Science Applications International Corp. Stock

Good day and thank you for standing by. Welcome to the SAIC Fiscal Year 2027 Q2 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jon Raviv, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining SAIC's Second Quarter Fiscal Year 2027 Earnings Call. My name is Jon Raviv, Vice President of Investor Relations. And joining me today to discuss our business and the financial results are Jim Reagan, our Chief Executive Officer; and Prabu Natarajan, our Chief Financial Officer and Executive Vice President of Enterprise Operations.

Today, we will discuss our results of the quarter ended July 31, 2026. Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call. I refer you to our SEC filings for a discussion of these risks. In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors. These non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP. A more fulsome explanation of these measures can also be found in our SEC filings.

It is now my pleasure to turn the call over to our CEO, Jim Reagan.

Thank you, John, and good morning to everyone joining our call. I want to start by saying how proud I am of this team. Our results this quarter are a testament to our employees' relentless commitment to our customers' most critical missions.

So let's take a look at Slide 3 for our key messages. We built on our momentum this quarter with performance once again ahead of our expectations. These results reflect our team's focus on driving program performance and operational efficiency, resulting in organic growth, double-digit margins and robust free cash flow. While award activity reflected some unevenness in the procurement environment, we remain encouraged by the strength of our qualified pipeline, our submission plan, and the performance of our business development team.

We continue to see healthy customer engagement, and we believe that we're well positioned to convert those opportunities into growth as we align with our customers' clear demand signals for more capability and capacity. We also believe our base is more secure with a recompete win rate of over 90% this quarter, creating an easier path to on-contract growth, and building momentum to capture the benefits of new business where our win rates are well within our target range. These results reflect our more disciplined bidding approach as we focus on fewer, mission-oriented pursuits. It also underscores our commitment to execution excellence and the trust our customers place in us.

Several wins over the last few months highlight our role in supporting critical national security missions. We booked over $1.6 billion of intel space awards in the first half of this fiscal year, well ahead of our recent trends. This high-value engineering work demonstrates our domain expertise and long-standing commitment to the space superiority market. We also secured a recompete win to support hardware-software integration and interoperability to help the Army deploy new technologies onto the battlefield. And after the quarter closed, we won a significant recompete of a critical border security program.

Combined with last quarter's successful DHS recompete, this latest win extends our long-standing role in delivering innovation with an integrated software-hardware solution to secure our country's borders.

These wins show a common threat across our intelligence, defense, and civilian markets. Each requires integrating advanced technology with deep domain expertise to deliver mission-critical outcomes. This is what SAIC does best. This is who we are. And we continue to build on this identity with investments supporting enhanced capability, capacity, and speed. For instance, our investments in quantum solutions bridge the gap between critical technologies and practical mission applications. It's still early in the journey, but like AI, we expect quantum to create new mission challenges we're prepared to address as we help our customers sense, decide, and act across their domains.

Turning to operations. As we previously mentioned, we are transforming our enterprise to build a stronger, more agile company that supports growth-oriented investments and sustained margin improvement. Project ORBIT, or Optimizing Resources for a Better Impact Tomorrow, is moving into its implementation phase. I'm encouraged by our employees' dedication and enthusiasm for driving a foundational shift so we can clear what I call the gunk out of our systems and processes.

Let me give you a sense of what structural change looks like in practice. In procurement, a new acquisition system can bring more rigor to how we buy, analyzing our spend, consolidating suppliers, and managing demand, so we buy smarter, not just spend less. In our recruiting function, a new onboarding system is designed to shrink the time between recruiting a candidate and putting them on a contract, protecting revenue and serving our customers faster. And in admission delivery, agenetic AI tools can scale capacity without adding headcount, whether it's training air traffic controllers or generating actionable intelligence.

