Group 1: Market Trends and Defense Spending - European Commission President Ursula von der Leyen announced an 800 billion euro ($841 billion) "REARM Europe" program to enhance military capabilities and support Ukraine, which may lead to increased purchases from U.S. defense contractors [3] - Citigroup suggested that recent declines in defense stock prices combined with potential European spending indicate it is time to buy defense stocks, highlighting a projected increase of $300 billion in the U.S. defense budget over the next 10 years [4] - Wells Fargo noted that defense stocks are becoming "interesting" and raised its price target on Lockheed Martin, reflecting a growing positive sentiment on Wall Street [5] Group 2: Company Valuations - Lockheed Martin's current price-to-earnings (P/E) ratio is 21.2, which is lower than the S&P 500 average of 28.8, but its price-to-sales (P/S) ratio of 1.6 and enterprise value-to-sales ratio of 1.8 indicate it is 43% more expensive than its 20-year average [7] - Science Applications International Corporation (SAIC) has a more attractive valuation with a P/E ratio of 17.9 and a P/S ratio of 0.8, along with significantly higher free cash flow compared to net income [8] - GE Aerospace's valuation is complex due to its hybrid business model, with a P/S ratio of 5.5 and a P/E ratio of nearly 32, which appear expensive given its cash flow generation [9][10]

Core Viewpoint - Science Applications International Corp. (SAIC) is set to release its fourth quarter fiscal year 2025 results on March 17, 2025, with a conference call scheduled for 10:00 a.m. Eastern time to discuss operational and financial results [1] Group 1: Company Overview - SAIC is a Fortune 500® technology integrator focused on technology and innovation to serve and protect the world [3] - The company has a diverse portfolio across defense, space, civilian, and intelligence markets, providing secure high-end solutions in mission IT, enterprise IT, engineering services, and professional services [3] - SAIC employs approximately 24,000 people and is headquartered in Reston, Virginia, with annual revenues of about $7.4 billion [4] Group 2: Conference Call Details - The conference call will be available via webcast only, with no dial-in access provided [2] - A supplemental presentation will be accessible through links on the SAIC website, and an on-demand audio replay of the webcast will be available after the call [2]

Group 1 - The U.S. Department of Defense is conducting a comprehensive review of consulting services contracts, aiming to make cuts and terminate nonessential contracts [1][4] - Companies such as Booz Allen Hamilton, Science Applications International, Leidos Holdings, and General Dynamics experienced stock declines due to investor concerns about the implications of the review [2][3] - The review results are expected to be released between March and mid-April, with the potential for significant contract terminations [4][5] Group 2 - The Department of Government Efficiency has already terminated a $1.9 billion contract with the Internal Revenue Service, indicating a trend towards cuts in consulting services [5] - There is uncertainty regarding the shift from a "cost-plus" contract model to a fixed-fee model, which could impact company margins [6] - Investment bank William Blair downgraded several companies, including Booz Allen and General Dynamics, reflecting the negative sentiment in the market [6] Group 3 - Despite the potential for cuts, there is a belief that the government may not fully revert to in-house operations for previously outsourced activities, as this would lead to significant disruptions and costs [8] - The industry had hoped that government streamlining efforts would create new opportunities, but the outlook now suggests a mix of both opportunities and cuts [7] - The current environment is expected to lead to volatility in the stocks of these government IT service providers until more clarity is achieved [8]

Summary of Key Points Core Viewpoint - Shares of Science Applications International Corporation (SAIC) have experienced a significant decline of 35%, dropping from a high of $154.10 on November 11, 2024, to $100.13 on February 18, 2025, primarily due to market sell-off pressures [1] Company Performance - The stock price of SAIC has decreased substantially over the past three months, indicating potential volatility and investor concerns [1] Investor Insights - Robert F. Abbott, an experienced investor since 1995, has been utilizing options strategies such as covered calls and collars alongside long stock positions, reflecting a cautious approach to market fluctuations [1] Market Context - The decline in SAIC's stock price may suggest broader market trends affecting technology and defense sectors, which are critical to the company's operations [1]

