Science Applications International Corporation Q2 FY2026 earnings call

• Overall results were mixed with revenue down 2.7% y/y but profit margins rebounding. Book-to-bill was comfortably over 1.0 for the second consecutive quarter, year-to-date book-to-bill at 1.4.
• Three drivers behind challenging environment: slower conversion of on-contract growth opportunities to revenue, increased impact from program disruptions, and delays on new business awards.
• Revised revenue guidance for FY 2026 and FY 2027 due to slower on-contract growth, program disruptions, and new business award delays.
• Emphasized investments in business development processes, strong qualified pipeline, plan submit levels, and backlog of pending awards.
• Leveraging enterprise operating model and AI for core operations to drive margin improvement and cost efficiency.

Second quarter revenue declined 2.7%, driven mainly by a 3% year-over-year headwind related to Cloud One compute and store revenue not fully offset by new business volume. Second quarter adjusted EBITDA was $185 million, resulting in an adjusted EBITDA margin of 10.5%. Second quarter free cash flow improved to $150 million. Revenue contribution details: Cloud One compute and store revenue was a significant factor in the revenue decline, while new business volume didn't fully offset the headwind.

• Lowered FY 2026 revenue to $7.25 billion to $7.325 billion, representing organic contraction of 2% to 3%. Expected organic revenue decline of ~5.54% in 3Q and 4Q.
• Revised FY 2027 revenue guidance to 0% to 3%, assuming subdued on-contract growth of 2% to 3%, modest new business benefit, and typical contract transition headwind.
• Lowered FY 2026 adjusted EBITDA margin guidance due to one-time tax impact, but reiterated FY 2027 adjusted EBITDA margin of 9.5% to 9.7%.
• Increased FY 2026 adjusted EPS guidance to $9.40 to $9.60 and FY 2027 EPS guidance to $9.00 to $9.20.
• Increased FY 2026 free cash flow guidance to >$550 million and expects similar dynamics in FY 2027, with combined cash tax reduction of ~$200 million over three years.

• Slower conversion of on-contract growth opportunities into revenue.
• Increase in impact from program disruptions.
• Delays on new business awards.
• Funding uncertainty, government spending reduction scrutiny, and workforce turnover impacting on-contract revenue growth.
• Dynamic budget timelines and potential prolonged government shutdown impacts.

Q: Do you think you're talking about some changes in the customer approach here. Does that affect the structure of this industry over time and the number of players and returns?

A: Toni and Prabu discussed market volatility, government personnel changes, delays in process, new entrants with commercial orientation, and more fixed-price/outcome-based programs. They see mission integration as a tailwind and welcome competition but note rhetoric vs reality on terms and conditions changing dramatically.

Q: Talk about the cost efficiency measures and tension between cost side now and tepid top line. Is it transitory?

A: Toni mentioned leveraging enterprise operating model and AI for margin improvement. Prabu said actions have begun, focus is on keeping submission volume up while getting efficiencies elsewhere, with civil business delivering healthy margins. Focus is on running the business effectively day to day.

Q: Quantify the bridge for '27 growth: on-contract growth, new program growth, efficiency headwinds?

A: Prabu said flat to 3% guide, expecting backlog to convert, ~1-3% on-contract growth, and factoring in new business wins already in hand. Also, ~$1B of wins not cleared protest windows potentially adding to bookings.

Q: Expectations for government fiscal year-end flush and shutdown impact?

A: Toni said flush environment irregular due to budget reconciliation, no significant opportunity seen. Prabu mentioned CR impact, with past shutdowns having marginal revenue impact and cash recovering in a couple of billing cycles.