Science Applications International Corporation Q4 FY2026 earnings call

Jim Regan mentioned focusing on business development, hiring a seasoned chief growth officer to prioritize BD and drive higher win rates, being selective in cost-plus and low-differentiated work, and focusing on areas with right to win and high customer retention. The team is performing well on existing book of business, removing indirect costs. Prabhu Natarajan reviewed fourth quarter and full-year results, highlighted margin performance and free cash flow, and discussed FY27 outlook including organic contraction, adjusted EBITDA margin expectations, and the enterprise transformation initiative.

Fourth quarter revenue was $1.75 billion, representing an organic contraction of approximately 6%, primarily due to a $60 million year-over-year reduction of low-margin revenue from the Cloud One program and a $45 million headwind related to a non-recurring software license sale in the prior year fourth quarter. Full-year revenue was $7.26 billion, declining approximately 3% organically, mainly due to a $200 million headwind from the no-bid of low-margin Cloud One revenue. Fourth quarter adjusted EBITDA was $181 million, resulting in a margin of 10.3%. Full-year adjusted EBITDA margin was 9.7%. FY27 is expected to have total revenue in the range of $7 billion to $7.2 billion, representing an organic contraction of 2% to 4%, with a headwind of approximately $400 million from recompete losses, and adjusted EBITDA in the range of $705 million to $715 million, reflecting margins between 9.9% to 10.1%, and adjusted diluted earnings per share guidance of $9.50 to $9.70, with free cash flow of at least $600 million.

FY27 is expected to have total revenue $7 billion to $7.2 billion, organic contraction 2% to 4% due to recompete losses headwind of approx $400 million, partially offset by new business wins from FY25 and FY26. Adjusted EBITDA $705 million to $715 million, margins 9.9% to 10.1%. Adjusted diluted earnings per share $9.50 to $9.70 unchanged. Free cash flow at least $600 million. FY28 expected to generate at least $530 million in free cash flow.

Organic revenue decline assumption assumes recompete losses only partially offset by previously won work growth, some large wins ramping slower than expected due to budget uncertainty and resource-constrained customer procurement function; potential downside if ramp doesn't materialize but upside likely in next 12-18 months; pipeline and bid goals focused on higher return efforts but submission levels lower than previous target; budget environment favorable but need to improve enterprise-wide performance, focus on right-to-win markets and deliver for customers.

Q: John Godden with Citi team asked about portfolio pivot; A: Jim Regan responded on focusing on right-to-win areas and leveraging acquired capabilities.

Q: John Siegman with Stiefel asked about FY27 CapEx; A: Jim and Prabhu Natarajan discussed CapEx adequacy and flexibility to ramp up production.

Q: Gavin Parsons with UBS asked about BD momentum and OCG growth; A: Jim and Prabhu talked about win rates and impact on revenue.

Q: Sheila Kailu with Jeffrey asked about enterprise IT work and pipeline offense; A: Jim and Prabhu explained enterprise IT changes and pipeline focus.

Q: Gautam Khanna with TD Cowan asked about guidance parameters and recompete headwind timing; A: Prabhu answered on guidance and headwind persistence.

Q: Colin Canfield with Cantor Fitzgerald asked about FAR 3.0 and hardware integration; A: Jim and Prabhu discussed procurement reform and hardware integration.

Q: Toby Salmer with Truist asked about culture, morale, and compensation; A: Jim responded on employee receptivity to process changes.

Q: Noah Poppenack with Goldman Sachs asked about recompete program details and funding environment; A: Prabhu answered on recompete programs and funding timing.