SAIC (SAIC) Q4 2026 Earnings Call Transcript

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DATE

Monday, March 16, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Jim Reagan
• Chief Financial Officer — Prabhu Natarajan

TAKEAWAYS

• Revenue -- $1.75 billion for the quarter, representing a 6% organic contraction primarily driven by a $60 million reduction from no-bid Cloud One and a $45 million headwind from a prior-year nonrecurring software license sale.
• Full-Year Revenue -- $7.26 billion, a 3% organic decline due mainly to a $200 million headwind from the decision to no-bid Cloud One low-margin work.
• Adjusted EBITDA -- $181 million for the quarter at a 10.3% margin, contributing to a 9.7% full-year margin, approximately 20 basis points above prior guidance.
• Adjusted Diluted Earnings per Share -- $2.62 for the quarter and $10.75 for the year, reflecting stronger margins and a favorable tax rate despite lower revenue.
• Free Cash Flow -- $336 million for the quarter, $577 million full year, surpassing guidance by 10% even as revenue finished 5% below the initial target.
• Fiscal Year 2027 Guidance -- Revenue outlook reaffirmed at $7.0 billion to $7.2 billion, signaling a 2%-4% organic contraction, primarily attributed to $400 million expected recompete headwinds.
• Adjusted EBITDA Margin Guidance -- Projected in the 9.9%-10.1% range, with the midpoint reflecting a 30-basis-point year-over-year increase and double-digit EBITDA margin for the first full year.
• Adjusted Diluted EPS Guidance -- $9.50 to $9.70, unchanged, supported by expected lower share count offsetting top-line contraction.
• Free Cash Flow Guidance -- At least $600 million targeted for fiscal 2027; at least $530 million expected for fiscal 2028, even without the $70 million nonrecurring cash tax benefit embedded in 2027 guidance.
• Enterprise IT Mix -- Large enterprise IT declining from 17% of revenues in fiscal 2025 to an expected 10% in fiscal 2027, as company focuses on fixed-price and T&M contracts with longer-term visibility.
• Backlog and Book-to-Bill -- Backlog sufficient for guidance with trailing 12-month book-to-bill at 1.1, minimizing reliance on new wins for the current year's projections.
• Cost-Reduction Program -- $100 million in cost-reduction targets highlighted as both achieved savings and a source of new investment capacity for margin-enhancing initiatives.
• Pipeline Submission Target -- Bidding focus refined to $25 billion to $28 billion in submissions, prioritizing high-retention, differentiated opportunities and supporting both growth and margin objectives.
• Win Rates -- Non–enterprise IT new business win rates recently approached or exceeded 50%, with recompete win rates in those areas at 85%-90% and lower exposure to volatile cost-plus enterprise IT contracts.
• Capital Expenditures -- Fiscal 2027 CapEx budget of approximately $35 million, with flexibility to increase based on ramped customer production demands, although additional upside is not embedded in the guide.
• Strategic Clarity -- Company is intentionally moving away from commoditized, low-margin, cost-plus enterprise IT in favor of areas "where we have a greater right to win" and can differentiate through innovation and customer outcomes.
• Enterprise Transformation Initiative -- First comprehensive company-wide process review since 2013, intended to drive organizational agility, margin expansion, and increased investment capacity, with progress updates expected next quarter.
• Recompete Exposure -- Only one significant recompete flagged for fiscal 2027: Department of State Vanguard program (supported for 15 years, current revenue size not explicitly stated in transcript), with most revenue impacts from potential outcome expected in the following year.
• Organic Contract Growth (OCG) -- Baseline guide assumes 2%-3% OCG for fiscal 2027, consistent with recent experience and positioned for potential upside if procurement pace accelerates.

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RISKS

• "We expect another year of organic contraction in FY 2027, largely due to recent recompete losses in the large enterprise IT market," with a forecasted $400 million headwind.
• "There are several large wins ramping at a slower rate than we expected, likely due to budget uncertainty and the lingering effects of a more resource-constrained customer procurement function," introducing potential downside if program ramp does not materialize as assumed.
• CFO Natarajan said, "the headwinds are going to persist with us for all four quarters of the year," specifically referencing the $400 million recompete loss impact spread across the fiscal period.

SUMMARY

The call highlighted Science Applications International Corporation (NASDAQ:SAIC) continuing portfolio shift, cost-reduction progress, and disciplined business development as it navigates a 2%-4% revenue contraction for the upcoming year. Management confirmed a double-digit adjusted EBITDA margin outlook and maintained robust free cash flow guidance. Leaders acknowledged that organic top-line growth will be limited near-term due to past recompete losses and slow program ramps, but emphasized sustained high win rates outside commoditized enterprise IT, rising margins, and improved operational focus as foundations for future growth acceleration.

• The company’s pipeline is now more weighted toward new, higher-margin, non–enterprise IT opportunities, reducing risk from further cost-plus contract volatility.
• A bottoms-up review of business processes is underway for the first time since 2013, aiming to unlock agility and reinvest cost savings to fuel innovation and expansion.
• Only one large recompete, the Department of State Vanguard program, represents material exposure in the near term, with most potential impact deferred until the next fiscal year.
• Management stressed that further improvement in revenue growth hinges on both procurement throughput from government customers and execution on focused capture strategies.

