Science Applications International Corporation (SAIC) reported robust financial results for Q1 FY2025, with a 40 basis points pro-forma organic growth despite a 5-point headwind from recompete losses. The company achieved an adjusted EBITDAUnderstanding Adjusted EBITDA: A Comprehensive Guide In the world of finance and business valuation, financial metrics play a crucial role in assessing a company's health, performa... More of $166 million (9% margin) and transaction-adjusted free cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More of $21 million. SAIC’s multi-year growth strategy emphasizes five national imperatives and focuses on four growth vectors, along with six key portfolio differentiators. The enterprise operating model implementation is on track, optimizing program execution and improving business development metrics. SAIC’s bid pipeline aligns with its strategic imperatives, with significant contributions from the Space & Intelligence Business Group. The company reported Q1 revenue of $1.85 billion, a 9% adjusted EBITDA margin, and an adjusted diluted EPS of $1.92. For FY2025, SAIC reiterated its financial guidance and plans significant share repurchases, reflecting confidence in its long-term growth strategy.

Financial Highlights

SAIC achieved an adjusted EBITDA of $166 million, translating to a 9% adjusted EBITDA margin. This margin reflects increased investments in the business, with expectations that the timing of certain program performance milestones in the second half of the year will improve margins. The company also reported transaction-adjusted free cash flow of $21 million, surpassing initial plans due to positive momentum in working capital efforts.

Strategic Initiatives and Growth Vectors

During the April Investor Day, SAIC outlined a multi-year growth strategy centered on leveraging its expertise in integrating emerging technologies to deliver profitable growth. The strategy focuses on five national imperatives:

1. All-Domain Warfighting
2. Next-Generation Space
3. Citizen Experience
4. Border of the Future
5. Undersea Dominance

To enhance value to customers and grow profitably across these imperatives, SAIC plans to shift its portfolio towards four key growth vectors:

1. Integrated Solutions
2. Enterprise and Mission IT
3. Civilian
4. Mission Advisory

Additionally, SAIC will prioritize investments in six portfolio differentiators:

1. Secure Multi-Cloud
2. Digital Engineering
3. Operational AI
4. Secure Data Analytics
5. System of Systems Integration
6. On-demand Solution Delivery

Implementation of Enterprise Operating Model

The implementation of SAIC’s enterprise operating model is progressing on schedule, optimizing program execution and building a best-in-class business development (BD) organization. Although the sales cycle in the business is long, typically taking 12 to 18 months to see full impact, early indicators of progress are encouraging. These include improvements in bid selection, bid thresholds, and submit volume.

Bid Pipeline and Strategy

SAIC’s bid pipeline leverages its Innovation Factory capabilities to drive differentiation and align with national imperatives, growth vectors, and optimal deal sizes. The company has a strong win rate on programs with a total contract value (TCV) under $500 million and aims to maintain a balanced mix of deals within this range. Larger pursuits, such as the DCSA One IT and Department of Treasury T-Cloud programs, offer significant growth prospects.

Utilization of Enterprise Differentiators

Currently, SAIC’s utilization of enterprise differentiators is skewed towards higher TCV pursuits. However, the company plans to increase Innovation Factory (IF) utilization over time to enhance win rates. Bid thresholds are being adjusted to reflect the value and capability brought to programs, with recent quarters showing improvement in these metrics.

Submit Volume and Growth Targets

In the first quarter, SAIC submitted proposals valued at over $8 billion and achieved net bookings of $2.6 billion, resulting in a book-to-bill ratio of 1.4. The Space & Intelligence Business Group significantly contributed to this success with notable awards from the U.S. Space Force and NASA. SAIC aims to increase bid volume to $30 billion by fiscal year 2027, driven by greater organizational accountability, standardized enterprise-wide processes, and investment in BD resources.

Revenue and Profitability Metrics

SAIC reported revenue of $1.85 billion for the first quarter, reflecting a 40 basis points pro-forma organic growth. This growth was largely offset by previously disclosed program transitions. Adjusted EBITDA was $166 million, with a 9% margin, influenced by increased internal investment and the timing of program milestones.

Adjusted diluted EPS was $1.92, benefiting from a favorable tax rate and a decline in the weighted average share count. Transaction-adjusted free cash flow was $21 million, ahead of plan, despite a $50 million headwind due to the sale of the supply chain business and higher cash bonuses.

Segment Reporting and Guidance

SAIC now provides revenue and profitability metrics for two segments: Defense & Intelligence and Civilian. Historical results for these segments have been included in the earnings release to assist with modeling. For fiscal year 2025, SAIC reiterates its financial guidance for revenue, adjusted EBITDA margin, adjusted diluted earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... More, and free cash flow.

