Earnings Call Transcript - SAIC Q1 2025

Operator, Operator

Thank you for standing by. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SAIC First Quarter Fiscal Year 2025 Earnings Conference Call. Thank you. I will now turn the conference over to Joe DeNardi, Senior Vice President of Investor Relations and Treasurer. Joe, you may begin your conference.

Joe DeNardi, Senior Vice President of Investor Relations and Treasurer

Good morning, and thank you for joining SAIC's first quarter fiscal year 2025 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 first quarter of fiscal year 2025 that ended May 3, 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.

Toni Townes-Whitley, CEO

Thank you, Joe, and good morning to everyone on our call. I'll start with a quick review of our first quarter results and then provide an update on our strategic priorities. Prabu will then discuss our financial results and outlook in greater detail. We reported solid financial results in the quarter with 40 basis points of pro-forma organic growth due to the ramp-up on new and existing programs, offset by a roughly 5-point headwind from previously discussed recompete losses. First quarter adjusted EBITDA of $166 million resulted in an adjusted EBITDA margin of 9%, which reflects the impact of increased investment in the business. We expect the timing of certain program performance milestones in the second half of the year to improve margins. Transaction adjusted free cash flow of $21 million was ahead of plan as we continue to see good momentum on working capital efforts. I'll now provide an update on our strategic priorities. I want to again thank many of you for joining us at our April Investor Day where we outlined SAIC's multi-year growth strategy. As we discussed then, SAIC's expertise in integrating emerging technology positions the company to deliver profitable growth by serving our customers across five national imperatives: All-Domain Warfighting, Next-Generation Space, Citizen Experience, Border of the Future, and Undersea Dominance. These imperatives represent drivers of long-term and enduring customer demand. In order to increase value to our customers' missions and grow more profitably across the five imperatives, we will work to progressively shift our portfolio and bid into four key growth vectors: Integrated Solutions, Enterprise and Mission IT, Civilian, and Mission Advisory. And finally, to enhance our competitive positioning in the market and the value that we deliver to customers, we will prioritize investment in six portfolio differentiators: Secure Multi-Cloud, Digital Engineering, Operational AI, Secure Data Analytics, System of Systems Integration, and On-demand Solution Delivery. The four growth vectors across five national imperatives with six differentiators, the four, five, six. The implementation of our enterprise operating model, which is optimizing program execution and building a best-in-class business development organization, continues to progress on schedule. While our business's sales cycle is such that it will likely take 12 to 18 months for our strategy to more fully impact our BD results, we are seeing encouraging year-to-date progress with indicators including bid selection, bid thresholds, and submit volume. Bid selection assesses the degree to which our pipeline leverages Innovation Factory capabilities to drive differentiation and aligns with our national imperatives, growth vectors, and optimal mix of deal size. Our win rate on programs with a TCV under $500 million has been quite strong in recent years. We are focused on ensuring that our pipeline reflects a proper mix of deals in this TCV zone with larger pursuits like our DCSA One IT and Department of Treasury T-Cloud program providing measurable upside to our growth prospects. At present, our utilization of enterprise differentiators skews more heavily across our pipeline towards the higher TCV pursuits with less impact on mid-size to smaller deals. Given the correlation we see between IF involvement and win rate, our strategy will increase IF utilization over time. Bid thresholds ensure that our pricing and profitability properly reflect the value and capability we're bringing to a program. Prabu will discuss and share metrics on the improvement we have seen in recent quarters. Submit volume measures our ability to convert pipeline into submitted proposals and effectively reallocate internal investments as customer procurement schedules inevitably shift over time. We submitted proposals with a total value of over $8 billion in the first quarter. Our performance in the first quarter and the progress we are seeing gives us confidence in reaching our targeted value of submissions of $22 billion in fiscal year '25 compared to $17 billion in fiscal year '24. Of the expected $22 billion in submit value for the year, roughly two-thirds represent new business. Similarly, in the first quarter, we delivered net bookings of $2.6 billion for a book-to-bill of 1.4 with roughly 60% of the awards representing a new business. Our Space & Intelligence Business Group was a significant contributor to the strong bookings with a $444 million new business award with the U.S. Space Force and a $350 million recompete win with NASA. Relative to the multi-year goal to increase bid volume to $30 billion by fiscal year '27, we see three primary drivers behind this: greater organizational accountability to convert pipeline identified into pipeline bid, adopting enterprise-wide processes to drive standardization and increased efficiency, and investment in BD resources and talent upgrades to drive greater quality and throughput. Importantly, we intend to drive higher bid volume while also improving shot selection and margin thresholds. In other words, we expect an improvement in the overall quality of our pipeline and submissions as we increase volume. Before turning the call over to Prabu to discuss our financial results and outlook in detail, I want to thank the SAIC team for their contributions in the quarter and for their partnership in implementing our strategy. I recognize the heavy lift that many of our functions and business groups have endured in recent quarters and appreciate their dedication to our customers and shareholders. I am proud of the performance we delivered in the quarter and encouraged by the indicators of progress we are seeing. Clearly, we have some revenue and margin headwinds to overcome this year. We have taken ownership of this challenge, and our business groups understand what is expected of them. We recognize that we must balance an intense focus on near-term execution with a commitment to our long-term plan. I believe this long-term plan will be a significant driver of value creation for our employees and shareholders. Prabu, over to you.