INDUSTRY GLOSSARY

• OCG (Organic Contract Growth): Net incremental growth derived from existing contracts, separate from new business wins.
• T&M (Time & Materials): Contract type where billing is based on actual labor hours and material costs incurred.
• Vanguard Program: Longstanding Department of State IT infrastructure and modernization contract referenced as a material recompete in the current company portfolio.

Full Conference Call Transcript

Jim Reagan: Thank you, John, and thanks to everyone for joining our call. I am happy to be here as CEO, and I am grateful to our board, to our team, and to all of our stakeholders for the faith that they have put in me to continue the critical work of sharpening our focus, strengthening our execution, and driving better results. After a thorough search for a permanent CEO by a leading executive search firm, the board concluded that, among other things, maintaining continuity in leadership, along with deep industry knowledge, was essential to Science Applications International Corporation's long-term success. After careful consideration, they selected me for the role.

And, honestly, when I stepped in as interim CEO in October, I did not expect to enjoy the role as much as I have. One of the most rewarding aspects has been working alongside an outstanding team, supporting critical customer missions, and creating value for our stakeholders. This includes my partnership with our CFO, Prabhu Natarajan, whose leadership has been invaluable. So while accepting the permanent role was not my original intention, I am humbled and honored to have this opportunity.

Since joining the board in 2023, my appreciation for Science Applications International Corporation's past achievements, current strengths, and future potential grew even deeper. With a career focused on operational excellence and value creation across this industry, I am excited to continue building on our strong foundation to deliver meaningful results to all of our stakeholders. FY 2027 is a year of commitment. We are committed to our strategy to align and focus the portfolio. We are committed to improving our internal processes and external results. And as always, we are committed to serving our customers' most important missions, including elevated operational tempo around the globe.

The tragic reality of war underscores the importance of mission expertise and customer intimacy that companies like Science Applications International Corporation have cultivated over many years. It also demands that our industry continue to invest and innovate to deliver capabilities and capacity. This is what we have done for decades and this is what we will continue to do.

Science Applications International Corporation's legacy of innovation and commitment to high-value customer priorities are valuable assets. At times, we may have struggled to convert these assets into consistent performance, but we are making discrete changes across the company to improve our results. I want to focus briefly on business development, where we recently hired a seasoned Chief Growth Officer to the leadership team to prioritize BD and drive higher win rates for recompetes and new business. This involves being selective as we approach cost-plus less differentiated work, and it means leaning into the pursuit of opportunities where we have a greater right to win and higher rates of customer retention. This is addition by subtraction.

Being selective in some areas frees up resources to pursue others. This means that we are going to be more focused with our bidding in FY 2027, and we are now aiming for $25 billion to $28 billion of submissions where we expect to support our dual goals of growing the top line and improving margin.

The team is also performing well on our existing book of business, removing indirect costs, and achieving higher growth in higher margin programs. This supports double-digit margins going forward. And as I said last quarter, we are committed to building on this progress in three ways. First, sharpening our focus on execution to increase capacity for investment in the business. Second, more efficiently deploying our financial resources to drive growth. And third, prioritizing yield and bid quality across our business development function, which, taken together, enables us to inject speed and innovation into our core capabilities to drive better growth and continued margin expansion.

Turning to results, as we discussed in our preannouncement last month, fourth quarter revenue was below our initial expectations largely due to procurement delays and customer disruptions as the environment continues to be uneven. However, I am encouraged by our margin performance despite this top-line choppiness, with FY 2026 margin of 9.7%. And we see improvement ahead as we guide to 10% adjusted EBITDA margin at the midpoint for FY 2027, the first time the company is guiding to double-digit margin on a full-year basis. Cash flow continues to be exceptional, thanks to efforts across the organization. And despite revenue finishing about 5% below our initial guidance from last year, our free cash flow exceeded our guidance by 10%.

This demonstrates strong execution as well as the resilience of our business model.

We expect another year of organic contraction in FY 2027, largely due to recent recompete losses in the large enterprise IT market. While we are encouraged to hear senior leaders emphasize fixed price, outcome-oriented contracting, we have yet to see these laudable goals translate into reality evenly across our customers, as some continue to use acquisition approaches where it is hard to differentiate. Instead, we are focused on opportunities where clients establish clear outcomes that enable Science Applications International Corporation to deliver innovation and measurable value throughout the life of the program. Across our civilian enterprise IT portfolio, these principles have driven stronger performance and elevated win rates.

Our successful work with Treasury, Commerce, Transportation, and the state of Texas demonstrates our cost-effective strategy for modernizing and supporting vital networks. By continually evaluating new technologies and delivering enhancements, we sustain long-term partnerships like the State Department's Vanguard program, which we have supported for 15 years. Looking ahead, we are collaborating with clients to pilot and implement AI-powered agents to stabilize and secure critical networks. The speed of these innovations is essential for helping our customers address the evolving threat landscape and meet affordability objectives.