Quarterly Expectations and Capital Deployment

For the second quarter, SAIC expects flat year-over-year revenue, with recompete losses offset by new business revenue and on-contract growth. The second half of FY2025 is anticipated to see mid-single-digit revenue growth, with stronger performance in the fourth quarter. Full-year guidance includes a 2% to 3% growth, factoring in a 5% recompete loss headwind, which is expected to normalize by the fourth quarter and into FY2026.

Share Repurchase and Long-Term Strategy

SAIC repurchased $81 million of shares in the first quarter and plans to target the higher end of the $350 million to $400 million repurchase range for the year. This strategy reflects confidence in the company’s ability to consistently and profitably grow over the long term.

Insights

1. SAIC shows resilience with 40 basis points organic growth despite recompete losses.
2. Adjusted EBITDA margin stands at 9%, indicating substantial internal investment.
3. The strategic focus includes national imperatives and growth vectors.
4. Q1 revenue reached $1.85 billion, reflecting strong business performance.
5. SAIC aims for $30 billion in bid volume by FY2027, showcasing ambitious growth targets.

The Essence (80/20)The Origins and Evolution of the 80/20 Principle The Discovery by Vilfredo Pareto In 1897, Italian economist Vilfredo Pareto uncovered a striking pattern in his study of wealth and... More

1. Financial Performance: SAIC reported strong Q1 FY2025 results with solid revenue growth, robust EBITDA, and positive free cash flow.
2. Strategic Growth: The company’s growth strategy includes leveraging expertise in emerging technologies to focus on national imperatives and growth vectors.
3. Enterprise Operating Model: SAIC’s implementation of an enterprise operating model is progressing, improving program execution and business development.
4. Bid Pipeline and Innovation: SAIC’s bid pipeline and Innovation Factory capabilities are key to differentiating and securing contracts, with significant contributions from the Space & Intelligence Business Group.

Detailed Descriptions:

1. Financial Performance: Pro-forma organic growth of 40 basis points, $166 million adjusted EBITDA, 9% margin, and $21 million transaction-adjusted free cash flow.
2. Strategic Growth: Focuses on all-domain warfighting, next-gen space, citizen experience, border of the future, and undersea dominance, with growth vectors in integrated solutions, enterprise IT, civilian, and mission advisory.
3. Enterprise Operating Model: On schedule, improving bid selection, bid thresholds, and submit volume with early positive indicators.
4. Bid Pipeline and Innovation: Leveraging Innovation Factory capabilities, targeting optimal deal sizes, and achieving high win rates in under $500 million TCV programs.

Action Plan – What SAIC Should Do

1. Optimize Program Execution: Continue implementing the enterprise operating model to enhance efficiency and business development.
2. Invest in Strategic Growth: Allocate resources to the five national imperatives and four key growth vectors to drive profitable growth.
3. Enhance Bid Pipeline: Utilize Innovation Factory capabilities to improve win rates and align bids with strategic priorities.
4. Monitor Financial Metrics: Regularly track financial performance, ensuring alignment with FY2025 guidance and long-term goals.
5. Increase Share Repurchase: Maintain confidence in growth strategy through targeted share repurchase programs.

Blind Spot

While the current strategies and financial metrics are promising, potential overlooked details include the long-term impacts of recompete losses and the dependency on large program wins. Additionally, the full benefits of the enterprise operating model may take longer to materialize than expected.

SAIC Technical Analysis

Price Movement: The stock has experienced a significant decline recently, dropping from around $135 to $118.81, a decrease of $15.84. This sharp decline indicates a strong bearish sentiment.

Moving Averages:

• The 50-day moving average is approximately $131.77.
• The 200-day moving average is approximately $124.99.
  The stock price has fallen below both the 50-day and 200-day moving averages, signaling potential continued bearish momentum.

Volume: There is a noticeable spike in trading volume, with 1.192 million shares traded. This increased volume during a price drop often suggests strong selling pressure.

Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI): The RSI is at 24.85, which is in the oversold territory (below 30). This indicates that the stock may be undervalued in the short term and could be due for a rebound.

On-Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV): The OBV is at 7.483 million and appears to be declining. A declining OBV alongside falling prices suggests that the selling volume is heavier than the buying volume, confirming the downtrend.

Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More: The Stochastic RSI is at 0.000, which is extremely oversold. This further supports the potential for a short-term rebound due to the oversold conditions.

Average Directional IndexThe Average Directional Index (ADX) stands as a cornerstone indicator in the toolkit of technical traders, offering insights into the strength of market trends. Developed by Welles... More (ADX): The ADX is at 24.37, indicating a weak trend. ADX values below 25 suggest that the current trend (downtrend in this case) is not particularly strong.

Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More: The Chaikin Oscillator is at -198,659, indicating significant bearish sentiment. A negative value typically signifies that the selling pressure is outweighing the buying pressure.

Time-frame Signals:

• 3-Month Horizon: Hold. Given the oversold conditions indicated by the RSI and Stochastic RSI, there may be a short-term rebound. However, the overall bearish sentiment and strong selling pressure suggest caution.
• 6-Month Horizon: Sell. The stock breaking below both key moving averages and the strong selling pressure indicated by volume and OBV suggest that the stock may continue to decline in the medium term.
• 12-Month Horizon: Hold. While the short to medium-term outlook appears bearish, the stock may find support and stabilize over a longer period. Watching for signs of a trend reversal will be crucial.

In summary, while there are short-term oversold conditions that might lead to a temporary rebound, the overall technical indicators suggest a bearish outlook in the medium term. Long-term investors should watch for potential stabilization and trend reversal signals.

Remember, past performance is not an indication of future results. Always conduct your own research and consider consulting with a financial advisor before making any investment decisions. 🧡

Looking Ahead

SAIC remains focused on implementing its strategy to drive long-term profitable growth. While near-term results may not always reflect the full impact of the strategy, the company is committed to rigorous capital deployment and has the capacity to increase investments through its share repurchase program. This strategic focus is expected to strengthen SAIC’s market competitiveness and drive consistent, predictable growth in the long term.

Frequently Asked Questions (FAQ)

Q1: What were the key financial results for SAIC in Q1 FY2025?

A1: SAIC reported strong financial results, including a 40 basis points pro-forma organic growth, adjusted EBITDA of $166 million with a 9% margin, and transaction-adjusted free cash flow of $21 million.

Q2: What strategic priorities did SAIC highlight during the April Investor Day?

A2: SAIC outlined a multi-year growth strategy focusing on five national imperatives: All-Domain Warfighting, Next-Generation Space, Citizen Experience, Border of the Future, and Undersea Dominance.

Q3: What are the four key growth vectors SAIC plans to focus on?

A3: SAIC’s growth strategy will focus on Integrated Solutions, Enterprise and Mission IT, Civilian, and Mission Advisory.

Q4: How is SAIC implementing its enterprise operating model?

A4: The implementation is progressing on schedule, focusing on optimizing program execution and building a best-in-class business development organization, with improvements seen in bid selection and submit volume.

Q5: What is SAIC’s bid pipeline strategy?

A5: SAIC leverages its Innovation Factory capabilities to align with national imperatives, growth vectors, and optimal deal sizes, maintaining a strong win rate on programs with a TCV under $500 million.

Q6: How does SAIC plan to enhance win rates using its enterprise differentiators?

A6: SAIC plans to increase the utilization of its Innovation Factory over time, adjusting bid thresholds to reflect the value and capability brought to programs, with recent improvements in these metrics.

Q7: What were the proposal submission and net bookings for Q1?

A7: SAIC submitted proposals valued at over $8 billion and achieved net bookings of $2.6 billion, resulting in a book-to-bill ratio of 1.4.

Q8: What were SAIC’s revenue and profitability metrics for Q1 FY2025?

A8: SAIC reported revenue of $1.85 billion, adjusted EBITDA of $166 million with a 9% margin, and adjusted diluted EPS of $1.92. Transaction-adjusted free cash flow was $21 million.

Q9: What new segment reporting did SAIC introduce?

A9: SAIC now provides revenue and profitability metrics for two segments: Defense & Intelligence and Civilian, with historical results included to assist with modeling.

Q10: What are SAIC’s expectations for Q2 and the rest of FY2025?

A10: SAIC expects flat year-over-year revenue for Q2, with recompete losses offset by new business revenue. The second half of FY2025 is anticipated to see mid-single-digit revenue growth.

Q11: How much did SAIC repurchase in shares during Q1, and what are the future plans?

A11: SAIC repurchased $81 million of shares in Q1 and plans to target the higher end of the $350 million to $400 million repurchase range for the year.

Q12: What is SAIC’s long-term strategy focus?

A12: SAIC remains focused on driving long-term profitable growth, rigorous capital deployment, and strengthening market competitiveness through strategic investments and share repurchase programs.

Book Recommendations

1. “Measure What Matters” by John Doerr – This book provides insights into how focusing on key objectives and results can drive significant growth and strategic success.
2. “Good to Great: Why Some Companies Make the Leap… and Others Don’t” by Jim Collins – Offers a comprehensive look at how companies achieve sustained success and could provide valuable lessons for SAIC’s strategic initiatives.
3. “The Innovator’s Dilemma” by Clayton M. Christensen – Explores how companies can manage innovation and disruption, relevant to SAIC’s focus on emerging technologies and growth vectors.