After tough start, SAIC sees better second half to 2017

A once-stellar performer on Wall Street, Science Applications International Corp. has had a challenging first half of the year for both its top and bottom lines but executives sees the picture as brighter for the second half.

Revenue in the second quarter declined for a third straight three-month period and earnings for the three months ended Aug. 4 also fell below what the analyst community expected. Speaking on SAIC’s second quarter earnings call Thursday with investors, CEO Tony Moraco cited some slowdown in activity among some civilian agencies in technology upgrades and IT modernization.

SAIC’s second quarter revenue fell 1.4 percent to $1.09 billion to fall in-line with the Wall Street consensus outlook. That decline was on the completion of contracts, a Homeland Security Department IT integration contract loss and lower activity on several contracts.

But an active second quarter bookings period keeps McLean, Va.-based SAIC on track to achieve its longer-term targets of single-digit growth and greater profitability, Moraco told analysts on the call. Second quarter bookings reached $2 billion for a 2.0 book-to-bill ratio he called the “largest quarterly bookings amount and book-to-bill ratio to-date.”

Trailing book-to-bill ratio over 12 months is 1.4 to show the company grows its backlog faster than it draws down and recognizes revenue.

The company also believes it will benefit from planned increases to defense spending in the government’s next fiscal year, Moraco told investors. SAIC generated 58 percent of revenue in its last fiscal year ended Feb. 3 from defense agencies, according to its fiscal 2017 annual report.

“Our defense and intelligence community customers are making contract award decisions and are looking to increase funding in areas of emphasis such as military readiness, IT modernization, cyber operations and training and simulation,” Moraco said.

SAIC also views its recent stretch of revenue declines as “stabilized now,” Moraco said, with a continuing resolution in place through December that stabilizes spending at fiscal year 2017 levels and a “slightly higher FY 18 perhaps.”

SAIC’s stock fell as much as 20 percent during the morning session Friday after investors took initial note of that second quarter profit miss. Earnings of 80 cents per share fell short of analysts’ 90-cent EPS expectation.

The stock also set a new 52-week low of $60.82 nearly seven months after an all-time record close of $89.24 on Feb. 27, which at the time was an almost 200 percent increase since its September 2013 re-launch.

For SAIC’s fiscal 2018 first half, sales fell 1.6 percent to $2.2 billion and adjusted earnings before interest, taxes, depreciation and amortization expenses declined 12 percent to $143 million.

Adjusted EBITDA margin for the first six months came in at 6.6 percent versus the 7.1 percent reported for the similar prior year period. SAIC expects to end the fiscal year in the 7-percent EBITDA margin range.

Moraco attributed the margin pressures in part to investments into SAIC’s Marine Corps vehicle integration programs and the civilian market slowdown. Civilian agencies are reacting to the Trump administration’s plans for spending cuts there, he said.

“We're seeing the program managers, contract administrators reacting to that and protecting their budget lines with an indication that they may be lower than they have been in the past. So that's actually the nature of the (federal civilian) customer space,” Moraco said.

Within civilian, Moraco said “the demand is still high” for support in cloud, cybersecurity and IT modernization efforts aligned with agencies’ goals to upgrade legacy systems.

Another factor SAIC is monitoring is a change in its contract mix that has seen an increase in cost-reimbursable type contracts versus fixed-price. Year-over-year, Moraco said cost-reimbursable contracts climbed 3 percent to 44 percent of the total mix in the second quarter versus the company’s expectation of growth in fixed-price contracts.

There is also SAICs recompete picture that will determine whether it can meet its growth targets. Moraco told investors the company expects to hear a decision from the Army in November on the $1 billion “Battlefield Systems” task order being migrated from the AMCOM Express vehicle to the General Services Administration’s OASIS vehicle.

SAIC is also awaiting a ruling in late September on a protest against the Army’s June award of the three-year, $575 million “Strategic Systems” order to Raytheon.

A bright spot, though, was that SAIC booked a potential five-year, $404 million Virtual Systems order with the Army in June, Moraco said.