Prabu Natarajan, CFO

Thank you, Toni, and good morning to everyone joining the call. I will discuss our first quarter financial results in greater detail and provide an update on our outlook for the remainder of the year. We reported revenue of $1.85 billion, representing pro-forma organic growth of approximately 40 basis points, as increased new business revenue and on-contract growth was largely offset by previously disclosed program transitions. Additionally, it's important to note that the prior year first quarter revenue benefited from a $30 million discrete materials sale to one customer, which did not recur this year, creating a roughly 1.5% year-over-year revenue headwind. Adjusted EBITDA was $166 million in the quarter, resulting in a 9% adjusted EBITDA margin, with the year-over-year decline largely due to increased internal investment and the timing of program performance milestones being weighted to the second half of the year. Adjusted diluted EPS of $1.92 benefited from a tax rate of approximately 18.5% and a roughly 5% decline in our weighted average share count. Transaction adjusted free cash flow was $21 million, ahead of plan, and included a $50 million year-over-year headwind due to the sale of our supply chain business in fiscal year 2024 and higher cash bonuses for the quarter. Lastly, beginning this quarter, we will be providing revenue and profitability metrics for two segments, Defense & Intelligence and Civilian. Historical results for both segments have been provided in our earnings release and presentation slides to assist with your modeling. While we are reiterating our fiscal year 2025 financial guidance for revenue, adjusted EBITDA margin, adjusted diluted earnings per share, and free cash flow, I’d like to provide some additional context around quarterly expectations and capital deployment plans. We now expect second-quarter revenue to be roughly flat year over year, assuming a similar dynamic as in the first quarter with a 5% to 6% headwind from recompete losses, offset by higher revenue from new business and continued strong on-contract growth. Second-half fiscal year 2025 revenue is expected to increase in the mid-single-digit range, with stronger growth in our fourth quarter as recompete headwinds ease. For the full year, our guidance for 2% to 3% growth includes an anticipated headwind of about 5% from recompete losses, which we expect to ease to a more normalized 2% in our fourth quarter and into fiscal year 2026. Overall, first-quarter revenue was generally in line with our plan, although expectations for second-quarter revenue have softened somewhat. We attribute this partly to the timing of certain materials revenue and to a recent normalization in government outlay trends. Our team is aware of the challenge we face this year in overcoming recompete headwinds and more difficult year-over-year comparisons to meet our 2% to 4% growth guidance. We have specific initiatives in place to drive on-contract revenue growth on programs with remaining ceiling value, of which we have many, and we are proactively engaging with customers ahead of a potentially active end-of-year spending cycle. This is a challenge that carries some risk, but it is one we are committed to achieving. We anticipate our margins to follow a similar pattern, with lower margins in the first half of the year and improvement in the second half driven primarily by the timing of program performance milestones and investments. We repurchased $81 million of shares in the quarter. As discussed during our Investor Day, our plan assumed we would repurchase approximately $350 million to $400 million in shares this year. We now intend to target the higher end of that range while maintaining sufficient capacity for capability-focused mergers and acquisitions. Our confidence in our capital deployment strategy stems from the belief that we can consistently and profitably grow this business over the long term. As Toni mentioned, we are focused on shifting our pipeline and portfolio over time to align with market areas that value differentiation. We are observing a favorable shift in the margin profile within our backlog and pipeline, reflecting the more stringent bid thresholds we've established, and we expect this mix improvement to continue as our pipeline and strategy align over time. In closing, we remain focused on implementing our strategy to drive long-term profitable growth for SAIC while intensifying our execution efforts to best address the revenue challenges we face this year. We are confident that our strategy will enhance SAIC's competitiveness in the market and foster more consistent, predictable growth in the long term. While our near-term results may not fully capture the impact of the strategy and our execution, we will remain disciplined in our capital deployment strategy and have the capacity to increase our investment in the company through our share repurchase program. I will now turn the call over to the operator for Q&A.