With ORBIT, we expect to book some quick wins at the start to fuel the investment for bigger changes with momentum building over the 3-year time horizon. The most transformative ideas will take the most time, such as fundamentally rethinking our procurement process. AI will play a role as we responsibly deploy relevant tools to achieve specific outcomes, rather than just directing people to consume more tokens. We're excited to do this while our customers are making fundamental changes to increase capacity, drive speed, and more effectively shepherd taxpayer dollars. We look forward to partnering with them on these efforts as we both lean forward to transform our organizations.

I want to update you on another piece of our transformation efforts, the portfolio and strategy review we announced last quarter. We have spent the last few months identifying the intersection of our strongest right to win and our greatest growth potential. I do not expect a sharp turn in who SAIC is, or what it does. But I do expect to emerge with a sharper sense of where we want to go. And I want to emphasize we are already doing a lot of things well. So this review is as much about doubling down and investing to grow those critical mission areas as it is about pursuing new ones. This includes M&A as we evaluate portfolio opportunities that are key to implementing our strategy. We will act on those opportunities as they arise, and we expect to share more on our December earnings call.

I appreciate that we're asking a lot of our employees, and I'm proud that the team has embraced these new efforts, while maintaining strong operational performance. As a result of our improved performance and outlook for the year, we are raising our FY '27 guidance for revenue, EBITDA and EPS. As I've repeatedly said, FY '27 is a year of commitment as we set targets that we're confident we can achieve. And we look forward to making FY '28 a year of implementation as the ORBIT and strategy projects roll out. We see significant opportunities to create value for all of our stakeholders and continue the mission of supporting our customers and our country.

With that, I'll turn the call over to Prabu.

Thank you, Jim, and good morning to everyone joining our call. I'll review our second quarter results, updated guidance, and share more detail on the financial impact of Project ORBIT.

Turning to our results on Slide 4. We reported second quarter revenue of $1.9 billion, representing organic growth of approximately 5%. The quarter benefited from solid growth across our markets and our teams' focus on converting backlog into revenue across our existing contracts in an improving outplay environment. We reported adjusted EBITDA of $193 million in the quarter and margins of 10.3%, reflecting strong program execution and continued benefit from our cost efficiency efforts. This result is up modestly year-over-year, excluding the prior year's favorable legal settlement. Adjusted diluted earnings per share of $3.01 and is down year-over-year due to a favorable settlement in the prior period, offset by lower share count.

Free cash flow was $131 million in the quarter, another strong result as we maintain peer-leading cash conversion. Net leverage fell to 3.0x this quarter as we continue to naturally delever as EBITDA improves. Going forward, we have flexibility to delever incrementally or actively shape the portfolio to support the strategy.

Please turn to Slide 5 to review our forward indicators. We are responding to clear customer signals for the services we deliver. But we've seen some large opportunities slip to the right as procurement offices try to do more with less while implementing new guidelines including fixed price directives. This resulted in a quarterly book-to-bill of 0.6,x, or 0.8x on a trailing 12-month basis. We would have been closer to 1.0x, if not for a delay in a large recompete award we booked 2 days after the quarter closed. Slower RFPs and awards also drove contract extensions and increased ceiling utilization as we offered execution pathways for our customers, which is reflected in our year-to-date organic growth. But combined with a slower submission and award environment, this suggests we could finish the year closer to 1.0x on a book-to-bill basis. Our pipeline is in place. and the business development team is prepared to substantially increase submissions in the coming months. We are confident that applying our strong win rates against higher submissions should generate higher book-to-bill. In the meantime, you can expect our team to continue delivering capability to our customers as our funded backlog continues to grow.

Please turn to Slide 6. This quarter's organic growth of 5% was driven by broad-based strength and unplanned material purchases worth approximately 1% that we don't expect will repeat. On-contract growth, or OCG of 9% was well ahead of our plan. This maintains the momentum from 1Q, suggesting an improving outlay environment translating into revenue growth. As previously discussed, Roughly half of this year's OCG comes from a handful of programs we won in FY '25 and FY '26 that ramped slowly last year. These programs generated $350 million last year, and we are planning for $500 million this year. We are on track with approximately $240 million in the first half of this year.

