Earnings Call Transcript - SAIC Q3 2021

Operator, Operator

Good afternoon, and welcome to SAIC's Third Quarter 2021 Earnings Call. At this time, I would like to turn the conference over to Shane Canestra, SAIC's Vice President of Investor Relations. Please go ahead, sir.

Shane Canestra, VP of Investor Relations

Good afternoon, and thank you for joining SAIC's Third Quarter Fiscal Year 2021 Earnings Call. My name is Shane Canestra, Vice President of Investor Relations. And joining me today to discuss our business and financial results are Nazzic Keene, SAIC's Chief Executive Officer; and Charlie Mathis, our Chief Financial Officer.

Nazzic Keene, CEO

Thank you, Shane, and good afternoon. As reported in our press release today, SAIC's third quarter results continue to reflect SAIC's strong financial performance and the continued building of momentum through our second straight quarter of highest book-to-bill and backlog in our 7-year history. Over the past few months, we have focused on the health and welfare of our employees, assisting our customers as they rapidly transition to a more virtual environment and continuing the strong program execution that SAIC is known for. As these efforts continue, we've also taken strategic, organizational and leadership steps that are foundational to the long-term success of SAIC. We are building on our past while positioning for the future. I am very pleased with the progress we've made, but before I discuss how we're shaping our future, let me briefly discuss our third quarter results. SAIC continues to deliver strong revenues and profitability, excellent cash flow generation and outstanding business development results. Internal revenue growth for the third quarter, excluding the impact of COVID-19, was 3%, our third consecutive quarter of organic growth. And on a year-to-date basis, again if you exclude the temporary impacts of the pandemic, organic growth was 4%. While balancing investments for the future and providing a return for our shareholders, we delivered another strong quarter of profitability and cash generation. Our record high book-to-bill ratio and backlog was a result of the refreshed organic strategy, coupled with our ability to leverage the capabilities and market access from our recent acquisitions.

Charles Mathis, CFO

Thank you, Nazzic. SAIC delivered another quarter of strong performance across a variety of business development and financial measures while continuing to build momentum for the next fiscal year and beyond. SAIC's results for the third quarter of fiscal year 2021 reflect solid revenues, strong profitability and free cash flow and another outstanding quarter of contract awards, resulting from effective strategy execution and investments in customer priority areas. Let me start with our strong business development results. Net bookings for the third quarter were approximately $5 billion, translating to a quarterly book-to-bill of 2.7, setting another historically high book-to-bill after setting an all-time high last quarter of 2.6x. The most significant contributions to our quarterly bookings are noted in our press release today, but I would also note the significant amount of new business awards, further proof of a building business development momentum. While producing exceptional bookings in the quarter, contract submittals continued to increase as well, setting another record for an all-time high in SAIC's value of submitted proposals. At the end of the third quarter, the value of submitted proposals was $22.1 billion, up $1.5 billion from the end of the second quarter. Also, for the second consecutive quarter, we have the highest amount of submitted proposals in our history, and approximately 80% of the value of submitted proposals is for new business opportunities. At the end of the third quarter, SAIC's total contract backlog stood at approximately $22.6 billion, up 16% from the second quarter and 55% from a year ago. Let me now turn to financial results for the quarter. Our third quarter revenues of approximately $1.8 billion reflect total revenue growth of 12% with generally flat year-over-year organic contraction of 1%. On a year-to-date basis, revenues reflect organic growth of 1%. Negatively affecting third quarter revenues were approximately $60 million of program-related COVID-19 headwinds, resulting from the same factors that impacted the first two quarters. Excluding the COVID-19 headwinds, organic revenues grew by 3% in the quarter and 4% year-to-date, in line with our expectations for the year prior to the onset of the pandemic.

Nazzic Keene, CEO

Thank you, Charlie. I want to take just a moment to thank Charlie for his leadership over these past four years. Charlie, you've helped transition SAIC from a $4.5 billion company when you started to the over $7 billion company it is today. Your steady hand in leadership, your focus on our shareholders, and your partnership and guidance to me have been a true value to SAIC. We wish you all the best in retirement. Now focusing on our future. We recently announced the appointment of Prabu Natarajan as Charlie's successor as Chief Financial Officer, effective January 4. We are extremely excited to have Prabu join the leadership team given his impressive track record of success as a finance executive in the aerospace, defense, and technology markets as well as his proven ability to successfully execute on growth strategy. He will bring tremendous value to our team as we execute our long-term growth strategy, advance our positions in key markets and provide value creation for our shareholders. Operator, we're now ready to take questions.