Operator, Operator

Your first question comes from Cai von Rumohr with TD Cowen. Please go ahead.

Cai von Rumohr, Analyst

Yes. Thanks so much and impressive bookings, guys. Could you give us some update in terms of the Vanguard recompete and any kind of recompete we're still looking at over the second half? And maybe the timing because I know the Vanguard is split into several pieces.

Toni Townes-Whitley, CEO

Do you want to start that?

Prabu Natarajan, CFO

Sure. Hi, good morning, Cai, Prabu here. So I'll take the first part of that. On Vanguard, I would say, we're in process right now. Our expectations for the timing of the award as well as potential revenue impacts have really not changed. We see minimal impact this year from any recompete on Vanguard. And that's probably the single largest one for the year that's probably worth calling out. There is an outside chance that we may get an RFP on one of our Army S3I programs, but it's hard to say right now at this point that may be Q4 of this year or Q1 of next year. So those are probably the two largest ones worth calling out.

Toni Townes-Whitley, CEO

Yes. Could you give us Cai? If you look at the recompete, I'm sorry, Cai, go ahead.

Cai von Rumohr, Analyst

I was just going to say, could you give us some sense of the timing of when you might expect a decision on Vanguard and S3I?

Prabu Natarajan, CFO

It's safe to assume probably starting in the second half of this year, I would say, probably biased towards the end of the fiscal year. So that's probably our best estimate right now, Cai.

Cai von Rumohr, Analyst

Okay.

Prabu Natarajan, CFO

And that would be true for both, correct? I mean, really for S3I as well, and we won't have a clear sense until the end of the fiscal year, Cai.

Cai von Rumohr, Analyst

Got it. And then the last one, Prabu, you mentioned that the margin in your backlog is stronger than the margin you're booking. Can you give us any kind of that's the first time I think you have mentioned that. Are we talking about 10, 20 bps? Are we talking 40, 50 bps? Can you give any kind of quantification or color on the increment?

Prabu Natarajan, CFO

Yes, good catch, Cai. We didn't mention that, and this is the first time we're providing more qualitative information on the margin implied in the backlog and the pipeline. We've established stringent bid thresholds, and we are seeing positive impacts on the bids that are going out, as well as the bids we're currently winning, where margin rates are increasing. Generally, they are higher than the numbers you mentioned in your question, which is about all we can disclose. We are observing this across all contract types, including our cost-plus programs for customers willing to pay for differentiation, as well as our fixed-price and time and materials work. It is important to note that we are strategic in our bid selection, but we are experiencing higher margins coming through both our pipeline and backlog. This is going to be a multi-year journey for us, and hopefully, this marks the beginning of a new and improved trend.

Cai von Rumohr, Analyst

Thank you very much.

Prabu Natarajan, CFO

Sure. Thank you, Cai.

Operator, Operator

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

Jason Gursky, Analyst

Hi, good morning, everybody. Probably just wanted to make sure I heard you right in the prepared remarks about M&A and capabilities and maybe you could just kind of talk us through what the M&A strategy is at this point and what you might have been referring to there. Thanks.

Prabu Natarajan, CFO

Hi, Jason, good morning. Thanks for the question and I'll certainly let Toni chime in here as well. But really big picture, not a lot of change in our M&A posture. I think for a couple of years now, we've signaled our preference for technology-based tuck-ins and capability-based tuck-ins. And we're seeing a reasonable pipeline of things out there, but I don't believe it's all that exciting right now. It still tends to be a very seller oriented market. And so we're just being very disciplined about what we're looking at. I think given the strategy refresh we've got going and our pipeline is starting to reflect the strategy. The reality is our tuck-ins now become acutely more sensible in terms of pivoting to where the strategy is pivoting us and that's how we're simply thinking about it, not really scale-based M&A. Toni?