While this large enterprise IT market has weighed on our results, it is a shrinking piece of the pie, from 17% of company revenues in FY 2025 to an expected 10% in FY 2027. And we have good visibility into most of this remaining portfolio. It includes the tCloud takeaway, has four years of performance remaining, and includes the Vanguard program, which is performing exceptionally well. These are both fixed-price or T&M enterprise IT contracts, the kind of work where we can differentiate and have the greater right to win.

In the meantime, we continue to be excited about what made Science Applications International Corporation great to begin with: delivering innovative science, technology, and engineering solutions in support of the security of the United States and its allies. For instance, our GMAS program sustains and upgrades radar critical to homeland defense. Our DHS work delivers integrated hardware and software solutions to help secure the border. Our JRE data link router provides real-time battlespace awareness. Our recent COBRA and TENCAP HOPE awards support multi-domain warfighting by enabling rapid technology insertion, integration, and innovation. And our munitions programs enhance combat capability and capacity. These are all customer priorities for securing the present and winning the future.

We are also investing in areas with the highest and clearest demand signals, whether it is expanding production capacity on key programs or investment for greater innovation and differentiation. We are currently engaging with customers at the highest levels to increase our throughput across multiple efforts. And our continued focus on executing against the $100 million in cost-reduction targets is expected to provide us with operational and financial flexibility to continue to invest in areas with the greatest return potential while continuing to improve our margins. Our recently announced enterprise transformation initiative is the first time the company has done a bottoms-up review of its processes and procedures since the split in 2013.

We have some of our best people committed to this project, which should result in a more efficient Science Applications International Corporation, with increased investment capacity to support innovation, growth, and margins. We are also encouraged that we will be making this journey in a supportive budget environment marked by large appropriations already in place with expectations for further budget growth ahead. I can speak for our board in saying that we see significant opportunity to drive value for our shareholders, create greater opportunities for our employees, and, most importantly, continue the mission of supporting our customers and our country. And with that, I will turn the call over to Prabhu.

Prabhu Natarajan: Thank you, Jim, and good morning to those joining our call. My comments today will focus on a review of our fourth quarter and full year results, our outlook for FY 2027, and the meaningful opportunities we see to create value for shareholders. Turning to slide four, our fourth quarter results were consistent with the update we provided on February 11. We reported fourth quarter revenue of $1.75 billion, representing an organic contraction of approximately 6% due primarily to a $60 million year-over-year reduction of low-margin revenue from the Cloud One program we no-bid and a $45 million headwind related to a nonrecurring software license sale in the prior-year fourth quarter.

Full-year revenue of $7.26 billion declined approximately 3% organically, primarily due to our decision to no-bid low-margin Cloud One revenue, which was an approximately $200 million headwind for the year. We reported adjusted EBITDA of $181 million in the quarter, resulting in a margin of 10.3%, which reflects strong program execution and recently enacted cost-efficiency efforts. This performance contributed to full-year margin of 9.7%, which is roughly 20 basis points ahead of the guidance we provided last quarter. We continue to see meaningful opportunities to improve margins in the near future while also investing to drive innovation and growth.

Adjusted diluted earnings per share was $2.62 in the quarter and $10.75 for the year, and benefited from stronger margins and a favorable tax rate, which offset lower revenues. Free cash flow was $336 million in the quarter and resulted in full-year free cash flow of $577 million, a robust result as we remain focused on maintaining our peer-best cash conversion and deploying the capital to maximize long-term value for all stakeholders.

Turning to slide six, I want to put the fiscal year 2026 results in context. It was a year of multiple disruptions, including internal leadership changes, budget headwinds, and significant customer workforce impacts. While we saw top-line pressure, we are proud of the team's resilience and hard work to achieve robust margins and cash flow. Our reported EBITDA at year-end was 2% below our initial guidance last year, and free cash flow was better than our initial guidance. We see similar dynamics compared to the initial FY 2026 targets we shared about three years ago.

As Jim said, these results demonstrate the resilience of our business model and the enduring nature of our mission work, although we know we have work to do to improve growth.

Turning to slide seven, we are reaffirming the guidance for fiscal year 2027 we provided on February 11. As we indicated at that time, we expect total revenue in a range of $7.0 billion to $7.2 billion, representing organic contraction of 2% to 4%. The year-over-year decline is driven mainly by recompete losses which we have previously discussed. Collectively, we expect these programs to represent a headwind of approximately $400 million in FY 2027. We expect to partially offset this headwind with the continued ramp-up of new business wins from FY 2025 and FY 2026.

Our guidance for adjusted EBITDA in a range of $705 million to $715 million reflects margins between 9.9% to 10.1%, representing a year-over-year increase at the midpoint of approximately 30 basis points. And we are executing our cost-efficiency efforts which we believe can drive upside to our margin outlook. We have also begun a multiyear enterprise transformation journey to unlock significant value and eliminate burdensome and outdated business processes to create a more agile organization focused on innovation, speed, and growth. We will provide an update on our Q2 call relative to progress on this initiative.

