Earnings Call Transcript - SAIC Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the SAIC Fiscal Year 2022 Fourth Quarter and Year-end Earnings Call. Thank you. It's now my pleasure to turn today's call over to Mr. Joseph DeNardi, Vice President of Investor Relations. Sir, please go ahead.

Joseph DeNardi, Vice President of Investor Relations

Good morning and thank you for joining SAIC's fourth quarter fiscal year 2022 earnings call. My name is Joe DeNardi, Vice President of Investor Relations, 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 fourth quarter of fiscal year 2022 that ended January 28, 2022. Earlier this morning, we issued our earnings release, which can be found at investors.saic.com, where you will also find supplemental financial presentation slides to be utilized in conjunction with today's call and a copy of management's prepared remarks. These documents, in addition to our Form 10-K 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 discussion of these risks, including the risk factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. In addition, the statements represent our views as of today, and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures. It is now my pleasure to introduce our CEO, Nazzic Keene.

Nazzic Keene, CEO

Thank you, Joe, and good morning to everyone joining our call. Before we discuss our strong financial results and outlook for fiscal year 2023, I would like to recognize what continues to be an inspiring level of performance from our employees who showcase the very best of SAIC values to our customers and their communities every day. This performance and dedication is evident in our financial results in fiscal year 2022 with margins exceeding our expectations due to strong execution in both sectors. It is evident in the improvement we see in our customer satisfaction scores, which speak to the value we provide and enable the strong on-contract growth we delivered in fiscal year '22. It is evident in the support our employees provide to their communities with nearly 30,000 volunteer hours and $5.5 million of combined employee and company charitable contributions made over the last two years. And, it is evident in the numerous awards recognizing the strength of our culture including being named by Forbes as a top employer for Veterans in 2021. It is my privilege to lead such a dedicated group of employees focused on using technology and expertise to serve our government and protect the ideals of our country. Now, onto a discussion of our fourth quarter results and fiscal year 2023 outlook. We delivered full-year revenues of $7.39 billion, an adjusted EBITDA margin of 9.3%, and $467 million of free cash flow. This represents a 2.5% increase in organic sales, a 40 basis point year-over-year improvement in margin, and a 10% increase in free cash flow, when adjusting the prior year for non-recurring benefits. We delivered on the financial commitments we made, and we will continue this going forward. We returned $297 million of excess capital to our shareholders through our dividend and share repurchase program. Our capital deployment plans for Fiscal Year '23 provide the opportunity for us to increase capital returned to shareholders by approximately 10% and to retire an additional 4% of shares outstanding. To be clear, our highest priority is on investing in our business and positioning our portfolio to drive sustained, profitable growth, and we have confidence in our plan to do just this. Given that confidence, we believe our share repurchase plan offers an attractive return on capital. For fiscal year 2023, we are providing initial guidance for revenue of $7.35 billion to $7.55 billion, representing roughly 1% total growth at the midpoint. Our fiscal year '23 adjusted EBITDA margin guidance of approximately 8.9% assumes continued strong execution. We expect to generate free cash flow in the range of $500 million to $530 million representing over 10% growth at the midpoint, compared to our fiscal year '22 cash performance. Before turning the call over to Prabu to discuss our financial results and outlook in more detail, I would like to reflect on areas of our financial performance where we have excelled and areas where I expect performance to improve. As I mentioned earlier, our ability to persevere and remain focused on delivering value to our customers and shareholders has been impressive. We demonstrated strong program performance in fiscal year '22 accounting for roughly 20 basis points of the improvement in margin relative to our initial guidance. Our cash performance continues to be strong with line of sight into double-digit growth in fiscal years '23 and '24. In fiscal year '22, we established goals to achieve parity between the representation of women and people of color within our leadership and non-leadership roles within 5 years. We made good progress towards our goals with women now representing 27% of our leadership and people of color representing 22%, both of these categories grew as compared to the prior year. While there are areas of our business that are clearly performing well, I want to acknowledge those where I am focused on driving further improvement. The primary means we have to increase long-term shareholder value is to deliver sustained and profitable organic growth. Fiscal year '22 represented an improvement in our growth rate relative to prior years, and we expect to continue this trend in the years to come. While we recognize that our initial expectations for fiscal year '23 are somewhat lower than our prior plan due to budget uncertainties and contract transitions, we remain confident in our ability to drive long-term profitable growth. To reinforce this, I want to provide some insight that we typically do not disclose. In order for our executive officers to earn target payout on the revenue component of our incentive compensation plan, we have to deliver fiscal year '23 revenue at the top end of our revenue guidance. In addition, beginning with the fiscal year '23 grant, we are modifying our long-term incentive compensation program for the executive leadership. We have substantially increased the relative importance of total shareholder return such that one-third of the payout, going forward, will be tied to TSR. This reflects our commitment to holding ourselves to a higher standard while increasing our 'skin in the game'. It is a challenge we believe is appropriate and one we embrace. I am impressed by the energy and commitment to drive continuous improvement across the company. However, like most things, our progress has not been perfectly linear, and contract transitions, due in part to recompete losses, represent a headwind to growth in fiscal year '23. Our pipeline, however, remains very strong with roughly $21 billion of submitted proposals and ample opportunities to drive stronger growth in the future. More importantly, the quality of our pipeline is improving. As we outlined on our third-quarter call, our innovation factories, together with our sectors, are developing solutions and capabilities that will improve our ability to win accretive new business, aligned with our strategy. This focus allows us to shape our portfolio organically by approaching our pipeline development and pursuit decisions in a disciplined manner with an emphasis on markets of strength, including engineering and IT services. Finally, we expect to generate free cash flow in fiscal year '23 equivalent to roughly 10% of our market value. We will continue to take a disciplined approach to capital deployment to maximize long-term shareholder value. I will now turn the call over to Prabu.