Toni Townes-Whitley, CEO

And Jason, I guess, I would just highlight, we've recently hired a Head of Corporate Development she's in and we are tightening our processes, obviously in terms of reviewing the market, assessing against a strategy that includes not only the hardening of our current enterprise differentiation. Think about the fact that we've identified where we believe our technology differentiation is. Hardening that capability, but also looking as part of our strategy into the advisory consultancy and our civilian business, which are also growth targets in terms of where there would be tuck-in capability there. So we've expanded our aperture a bit. We've gotten very tight on our process. And as Prabu has indicated, the market hasn't been flushed with that many relevant opportunities to date, but we are diligent in our process and looking forward.

Jason Gursky, Analyst

Okay, great. And then if I might, just my follow-up question. Talk a little bit about what you're seeing for the company on the opportunity side in Europe. That's a continent that seems like it's going to have a prolonged upcycle here in spending. And just kind of curious if you see any opportunities over there that could potentially be additive to your expected growth rates here over the next few years.

Prabu Natarajan, CFO

Hi, Jason, I'll take the first part of that. See, big picture, I'd say our opportunity set is very closely aligned to where the customer priorities remain and that means if they see more up-tempo in that part of the world, we are likely to follow them there. I'd say specifically, as we think about what will create real differentiation in that market, I think we very much follow the strategy and the pipeline to say, are there interesting tuck-in opportunities internationally, just as we are looking at those domestically to say, are there specific capabilities that will be more differentiated in that particular theater. So I'd say by and large, kind of sticking to our knitting at this point in terms of opportunities there.

Toni Townes-Whitley, CEO

I think, yes, primary statement that Prabu made, they're customer-driven secondary statement capabilities enabled, right? And so if we're that those two will trump a geographic location initially in our thesis. And look, we're having the conversations, right? We're having the conversations internally to look at our strategy that's part of having a multi-year strategy is our ability to refresh and to considerably consider all of the opportunities that come with that strategy. So we're obviously looking, where our heads up and out, but to Prabu's point, versus just taking a geography and determining if it is a good place for us to do business, we're much more disciplined around where our customers are and where our capabilities need to be.

Jason Gursky, Analyst

Great. Thank you.

Prabu Natarajan, CFO

Thanks, Jason.

Operator, Operator

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

Matt Akers, Analyst

Yes. Hi, good morning, everybody. Thanks for the question. Yes, good morning. Thanks for providing the segment data this time. I had a couple of questions that I guess just if you think about the mix between your Defense and Intel kind of around three-quarters of the business and how you think of the right mix going forward. Is that the right mix or do you think you'll kind of move more toward one segment or the other? And then on the margin side, I guess, between the two segments, as you think of kind of the 10% long-term target, which of those two segments kind of has the most upside potential?

Prabu Natarajan, CFO

Hi, Matt, I'll probably take the quantitative part of this first. In terms of the two reported segments that we have out there, I think it's fair to say that we would expect both segments to grow over the long-term, data point one. Data point two, by and large, the Civilian business is where we have the predominant mix of fixed-price and T&M work, not surprising for that market. And therefore, we would expect us to continue to improve the mix relative to the Defense and Intel market. I think the third data point we would say is, as we think about where the optimal mix is, we're not targeting a specific long-term mix, but I think given the potential in that market and the strategy pivots that Toni has referenced a few times, the reality is we would expect the Civilian business to grow as a relative share. And candidly, I wish I could sit here and say that the margins are only going to improve in Civilian. Our business group teams recognize that we have to improve margins across the portfolio and that includes margins in our cost-plus programs, which is where our Defense and Intel business have to continue to pound the pavement here to ensure that we are improving margins there as well on the mix side. Toni?

Toni Townes-Whitley, CEO

No, I think earlier questions regarding our bid profile illustrate how we will assess and shape our growth. Our approach to bidding in these areas will be more strategic moving forward. We view growth in the Civilian sector as a key strategic focus, and we are even considering launching an advisory capability to further enhance that growth. Our efforts in Defense and Intelligence represent our value-creation strategy, and we need to advance our position in that sector. I believe there remains substantial growth potential in both areas. Additionally, as Prabu mentioned, we anticipate growth across all five of our business groups. That is the key takeaway. We will be concentrating efforts on capturing a larger share of the addressable market in the Civilian sector over the next three years.

Matt Akers, Analyst

Great. I'll leave it there. Thank you.

Prabu Natarajan, CFO

Thanks, Matt.

Operator, Operator

Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Sheila Kahyaoglu, Analyst

Good morning, everyone, and thank you for the time.

Prabu Natarajan, CFO

Good morning, Sheila.

