Science Applications International Corp Q1 FY2026 earnings call

• Operating environment stabilized but had procurement delays due to customer turnover. Year-to-date impact from government efficiency initiatives was nominal. • Initial assessment of FY 2026 budget request was supportive of growth strategy, with solid defense spending increase. • Business development: net bookings of $2.4 billion, book-to-bill of 1.3, including key recompetes. Submitted proposals with $7 billion contract value, backlog of pending awards at ~$20 billion. • Financial results: revenue of $1.877 billion, adjusted EBITDA $157 million (8.4% margin), adjusted diluted EPS $1.92, free cash flow negative $44 million. • Strategy pivot to mission and enterprise IT aligns with new administration's priorities, e.g., awarded mission integrator role for Space Development Agency's tranche three. • Nondefense budgets: civilian agency customers' areas of focus were well supported.

The company has civilian and defense segments. Civilian segment's five largest agency customers were well supported, with over $1 billion additional budget for DOT to fund FAA improvements, over $40 billion to DHS for border security, stable funding for State IT, over $1 billion for VA, etc. Annual revenue from these five civilian agencies represents over 70% of total revenue. Defense segment has balance across DoD branches with roughly comparable revenue from Navy, Air Force, Space Force, and Army. Revenue contribution: civilian segment is a significant portion, over 70% of total revenue.

• Revenue guidance: $7.6 billion to $7.75 billion, organic growth ~2.5% midpoint. Growth expected 1%-3% in first half, 2%-4% in second half. • Adjusted EBITDA margin guidance: 9.4%-9.6%. • Adjusted diluted EPS guidance: $9.10-$9.30, effective tax rate 23%, weighted average share count 47 million. • Free cash flow guidance: $510 million-$530 million ($11 per share). • Capital deployment: targeted annual share repurchases $350 million to $150 million-$200 million for M&A or repurchase.

• Procurement delays due to customer turnover. • Protest windows on some awards. • Program cost overruns in space fixed price program initially, though expected to improve with sustainment phase. • Uncertainty in budget negotiations and agency strategic priority implementations.

Q: Gavin Parsons asked about operating environment and budget priorities.

A: Toni Townes-Whitley said operating environment stabilized, but customer personnel turnover caused procurement delays. Initial budget request was supportive, with defense spending increase.

Q: Gautam Khanna asked about known headwinds.

A: Toni and Prabu said known headwinds include NASA program loss rounding out in Q3, no bid on lower margin CloudOne program, and a pre-award protest on a program with a six-month extension not impacting FY 2026 financials.

Q: Jason Gursky asked about end markets.

A: Toni discussed civilian business growth and opportunity, and DoD segments (army, air force, space, navy) with their respective opportunities and risks.

Q: Sheila Kahyaoglu asked about margins.

A: Prabu said civil margins expected to improve, space fixed price program had ~$3M-$5M impact, and margins expected to ramp to meet full year guidance.

Q: Tobey Sommer asked about DoD communications and new business capture.

A: Toni said strategy of pivoting to mission and enterprise IT was directionally correct, and expediting commercial solutions.

Q: Colin Canfield asked about margin trajectory and mix.

A: Toni and Prabu discussed civil margin improvement, defense bid thresholds, and commercial operating segment growth.

Q: Noah Poponak asked about outcome-based contracts.

A: Toni said proactively looking at fixed price opportunities in civilian business, prepared for conversion to outcome-based contracts with risk but opportunity for margin improvement.