Prabu Natarajan, CFO

Thank you, Nazzic and good morning, everyone. I will quickly summarize our fourth quarter and fiscal year 2022 financial performance and then discuss our outlook for fiscal year 2023, as well as some additional disclosures we are providing in our supplementary slides designed to improve transparency into our business. I am pleased with the overall performance of the business in the fourth quarter. We reported revenues of $1.78 billion for the quarter and $7.39 billion for the year, in line with our most recent guidance. For the quarter, this represented roughly 4% total growth and 1.4% organic growth, and for the year, approximately 5% total growth and 2.5% organic growth. Our fourth quarter adjusted EBITDA margin of 8.2% was better than our plan, reflecting good program execution, partially offset by the impact of higher investment spend, consistent with our prior guidance. Our full-year adjusted EBITDA margin of 9.3% was 60 basis points above the mid-point of our initial guidance for the year and 40 basis points higher on a year-over-year basis due to strong performance and the benefit of certain nonrecurring items. We reported adjusted earnings per share of $1.50 for the quarter and $7.27 for the year, with stronger performance driven by program execution and a favorable tax rate. Our full-year free cash flow of $467 million represents a roughly 10% increase year-over-year and, as Nazzic mentioned, we have good line of sight into continuing this growth in Fiscal Year 2023 and Fiscal Year 2024. Consistent with the commentary from our Q3 earnings call in December, we have assumed that the implementation of the Section 174 R&D amortization provision will be deferred. Lastly, net bookings in the quarter were $2.2 billion, resulting in a book-to-bill ratio of approximately 1.2x for the quarter and 1.3x for the year. Our backlog duration now stands at nearly 4.5 years, which we indicate on Slide 12 of our presentation. We are providing initial fiscal year 2023 guidance for revenue of $7.35 billion to $7.55 billion, adjusted EBITDA margins of approximately 8.9%, adjusted EPS of $6.80 to $7.10, and free cash flow of $500 million to $530 million. Our revenue guidance reflects a few different factors, which I would like to make sure are well understood: our outlook assumes about 3 to 4 points of headwind from contract transitions and runoffs; 2 points of total tailwind from our acquisition of Halfaker and the extra fourth quarter working days; and 1 to 3.5 points of tailwind from on-contract growth and new business. We have summarized these factors on Slide 10 of our presentation. We believe this revenue range properly captures the opportunities to grow from new business and the known contract transition headwinds we face against a somewhat uncertain and fluid backdrop given the slower pace of outlays to start the year and the residual impacts of the continuing resolution. Our revenue guidance is roughly 1 to 2 points below what we had contemplated on our previous earnings call with modest incremental pressure from contract transitions and a more conservative view regarding the pace of customer activity over the next several months. As Nazzic mentioned, our pipeline remains strong both in terms of the magnitude of the opportunity and the quality of the work. While we were unsuccessful on one of the larger new business pursuits I referenced on our third-quarter call, I remain confident that the investments we are making will allow us to win more than our fair share going forward. Additionally, I would like to remind you that our pipeline contains some significant opportunities over the course of fiscal year 2023 across our Engineering and IT service domains. In terms of revenue cadence throughout the year, at this time, we expect low single-digit total revenue growth in the first and fourth quarters and low single-digit declines in the second and third quarters. Our margin guidance of approximately 8.9% represents comparable year-over-year performance when accounting for certain one-time gains in fiscal year 2022, which we estimate added roughly 40 basis points to full-year