Sheila Kahyaoglu, Analyst

Maybe my first question, just continuing on the segment discussion, and thank you for that. If we could just maybe focusing on the shorter-term with the defense value proposition and defense and intelligence margins, they contracted year-over-year, which I guess part of it was attributed to the divestiture. But how do we think about the profitability profile longer-term here of the two segments? You kind of touched on it, Toni, a little bit earlier, but should we expect a wider divergence?

Prabu Natarajan, CFO

Hi, Sheila, Prabu here. I'll take the first crack at this one. Big picture, margins came down in Defense and Intel compared to the first quarter of last year. Part of that is due to the timing of EACs, which are more focused on the second half. Additionally, we are making investments across the business, which we've discussed in our year-end earnings call and our Investor Day. That is part of the reason for the decline in margins in Defense and Intel relative to the first quarter of last year. Overall, we have a higher mix of cost-plus work in our Defense and Intel business, but we do expect our EBITDA and EBIT margins to improve in that area. As I mentioned earlier, we have a significant amount of cost-plus work in our pipeline, and we are seeing margin rates increase there. In terms of the relative spread, the Civilian business includes time-and-materials and fixed-price work, and their EBITDA and EBIT margins are generally in the low double digits. We expect to see margins continue to rise in our Civilian business as we expand our presence in that market. Therefore, I anticipate that both reportable segments will improve their margins over the long term. In reality, it may be somewhat easier to achieve that in Civilian given the current mix.

Toni Townes-Whitley, CEO

I think the only thing I would add to that, Sheila, would be the investment thesis was a return relative to inserting more differentiation, both in terms of our current programs as well as our bid cycles. So as we move into more differentiated space, the expectation is that, that plus contracts mix is what's going to drive the more accretive revenue as well as introducing advisory capability, which has a different profile, as you know, in terms of its accretive nature. So it's really those three aspects that are going to drive the growth, and on top and bottom over the next few years.

Sheila Kahyaoglu, Analyst

Sure. Now that advisory capability definitely seems really neat. Maybe on the organic growth, just talking about more of the quarterly cadence comments probably you talked about in your prepared remarks. Just basically flat in the first quarter and then ramping to mid-single digits and rather Q4 weighted. Can you talk about the drivers of that growth outside of timing of recompete losses and what are the biggest programs that ramps?

Prabu Natarajan, CFO

Sure. In terms of organic growth, we anticipate a flat performance in the first half, with an increase to mid-single-digit growth in the second half of the year. Some material sales expected in Q2 might shift to Q3, but we're making every effort to move things forward as we approach the latter half of the year. Key growth drivers from the first half to the second half include our DTAMM win, which we highlighted during our year-end call, and is expected to increase throughout the year, particularly in the second half as the team completes the task orders for that program. The T-Cloud program is gaining momentum, though it's still in the early stages, and we expect it to contribute over 1% to our revenue growth this year compared to last. GMASS, which we won in Q3 of last year, is ramping up, and we anticipate progress there as well. Additionally, we have a recent win worth over $200 million with the Air Force that we will discuss in the coming weeks, which should also drive new business growth. Separately, we estimate around 5% in recompete losses for the year, but we're also expecting on-contract growth to be about 3% to 5% above last year's figures. When considering recompete losses alongside increased on-contract growth and new business wins, we feel confident that our growth will fall within the 2% to 3% range, though it may be more concentrated in the latter part of the year compared to our initial estimates. Toni, do you have anything to add?

Sheila Kahyaoglu, Analyst

Sure. Thank you so much.

Toni Townes-Whitley, CEO

Thank you so much.

Operator, Operator

Your next question comes from the line of Seth Seifman with JPMorgan. Please go ahead.

Seth Seifman, Analyst

Hi, thanks very much and good morning, everyone.

Prabu Natarajan, CFO

Good morning.

Seth Seifman, Analyst

I wanted to ask, I think probably you made some comments in the script about a normalizing environment for government outlays as a reason for some of the slowness that you're expecting in the second quarter. And I wonder if you could talk a little bit more about how the environment might be changing, what's driving it? Why that doesn't alarm you a little bit more about the second half? And yes, if you can address that. Yes.