Core Insights - Science Applications International Corp. (SAIC) shares have declined 18% over the past three months, underperforming the Zacks Computers - IT Services industry, Zacks Computer and Technology sector, and the S&P index, which grew by 7.4%, 9.8%, and 6.6% respectively [1][2] Financial Performance - SAIC's fiscal 2025 revenue outlook is projected to be between $7.425 billion and $7.475 billion, raising investor concerns due to a slight expected decline of 0.13% year over year based on Zacks consensus estimates [2][11] - The company is currently facing revenue gaps due to contract transitions and improved bid selections [2] Recent Developments - SAIC secured a $170.9 million contract from the Texas Department of Information Resources to provide cybersecurity services, indicating a growing presence in state and local government sectors [3] - The company has been focusing on increasing its market presence in the federal government sector, with approximately 98% of its revenues coming from U.S. government contracts in recent years [6] Market Position - Major clients include various U.S. government agencies such as Homeland Security, NASA, and military branches, which helps stabilize revenue and minimize fluctuations [6][7] - The increased federal government budget is expected to accelerate contract awards, benefiting SAIC's top-line growth [7] Competitive Landscape - SAIC operates in a competitive market with players like CACI International, KBR Inc., and Leidos Holdings, which creates pricing pressure and low-margin government deals affecting profitability [8][9] - Rising component costs, labor, and logistics expenses, along with recession concerns, may lead to softened spending by government agencies, impacting near-term prospects [10]

Core Insights - Science Applications International Corp. (SAIC) has been awarded a contract valued at $170.9 million by the State of Texas' Department of Information Resources to provide cybersecurity services [1][3]. Group 1: Contract Details - The contract aims to enhance cybersecurity for state agency networks, focusing on security operations services, risk management, and compliance with regulations [3][4]. - This contract signifies an expansion of SAIC's cybersecurity efforts in Texas, building on its existing partnerships with various state and local governments [2][3]. Group 2: Company Overview - SAIC is a Fortune 500 technology integrator with a focus on defense, space, civilian, and intelligence markets, generating annual revenues of approximately $7.4 billion [5][6]. - The company employs around 24,000 individuals and emphasizes a culture of diversity, equity, and inclusion [6].

Core Viewpoint - Science Applications International Corp. (SAIC) has underperformed in the year-to-date period, with a share price decline of 7.8%, contrasting with the growth of the Zacks Computers - IT Services industry, Zacks Computer and Technology sector, and the S&P index, which grew by 16.7%, 34.2%, and 27.8% respectively [1][2]. Group 1: Performance and Challenges - The decline in SAIC's stock performance is attributed to temporary challenges related to contract transitions and improved bid selections, leading to revenue gaps [2]. - The company's cautious outlook for fiscal 2025 revenues, projected between $7.425 billion and $7.475 billion, raises concerns among investors [2]. - Despite these challenges, SAIC is recovering and securing new contracts [2]. Group 2: Recent Contracts and Government Focus - SAIC has recently secured a prime position on the $1.8 billion Personnel and Readiness Infrastructure Support Management (PRISM) contract to support the U.S. Department of Defense (DoD) [3]. - The contract involves assisting the Office of the Under Secretary of Defense for Personnel & Readiness with services such as technology integration, data analytics, and mission support [3][4]. - The focus on federal government contracts is significant, with approximately 98% of SAIC's revenues in 2021, 2022, and 2023 derived from U.S. government contracts [7]. Group 3: Market Dynamics and Competitive Landscape - The company operates in a highly competitive market for defense, space, intelligence, and mission-critical services, facing competition from firms like CACI International, KBR Inc., and Leidos Holdings [9][10]. - Pricing pressures in government contracts lead to low-margin deals, impacting SAIC's profitability [10]. - Rising component costs, labor, and logistics expenses, along with recession concerns, pose additional challenges to the company's near-term prospects [11]. Group 4: Future Outlook - The increased federal government budget is expected to accelerate contract awards, which could positively impact SAIC's top-line growth [8]. - The company is on a recovery path, obtaining multiple government contracts, suggesting a potential for improved performance moving forward [12].