margins. This is consistent with the fiscal year 2023 margin expectations we communicated on our Q3 earnings call. For additional clarity, we have provided a walk from fiscal year 2021 actual margins to our guidance for fiscal year 2023 on Slide 11 of the presentation. While our fiscal year 2023 margin guidance represents comparable performance versus fiscal year 2022, we continue to see opportunities for steady improvement over time and have initiatives in place to continue to drive our performance. We expect adjusted diluted earnings per share in a range of $6.80 to $7.10, which assumes an effective tax rate of approximately 24%. Finally, our guidance for fiscal year 2023 free cash flow of $500 million to $530 million represents an over 10% increase at the midpoint versus fiscal year 2022. This is slightly higher than the expectations we communicated on our Q3 call in December. After debt payments of approximately $180 million and approximately $85 million for our dividend, we expect to have between $200 million and $250 million to deploy with a bias towards repurchases, depending on market conditions. We expect net leverage of 3.0x to 3.3x by the end of the current year. We have assumed between four and six Federal Reserve rate increases in our guidance and believe our interest expense for fiscal year 2023 is calibrated appropriately. Additionally, as Nazzic mentioned, we expect a 7% decline in our diluted share count by year-end fiscal year 2023 compared to fiscal year 2021. When combined with at least a 10% improvement in our free cash flow, we expect to increase free cash flow per share to well over $9 per share this year. We remain focused on ensuring that the excess capital we generate is deployed to support the highest long-term returns with incentive metrics in place to ensure that we are aligned around improving our performance against plan and against our peer set. As Nazzic indicated, we will be making changes to our incentive compensation program in fiscal year 2023, which we believe will further improve alignment between our team and our shareholders. Beginning with the fiscal year 2023 grant, Total Shareholder Return will become a standalone metric for the SAIC executive leadership team, versus serving as a modifier previously, and have the effect of increasing the weighting for TSR by 10% to 15%. In addition, for the SAIC executive leadership team, the long-term incentive equity payout will shift more towards performance-based units and away from time-vesting units with incentive curves requiring continued improvement in performance on a year-over-year basis. We believe these changes, combined with those we made in fiscal year 2022, will result in further aligning our team’s performance and value for our shareholders. Our focus to begin fiscal year 2023 is on positioning our company and our portfolio for long-term sustainable growth, investing in markets aligned with increasing demand and our competitive strengths, and ensuring our capital deployment strategy drives long-term shareholder value. I will now turn the call back over to Nazzic.

Nazzic Keene, CEO

Thank you, Prabu. Before taking your questions, I would like to take a moment to acknowledge the tragedy unfolding in Ukraine and the heartbreaking humanitarian crisis due to Russia’s ongoing invasion and aggression. Having spent my early years in Libya and then watching from afar the human toll on many Libyans, including family members from decades of autocratic rule, I am forever appreciative of the democratic ideals the Ukrainians are fighting to protect. I know this sense of appreciation is shared broadly by the SAIC family. Two weeks ago, we announced a partnership with the American Red Cross to support humanitarian relief efforts for the people of Ukraine. To date, SAIC has raised over $125,000 through employee contributions and a company match. This is yet another testament to the quality of our people and our purpose and culture at SAIC where we are driven to serve and protect our world. We stand with Ukraine, our customers, and our employees. I will now turn the call over to the operator to begin Q&A.