Our adjusted diluted earnings per share guidance of $9.50 to $9.70 is unchanged from our previous FY 2027 guidance last quarter, with the lower top line offset by a decline in our share count. We are maintaining our guidance for free cash flow of at least $600 million, which will translate into over $14 of free cash flow per share. As we have previously highlighted, our FY 2027 guidance reflects approximately $70 million in nonrecurring cash tax benefits from recent legislation. Even without this benefit, in FY 2028, we expect to generate at least $530 million in free cash flow, or approximately $13 of free cash flow per share.

As Jim indicated, we recognize the significant value-creation potential that exists based on our ability to deliver more sustained revenue growth in the future. As a result, I want to discuss some of the key risks and opportunities moving forward. As I mentioned, our guide for an organic revenue decline assumes that our recompete losses are only partially offset by the continued ramp on previously won work. There are several large wins ramping at a slower rate than we expected, likely due to budget uncertainty and the lingering effects of a more resource-constrained customer procurement function. Total revenue from these programs was $350 million in FY 2026, and we are assuming $500 million in FY 2027 based on reasonable assumptions.

This compares to a potential run rate in excess of $800 million based on contract value and period of performance. While there is potential downside should some of this ramp not materialize, we believe that, on balance, the upside scenario is more likely over the next 12 to 18 months based on customer demand and supportive budgets. This could be a meaningful tailwind. In addition, our strong pipeline and alignment with customer priorities, which we expect to be well funded in a trillion-dollar-plus defense budget, are strong indicators of future growth. As we previously said, outside of our cost-plus enterprise IT work, our win rates on both recompetes and new business are in line with or higher than industry standards.

Turning to slide eight, our pipeline and submission goals are more focused on these higher-return efforts, reflecting initial results of our renewed BD discipline. While submission levels are lower than our previous target, we view them as sufficient to achieve our goals. And we expect trailing book-to-bill to improve over the course of the year as we play more offense than defense this year on our captures. We recognize that an increasingly favorable budget backdrop is only relevant if we can improve enterprise-wide performance, focus on the markets where we have the strongest right to win, and deliver for our customers.

The leadership that Jim has provided in these areas and his emphasis on focus and accountability across the company has had tangible results over the past several months. I am confident that our efforts will continue to translate into significant value creation for our shareholders in the coming years. With that, I will turn the call over for Q&A. We will now open for questions.

Operator: And wait for your name to be announced. To withdraw your question, please press 11 again. In the interest of time, we ask that you limit yourself to one question and one follow-up. Our first question comes from John Gaudin with Citi.

Jeremy Jason: Hi, this is Jeremy Jason on for John Gaudin. Jim, congrats on your role. I just want to ask, now that you have moved from the interim role to the permanent one, what is the single most significant sort of portfolio pivot you believe is required to align the company with the next roughly 10 years of government budget priorities? And more importantly, what is the message you want to say to the investor base who are trying to bridge that between your experience and the specific issues like recompetes have hampered growth in recent years?

Jim Reagan: Yeah. Well, thanks for your kind words, Jason. I think that, first of all, the moment that I stepped from being an interim to being the permanent person in charge, it was pretty amazing how my perspective changed from managing the day-to-day and being focused on getting our business development function back in gear, which is still a focus of mine, but adding to that the need to reassess our strategy, which is a process that we normally undertake during the summertime and I am actively engaged in right now. I think it might be premature for me to announce any strategic pivots other than a couple of notes that are probably worth providing for you.

First of all, the first thing that I think that we needed to do—and I think of it as a bit of a pivot—is to get focused on those areas where we have the right to win, and those areas where customer retention is the reward for innovation and strong performance. And the thing that we have been seeing over the last year has been the things that are more commoditized where you are not only finding it more difficult to differentiate and keep customers, but it is also more difficult to get paid for the hard work that we do.

On some of the more vanilla enterprise IT things are things that we want to continue doing to the extent we have it, but also to deemphasize it as kind of a strategic imperative. So that, I think, is the first epiphany that it did not take very long for me and Prabhu to wrap our heads around. I think that the next thing is to start moving into some pretty hard focus on realizing the benefits of the business model we acquired with SilverEdge.

We think that the things that we have acquired from them on the intellectual property side as well as some of the capabilities that we have to serve our intelligence customers with AI enablement in classified networks is something that we think is extensible beyond the customers that they brought with them, and we are working to leverage that. Probably have more to talk about in terms of any further strategic pivots as we work through the strategy process through the season. Probably you are going to get that. I am not interested. Okay. Thanks. Appreciate it, Jason. Thank you so much.

Operator: Our next question comes from Jonathan Siegman with Stifel.

Sebastian Rivera: Hey. Good morning. This is actually Sebastian Rivera on for Jonathan Siegman. Congrats to Jim as well on the full-time position now. I guess we would love to kind of hear your thoughts regarding the FY 2027 guidance, roughly $35 million of CapEx here. I get it does not suggest too much change relative to last year, and I believe that FY 2026 number was about $4 million lower than the year prior. And I guess would have thought the changed environment today kind of creates incremental opportunities to invest, but we would love to kind of get your thoughts there.

