Science Applications International Corp Q4 FY2025 earnings call

• Acknowledged employee dedication and strong financial results closing the year.
• Market conditions: Minimal financial impact from recent executive orders, but prepared for changes. Conversations with the administration have been productive. Expect changes in procurement emphasizing mission criticality, cutting-edge technology, and outcome-based contracting.
• Program examples: Customs and Border Protection's task PD program with facial and touchless fingerprint tech; Space Force's GMAS program leveraging digital engineering. Commercial operating sector growth with DevSecOps sprints. Assessment of cost-plus portfolio transition to fixed-price contracting.
• Financials: Net bookings in Q4 $1.3 billion, FY 2025 $6.6 billion (book-to-bill 0.9). Won $1.8 billion SSLE contract. Submitted bids increased from $22 billion to $28 billion, backlog over $20 billion, expecting awards over next 2-3 quarters.

Fourth-quarter revenue was $1.84 billion, a 6% year-over-year increase, driven by new program wins and on-contract growth. Full-year fiscal year 2025 revenue was $7.48 billion, representing 3.1% organic growth, which was at the high end of the guidance provided at the start of the year. Fourth-quarter adjusted EBITDA was $177 million, resulting in a margin of 9.6%. For the full year, adjusted EBITDA was $710 million, producing a margin of 9.5%, 20 basis points ahead of guidance due to strong program performance and lower incentive compensation expense. Adjusted diluted earnings per share was $2.57 for the fourth quarter and $9.13 for the full year. Free cash flow in the fourth quarter was $236 million. The commercial operating sector's revenue has increased from less than $1 million in fiscal year 2022 to approximately $45 million in fiscal year 2025 and aims for approximately $100 million by fiscal year 2028 with healthy margins.

• Revenues guided to a range of $7.6 billion to $7.75 billion, representing approximately 3% organic growth at the midpoint. Growth expected to accelerate from 1%-3% in the first half to 2%-4% in the second half.
• EBITDA margin guided to a range of 9.4% to 9.6%, an increase of 10 basis points. Expected to improve an additional 10 basis points to 9.5%-9.7% in FY 2027.
• Adjusted diluted earnings per share guided to a range of $9.10 to $9.30.
• Free cash flow of $510 million to $530 million, translating to approximately $11 per share in FY 2026 and $12 per share in FY 2027.
• Expect to repurchase between $350 million to $400 million in FY 2026 and 2027.

• Dynamic government environment with potential changes in procurement, including emphasis on mission criticality and outcome-based contracting.
• Uncertainty from government efficiency initiatives and potential program cancellations.
• Mixed signals and potential delays in contract actions.
• Scrutiny on consulting-like contracts and reseller agreements.

Q: Just making sure we understand the $1.8 billion recompete. Can you talk us through how that impacts book-to-bill for the future quarter?

A: Sure. Good morning, Colin. Thank you for the question. And, again, let me just reiterate how pleased I am with the Q4 results and having this award as well as a pending award backlog that we have shared through our results. On SSLE, on this particular win, from a trailing twelve-month perspective, this win would get us close to the 1.0 trailing twelve-month. You heard us report at 0.9 prior at the quarter or year-end close. So that would be the impact on the trailing twelve-month. Obviously, we see this as an important continuation of our relationship with the Army Aviation and Missile Command and, quite frankly, not only the win but also the ongoing work that we expect on this contract, I think, sets us up fairly well for this part of the business.

Q: Maybe talking about the incremental submit increase, so it goes from $22 billion to $28 billion. Can you just talk a little bit about what was in that incremental $6 billion of submits and where do you feel that Science Applications International Corporation has a right to win on those incremental wins or incremental submits?

A: If we're talking about the increase from $22 billion to $28 billion, look, we think there's a combination of reasons for that, including the efficiency of having standardized our business development function using an enterprise operating model that drives that, and we talk about it in terms of not only bid more, quantity, but also bid better. The nature of those bids being on strategy and, quite frankly, marginally accretive to prior bids. When we look at that pending plan right now, about two-thirds of that pipeline that we are waiting to have awarded in adjudication is in the Mission Enterprise IT arena. About two-thirds of that is new business. The third is recompete. So we feel balanced in both the new business recompete component as well as that this is the strategic area that we put in place in our 2024 growth strategy and that the majority, again, over two-thirds of our pipeline, are in these strategic areas of our portfolio.

Q: Toni, quick question for you. You emphasized a bit the potential for some mix shift ahead of you from cost-plus to firm fixed price. I'm just kind of curious how that will work mechanically for you all as you've done that analysis. Is there the potential that we see higher margins but lower revenue? Is that one of the things that you've kind of discovered as you've gone through that analysis?

A: Look, we're and thanks first of all, for the question, Jason. We've been doing that analysis for a number of quarters. Quite frankly, we have looked at opportunities to move our cost-plus contract into more of a fixed-price environment. We see the upside as well as we understand the additional risk. What it requires for us we probably spend more time making sure that we have the frame for what we call service level agreements, very clear agreements with the government of what success looks like measurable. We've seen in our civilian business, which you see a good portion of fixed-price work in our civilian business, that we've been able to not only compete and win that business but also deliver it in at higher margins and continue to be competitive in that space. So we feel like we can we have a lot that we can if you will, transfer from that civilian business into other parts of our organization into other business groups for fixed price. And right now, I don't know if we have the assumption that revenue would necessarily decline. I think more we probably see it more as a margin improvement. Opportunity with the appropriate execution, with the appropriate guardrails as it relates to service level agreements with the customer. Not yet a revenue impact that we see to date. Prabu, any thoughts you might have there?

A: Hey, Jason. The only thing I would add to that would be the transition from cost to fixed price will depend on the customer and the current contract vehicles. If we assume that invasive changes occur in the procurement environment, you're gonna likely see the transition happen sooner than, you know, one might reasonably expect. On the other hand, by and large, we expect the transition to happen as things come up for renewal, as we introduce more fixed-price work inside of existing cost-plus work. So I think I suspect it's going to be more gradual. And to date, the extent that it happens a little bit sooner, in theory, what that would imply is that you will have less cost as a contractor and higher margin percentages. And therefore, arguably, perhaps an impact but the reality is I think we expect the transition itself to be gradual and we'll be working with our customers to facilitate the transition whenever we think that is in our best interest and the customer's best interest. So it's an ongoing process, so stay tuned.