Operator, Operator

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

Bert Subin, Analyst

Great. Thanks for the question. Good morning.

Nazzic Keene, CEO

Good morning.

Bert Subin, Analyst

Have you seen a significant increase in demand following appropriations? Is that influencing your perspective on the revenue growth timeline for the fiscal year, which I believe was indicating low single-digit declines in the first and fourth quarters, and low single-digit growth in the second and third quarters? Additionally, you mentioned in your commentary that you anticipate solid organic growth. Is this situation impacting that expectation?

Nazzic Keene, CEO

Hi. This is Nazzic. Let me tackle part of this and Prabu and I will tag team on trying to address your questions. We have seen a slower pace of customer activity as we started this government fiscal year '22. We've seen it both in terms of award timings and outlays. So, it's a little difficult at this particular time to see what impact the slower outlays we have had as we think about our business. But the slowness in some of the O&M outlays, certainly, we could infer a bit of delay to our kickoff of this fiscal year as well. So, we're starting to see some award timing move to the right. And so, we do believe that will have an impact. Now, to your question, we do expect this dynamic to improve in '22 now that there has been some more budget certainty for the year. And so, we're assuming an improvement in the second half of the year, as Prabu indicated, as we think about our guidance. I will let Prabu do a little bit of discussion on the back half of '22 then.

Prabu Natarajan, CFO

Thank you for your question. The data shows that the first five months of the GFY '22 fiscal year have seen slower outlays, noticeably slower than the last two decades. However, we expect this pace to increase in the second half of the year, as reflected in our guidance. Regarding the revenue progression for the year, we anticipate some limitations due to contract conditions, which we have previously mentioned, particularly in the second and third quarters. We have incorporated a significant amount of on-contract, new business into our GFY or FY '23 guidance, so you can expect to see that reflected in our bookings and the revenue progression throughout the year. This summarizes our outlook on revenue progression.

Bert Subin, Analyst

Great. Thanks Prabu and Nazzic. Just one follow-up question for me, maybe higher level. How are you thinking about client exposure? Historically have a tilt toward the Army, it seems like Navy and Air Force is where a lot of that growth is going to be at least in terms of DoD. I know you put out the tailcone contract that you highlighted. Do you think you're sort of shifting appropriately to the Navy, Air Force? And then in terms of customer, do you think the fed civ opportunity is greater? Or do you think it maybe Air Force? Thank you.

Nazzic Keene, CEO

We are very proud of our diversified portfolio at SAIC. We maintain a strong presence across the Department of Defense, civilian government, and the intelligence community, which gives us confidence in our ability to adapt to national priorities as needed in any of these areas. We have a solid position with the Air Force, Navy, and the Army. Our capability to deliver engineering and IT services across these customer bases makes us comfortable in our strategy. We approach the market by focusing on specific accounts and customers, ensuring strong relationships and good insights into their priorities and missions.

Bert Subin, Analyst

Thank you, Nazzic.

Nazzic Keene, CEO

Welcome.

Operator, Operator

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

Matthew Akers, Analyst

Hey, thanks. Good morning, everybody. I wonder if you could comment on some of the contract losses and exactly what you think sort of drove that. I think like looking at the protest for agents, looks like your competitor was below your prices. Has it been mostly pricing? Or any sort of lessons you've taken away from those that you can apply to sort of win more going forward?

Nazzic Keene, CEO

Yes, Matt. Let me add some context. As we've mentioned, the main challenge regarding contract transitions is the losses. We've conducted a thorough analysis of these for the upcoming fiscal year. We regularly perform detailed win-loss evaluations, examining both the losses and wins. I can say that there isn't a consistent pattern in these significant losses. The customer feedback we’ve received reinforces our confidence that we have the scale, talent, and solutions necessary to remain competitive in a tough market. We continue to invest in these areas to further set ourselves apart and enhance our winning capabilities. To directly address your question, there isn't a common theme. We don’t believe there’s a pricing weakness or challenge we need to address. Sadly, we do sometimes lose contracts, but we also win more than our fair share. However, we don’t see any factors affecting our strong performance in retaining existing accounts or securing new business in the future.