Prabu Natarajan, CFO

Yes. I'll do that, Seth, and Toni, if I missed something, please add in here. Seth, as we sort of began this our fiscal year here, we began to see some softening in O&M outlay. I think you all saw the data that came out of the DoD. And now we saw that weakness for maybe two or three months and then it began to change again the last time we saw the O&M outlay data. So I think what we're really signaling is a softness that we saw in the outlay data to start the fiscal year. And I think part of the caution heading into the second quarter is that we would like to sit back and see if the April trend is a one-month blip in the radar or actually a reversion to what we saw last year. And just as a reminder, outlays remained incredibly strong through the course of last fiscal year and caused us as well as many in the industry to continue to beat consensus numbers very handsomely. And we've been signaling for a couple of months now that when the outlay environment returns to something that is more normalized, we are likely to see some impacts on the revenue profile. So the reason it doesn't alarm me is we do have a budget in place for GFY '24 and therefore we do expect O&M outlays to pick up again sometime this year. But the reality is we are being cautious because the last time we saw outlays pick up, we didn't always see revenue come through right away, but we saw a little bit of a lag about a three to six-month lag. So I think we're just being cautious about it. And as I've said, we'd like to stay calibrated with our investors around what we're seeing in the market. So we're not alarmed because we don't think it's a long-term trend, but we are certainly cautious given that it may have some temporary impacts on our revenue profile and that's simply all we're signaling in the script, Seth.

Seth Seifman, Analyst

Alright. Okay. Okay, great. Thanks. And then maybe just to follow up on that point. You also mentioned potentially an active end-of-year spending cycle. And so despite maybe some of this unevenness in the outlays, it sounds like maybe you are looking for a fair amount of award activity as we exit the year. And I'm wondering the extent to which that is tempered at all by the potential continuing resolution through the last part of your fiscal year and the election.

Toni Townes-Whitley, CEO

Seth, let me just jump into that particular part of the question. We have worked with our government relations team to get a pretty clear signal on what will be an end-of-fiscal-year sort of spending cycle. And that happens, as you know, every fiscal year we do see and we've obviously done the research down to our customer set. We do see where agencies across the various government sectors are going to be active at the close of the fiscal year. In fact, in advance of what may be either concerns, trepidation, and/or not having a clear signal for the next continuing resolution. So we've got a plan in place and a fairly robust playbook to make sure that we are part of sort of sweeping in the end of the fiscal year across every one of our business groups. In fact, we targeted it down to specific program levels. So that's partially an offset when Prabu talks about H2, the Q3 component of H2 for us, we are looking to see some lift in that regard.

Seth Seifman, Analyst

Great. Excellent. Thanks very much.

Prabu Natarajan, CFO

Thank you, Seth.

Operator, Operator

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

Bert Subin, Analyst

Hi. Good morning, and thank you for the questions.

Prabu Natarajan, CFO

Good morning, Bert.

Toni Townes-Whitley, CEO

Thanks, Bert.

Bert Subin, Analyst

Maybe just following up to Seth's question there. It sounds like you're somewhat cautious on the spending environment, but we're now in a position with appropriations having taken place, supplemental spending bills in the past, and that should drive incremental improvement from the first quarter. Assuming that does happen, how do you go about pushing for more on-contract growth maybe above the 3% to 5% levels you mentioned and just broader new task order wins to help provide some padding in what's likely to be a more uncertain FY '25 setup where you're still going to be awaiting some of those larger awards?

Toni Townes-Whitley, CEO

Hi, Bert. Thank you. Good question. Look, as Prabu mentioned, we've got specific programs that we're looking to ramp and he mentioned a number of them, even programs that we've had for over a year here at DCSA, One IT, AOC, Falconer, and others. But fundamentally, we have a playbook around on-contract growth that we are working across each one of our business groups, that actually gives, if you will, a template around different types of contracts, how we grow off of those contracts, whether it be fixed price, T&M, cost-plus, how we introduce differentiation. We're starting to measure the differentiation in our current programs. And we know about a quarter of our programs right now. Our larger programs that we deliver have differentiation from our factory. We are looking to drive that systematically beyond the quarter to the majority of our programs that we are delivering as many as possible. So we're starting to measure where, if you will, our enterprise tech and other forms of differentiation occur on existing contracts and how do we introduce that differentiation as part of our on-contract growth. And then probably mentioned even in terms of understanding where our customers are putting their focus, in terms of growing their programs for their various missions. So we have a pretty tight playbook that we're working. We've just instituted for the rest of the fiscal year that we'll be driving this on-contract growth with the goal of starting as soon as possible. As you heard Prabu say, moved left, we all understand that on-contract growth has to start right now to have the annualized impact that we need.