Jim Reagan: Sure. And appreciate the question, Sebastian. Because, you know, with what we have today in hand, we think that the CapEx is adequate to meet the current demand signals that we have on programs that require production capacity that largely exists in a number of our—for the programs where we actually make things. But I think that in Prabhu's remarks, he mentioned that we have a flexible business model, and we are in active discussions with customers about what they might see as the need to ramp up production on certain programs. And to the extent that we get the demand signals—which, by the way, I have talked to senior leadership at the Department of War.

They understand very clearly that industry, when they receive demand signals, they could pivot. We are no exception. To the extent that we get demand from customers to ramp up productions of certain weapons capabilities, we are prepared to increase the plant capacity, increase space, spend money on tooling, to meet those demands. The revenue and the take rate on those is not reflected in the guide today. But to the extent that there is any reason to update it in future, we will certainly let you know. So I think that the short answer to your question, Sebastian, is we have a business model, and we are prepared to flex it.

And we are prepared to spend more money on additional capacity to the extent that our customer comes to us and asks for it.

Prabhu Natarajan: Hey, Sebastian. Prabhu here. Thank you for the question. I think the only thing that I would add to Jim's response is that we are investing where we see clear demand signals. And we are engaging with customers at their highest levels on some of these opportunities. I would also think of the $100 million cost reductions as freeing up capacity for investment that may not show up in CapEx necessarily, but it does provide us some ammunition to be able to invest in some differentiation as we go to market in a handful of areas. Finally, I would also say that investment takes many forms.

We actively think of the investments that we make to include the time we spend with customers, helping understand needs, shaping solutions to fit the needs, and then actually actively investing in a business development and capture function that allows us to be more differentiated when we offer, I think, real solutions. We are also investing—SilverEdge is a classic example of investing a couple hundred million off our balance sheet to be able to fund, to bring some real new capabilities into the organization.

And I think finally, but certainly not the least important of which is we are actively building capabilities, whether that is mission labs, or our Mission Data Platform, or our classified—there are areas that show up beyond a CapEx line that we are investing in. And finally, I would say a foot stomp the fact that we are investing in some really key talent, and Jim talked about the Chief Growth Officer we brought to the company. But we are investing in some real talent inside the organization, refreshing our org structure. And so our investment has taken multiple forms.

But we are very comfortable that we are investing in line with the signals that we are getting, and we are frankly not waiting for contracts to start the investment. We are trying to get ahead of where the needs are going to be so that we can be ready for when those things show up in a pipe somewhere. So thank you for the question.

Sebastian Rivera: Thank you. Very helpful.

Operator: Our next question comes from Gavin Parsons with UBS.

Gavin Parsons: Thank you. Good morning. Jim, you have been sharpening the BD process for a few months now. I know that is ongoing. How long does that take you to build momentum and actually start converting that to revenue, and how much opportunity is there on a shorter-term basis to drive maybe some OCG growth?

Jim Reagan: Yeah. It is a great question, Gavin. I think that there are kind of two elements to that answer. The first one is to say that, as you know, the sales cycle in this business—converting a proposal into revenue—can take a painfully long period of time in some cases, not in all. I think that to the extent that our team is able to move the needle on win rates on work that is already in production in the proposal shop and build some more innovation, perhaps even some more discipline around how the finished product comes out, that can move the needle on win rates within six months.

I think it is probably worth noting that while we were disappointed by the outcome on a couple of these large recompetes during the year, our win rates on new work in the year, but the most recent quarters, has been in line with our expectation and industry averages. So I think that we are really pleased with that, and with less exposure in FY 2027 to the large recompetes like we had some significant exposure last year, I feel really good about our ability to achieve the kind of book-to-bill that we need to get us back on a growth trajectory after we have lapped out the impact of these losses that we have recently experienced.

I think that the last comment that I would have—and Prabhu might want to amplify on this as well—is that one of the things that I think that we are doing really well already is ensuring that the spend and investment on capture and winning work is focused on the $28 billion or so of opportunities that we have the greatest opportunity to win, to differentiate, to drive margin improvement in the business, in addition to whatever margin improvement we are going to be seeing out of the business initiatives that we have been outlining.

This year, we have called it addition by subtraction earlier, and what that really means is focusing on the things that will drive higher win rates and higher opportunities to retain customers for longer.

Prabhu Natarajan: Thank you, Jim. Hey, Gavin. Appreciate the question. Maybe a couple of data points on the guide itself. We are right now assuming about a 2% to 3% OCG in our current baseline guide for fiscal 2027. That is consistent with our 2% to 3% last year, which was the lowest of the five years that I have been here. So while we are not expecting things to get better, we do not expect things to get worse either on those, and therefore, on balance, I would say bias to the upside to the extent that the enacted budget translates into tangible procurement action over the course of the next three quarters or so.

I think as Jim said, I would foot stomp the fact that our win rates on non–enterprise IT work—some of the work we do on the engineering side as well as the mission IT side—our win rates on new have approached 50% or more at various points over the last couple of years. So our win rates really demonstrate, I think, that we have the right to win in these areas. And I think just as importantly, our recompete win rates on non-commoditized enterprise IT is sort of in that 85% to 90% range. So good win rates outside of the commoditized enterprise IT work.