Matthew Akers, Analyst

Got it. Thanks. And I guess if you could remind us just in terms of recompetes you have coming up in '23. Are there any big ones we should watch for?

Prabu Natarajan, CFO

Let me take that one. I would say it's primarily in the PVMRO portfolio. Those would not impact revenue in FY '23, but we're going through the recompete cycle here, of course. And obviously, there's Vanguard on top of that, and those are probably the big ones for the year. And as you know, Vanguard, that's a complex procurement. And we are executing well on the program and supporting the customer as they lay out their aspirations for that recompete cycle.

Nazzic Keene, CEO

I would like to add that this year is quite typical for us in terms of recompetes, which generally fall within the 15% to 20% range, and overall it’s a normal year.

Matthew Akers, Analyst

Got it. All right. Thank you.

Operator, Operator

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

Cai von Rumohr, Analyst

Thank you very much.

Prabu Natarajan, CFO

Good morning.

Cai von Rumohr, Analyst

So, I guess, Prabu, to help us understand the fourth quarter profitability a bit better, your release talks of the favorable impact of settlement of prior year indirect rates and a negative compare year-over-year in EACs. Could you quantify both of those items for us, please?

Nazzic Keene, CEO

On the EAC topic, as indicated in the 10-K that will be filed, the net EAC for Q4 is about $4 million compared to Q4 FY '21, which likely isn't a significant factor. Regarding the indirect rates, we usually adjust these at the end of the year, and it's common for us to experience some level of either favorable or unfavorable adjustments at that time. This is a routine process. For Q4 margins, we had previously implied guidance in the mid to high 7% range and we outperformed our expectations, mainly due to some rate settlements that provided upside for the year. We've adjusted our execution expectations accordingly. Looking ahead to FY '23, we've provided an initial guidance of about 8.9% to reflect comparable year-over-year performance. Overall, there was nothing unusual in Q4, and any effects are at least partially reflected in our margin guidance for that quarter.

Cai von Rumohr, Analyst

Terrific. And then obviously, we have the Ukraine conflict on us now. And I would assume that’s going to have some impact on all defense business. As you see things today, Nazzic, Prabu, what sort of impact do you think it might have on your business? And are you seeing any preliminary signs of any change in terms of your outlook as a result of the Ukraine conflict?

Nazzic Keene, CEO

Yes. Thanks, Cai. Good morning. Well, first and foremost, as you heard, we are incredibly focused on supporting our country and enabling execution of the mission and employees as they continue to do an excellent job of rising to the occasion. And I know that we are all saddened by what we see over there. We’ve not seen any changes to date in our business or really any impact to revenues that I would classify as material. Within certain business areas, we are seeing some changing demand signals related to increased focus on Ukraine, but it's really in certain pockets of the portfolio. So, we just remain focused on supporting our country and our customers, and if they require additional resources from us, we will absolutely and always be there, and that’s what we are focused on at this point. But to purely answer the broader question as it relates to the long-term impact, Prabu, do you want to add any color?

Prabu Natarajan, CFO

And Cai, specifically in respect to guidance, I think it's safe to say we are not assuming any incremental upside from that situation in our guidance.

Cai von Rumohr, Analyst

Okay, great. Thank you very much.

Operator, Operator

Your next question is from the line of Colin Canfield with Barclays. Your line is open.

Colin Canfield, Analyst

Hey, good morning, Nazzic, Prabu. For the FY '23 guide, can you just talk about what you guys are assuming in terms of logistics recovery?

Prabu Natarajan, CFO

So, in terms of the recovery on the logistics side, as we said on the December call, we are not assuming that there is a material improvement in the performance of that business. And I'd say that continues to be our posture as we head into FY '23 to the extent that there is an inflection towards maybe higher spend for readiness than currently assumed in the guidance, it is fair to say that we may see some upside from that business. But on a relative basis, on a year-over-year basis, I'd say we are thinking that business modestly improves, but not materially so.

Colin Canfield, Analyst

Got it. And then if we think about the FY '24 free cash flow comments of 10%, can you just discuss some of the moving pieces, split between sales growth, margin improvement and working capital improvements as well as kind of the capital intensity that you're contemplating within your pipeline?