Core Insights - Science Applications International Corp. (SAIC) has secured a prime position on the $1.8 billion Personnel and Readiness Infrastructure Support Management (PRISM) Multiple Award Task Order Contract (MATOC) to support the Department of Defense (DoD) [1] - The PRISM contract aims to provide innovative and cost-effective services, significantly reducing acquisition lead time and increasing flexibility in the acquisition process [2] - SAIC's commitment under the PRISM MATOC includes enhancing operational capabilities, optimizing readiness, and ensuring a resilient defense personnel framework through advanced data integration and analytics [3] Company Overview - SAIC is a Fortune 500 technology integrator with annual revenues of approximately $7.4 billion, focusing on technology and innovation across defense, space, civilian, and intelligence markets [5] - The company employs around 24,000 individuals and emphasizes a culture of diversity, equity, and inclusion [5] - SAIC integrates emerging technology into mission-critical operations to modernize and enable national imperatives [4]

Financial Data and Key Metrics Changes - The company reported third quarter organic revenue growth of 4.3%, with adjusted EBITDA of $197 million and a margin of 10% [8][9] - Adjusted diluted earnings per share increased to $2.61, benefiting from strong profitability and a 16% effective tax rate [8][9] - Free cash flow was $9 million, lower than typical due to an additional payroll cycle and strong collections in the previous quarter [9] Business Line Data and Key Metrics Changes - The backlog of submitted bids increased to nearly $19 billion, up from $17 billion in the previous quarter [11] - Bookings for the quarter were $1.5 billion, resulting in a trailing 12-month book-to-bill ratio of 0.9% [11] - The company expects to submit over $25 billion in bids for the full year, up from the prior target of $22 billion [10] Market Data and Key Metrics Changes - The company anticipates a revenue growth of 3% for the full fiscal year, slightly ahead of previous guidance [9][24] - The company is preparing for potential changes in the market due to the incoming administration's focus on efficiency, which may impact funding in certain markets [12][13] Company Strategy and Development Direction - The company is focused on an enterprise growth strategy to "bid more, bid better, and win more," with an emphasis on mission IT and enterprise IT [10][14] - The strategy includes a shift towards fixed-price contracts, which are expected to provide better margins and align with government efficiency goals [14][55] - The company plans to manage its cost structure and investments to maximize long-term value while ensuring earnings and cash flow durability [15][30] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating the uncertainty created by the incoming administration, emphasizing the importance of technology in driving efficiency [12][13] - The company expects to see improved margins in the civilian segment, projecting a low point of 12% for civilian segment margins [104][106] - Management indicated that the company is well-positioned to capitalize on opportunities arising from the government's focus on efficiency [15][31] Other Important Information - The company has a new $1.2 billion share repurchase authorization approved by the Board, with plans to repurchase approximately $500 million of shares this year [30] - The company is scenario planning for potential changes in the market, maintaining a highly variable cost structure to adapt to different revenue environments [26][28] Q&A Session Summary Question: Impact of AAV contract resolution - The AAV contract resolution had a revenue impact of about $13 million to $14 million, less than 1% of revenue for the quarter [35] Question: Guidance for fiscal year 2025 - The company expects a 3% growth at the midpoint for fiscal year 2025, with recompete headwinds expected to be a little over 2% [36][39] Question: Recompete win rate - The recompete win rate is currently below target, but management is implementing a new centralized business development process to improve it [42][44] Question: Shift to fixed-price contracts - The majority of the company's work is still cost-plus, but there is a track record of transitioning to fixed-price contracts, which are more efficient for the government [49][51] Question: Book-to-bill target of 1.2% - Management believes they can achieve the 1.2% book-to-bill target by the first half of fiscal year 2026, despite potential timing risks from the administration transition [57][61] Question: Margin profile of backlog - The company has raised internal hurdle rates for contracts, expecting higher margins in the backlog compared to current reported margins [114][116]