Operator, Operator

Your first question comes from the line of Louie DiPalma with William Blair.

Louie DiPalma, Analyst

Nazzic, your team has been on fire in terms of capturing 4 of the largest contracts in the government IT services industry. The bookings for your 8 peers were down by an average of 21% while yours were up by 127%. In addition to the bookings that you mentioned in your prepared remarks, we learned that the Army in November chose SAIC for the hotly contested $1.3 billion Revolutionary Information Technology Services contract. You didn't mention this RITS award in your prepared remarks. So I have a 2-part question. First, are there any details that you are allowed to share for the Army RITS contract? And secondly, investors want to just know how these strong bookings translate into next year's growth outlook. I think on the last call, you provided some commentary about fiscal 2022. So just if you have any updated thoughts on the unofficial 2022 outlook, that would be great.

Nazzic Keene, CEO

Thank you for the question. We are optimistic about RITS, but since it is still an open procurement, I can't share any further details at this time. We closely monitor our competitive environment, and we're proud of our business results and development, which set us up well for next year. Although we won't provide guidance for the upcoming year until our March call, we are currently engaged in our annual planning and strategic investment decisions. In March, we will share more details, but the momentum we are seeing from our ability to protect our recompetes and secure new business gives us confidence going into next year.

Operator, Operator

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

Gregory Konrad, Analyst

It's actually Greg on for Sheila. I wanted to follow up on your comments about deleveraging. You mentioned you are ahead of the 3.0 target you set for next year. How much more debt do you need to pay down? And how are you considering capital deployment after deleveraging?

Charles Mathis, CFO

Thanks. Good question there. So this year, we've laid out a plan at the beginning of the year to $75 million of mandatory debt repayment and $325 million of voluntary payments. We made $50 million of the mandatory payments through Q3, and we've paid all of the voluntary debt, $325 million, already. So we're ahead of schedule from that standpoint. The company will certainly have capacity for other capital deployment activities next year in addition to paying down debt. And if cash flow continues to be strong as it has been, this could happen sooner than previously expected.

Gregory Konrad, Analyst

And then just one kind of...

Charles Mathis, CFO

I'm sorry.

Gregory Konrad, Analyst

I'm sorry. Just one quick housekeeping. I mean if we look at the guidance, you talked about $250 million impact for COVID for the year. I think you're at $160 million. Is there something that steps up in Q4? Or is that just a little bit of conservatism?

Charles Mathis, CFO

Yes. It's a little bit of being cautious due to the resurgence of the cases of COVID that we've been seeing.

Operator, Operator

Your next question comes from the line of Jon Raviv with Citi.

Jonathan Raviv, Analyst

I'm just following up on that question. Just looking at the full year sales guidance, it implies a pretty big organic step-up in Q4. You also have COVID conservatism baked in there. So I'm trying to understand, like what takes you from negative organic growth to pretty good positive organic growth in Q4?

Charles Mathis, CFO

Well, you are right that, that is the expectation, that Q4 will have strong growth in there organically. And as you see, the momentum has been building. And I would just say that we had some challenges as far as the revenue goes. A few of the new business programs that we won earlier in the year have not ramped up as fast as we expected. There's a tremendous ongoing effort to transition and ramp up these programs, but the environment with COVID has been challenging. So we're not able to get to the higher end of that revenue forecast that we were hoping for because of this slow ramp-up. But Q4 does look to be strong, that sets up with all these bookings, historical bookings we have. It sets up next year to, I believe, be quite robust.

Jonathan Raviv, Analyst

Thank you for the fiscal year '22 guidance. I have a quick follow-up regarding cash flow as we approach year-end, particularly concerning the multiyear cash flow goal you mentioned and that you will discuss with Prabu. Could you share any updated insights on trends for fiscal year '22 and the aim for achieving the sustainable $550 million?

Charles Mathis, CFO

Thanks, Jon. Well, I can say we're very pleased with the cash generation to date, $470 million, only $30 million shy of the full year target of $500 million we talked about earlier. I would say that as far as the expectations of the $1 billion over the 2 years, as of now, that expectation has not changed. So we would still be there.