Prabu Natarajan, CFO

And Bert, the only thing I would add to that response would be that we are not relying on a lot of new business wins in the second half of the year to make the 2% to 3% guide we have out there. I think our focus acutely remains on contract growth and to the extent we can upsize the 3% to 5%, it's likely to help us bolster what we deliver as underlying performance. We also have $24 billion in backlog. And so there are many, many large contracts we have with ample amounts of ceiling and the team is laser-focused on delivering additional volume through these large ceiling programs.

Bert Subin, Analyst

Got it. As a follow-up, regarding recompete challenges, you mentioned several headwinds this year. NASA appears to be a key area where these losses have occurred, starting with Aegis, then OHMs, and now possibly NASA EAST. My question has two parts. First, is there a possibility of retaining some work under NASA EAST, or is that included in the anticipated recompete challenges? Second, how confident are you that you have adjusted your strategy with NASA to reverse the outcomes of these pursuits?

Prabu Natarajan, CFO

Do you want to take it or I will take... Hi, Bert. Thank you for your question. We did successfully secure a NASA recompete for our SMAEC program, which contributed approximately $350 million to our bookings in the first quarter of this year. So, that definitely counts. Regarding the NCAPS program, we currently anticipate that we won't experience significant revenue disruptions from NCAPS in this fiscal year. However, we are being very cautious about how NCAPS may affect our revenue next year, and that consideration is fully incorporated into our 2% to 4% guidance. Additionally, mission suitability is an area where our team has dedicated significant time to assess our submissions against the evaluation criteria. We're focused on this, and we hope that SMAEC indicates a positive shift in our capability to improve that segment of our portfolio.

Toni Townes-Whitley, CEO

I agree with Prabu regarding our mission suitability and the unique strengths of our factory that appeal to NASA customers. We've conducted thorough analyses and loss reviews to identify where we fell short, both in the solutions we offered and in our execution. These factors contributed to our unsatisfactory position with NASA during the recompete process. However, we are making progress in both areas, as Prabu noted, especially with our recent recompete win of over $300 million. Additionally, our current contract is benefiting from significant differentiators in program delivery. NASA continues to present opportunities, and we are actively assessing where to position ourselves. We have several major bidding opportunities coming up in the next two to three quarters.

Bert Subin, Analyst

Thank you.

Prabu Natarajan, CFO

Thank you.

Operator, Operator

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

David Strauss, Analyst

Thanks. Good morning.

Prabu Natarajan, CFO

Hi, David.

David Strauss, Analyst

I wanted to return to the growth dynamics between the first half and the second half of the year. You mentioned mid-single-digit growth for the second half. Will most of that growth really materialize in the fourth quarter? The comparison for Q3 seems quite challenging, while Q4 appears to have a more favorable comparison based on work days. Is the situation essentially that we see minimal growth in Q3 followed by significant growth in Q4?

Prabu Natarajan, CFO

Yes. David, I think you’re onto something. We are indicating that we expect flat performance in the first half and mid-single-digit growth. You’re right that the comparisons get tougher in the second half of the year, which is why we are being cautious as we approach this upcoming report. The growth model we have in place will take some time to gain momentum throughout the rest of the fiscal year. Our teams are working hard to generate revenue, and I hope we can start to pull revenue forward beginning in Q2, exceeding what we currently have in our forecast, with improvements in Q3 to avoid a significant spike in Q4. This is our operational plan, but we don't always control the timing of procurement volume or moving revenue forward. Therefore, we are being careful in our assessment of the first half compared to the second half, as we don't want to rely on a strong performance in Q4, which we know will be very challenging.

David Strauss, Analyst

Okay. Got it. And then on cash flow, what is kind of the cadence on cash flow look like the rest of the year? When does the receivable benefit that you had in Q1 reverse out?

Prabu Natarajan, CFO

Yes, that's a fair question, David. In terms of the first quarter, we reported $20 million to $22 million of free cash flow. If we adjust for the increased incentive compensation accrual and the sale of the supply-chain business, we would be close to where we were last year, roughly $70 million to $75 million in free cash flow. Typically, our free cash flow is more weighted in the second half of the year, and this year follows that usual pattern. The strong collections we had from the second quarter of last year through the first quarter of this year should help maintain that trend. However, cash flow usually has a greater impact in the second half. Our cash flow is also influenced by our pay periods, and there is usually an additional pay period every other quarter, which affects our cash flow timing. Nonetheless, we do not anticipate any surprises for the year. Our collections are on track, and it mainly concerns the timing of specific one-time items, including cash bonuses in the first quarter. I hope that answers your question.