Financial Performance - Revenues for the three months ended November 1, 2024, were $1,976 million, a 4.3% increase from $1,895 million for the same period last year[8]. - Operating income for the nine months ended November 1, 2024, was $425 million, down 35.8% from $662 million for the same period last year[8]. - Net income for the three months ended November 1, 2024, was $106 million, representing a 14.0% increase compared to $93 million for the same period last year[11]. - Basic earnings per share for the three months ended November 1, 2024, were $2.15, up 20.1% from $1.79 for the same period last year[8]. - Comprehensive income for the three months ended November 1, 2024, was $105 million, compared to $90 million for the same period last year[11]. - Net income for the nine months ended November 1, 2024, was $264 million, compared to $438 million for the same period in 2023, representing a decrease of 39.7%[23]. - For the three months ended November 1, 2024, total revenues reached $1,976 million, an increase from $1,895 million in the same period last year, representing a growth of approximately 4.3%[110]. - For the nine months ended November 1, 2024, total revenue reached $5,641 million, compared to $4,465 million for the same period in the previous year, marking a year-over-year increase of 26.3%[61]. Assets and Liabilities - Total current assets as of November 1, 2024, were $1,160 million, an increase from $1,131 million as of February 2, 2024[15]. - Total liabilities as of November 1, 2024, were $3,663 million, a decrease from $3,529 million as of February 2, 2024[15]. - Cash and cash equivalents decreased to $46 million as of November 1, 2024, down from $94 million as of February 2, 2024[15]. - Accounts payable increased to $714 million as of November 1, 2024, compared to $567 million as of February 2, 2024[15]. - Retained earnings increased to $1,602 million as of November 1, 2024, from $1,432 million as of February 2, 2024[15]. - The company reported a decrease in receivables by $108 million for the nine months ended November 1, 2024, compared to a decrease of $142 million for the same period in 2023[23]. - The company reported a remaining performance obligation (RPO) of approximately $5.7 billion as of November 1, 2024, with an expectation to recognize revenue on about 81% of this amount over the next 12 months[65]. Cash Flow and Investments - Net cash provided by operating activities increased to $379 million for the nine months ended November 1, 2024, compared to $333 million for the same period in 2023, an increase of 13.8%[23]. - The company reported a net increase of $95 million to cash flows from operating activities from sold receivables for the nine months ended November 1, 2024, compared to no net impact in the prior year[103]. - Cash used in investing activities for the nine months ended November 1, 2024 was $15 million, a significant decrease from $324 million in the prior year, primarily due to the $356 million cash proceeds from the sale of the Supply Chain Business in the previous period[202]. - The company executed a $510 million senior secured term loan credit facility (Term Loan B3 Facility) due February 2031, which was fully borrowed to pay off previous loans[86]. - The company borrowed $975 million and repaid $860 million under the Revolving Credit Facility during the nine months ended November 1, 2024[91]. Shareholder Returns - Cash dividends paid were $57 million for the nine months ended November 1, 2024, compared to $60 million for the same period in 2023, reflecting a decrease of 5%[23]. - The company declared a quarterly dividend of $0.37 per share during the three months ended November 1, 2024[53]. - The company has authorized a share repurchase program of up to $1.2 billion, effective December 16, 2024[129]. - The company repurchased approximately 23.4 million shares under its repurchase plan, with a total authorized repurchase of approximately 24.4 million shares[52]. Business Segments - The Defense and Intelligence segment provides a diverse portfolio of national security solutions to U.S. government agencies, while the Civilian segment focuses on solutions for federal, state, and local governments[27]. - The Defense and Intelligence segment generated revenues of $1,515 million, while the Civilian segment contributed $461 million for the same quarter, indicating a strong performance in both areas[110]. - The operating income for the Defense and Intelligence segment was $344 million for the nine months ended November 1, 2024, compared to $336 million in the same period last year, showing a modest increase[115]. - The Civilian segment's operating income was $105 million for the nine months ended November 1, 2024, compared to $139 million in the same period last year, reflecting a decrease of approximately 24.5%[115]. Operational Changes - The company completed a business reorganization effective February 3, 2024, transitioning from two customer-facing operating sectors to five business groups, enhancing operational efficiency[104]. - The company completed a business reorganization effective February 3, 2024, creating five customer-facing business groups[134]. Tax and Compliance - The effective income tax rate for the three months ended November 1, 2024, was 15.6%, a decrease from 18.0% for the same period in 2023, primarily due to the non-recurrence of a gain from the disposition of the Supply Chain Business[80][83]. - The company is currently subject to ongoing investigations by the U.S. Department of Justice, which may impact future financial results[121]. Future Outlook - The company expects to recognize revenue from a substantial portion of its funded backlog within the next twelve months[189]. - The fiscal year 2025 budget includes a 1% growth for defense budgets and an overall 1% growth for non-defense budgets[140]. - The company anticipates future cash needs for working capital, capital expenditures, and contractual commitments, evaluating cash provided by operating activities and free cash flow[197].