Jonathan Raviv, Analyst

Thanks, Charlie, and congratulations.

Charles Mathis, CFO

Thanks, Jon.

Operator, Operator

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

Seth Seifman, Analyst

There has been really impressive growth in the backlog over the last two quarters. When examining the backlog, considering what's included and its implications for the future, particularly regarding the customer mix, contract type mix, and the adjusted EBITDA margin, what can you share about these aspects in relation to the growth of the book of business over the past six months?

Nazzic Keene, CEO

This is Nazzic. I'll try to provide some additional details. We'll share specific information about next fiscal year in the March timeframe. As we consider our recent business wins and retention, it aligns well with our strategy from the last couple of years. Our business development growth and bookings have been driven by a focused strategy of diversifying our portfolio, as well as our work in engineering and IT. Our recent acquisitions have strengthened our portfolio and solutions. We are pleased with the momentum we are seeing, which is consistent with our focus on core markets and areas that drive our solutions. I must also highlight the exceptional talent we have at SAIC.

Seth Seifman, Analyst

And kind of consistent with the margin goals that you guys have laid out in the past?

Nazzic Keene, CEO

We are not going to provide that guidance until we reach the March timeframe, but it is a consistent portfolio. This is likely the best way to consider it.

Seth Seifman, Analyst

Okay, great. As a quick follow-up for everyone across all sectors, should we anticipate that the April quarter will experience another impact from the virus, possibly not improving until the second half of the year when widespread vaccine distribution occurs, and then progressively moving forward through fiscal '22?

Charles Mathis, CFO

Yes. So it's a good question. So we think it's a bit premature for us to certainly quantify any type of impact COVID for next fiscal year. I think that's what you're asking. Given the large number of cases recently, it's not too much of a stretch to say that we do see it going into next year. We don't know how soon or how well it will last. But it would go into next year, we believe. And we're continuing to watch it closely.

Operator, Operator

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

Daniel Flick, Analyst

This is Dan on for Cai. Would you mind updating us on the expected timing for some of your bigger upcoming recompetes, particularly what's left of AMCOM and NASA NICS and Vanguard?

Nazzic Keene, CEO

Sure. This is Nazzic. So on AMCOM, as you know, we won the first one out of the chute for that recompete and very pleased about that. And there's 3 significant ones remaining. And we believe that the first one of those 3 will be awarded in the December-ish timeframe. So hopefully, over the course of the next few weeks. And the remaining 2 of those large ones will be in the January into March, April timeframe. It's what we understand to be the case now. So those are certainly a big chunk of our recompete portfolio for next year. NASA NICS is summer of 2021. So we've got several months there. And the other big one is the recompete of the PB MRO and our supply chain portfolio. Those really are the most significant recompetes as we go into '21. Fiscal year '21 will also be a lighter recompete year for us. So every year has a little bit different profile. This was a more normative year this fiscal year that we're in. Next year will be a little bit lighter. So that also bodes well for being able to invest in driving growth in the out years as well. Does that answer your question?

Daniel Flick, Analyst

Yes, that’s very helpful. Can you provide some insight into booking prospects for the fourth quarter and possibly the next few quarters? It has been very strong, but is there a point where that might slow down? Are you capturing more business than you initially anticipated?

Nazzic Keene, CEO

Well, I think...

Daniel Flick, Analyst

Anything there.

Nazzic Keene, CEO

I would describe bookings as inconsistent, which is simply part of the business. However, as Charlie mentioned, due to the number of proposals we have submitted and the momentum we've gained, we are confident that we will see strong bookings for at least the next couple of quarters.

Operator, Operator

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

Tobey Sommer, Analyst

What are your updated thoughts on the small impact of COVID, considering the buyers' outlook for next year? Is it a matter of demand disruption or demand deferral, and how might that be recouped in the future?

Charles Mathis, CFO

Thanks, Tobey. So again, I just reemphasize the areas that impact us continue to be supply chain business, and that's due to the reduced operational tempo. Whenever that gets back, that will turn around, the reduced training for FAA and then the ready-state labor in the intel community. Those are the 3 areas that are having the majority of the impact on us, and the supply chain is the area that has the biggest revenue impact on this. And it's all related to the reduced operational tempo. As soon as that starts to turn around, it will get back to a more normalized kind of run rate, but we think that would certainly probably be a quarter or so into this next year.