David Strauss, Analyst

Thanks very much.

Prabu Natarajan, CFO

Sure.

Operator, Operator

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

Jack Wilson, Analyst

Yes. Good morning. This is Jack Wilson on for Tobey. I'm sort of continuing on sort of the cadence trend, can you speak to sort of any changes in sort of the historical seasonality we could expect to see in '26 and '27, given sort of the ramp timeline of some key contracts?

Prabu Natarajan, CFO

So let me, Jeff, good morning. Let me try and take the first half, and if it's not responsive, do let us know, we're happy to clarify. Kind of a big picture, as we said, we are expecting the headwinds from our recompete losses to, I'd say, somewhere down to about the 2% rhythm at the end of the year, at Q4 specifically. That's the assumption we have going into FY '26. Last year, FY '24 was a more normal recompete last year cycle for us. We're about 2% and we delivered about 7.5% growth in last year. So I would say, if recompetes are back to that 2% to 3% rhythm, which is expected to be at Q4 and if that trend continues into next year, we would expect this business to grow, in our current guide is 2% to 4%, but again, depends on frankly conversion of outlays into revenue heading into next year. But we also have a robust pipeline out there. As we mentioned in the prepared remarks, we submitted about $8 billion of volume in Q1. We submitted $17 billion in all of last year combined. So we are certainly on pace to get to about $22 billion. And I would say the vast majority of that, at least two-thirds of that is inflecting to new business. So I think part of the expectation is that while new business is not something we're relying on for this year, we are expecting new business wins to continue to ramp and provide some support for our organic growth rate thesis as we head into '26 and '27.

Jack Wilson, Analyst

That's helpful. And then maybe as a quick follow-up, is it possible to quantify sort of in what percentage of the bids you're submitting you're using AI as a differentiator?

Prabu Natarajan, CFO

That's a good question. I don't know that we are using AI as a differentiator for the bids that are going out the door. We are certainly using the tools inside our business development organization as we're reviewing the proposals that are coming into the door here. There is a handful of bids that are more AI-oriented, operational AI-oriented in the pipeline, and we're likely to talk about it when something comes out.

Toni Townes-Whitley, CEO

Yes. I would just say, think about AI, both in terms of how we use it to bid and then what is actually in the solution set. And operational AI that we talk about differentiating on, which is AI that we say, operational is fairly unique in that it is sort of a lightweight AI. It's got form factor considerations, it's air-gapped for certain environments for classified environments. That is usually combined with some of our secure data capability on our platform on our Koverse Data Platform. And those bids, we are measuring our ability to insert those and we are pleased to see that capability is in our largest bids. It is refined in the majority of our bids that are our top largest revenue bids that we are in fact leveraging those kinds of capabilities. What we have to do again to be balanced is to make sure that we are systematically driving that capability into all of our bids. And so we're measuring both aspects, revenue and account.

Jack Wilson, Analyst

Thank you very much.

Operator, Operator

Our final question today comes from Cai von Rumohr with TD Cowen. Please go ahead.

Cai von Rumohr, Analyst

Thank you. This has been partially addressed, but you recorded a $79 million MARPA benefit in the quarter. If I remove that, it appears that the days sales outstanding increased from 45 to 50, indicating a notable decline. Do you anticipate the MARPA will be zero for the year, meaning that the $79 million will be reversed, or will that play a role in achieving our cash flow target?

Prabu Natarajan, CFO

Hi, Cai, I appreciate the question. Our guidance for free cash flow and by definition, operating cash flow excludes our borrowings from our MARPA Facility. So we're actually normalizing for that and we're not including it in our operating cash metrics. I think in terms of the DSO questions, it's very hard to measure DSO on a quarterly basis. What we tend to look at is sort of our average daily collections volume. And if I look at the trend in our average daily collections, it's remained very, very strong over the course of the last six or nine months and it remained very, very strong at Q1. So yes, DSO went up a little bit. The reality is that we are pretty comfortable with our rhythm on collections and no concerns around the full year, but MARPA is not in our adjusted operating cash or our free cash flow metric.

Cai von Rumohr, Analyst

Terrific. Thanks so much. Good answer.

Prabu Natarajan, CFO

Sure. Sure.

Operator, Operator

Ladies and gentlemen, that does conclude our question-and-answer session. And with that, that does conclude today's conference call. Thank you for your participation. And you may now disconnect.