SAIC Profit Jumps 77% in Fiscal Q2

Key Points

• Adjusted EPS climbed 77% year over year in Q2 FY2026, marking notable profitability growth.

• Revenue contracted by 3% in fiscal 2026's Q2, triggering a downward revision to full-year revenue and adjusted EBITDA guidance for FY2026.

• Quarterly bookings were strong and a robust business development pipeline.

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Science Applications International (NASDAQ:SAIC), a leading provider of technology and engineering solutions for U.S. government agencies, released its fiscal 2026 second-quarter results on Sept. 4, 2025. The most significant news was a sharp jump in profitability, as adjusted EPS rose to $3.63, up 77% year over year. However, quarterly revenue (GAAP) slipped by 3% to $1.77 billion in Q2 FY2026, missing prior growth targets and prompting management to lower full-year guidance for both revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

Despite solid margin expansion and record bookings, the quarter was marked by heightened caution as delays in contract awards and ramp-ups weighed on the company's near-term outlook.

Source: SAIC. Note: Fiscal 2026's second quarter ended Aug. 1, 2025. Fiscal 2025's Q2 ended Aug. 2, 2024.

Business Overview and Key Success Factors

Science Applications International offers advanced IT, engineering, and mission services to many U.S. federal agencies, with a primary focus on national security and government modernization. Its business spans technology integration, IT modernization, digital engineering, cloud computing, artificial intelligence (AI), and cybersecurity. Historically, nearly all revenue comes from contracts with the Department of Defense and other major agencies.

Recently, the company has emphasized next-generation technology solutions, expanding its digital services and aiming for more high-value IT modernization contracts. Key areas for success include strong government relationships, securing new and renewal contracts, integrating cutting-edge technology such as AI and cybersecurity, and maintaining regulatory compliance. A skilled workforce and efficient cost management are also central to its competitive edge.

Quarter in Review: Performance and Milestones

Profitability improved significantly in Q2 FY2026. Adjusted operating margin increased by 1.0 percentage point. Adjusted EBITDA rose 9% year over year in the second quarter of fiscal year 2026. The improvement reflects better profitability across existing contracts and some one-time benefits, such as a patent infringement settlement recovery. Adjusted diluted earnings per share growth was also bolstered by a lower share count due to continued share repurchases.

Revenue (GAAP) declined by 3% from the same period a year prior. Management pointed to contract completions and reduced volumes on certain contracts as the main reasons for the drop, with only partial offsets from new contract wins. Both key business segments -- Defense & Intelligence and Civilian -- reported modest year-over-year GAAP revenue declines. Defense revenue represented about 78% of the total and civilian about 22% in the second quarter of fiscal year 2026.

Bookings reached $2.6 billion during the quarter, producing a book-to-bill ratio of 1.5. The book-to-bill ratio is an important indicator that compares the value of new bookings to recognized revenue; a ratio above 1.0 signals contract growth. The company’s total backlog rose to $23.2 billion at quarter-end, including a robust pipeline in both defense and civilian areas. Major contract awards included a $928 million contract with the Air Force for mission engineering services and sizable wins with the Navy, the Department of Treasury (for cloud services), and the Department of State.

The Civilian segment’s adjusted operating margin improved to 13.7%, up from 11.4% in the prior year. The change was driven by improved profitability across its contract portfolio. Defense & Intelligence segment adjusted operating margin edged up slightly. However, Defense & Intelligence revenue (GAAP) dipped 2.9%, affected by contract completions and slower volume ramps. Overall, the company continued investing in digital engineering, cloud, and AI solutions, aiming to align its portfolio with evolving government priorities. Importantly, these IT modernization and cybersecurity projects are increasingly central to new federal contracts and to the company’s growth plan.

Free cash flow (non-GAAP) fell by 38% year over year to $150 million. The company attributed the drop to the timing of customer collections and vendor payments, partially offset by lower cash outflows from the use of the Master Accounts Receivable Purchase Agreement ("MARPA Facility") and other changes in working capital. Cash flows from operating activities (GAAP) slipped by 11.6% year over year. On capital allocation, $130 million was returned to shareholders, with $106 million in buybacks and $17 million paid in dividends. The quarterly dividend was maintained at $0.37 per share, reflecting management’s commitment to regular dividends as part of its shareholder returns strategy.

Management flagged ongoing headwinds, primarily ongoing delays in contract awards and program ramp-ups, which have emerged as a significant risk to near-term revenue growth. The company also called out the impact of changing federal procurement policies and a dynamic regulatory environment, which have slowed the conversion of backlog into revenue. Leadership reported that cost discipline, margin improvement, and robust business development allowed for some offset to revenue softness, but acknowledged a more challenging environment compared to prior quarters.

Outlook and What to Watch

Looking forward, management lowered full-year guidance to reflect current business conditions. Revenue for FY2026 is now expected to be between $7.25 billion and $7.33 billion, down from the previous range of $7.60 billion to $7.75 billion. Adjusted EBITDA (non-GAAP) has been revised down to a range of $680 million to $690 million. Adjusted diluted earnings per share (non-GAAP) has been raised to $9.40–$9.60. Free cash flow (non-GAAP) is also projected to exceed $550 million, higher than the earlier $510–$530 million range.

Investors should watch the pace at which trends in federal procurement and regulatory compliance develop. The next few quarters will reveal whether operational and business development strengths can offset the current slowdown in revenue. The quarterly dividend was maintained at $0.37 per share for the period.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.

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