Prabu Natarajan, CFO

Sure. We are confident in what we discussed on the December call, where we anticipate about a 10% increase in our capacity to generate free cash flow from FY '23 into FY '24. This illustrates our cash generation potential. Our primary goal remains consistent growth of the business and improving margin rates over time. For the past nine months, I've highlighted opportunities related to working capital. When considering the sources of incremental benefits, we believe it will stem from improvements in working capital and various initiatives we are implementing related to DSO, PPO, and subcontracting, all of which should enhance cash flow as we approach '24. Additionally, we aim for sustained top-line growth and improved margin share. Therefore, we see several avenues to achieve that 10% target for FY '24.

Colin Canfield, Analyst

Got it. Got it. And then one last one on strategy, going back to kind of Matt's question on price. Can you just discuss sort of the scale of contracts that you're competing for in IT services? I know it isn't really the right comp for you guys, but if we think about the final bidders there versus SAIC, do you view that you have the scale to kind of go after some of the larger IT modernization contracts? Or is there a better way to think about your strategy in that business?

Nazzic Keene, CEO

Great question. I can confidently say that we have the scale to pursue most of the large enterprise IT modernization contracts. Our experience in this area is substantial, and we have strong capabilities, including those from SAIC. We integrated federal capabilities into our operations about a year and a half to two years ago, and we've maintained consistent performance across all government sectors. Therefore, I feel very optimistic about our potential to lead in the IT modernization space.

Colin Canfield, Analyst

Thank you.

Nazzic Keene, CEO

Thank you.

Prabu Natarajan, CFO

Thank you.

Operator, Operator

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

Gavin Parsons, Analyst

Hey, good morning.

Nazzic Keene, CEO

Good morning, Gavin.

Prabu Natarajan, CFO

Good morning, Gavin.

Gavin Parsons, Analyst

I understand there is still a lot of budget uncertainty and many unknowns. However, some of your competitors have outlined their long-term growth prospects. Could you share any insights on what the medium-term growth rate or the growth of the addressable market looks like for SAIC?

Nazzic Keene, CEO

So, as we've been discussing, we're not in a position to share multiyear targets at this juncture. We are laser-focused on positioning our portfolio to truly maximize long-term shareholder value. And we have a strategy that we've shared over the course of the last many calls to support that. We continue to make investments in those areas of the portfolio that will produce and can produce higher rates of growth over time. And so really looking at a portfolio view of our business. We know there's interest in hearing more from us on longer-term targets, we're not prepared to do so on this call. But it is something that Prabu and I talk about quite a bit and we look for the opportunity to do that in the future. And I think the last thing I would draw your attention to is, hopefully, the insights that we provided around the changes, pretty substantial changes to our incentive compensation demonstrate our commitment to delivering sustained profitable growth. The leadership will continue to benefit when the shareholders benefit. And creating that linkage, we believe, is a very powerful tool.

Prabu Natarajan, CFO

And Gavin, the one thing I would add to that is one of the more important changes we made to our incentive comp metrics was to make it not just plan-focused but make it sort of peer result. So, we recognize what our peers communicate regularly in terms of their growth rate aspirations. And I think suffice it to say that we are challenging the teams internally to be at or above those targets. But recognize every year comes with its own sets of challenges and its own sense of opportunities. It is our job to go execute on a year-over-year basis. So, this all isn't probably the perfect venue for a long-term guidance conversation. We will certainly look forward to having a conversation with the street sometime over the course of the year.

Gavin Parsons, Analyst

That makes sense. That’s helpful. Quick clarification on the buybacks. Reducing the share count by 7%, I think that the deck says it to be 8% to 10%. Is that an upside scenario? And what are your thoughts on allocating more towards buybacks relative to M&A? Thanks.