Tobey Sommer, Analyst

Could you discuss your new contract wins and your ability to ramp them, particularly how this ramp may differ in a pandemic scenario? It's important for us to understand, even though you aren't providing guidance for next year, as we need to model it. Any comments you could share about the ramping process would be appreciated.

Nazzic Keene, CEO

Yes. This is Nazzic. I think what I can do is share in general some things that we're seeing. We are seeing, in some cases, a little bit slower ramp and a little slower transition and greatly due to COVID being able to have people where they need to be, when they need to be there to help facilitate the transition. So we are seeing, in some cases, that take a little bit longer. We saw that some this year. I expect we'll see that going into next year. It's hard to quantify, and every contract is a little bit different. But I do think that, that is an anomaly that we're seeing more as a result of COVID in some of these new wins to facilitate the transition time frame. And so I would just think about it from that as an overarching reality of what we're dealing with.

Tobey Sommer, Analyst

Last question from me now. Could you give us an update on what your kind of interesting areas are for acquisitions for the firm in terms of any kind of hold or new capabilities that you'd like to add?

Nazzic Keene, CEO

Yes, absolutely. As Charlie mentioned, we are focused on paying down our debt and feel very positive about our achievements this year as we look ahead. We remain engaged in our industry and want to stay alert to potential opportunities. For instance, there are significant growth prospects in the public sector health area, particularly within the federal government, even though we currently have a limited presence there. We believe this sector will see sustained growth in the coming years, and if the right acquisition opportunity arises, it could be compelling for us. Similarly, in technology, such as AI, we possess strong skills and capabilities, and enhancing our presence in this area could also be beneficial. These are just a few examples, but our primary focus remains on reducing our debt and maintaining flexibility in the upcoming quarters.

Operator, Operator

Your next question comes from the line of Joseph DeNardi with Stifel.

Joseph DeNardi, Analyst

I would like to reframe my question regarding organic growth. Some competitors achieving a 2x book-to-bill ratio have translated that into double-digit organic growth. Is there something about the nature of your bookings, perhaps related to longer durations or a higher proportion of recompete contracts, that we should consider when evaluating why your 2x book-to-bill might not lead to similar double-digit organic growth?

Nazzic Keene, CEO

I have a few comments. First, whether you are an investor or a competitor, the bookings and book-to-bill ratio serve as leading indicators of future growth. We are very confident and optimistic about our bookings and pleased with our ability to protect existing work as well as secure new projects. We believe this is a strong sign for the upcoming quarters and the next few years. I agree with your analysis that it indicates growth. However, I cannot provide specific details at this moment, but we will share more information in March. Each contract varies in duration and ramp-up time, and we are currently working on that to give you a clearer picture for next year.

Joseph DeNardi, Analyst

Okay. And just two quick follow-ups. Could you just maybe clarify what drove the reduction in revenue guidance albeit modest? And then if you back into kind of what the revenue contribution was from Unisys the past couple of quarters, it looks to be flat to down a little bit. It had been growing nicely. So can you just talk about what's driving that and maybe overall how that business is performing thus far?

Charles Mathis, CFO

Let me emphasize the revenue guidance again. We expected some of the new business programs we secured earlier this year to ramp up quickly, but that didn't happen. This could potentially be linked to COVID, though we haven't specifically attributed it to that. There has been a significant ongoing effort to transition and ramp up these programs, with some wins coming in the first and second quarters. However, the COVID environment proved to be challenging, and we weren't able to ramp up quickly enough for revenue to meet our expectations this year. Regarding Unisys Federal, it has had an exceptional year in terms of new wins and has met our growth expectations when we acquired the company. We are optimistic about Unisys Federal's future contributions and overall outlook.

Shane Canestra, VP of Investor Relations

Joe, this is Shane. I want to add something to what Charlie mentioned. Unisys Federal, before we acquired them, secured a substantial contract, which I believe was referred to as BEMS. We anticipated that the revenue profile for this year in the second and third quarters would be more modest compared to the fourth quarter due to the anniversary of that loss. This was understood at the time of acquisition. Regarding your point about being somewhat flat, while we won’t disclose the actual figures, I can say that we expected a more significant performance in the latter half of the year as we moved past the anniversary of that contract.

