decision, but when should we expect decisions to be forthcoming on Vanguard? Thank you.

Yes. And on the first part, Cai, I mean we typically don't call out individual programs that are awaiting adjudication suffice...

Just the total dollar...

And we can certainly try and find the number, Cai, but it's probably right in line with where the historical numbers have been in terms of just waiting adjudication that at any point in time, we have a pretty healthy amount of awards that are pending adjudication. So we'll get you a more precise number, if necessary. And in terms of the timing question, I would say we would expect to hear on some of these in the Q1, Q2, Q3 time frame. Q4 is not where we're expecting most of it. Obviously, some of this will depend on the government funding environment, but I would say, biased to the Q2, Q3 time frame for this year. Hope that's helpful.

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

Thank you. What's the most important financial outcome that you expect to derive from the new organizational structure with more business units?

Tobey, let me take the first part of that and then Toni, please chime in. So really big picture, Tobey, I think part of what animated the reorg was the desire to eliminate a layer to simplify the org structure so that we could have a direct perspective on what's going on inside of the business groups. And so to me, that was probably the most important reason part of what was animating that was to get closer to the customer, closer to where the rubber hits the road, if you will. And that was really the reason we announced the reorganization in Q4 of last year. In terms of the single most important financial metric, I would say, look, our incentive comp metrics are always reflecting what we want to deliver over long periods of time. And that is EBITDA dollar growth, free cash flow and total shareholder return. As I think about really important long term, what is the objective of driving additional organic growth? It is to drive higher EBITDA growth from the business and then converting cash out of that EBITDA and delivering TSR. To me, I think I've not given a single financial metric, but I think those are really what we're hoping to get.

This is Toni. Let me provide an operational perspective for a moment. Long term, my views are completely aligned with what Prabu just shared. There have been two key moves within the organization intended to work together towards achieving favorable outcomes. We are centralizing the business development function and flattening the organization. These actions aim to reduce our risk associated with organic growth by addressing our recompete rate. A recompete win rate that falls below our historical 90% has been a burden on the business, as we've discussed previously. To mitigate that risk, we need to tackle the recompete challenge in two organizational ways: first, by standardizing processes with a single point of accountability in business development and capture functions; and second, by flattening the organization so we can be closer to our customers. This ensures that each business group has its leaders reporting directly to me, making them part of the executive team focused on driving value creation during program delivery. It also emphasizes the systematic deployment of our unique advantages across the portfolio and increases accountability in a more streamlined organization with direct reporting responsibilities. The two strategies to address the recompete issue are establishing standardized bid capture capabilities and fostering value creation in program delivery. These are the fundamental changes reflected in the organizational adjustments I’ve implemented.

Thanks. As you migrate the margins towards the industry average, it seems to me that there's kind of a tension where you're bidding on work that's higher value in order to drive the margin higher and also trying to inject more value into lower margin work to see if you can keep the same margin or even encourage that hire. Are you having more success or less success on that higher value stuff sort of the newer work to the company where we're trying to push the frontier out? Or on the lower margin work that you're trying to defend or sort of inject with more value and distinction to drive the margin higher?

Great question. I think we need to focus on both margin improvement from new business and the challenges posed by ongoing recompete cycles. Our new business strategy emphasizes differentiating factors that enable us to achieve the top line growth necessary for SAIC's future. When it comes to recompetes, we aim to introduce innovation while managing current programs effectively. We also seek to deliver services on cost-plus programs and optimize fixed-price programs by substituting labor costs with solution costs. We are evaluating our recompete win rate thresholds to ensure we pursue the right opportunities and add value throughout program performance. Our goal is to achieve higher operating margins during recompetes, with a solutions-oriented mindset. It’s challenging to prioritize one over the other since both strategies are essential, and we are committed to executing both effectively.

I completely agree on the recompete side, as Prabu mentioned specific measures to ensure that the margin is increasing on the retained business. When we consider the investment we are making in reskilling, particularly where labor is pertinent to a recompete, it's essential that our labor provides increased value over time. This is another reason for our investments in upskilling. However, I believe our win rates suggest that our new business, relative to the industry standard, is improving. We are on track to bid a differentiated portfolio and succeed in new business opportunities. We will dedicate significant time and resources to ensure that in our existing program business, we are delivering more value on the ground in those contracts and improving our recompete win rates.

Thank you.

Thank you. Sure.

And your final question comes from the line of David Strauss with Barclays. Your line is open.

Hi. Good morning. This is Josh Korn on for David. Thanks for taking the question. So I think you mentioned for sort of new verticals during the prepared remarks, you see border, which I don't think has really been emphasized before, so I just wanted to ask like how you plan to differentiate in those markets going forward? Thanks.

Yes. Let me speak to them. We call them national imperatives. I believe there were five that were identified. You don't think of them as an organizational construct, they are not. In fact, what they represent are the long-term efforts of our customer, our programmatic engagement with our customers, the imperatives for the country that the customers are working. What we are trying to do in our strategy is to ensure that when we build differentiation across our portfolio, and we do good bid selection in terms of how we want to grow our business, that we're driving towards outcomes in each of those imperatives. So for example, undersea dominance is one that speaks to our naval fleet and the undersea capabilities of the U.S., we have contracts in that space. We are doing work in that space. We are differentiated. We want to continue to differentiate in that space and grow that type of work going forward. So they're more directional for mid and long-range investments and how we engage and how we position with those customers that are driving towards those outcomes.

Great. Thank you.

Yes. No worries, Josh.

This will conclude the question-and-answer session and today's conference call. We thank you for joining. You may now disconnect your lines.