Science Applications International Corporation Q1 FY2027 earnings call

- Overall Quarterly Performance * Reported total Q1 FY27 revenue of $1.9 billion, with 0.5% organic growth that outperformed expectations driven by timing of materials and the RITS contract extension * Adjusted EBITDA hit $222 million, including a $12 million gain from the IPO of a venture investment that added 60 basis points to margin; adjusted diluted EPS was $3.23 * Free cash flow reached $118 million, maintaining peer-leading cash conversion, and net leverage fell to 3.1x, within the company's target range * Net bookings were $2.1 billion, resulting in a quarterly book-to-bill of 1.1x (1.0x on a trailing 12-month basis), including a $200 million recompete win in the DHS business

- Strategic Portfolio and Pipeline Updates * The company is conducting a full portfolio review, with plans to share results on the December 2026 earnings call, to realign around high-priority mission areas and reduce exposure to commoditized enterprise IT segments * The qualified total pipeline is $85 billion, down ~25% year-over-year with almost all of the contraction coming from commoditized enterprise IT, reflecting the company's more selective bidding strategy; mission and engineering businesses now represent a larger share of the pipeline and are outperforming the rest of the portfolio * Recompete win rates are stabilizing and expected to return to the 90% range, while new business win rates remain above 30%

- Strategic Growth Initiatives * The company is investing in high-demand capability areas: next-generation command and control, legacy radar modernization, loitering munitions, and domestic production expansion for autonomous systems; it is also integrating AI into missions including legacy code modernization, cyber defense, data fusion, and human-machine teaming * Project Orbit, the enterprise transformation initiative launched in February 2026, has collected over 3,500 cost efficiency and agility ideas from employees; the initiative is designed to free up internal capacity for growth and margin expansion, with a detailed update planned for the September 2026 earnings call * Capital allocation remains disciplined: share repurchases are opportunistic, with Q1 repurchases of $188 million aligning with a full-year target of ~$400 million; the company is also evaluating tuck-in M&A to round out capabilities aligned with its strategic priorities

- Leadership Update * Civil segment head Srini Attili left SAIC; CFO Prabhu Natarajan will serve as interim head of the civilian business while a permanent replacement is recruited, and the company reaffirmed its strong commitment to the civilian market

The transcript does not report separate formal financial results for each business segment, only high-level margin commentary. The Civil segment (which includes most of the company's enterprise IT work, concentrated on outcome-based contracts) achieved a 15% margin in Q1 FY27, reaching the targeted margin level the company set several years prior when the segment was at a trough of 12-12.5%. The Defense and Intelligence segment has also delivered consistent margin improvement over the past 3-5 years, driven by updated minimum profitability thresholds for new bids across all contract types, including cost-plus programs. Broad-based operational outperformance was seen across both segments in the quarter, even after excluding the $12 million venture investment gain.

- Total sales guidance is maintained at its current negative 2% to negative 4% range for full-year FY27, though management now expects revenue to come in at or slightly above the midpoint of the range, and will revisit guidance on the Q2 earnings call. Management is maintaining the conservative approach due to ongoing market volatility and recompete headwinds - Full-year adjusted EBITDA guidance has been increased to a margin range of 10.1% to 10.3%, adding 20 basis points to account for the Q1 venture investment gain and stronger-than-expected operational performance - Adjusted EPS guidance has been increased by approximately 4% to a range of $9.90 to $10.10, driven by the higher EBITDA outlook and favorable resolution of outstanding tax issues - The full-year free cash flow guidance of greater than $600 million remains unchanged; management still expects at least $14 of free cash flow per share in FY27 and at least $13 per share in FY28 - On-contract growth is expected to remain 2% to 3% for full-year FY27, in line with FY26 performance; the $200 million RITZ recompete roll-off has been delayed from Q2 to Q3 FY27, and will create a roughly 3% organic growth headwind spread across the second half of the year

- Recompete losses in the large enterprise IT market create ongoing near-term organic growth headwinds, and the outcome of key upcoming recompetes (such as the State Department's Evolve program that replaces the legacy Vanguard contract) remains uncertain, with both upside and downside to current volumes - Appropriations from recent federal legislation are flowing unevenly, and RFP and award processes remain slowed by external environmental factors, creating timing uncertainty for new business growth - Broader market volatility and macro/government budget uncertainty, particularly in an election year, could create unexpected headwinds through the remainder of the fiscal year - There is a risk of insourcing of government services across civilian agencies, which could negatively impact existing contracted revenue - Budget tradeoffs between Department of Defense spending and civilian agency funding could create pressure on civilian segment revenue growth - Commoditized segments of the enterprise IT market face intense price competition and lower recompete win rates, which the company is addressing by reducing exposure to these areas

Q: Analyst asks how to reconcile the strong Q1 organic growth with the full-year guidance of -2% to -4%, and if there is upside to the current revenue guide. / A: Management confirms Q1 has the toughest year-over-year comparables for FY27, and notes that the strong Q1 start makes the upper end of the current guidance range (4% full-year contraction) look like an outlier at this point. They are retaining the conservative guidance due to lessons from recent years of quarterly volatility and remaining uncertainty over the next nine months. Management also states revenue is tracking to come in at or slightly above the midpoint of the current range, and will revisit guidance on the Q2 call.

Q: Analyst asks for more details on the ongoing portfolio review and planned additions or subtractions to the portfolio. / A: Management explains that after becoming permanent CEO, they have refreshed the full corporate strategy to align with customer demand for speed and agility. The company plans to reduce investment in commoditized enterprise IT segments, and will reallocate capital and bid focus to higher-value mission areas aligned to customer budget priorities. The company is also evaluating M&A opportunities over the next 12-18 months to round out capabilities and accelerate growth in these priority areas.

Q: Analyst asks how SAIC views opportunities in hardware, given recent commentary on command and control, radars, and loitering munitions, and whether this will be organic or acquired growth. / A: Management notes SAIC already has strong existing hardware capabilities at the intersection of hardware and software, typically growing hardware work organically from existing sustainment contracts (examples include the Mark 48 torpedo program and GMAS radar sustainment). The company will remain disciplined and will not become a large-scale hardware prime, but will scale up existing production and rapid prototyping to meet increased customer demand driven by global operational tempo, including through targeted investments where needed.

Q: Analyst asks about the sustainability of the strong Q1 civil segment margin, which reached 15% after trending up from a 12% trough a few years ago. / A: Management explains the civil margin improvement has been driven by intentional focus on EBITDA growth over chasing low-margin top-line revenue, and the civil segment has more margin levers than defense due to its mostly fixed-price and T&M contract mix. They do not expect 15% to be sustainable in the long term, and are targeting a sustainable mid-to-upper 10% margin for the segment over a multi-year journey, balancing margin improvement with needed business development investments.

Q: Analyst asks about the size and timing of opportunities for SAIC on the new State Department Evolve contract vehicle that replaces the legacy Vanguard program. / A: Management notes the legacy Vanguard program has a $250 million annual run rate with above-average margins, while the new Evolve vehicle has a $10 billion total ceiling over seven years, implying an annual run rate of over $1 billion. SAIC won positions on 4 of the 5 work streams, and there is potential upside beyond the current Vanguard volume, but also some downside risk. No material impact to FY27 guidance is expected, with most impacts coming in 2028, and the company will incrementally de-risk the recompete over the next several quarters.