SAIC sees more market stability & another CR in September

Add Science Applications International Corp. to the group of large government services companies that are signaling this coming summer will be a busy one as the government gets ready for what has become a traditional fiscal year-end spending spree.

September appears still likely to end with a continuing resolution for the start of fiscal 2019 through the mid-term elections, SAIC CEO Tony Moraco said Tuesday during the company’s first quarter earnings call with investors.

But agencies will be able to go through at least the first quarter of fiscal 2019 at the elevated funding levels passed for 2018, Moraco said.

The two-year budget agreement struck in March -- six months into the fiscal year -- lifted both defense and nondefense spending caps. As pointed out by Credit Suisse analysts in May, a continuing resolution to start fiscal 2019 would carry forward the funding levels from the previous year.

“There will be less impact and we've kind of seen that trend, so we don't see the CR affecting the profiles,” Moraco said.

For agencies, the time to get those contracting obligations committed appears to be this fiscal year -- or essentially now -- before another round of sequestration cuts could come down when fiscal 2020 starts as mandated by the Budget Control Act.

It was just last week that Professional Services Council CEO David Berteau highlighted the prospect of what is to come on Oct. 1, 2019 and said the time for contractors to start talking with their agency customers about that is now.

The now-traditional “fourth quarter spending spree” widely expected across industry is really going to be four months of work for agencies rather than six months as agencies are restricted in what they can do in the last two months.

“They're trying to get as much mission capability and IT modernization as fast as possible,” Moraco said Tuesday. “Faster deployments and faster implementations of existing capability, they want to get in front of that, that potential down cycle.”

Moraco is also the latest government services CEO to shed light on how federal civilian agencies may be somewhat slower to spend, as some of his peers pointed out during the late April round of earnings calls from other companies.

“Maybe there's a slight tendency on the ‘fed/civ’ side to be a little slower, a little more conservative. Maybe it's in reaction to that, also that skepticism of is it going to hold as we get into the government FY '19,” Moraco said.

“But we haven't seen any dramatic changes based on administration rhetoric or actions at this point, but we’ll track it. The demand is still there. I think they've kind of rationalized what budgets they do have, but there may be some that are holding back,” he said.

No government IT company’s earnings call with investors goes without a question related to mergers and acquisitions given the recent megadeal of General Dynamics-CSRA and the complex creation of what is now Perspecta, all driven in large part by a desire to add scale and hence be more competitive for contracts with a larger base to push costs of doing business across.

McLean, Virginia-based SAIC has said in the past that it is comfortable at its current size of $4.5 billion in revenue from its last fiscal year, which was 2.5-percent higher on an organic basis.

And it saw success during the period ended Jan. 31 with $6.5 billion in bookings, backlog growth to $10.2 billion from $8 billion in the year before and a book-to-bill ratio of 1.5 (awards versus drawdowns to realize revenue).

The company jumped two spots to No. 9 for our 2018 Washington Technology Top 100 rankings. SAIC is also holding to its financial goals of low-single digit revenue growth over the long-term and slight margin expansion.

But on Tuesday, Moraco said “there is some merit to having a broad portfolio of enterprise IT modernization, whether you're leveraging managed services across a bigger base, as a service type contracts, sometimes that broader scale tends to be a complement.”

The much-touted economies of scale talked about in other deals help with the IT infrastructure piece as large entrants such as Amazon Web Services and Microsoft move in, he said.

But scale is less important with higher margin work such as application modernization and migration to the cloud and data analytics, Moraco said.

“We're trying to look at a balance, probably more emphasis on the latter with mission capabilities and application development that play into the mission side,” he said.

The company wants to stay out of the more commoditized, broad enterprise IT where scale is a bit more relevant.

SAIC has some capacity to make an acquisition with its 2.8 debt ratio versus earnings, interest, taxes, depreciation and amortization expenses but that also might hold the company back from a large scale play.

However, that did not stop SAIC from engaging in the once-private bidding war for CSRA that went public when CACI tried to outbid General Dynamics.

SAIC’s legacy as a systems engineering and technical assistance services provider and current effort to place itself as a leading technology integrator for agency put the company at something of a crossroads, Technology Business Research Public Sector IT analyst Joey Cresta wrote in a Tuesday note for clients.

“To remain competitive in those (SETA) areas may require engaging in M&A to add scale; alternatively, moving up the value chain means investing more in applications development and higher-skilled talent. SAIC has options, and its next choices will determine its fate in a rapidly changing industry,” Cresta wrote.

Also of note from the first quarter call, SAIC held onto the $700 million "Task Order 33" recompete from its AMCOM Express contract vehicle after a protest was resolved in the company's favor. SAIC said in a March call with investors that it was awaiting the outcome of that protest.