Please turn to Slide 7. We are increasing our revenue, margin and EPS guidance to reflect our strong year-to-date performance. We are raising our revenue guidance by 2% to a midpoint of $7.25 billion, reflecting organic contraction of 2% to flat. The applied second half contraction reflects the RITS contract rolling off, creating an approximately 350 basis point headwind in the second half. We are also raising our adjusted EBITDA guidance by 4% at the midpoint implying margins of 10.3% to 10.5%, or 20 basis points above our previous guidance. This increase is primarily due to strong first half performance.

We expect margins to step down in the second half to the high 9% range as we make targeted investments in several high-priority areas where customer demand and strategic relevance are accelerating. Our investments include CapEx, where we have spent approximately $25 million in the first half to support growth opportunities. We still expect free cash flow of at least $600 million or $14 per share this year. As Jim said, this is a year of commitment, commitment to being transparent with our performance and expectations and a commitment to setting targets within our control that we expect to achieve.

Please turn to Slide 8. We are pleased to be heading into the implementation phase of Project ORBIT, our disciplined, data-driven approach to support growth and margin improvement. As you can see on the left, these efforts span 6 themes. On the right, you can see how these teams map against time line and customer partnership. The bubble size represents the 3-year dollar value opportunity. We are running our project implementation just as we would run a program for our customers. We have staffed a strong team, set clear goals and are focused on delivering an outcome.

Buy Smarter is the largest and longest-term opportunity, as it takes time to restructure how we buy across the enterprise. The Automation theme requires more customer partnership as it impacts how we deliver programs. And other efforts like Simplify Processes and Work Smarter are more with our control and are areas where we can move faster. As Jim said, we are excited to partner with our customers at a time when we are both hungry for change.

Please turn to Slide 9 to discuss what this means for the financial model. Late last year, we discussed approximately $100 million in cost reductions. Those were hard choices, made quickly, and they are delivering benefits. ORBIT is different. It is more fundamental. This means harder, more sustained work over a longer time frame to generate more structural change. At this point, we expect approximately $150 million in annual run rate savings by the end of the 3-year implementation period. This opportunity is spread across the business, including our direct programs and our indirect spending. We expect approximately 2/3 of the savings or $100 million to go back into business, investing in new efforts, expanding our capacity to address demand on our current contracts, or making us more competitive. The rest should support our margin expansion story.

As a result, we consider mid-10s to be a reasonable margin target for next year, and we see a path to approximately 11% margin in FY '30 as the benefits from Project ORBIT fully materialize. Our margin story does not depend on any single initiative. ORBIT is a key driver, but it is one of several levers, including continued discipline raising our bid thresholds, focused business development, and shaping and pursuing more outcome-oriented work. All of these dynamics support the business remaining solidly double digit on an annual basis going forward.

In closing, I'm grateful for the team's focus on executing these changes while running the business. There's more work to do, and I'm confident that our efforts will continue to translate into value for our stakeholders in the coming quarters.

With that, I'll turn the call over for Q&A.

[Operator Instructions] And our first question comes from Jonathan Siegmann with Stifel.

Congratulations on strong results. Really happy to see the organic growth. Maybe just on the on-contract growth portion of it, on-contract growth portion of it, well ahead of plans. Can you talk about what the company is assuming for the second half? And then maybe a sense of disaggregating where the upside came from? Is this really the market getting better? Or is this some of the actions the team is taking to more efficiently pursue those opportunities?

Jonathan, this is Jim. Thanks for your question. In terms of the strength that we've been seeing in on-contract growth, I'd say it's roughly double what we were seeing this time last year. And what we're seeing is that kind of a broad-based ability for the customers to move money faster on to contracts. And that isn't limited to any particular customer or part of the government. And the velocity that we see there is expected to continue through the balance of the year, which is the basis upon which we've altered our guidance for the year. In addition to that, we're seeing broad-brushed success in executing and having a focus on executing programs that's enabled us to push our margin expectation a bit higher. That -- and that's not only strong execution on programs, but it's also a result of the successful execution of some cost reduction programs from late last year that Prabu had mentioned during the script. So I think that -- I hope that answers your question. But if you have a follow-up, feel free to tee it up.