Prabu Natarajan, CFO

Good question. I'd say the deck refers specifically to the total share count. And 7% is effectively meant at the equity issuances that we have here, so they're entirely consistent with each other. I would say, look, as we sort of start out the year and we think about capital allocation, we always said we want to allocate it in ways that are increasing shareholder value. We believe the market does not have conviction that we can consistently grow this business at a rate to justify the purchases. And we think, therefore, it's implied in the discount that we see in the stock price that we see as a dislocation in the market for our equity. And we have therefore purposefully chosen to invest a little more capital in buybacks because we believe that was a good way for us to return value to our shareholders. So as long as the dislocation is there, we are going to remain aggressive on the share repurchase front and that’s what is implied in the guide and as we start out the year, we do typically the market repurchases and we've got a greement in place. And not surprisingly, we buy more at lower prices and we buy less at higher prices. And so, we just have to see how the year plays out. But recognizing 7% is a reasonable target for us in terms of reduction in share count by the end of FY '23.

Gavin Parsons, Analyst

Thank you both.

Nazzic Keene, CEO

Thank you.

Operator, Operator

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

Sheila Kahyaoglu, Analyst

Hey, guys. Good morning and thank you for the time. So, two questions. I guess to start off, my favorite topic is the revenue bridge. And on Slide 10, you talk about new business and on-contract, 1% to 3.5% growth. Just thinking about the budget that came out, the President's budget, it's an initial step and it's already at 3.5%. So, I guess, what end markets are you basing that off of? And how do you come up with that 1% to 3.5% new business growth forecast?

Prabu Natarajan, CFO

Hi, Sheila, I will take that one first. So, in terms of the bridge that we provided from FY '22 into '23, broken out between new business and on-contract growth, I would say, let's start with the backlog we have in the books, just $24 billion. It rose about 10% last year. And as we think about where the greatest set of near-term opportunities come, that is from things that are already sitting in the backlog. There is an intense amount of focus for the teams to go generate incremental growth beyond what's reflected and implied in the guidance we had out there. So, we are comfortable that, that will provide a good source of consistent year-over-year revenue growth. On the new business front, it's probably a tale of two halves in this particular fiscal year. The first half was really slow given the slower pace of outlays. We do expect that pace to pick up. It is also our expectation that as we start a mixed fiscal year for the government, GFY '23, we're likely to start in the CR again. So, as we said in our prepared remarks, I think what's changed a little bit from the December conversation we had with you all is that our view of the awards activity has become a little more conservative just given what we've seen in the market over the last six months. So, as we think about it, the portfolio, we will always work on the portfolio, but we are aligned with where the spending is going to be. But I think we tend to decompose the spending into the sub-accounts and then within the customer accounts as we see those spending patterns. And if we think about primarily O&M, that tends to be like a flat to plus 3 in this environment and that's effectively what's captured in the guidance.

Sheila Kahyaoglu, Analyst

Okay. I’m going to change my second question. Where do you think your portfolio has been quite defensive regarding your pipeline strategy, particularly with AMCOM and the Army portfolio? It seems to depend on maintaining your business and the recompete turnover. When you mention that you're focusing on the pipeline and its quality, where are you being most aggressive in pursuing new wins by customer or by end market?

Nazzic Keene, CEO

Yes, Sheila, this is Nazzic. I want to provide some additional insights. We mentioned in our prepared remarks that we have $21 billion in submitted proposals awaiting award. Prabu highlighted that we are closely monitoring the pace of these awards and adjusting our strategy accordingly. Approximately half of this amount is related to new business, which is significant for both our defensive and offensive strategies in securing new contracts. I wanted to share some metrics regarding the areas in our portfolio that are driving growth. This is in line with what we've discussed previously. We see substantial opportunities in IT modernization and cloud migration across the federal government. There are also prospects in the space-related market, which we are actively pursuing. While we identify certain sectors of our portfolio with higher growth potential, we recognize that there are also areas that may not perform as well. Over the past couple of years, we have become more disciplined in our investments, focusing on areas we believe will yield profitable organic growth. We are not neglecting other parts of our portfolio but are instead prioritizing investments that will promote growth. We are confident in our strategy and are observing positive results in new business submissions and successful wins. Prabu, I will let you add more details.