And again, while it does not help lose these recompetes, the reality is I think there is very little of that left in the portfolio at this point. As we said in the prepared remarks, about 10% left of revenues from large, I would say, cost-plus EIT work. And so I do think that, on balance, we are probably at the other side of this slope here. And given that we have about 5% of recompete headwinds, with the $400 million or so that we disclosed, the reality is the absence of this headwind going into next year is going to be a tailwind in and of itself. So again, I think we feel good about where the positioning is.

None of this matters—none of what I say matters—unless we execute well, and this is a message internally as well as externally. But we have got to keep every recompete that comes our way, and we have to keep up the win rates on new, and that is where the focus is for the team.

Gavin Parsons: Thank you for that.

Operator: Our next question comes from Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu: Morning, guys. Thank you. Congrats, Jim and to Joe as well. Maybe two questions if I could start. The first question would be just on the—you know, what do you think on the enterprise IT work? And I know Prabhu did a good job of this at conference, so thank you, Prabhu, for that. Like, what changed? Was it a Science Applications International Corporation decision? Did the competitive landscape change? And then as we think about the $25 billion pipeline, how do we think about Science Applications International Corporation getting on the offensive?

Jim Reagan: I will start. I think Prabhu might amplify on my enterprise IT answers. I think that what we have seen is increasingly customers—there is a handful of our customers that are buying based on what I might say is kind of more of a cookie-cutter recipe for what they are looking for, where it is heavily embedded with network management, network uptime, help desk support, things that are harder to differentiate than the things that blend more of a mission focus in with the IT side.

Think about—on the maybe one of the more toward mission IT, it is probably supporting networks that support the warfighter and networks that blend multiple areas of information and synthesize it into a pane of glass for people that do mission planning. Those are the things that we think that we can continue to excel at or earn our share on recompetes and new work. So I think that when we stepped back and took a hard look at different flavors of enterprise IT work, that gave us some greater visibility into the kind of things that we would continue to pursue, continue to win, and the things that we are probably going to deemphasize in our pipeline going forward.

Probably everything, Dan.

Prabhu Natarajan: Yeah. Sheila, a couple of things I would probably want to add. I think the recognition that being selective on, you know, sort of, I would say, cost-plus enterprise IT was sort of a conclusion we came to over the course of the last several months. I think, if you looked at the track record of where our largest recompete challenges have been—and it does not take a bunch of research to get to NASA AEGIS, parts of Cloud One, U.S. CENTCOM, Army RITS—I think the common thread line running through all of these is that it is very hard to differentiate on predominantly cost-plus work where it is very hard to separate yourself from the competition.

And sometimes the magic is in how one writes a proposal more than what the delivery on the ground looks like. So I think it is just a recognition that we have come to. We also had perhaps more of that enterprise IT work in our pipeline five years ago than we do today. So that has been a gradual evolution. Our decision to consciously no-bid $200 million of compute and store as part of Cloud One—candidly, we contracted 3%. All of that 3% was related to one decision to no-bid that Cloud One contract.

That was a recognition that we communicated externally that is not the kind of work we want to be doing long term as we think about focusing the resources of the company into meaningful areas that will truly, I would say, restore and reassess the legacy of this company. So I think it is an evolution of what we have come to in terms of our own portfolio. Broadly speaking, I would say if you looked at competitors and where win rates are for enterprise IT versus non–enterprise IT work, you will see some of the same—I am going to say—volatility in recompete win rates within our competitors.

I think the reality was we had more of it than perhaps others, but you should expect to see some of the same volatility. And then finally, on the pipeline question, the only thing I would add to the comment that we are playing more offense than defense is the fact that our pipeline is inflecting to higher levels of non-EIT work, mission work, engineering work, and more of our opportunities on our submits this year and next year are more towards the takeaway side than the recompete side. Our largest single recompete coming up is our Vanguard Department of State program that we are feeling really good about. We have had it for 15 years.

We have done it for 15 years. And, candidly, I think that is our sentiment underlying their narrative that we get to play a little bit more offense this year than we have had the luxury of the last couple of years. Thanks, Sheila.

Operator: Our next question comes from Gautam Khanna with TD Cowen.

Gautam Khanna: Good morning and congratulations, Jim and John and Joe. I wanted to just ask within the midpoint of the guidance, maybe if there is any parameter you could tell us on how much you have to quite go get. You know, you told us about on-contract growth, but based on the backlog you have today, how do you get to—what do you still need to bid in turn, if you will, in the year? And then if you could just remind us of when the year-over-year headwinds on the $400 million of recompete losses abates—what—when is the last quarter that becomes the headwind? That one moves out of the numbers. Thank you.

Prabhu Natarajan: Hey, Gautam. Prabhu here. Thank you for the question. I will take the guidance one. In terms of the negative two to negative four of contraction, as I said earlier, we are assuming nominal amounts of OCG, 2% to 3% of OCG, and not a ton in the way of new business go-get. And so I think very much focused on what is within our control this year, and not a lot of assumptions built in around what we need to win in order to actually—in order to get to the guide that we have out there.