Operator, Operator

Your next question comes from the line of Gavin Parsons with Goldman Sachs.

Gavin Parsons, Analyst

The pipeline is growing alongside your record bookings, indicating that the addressable market is expanding and your bidding opportunities are increasing. While I understand you do not share your actual win rates, could you provide some insight on whether you're winning at a higher rate as you grow that pipeline? Also, are there specific factors that you believe are most significant in driving those wins?

Nazzic Keene, CEO

Yes, that's a great question. Each quarter presents unique challenges, and while bookings can be unpredictable, we've seen success in both areas this year. We've been able to place more bids in advance of the quarters, and our win rates have improved as of now. Historically, we have maintained strong win rates in our recompetes, which has remained consistent, and our new business win rates have also increased. I attribute this improvement to several factors, including the strength and value from our recent acquisitions, which have provided us with excellent past performance, robust solutions, skilled talent, and access to markets and customers. Our focused strategy has also played a crucial role; we've been clear about our priorities and areas of concentration, allowing us to differentiate and offer compelling solutions to our customers. Overall, a combination of these elements has contributed to our success in bookings and securing new wins. We aim to maintain this momentum and stay committed to our strategy, continuing to deliver with the excellence that SAIC is known for, which is essential for winning new business and providing impactful solutions.

Gavin Parsons, Analyst

Great. And then recompete next year, I think you said it's about 25%. So I just wanted to ask on visibility. The backlog has grown pretty quickly. What is the duration of your backlog relative to your current revenue base? And should we expect that recompete rate to decline over the next few years?

Nazzic Keene, CEO

Yes, for clarification, in our next fiscal year 2022, approximately 15% of our revenues will be up for recompete. This means it's a somewhat lighter year than usual. I wanted to mention that. Could you remind me what the second part of your question was?

Gavin Parsons, Analyst

Sorry, apologies for that. That makes sense, the statement. I was just asking if your current backlog would reduce your recompete rate going forward, but it sounds like it might have already done that.

Nazzic Keene, CEO

Yes. Certainly, we had some significant ones this year. And when we close out the recompetes and are successful in our recompetes in AMCOM, NASA NICS and PB MRO, that will retire most of our recompete risk for next year.

Gavin Parsons, Analyst

Great. And then just one last question on revenue. I think the $250 million in guidance is relative to $160 million year-to-date. So does that imply you expect a larger COVID headwind in 4Q than you had this quarter or last quarter?

Charles Mathis, CFO

Yes. So let me just clarify that a little bit. So again, we have been cautious here about the revenue impact in Q4. Also, when we went back and looked at the quarterly impacts, I think the first quarter was probably like what we stated. We've been running kind of consistently in that $60 million, $65 million impact per quarter when you average it. And so it's slightly ahead of that in Q4, but part of that is going back to Q1 when we announced it. And there's probably $15 million that was really attributed to Q1. Didn't change the overall amount. Shane can certainly go over the detail with you as far as that goes, but it's pretty consistent in that $60 million, $65 million range.

Operator, Operator

Your next question comes from the line of Jon Raviv with Citi.

Jonathan Raviv, Analyst

Nazzic, I have a question which we might hold until Prabu joins the call. I'd like your perspective on his inclusion. You mentioned him briefly in your prepared remarks. Considering his background at Northrop Grumman, which is more product-focused, I'm curious about your thoughts on this shift, especially since you've historically shown little interest in products unlike some of your peers. He oversaw M&A there, and to an extent, your approach has been less episodic. So, could you share any evolution in your thinking regarding these aspects given his experience with a major defense contractor?

Nazzic Keene, CEO

No. I look forward to you meeting him. As we considered Prabu, we certainly acknowledged his experience and background. He has a diverse history in services, technology, and both commercial and defense aerospace sectors. This diversity in his background is compelling for us, and I am confident that he will bring immense value to SAIC. This does not indicate any change in our strategy in any way.

Operator, Operator

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

Shane Canestra, VP of Investor Relations

Thank you very much for your participation in SAIC's Third Quarter Fiscal Year 2021 Earnings Call. This concludes the call, and we thank you for your continued interest in SAIC.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.