Prabu Natarajan, CFO

Thank you, Nazzic. That was great. I want to add one more point, Sheila. As Nazzic mentioned, just over half of our recent developments involve new business. Reflecting on our progress over the past decade, we've recently gone through a recompete cycle for our mix and are currently facing recompetes for PVMRO and actively competing for Vanguard. We also just completed the recompete cycle for our AMCOM SGI portfolio. Looking ahead to the next few years, I'm pleased to see that the major recompete cycle for our SAIC franchise program is behind us. We now have a range of opportunities in the pipeline that will allow us to capture business from competitors. This represents a significant turning point for our portfolio and positions us well to increase our market share, especially as we navigate this super cycle for our large contracts.

Sheila Kahyaoglu, Analyst

Okay. Thank you.

Nazzic Keene, CEO

Thank you.

Operator, Operator

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

Seth Seifman, Analyst

Hey, thanks very much and good morning.

Nazzic Keene, CEO

Good morning.

Seth Seifman, Analyst

I have a couple of questions regarding revenue projections as we move later into the year, possibly into 2024. Firstly, does the guidance for 2023 take into account a continuing resolution in your fiscal fourth quarter, specifically from September 30 onwards?

Nazzic Keene, CEO

Yes, it does.

Seth Seifman, Analyst

Okay, great. Okay. And then when we look at the elevated number of working days, it looks like in this year, do we think about that as a headwind to growth as we head to fiscal '24?

Prabu Natarajan, CFO

So, this occurred last time in 2017. I would say that the additional working days would present a slight challenge for fiscal year '24.

Seth Seifman, Analyst

Okay. Thanks. Yes, I think everybody hit on the big picture stuff. So, I will leave it there. Thank you.

Nazzic Keene, CEO

Thank you, Seth.

Operator, Operator

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

Tobey Sommer, Analyst

Thank you. With respect to the focus on TSR and share repurchase, how would you describe the effect of that on the company's posture in the acquisition market and appetite over the next year or more if this is how the focus of incentive comp will remain?

Prabu Natarajan, CFO

So, thank you for the question, Tobey. I think we've said a couple of times, our focus remains on organically investing in the business. And the push towards repurchases on capital allocation is simply with respect to the excess capital that we generate every year. And this becomes a viable way for us to allocate sort of excess capital towards buybacks given where the equity is currently trading at. So, yes, I think it's really important to recognize that that is the primary focus for the management team. With respect to whether that diminishes or has an impact on our capacity for M&A, I would say the following: I'd say if we find good M&A deals that are accretive, tuck-ins, like Halfaker that have the capacity to get us in the markets that we don't have exposure to or generate good returns, and I'm thinking good earnings as well as cash, then we will have incremental capacity to go raise the debt we need to do so. Our levers that we are organically targeting are between 3 and 3.25, give or take, this year. And therefore, we believe we have capacity for M&A. And obviously, large M&A may be out of the question for the near-term, but that's a function of what's out there specifically. But in terms of just the M&A appetite, I don't think it is particularly diminished by our desire to repurchase shares.

Tobey Sommer, Analyst

A question for you about the following fiscal year federal budget. You said you assumed a CR in your final fiscal quarter. Historically, when you look back at periods where there's been sort of active military engagements, wars, NATO on sort of a higher op tempo, does the federal government tend to be a little bit more responsive and get budgets done, maybe not perfectly timely fashion, but better than the 6-month CR we recently had?

Nazzic Keene, CEO

I believe there is a case to be made that during times of need, as you mentioned, there is usually less partisanship, which can lead to a smoother process in passing budgets that align with national priorities. However, I don't want to speculate on what might happen. I can say that it would be reasonable to expect less partisanship, possibly resulting in a greater willingness to advance some initiatives. Prabu, would you like to add your thoughts?

Prabu Natarajan, CFO

Maybe the other data point would be that as we are seeing outlays pick up starting right now, I would say it's picking up because our customers were perhaps operating with an assumption that the CR would go on a little bit longer. Therefore, there is a little more money to be spent in the next six months before we potentially get CR again. As you know, since we implement the energy benefit from the last budget, there's about a one-year tail to the appropriations.

Tobey Sommer, Analyst

Thank you.

Operator, Operator

There are no further questions at this time. I will now turn the call back over to Mr. DeNardi.

Joseph DeNardi, Vice President of Investor Relations

Great. Thank you, Brent, and thank you, everyone for joining us today. We look forward to speaking with you all again in June. Have a nice day.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.