So I think there is always going to be a mix of some recompetes and new that is in the mix in the business. Our backlog is sufficient with our trailing 12-to-12-month book-to-bill of 1.1. I think the backlog exists for us to get to the guide without a lot of heroics this year. But that is how we wanted to position the conversation coming into this fiscal year compared to perhaps last year where we had a little more in the way of go-gets. And, of course, we had a tremendous amount of disruption from those and other procurement disruptions over the course of the year.

So I think it is very much a guide that we have control over, that the team is fully committed to, and does not take a ton of heroics for us to get to over the course of the year. But, candidly, that means we just have to put our head down and execute every single quarter. In terms of the headwinds, on a quarterly basis, I think I would say it is fair to assume that the headwinds are going to persist with us for all four quarters of the year. I think that is probably the most sensible way to think about it.

Naturally, there will be some—I am going to say—some changes over the course of the quarter as we lap on some programs and lapped into some other programs. But the reality is you should assume that there is about four quarters of headwinds and that Q1 of next year is probably going to be the cleanest quarter on a compare basis.

Gautam Khanna: Terrific. Thank you.

Operator: Our next question comes from Colin Canfield with Cantor Fitzgerald.

Colin Canfield: Hey, thank you for the question. Maybe focusing on FAR 3.0. If you could talk a little bit about Federal Acquisition Regulation and essentially what you are hearing in terms of kind of the next set of objectives look like, what that means for Science Applications International Corporation, and any sort of timing around outcomes. Thank you.

Jim Reagan: Sure. I had the chance to meet with a senior Department of War official about that just this past Friday, along with some other CEOs in a small forum. And I think that, first of all, there is tremendous urgency that we have not seen in decades around procurement reform in general, including updates and upgrades to the FAR. There is a lot that I think we can expect to see stripped down and stripped out, and some new provisions put in there are going to be really aimed at improving speed and throughput from the defense industrial base.

I think that with that said, there is going to be some spotty implementation, and there is a large acquisition community that needs to be retrained, needs to be upskilled, reskilled. But in the meantime, when the need exists, I think that our customer in the building is going to be relying on things like OT, OTAs, other innovative contracting vehicles, including the use of commercial pricing and commercial contracting mechanisms, to get what they need done faster. That said, we do have a commercial operating segment that is available, and we are actively using it to bid some of these things that the customer is needing.

We have made some changes in our own procurement and contracting organization to be ready to meet the requirement for speed. And we have an internal initiative aimed at not just handling it from the procurement side, but also how we bid differently. And that is one thing that our new Chief Growth Officer is actively engaged at so that we can meet the customer demand when they bring it to us.

Colin Canfield: Got it. Got it. And then maybe as you think about kind of your future as a hardware integrator, can you just perhaps talk about kind of your relationship and your opportunity set across the branches? We have seen obviously a lot of capital start to flow into VC-developed products, but not as much focus on kind of the integration of all of the capabilities. Right? There are the leading players, but you still have a lot of stuff that is kind of Series B, Series C, that fundamentally will need something like Science Applications International Corporation's kind of acquisition pipeline or the creds around national security and the cleared folks.

So can you just maybe talk about kind of within that context so far, how you think about Science Applications International Corporation's ability to go and integrate a lot of these earlier-stage products? Thank you.

Prabhu Natarajan: Hey, Colin. Prabhu here. I will take that one. I think you are hitting on something that is incredibly important. The strength of the total defense industrial base is going to be relevant and necessary to deliver what the warfighter needs. And so I think there are folks like Science Applications International Corporation that are in the ecosystem that have for decades brought evolving capabilities to the warfighter because we have an acute understanding of how the mission works. And I do not think that demand signal is going to look any softer in the next five years. So we are actively partnering with venture companies. We have a venture program that we are very proud of.

That—we actively bring capabilities, integrate them in the number of hardware-software integration centers we have across the country, whether that is Huntsville, or Charleston in South Carolina, or in Crane, Indiana, where we do a tremendous amount of hardware and software integration. And we are just getting better at that kind of work. And there is a decent chunk of it in our pipeline, and so I do think that we have the sort of mission set, if you will, where our expertise and our mission and our domain understanding is going to be critical as we graduate more of these smaller companies into the larger ecosystem.

So we are looking forward to partnering with them, and, as you know, this is how this business, this industry, has evolved over the last, I would say, 50 years, and I do not expect the next 20 or 30 to look any different. I think, to be fair, some of the new entrants have put, I think rightfully so, pressure on the incumbents to deliver faster, better capability, and at cheaper prices. I think that competition is a good thing. So we are looking forward to it, and we are doing a really nice job integrating some really good capability into the ecosystem.

Colin Canfield: That is great color, Prabhu. Thank you.

Operator: Our next question comes from Tobey Sommer with Truist.

Tobey Sommer: Thanks. You mentioned the evaluation that you have ongoing is the first, I think, bottoms-up evaluation on processes and so forth since the split, but the company has been trying to address these issues for a number of years. Maybe the process is different this time, but the pursuit is an ongoing one. How do you manage the culture and the morale when you are sort of reexamining something that has been kind of a focal point? And do you envision any changes in compensation as being helpful in achieving your end?

Jim Reagan: Toby, I appreciate that question. I think at least once or twice every week, I get an email from one of our 23,000 employees applauding what we are doing and giving me some real-life examples of things that we could do differently to help them get their jobs done easier. Sometimes they are seemingly mundane, but still important. Some of them are things that I would not have been made aware of had not someone sent me an email directly. And I look at that. I read it. I send it to the team in the program office that is running this.

So I would say that the employees are saying, finally, we are doing some things to get some of the gunk out of the system. Gunk is a technical term for me on this, and we are definitely working hard in getting this program to get things working better, faster, more efficient, not just for our internal teams, but it also will translate into gains for our customers as we are able to be a bit more nimble.

So I would say that there is tremendous receptivity to this, and I think that it is going to allow us to make decisions faster, get stuff done faster, but also take a lot of the cost that is going to fall out of that and reinvest it into the things that we have been talking about in terms of growth. I think that we have the capability with that to add more account management teams, people who are walking the halls of the building, to bring new ideas to customers and increase the daily communication about what we need to do to help them be more successful.

And with that, I think it is probably one of the most important things that we are going to get done this year.

Operator: Our next question comes from Noah Poponak with Goldman Sachs.

Noah Poponak: Hey, good morning, everyone. Morning, Don. Is it possible to give us the details of recompetes of size that you have in your fiscal 2027 and fiscal 2028—just kind of cover the next two years—which programs, when, and how big are they for you now in revenue?

Prabhu Natarajan: Hey, Noah. Prabhu here. I will take the first stab at this. I think, if I think about significant programs, as you know, 10% to 20% of the business comes up for recompete every year. So if I think about the largest recompetes out there, Department of State Vanguard is the single largest program that is going through a recompete cycle in fiscal 2027. Okay? And that program, as we know, the scope of the program is increased. We are on year 15 of that program, and we have been qualified to bid and compete for work on four of the five workstreams.

The one workstream that we chose not to bid because it would have created the OCI for us for the other four workstreams. So that is the single largest recompete that we have. Beyond that, we always have programs that are in the, I am going to say, $75 million to $150 million range. Let us call it 1% or 2% a year. We always have one or two of those every year, but, in reality, we are also bidding a multiple of that in the form of takeaway opportunities in the pipeline. So I tend to not think of those actively as, you know, sort of significant recompete risk.

I think the reality is the way we are approaching this, Noah, is, you know, keep as much of the workshare on Vanguard as possible—hopefully even eke out a little gain there. But our baseline assumption right now for this year is that we have accommodated all kinds of contingencies into the minus two to minus four. But Vanguard is probably the only one that is worth calling out right now.

Noah Poponak: When will you be recompeting that? And can you size it for us approximately annual revenue for you?

Prabhu Natarajan: Yeah. So we will be going through a recompete cycle on Vanguard. Again, it is going to go by workstream to workstream. There are four workstreams that will get recompeted over the course of this year. We are the incumbent. We will be competing for all four. We have been qualified to compete, and we are in the down-selected category. And so it is unlikely to materialize in terms of impacts to revenue anytime, I would say, safely in the first half of this year. If anything, we may have some nominal impacts in the second half. But I say nominal.

So more of the impacts, if we were to be in an unfortunate position of not keeping most of that work, most of that impact will be felt next year and not this year. So that is how I would probably preface it.

Noah Poponak: Okay. And then would it be possible to talk about how the funding environment has evolved year to date? I know that is a short-term question, maybe it gets into splitting hairs. But just given the—as you described—the funding of obligated dollars has been slow and choppy and uneven. In January, it sounded like some in the industry saw that getting better. I am just curious if that improved through the quarter or got worse through the quarter. Is it better or worse today or the same versus how the year ended?

Prabhu Natarajan: Yeah. I—you know, I am going to say the health warning here is that whatever I say now is probably going to be OBE probably at the end of the week. But here is what we have seen. I think it is true that January for outlays was better than the preceding three months for sure. I think on outlays, as you know, there is probably about a three-month lag between outlays and revenue performance. So a good January month on outlays means that April-May should look healthier than it would have looked otherwise.

I think the more important milestone that we are tracking to is a milestone in the second quarter of our fiscal year—sort of the June, July, August timeframe. Certainly June or July, if you look at where the agencies are relative to their—relative comparing outlays to the appropriations or the budget amounts—I think that will tell us if we are going to see a year-end flush in terms of money that needs to be spent before the end of the government fiscal year. So that is probably the clearest goalpost that we would say is out there. But in reality, we do think that the appropriations have to get spent; therefore, the money will have to come.

I think for us, it is very much a question of timing and how quickly is the spigot going to open up. And this is where the constraints on the government procurement functions have been difficult to size and estimate. But hopefully things get better here, certainly in the second half from the summertime through the end of the fiscal year, Noah. Then perhaps, immediate change in the first quarter of this fiscal year for us.

Noah Poponak: I understand. Okay. Thank you. Bye.

Operator: I am showing no further questions in queue at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.

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