Maybe just if I understand the prepared remarks, $300 million is in the plan for on-contract growth and you've already hit $250 million with Q1, Q2. Is that the right math to do, Prabu?

John, I appreciate the question. First of all, a big shout out to the team that puts us in a place where we can sit here and talk about OCG being at 9%, which is obviously a far track from where we were at Q2 of last year. Jim was right on. I think the growth we saw was broad-based. And our assumption for the second half of the year is that we will see OCG at about a 5% clip. Obviously, we were expecting 2% to 3% for the remainder of the year at Q1. And if obviously, Q3 or Q4 happens to be better than the 5% we are modeling right now, then obviously, we're going to see some upside pressure to the revenue guide itself.

I think the other data point I'd throw out there is last year's book-to-bill was 1.1. And I think sometimes we lose sight of the booking strength that we've had, excluding the single award IDIQ, we were sitting at 1.1 at year-end of last year. We all know that the outlay environment has been gradually improving over the course of the year, that there's probably a 3- to 4-month lag from outlays converting into revenue. We saw some of that benefit come through. And importantly, over the last couple of years, Jonathan, we've had about $2 billion to $2.5 billion of single-award IDIQ wins that are not nearly fully reflected in the backlog. I'd say roughly 20%, 25% has been reflected in the backlog. So part of how we book keep, if you will, for the single award IDIQs is we book the task orders that expect to convert into revenue, and that usually happens within 12 months. So you're not going to see it come through the backlog, but you will definitely see it come through OCG. So that's sort of the confluence of things that caused OCG to be higher in the second quarter.

And then finally, on the $300 million, I think that was our -- what we said was when we set the plan and offered guidance early on that there were a handful of programs that we expect will run rate to about $0.5 billion this year. And at the first half of this year, we were sitting at roughly the 50% mark. So those programs are continuing to provide the momentum we expected to. Again, these are wins from last year and the year before that candidly had not converted into revenues, but they were in backlog, at least some of them. So I think you're seeing a combination of those factors come through. But again, big picture, about a 5% assumption for the second half of the year, and let's see how Q3 plays out.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Great quarter. Kudos to both of you. Jim and Prabu, I know Orbit is a new initiative. So maybe some time on that and Prabu, I feel like you've been focusing on cost for so long. So what kind of drove the origination of Project ORBIT and how you think about the $150 million of savings this quarter -- sorry, as you think about that $150 million of savings in terms of buckets of efficiency and in a labor-oriented business, how do you really drive that?

Sheila, thanks for the question. And I think you can tell from how we've talked about ORBIT, it is an area of significant focus for us. When I arrived into my current role back in October and spent a lot of time with the team, both here in headquarters, but more importantly, out in the field, I heard repeated stories of things that people were identifying as opportunities to make the business run smoother. And what I -- what really came -- became apparent to me pretty quickly was that since the split, we had been focusing a lot on organization, what our capabilities were, how to grow the business, but not enough on how to operate the business.

And so the opportunity that I saw were greater opportunities for organizational efficiency as well as putting some tools and processes in place to make the business run easier. And so -- and people hear me talk about gunk, which is kind of my own term, but it really is -- there are things that from a business process do slow us down and aren't consistent with how we need to be operating in an environment where our customer is driving us to move faster, make decisions faster and implement programs faster for them. So that's really what the genesis of it was.

And what's different about this than other cost reduction programs that you might have heard about or even that I've worked in is that this is not just taking targets and pushing them down and it's much more fundamental. And it is actually going out to the people that do the work and asking them to help us identify the opportunities to make things run better. And so it's everything from a resume to retire process. It's how we buy and it's not just identifying a need and driving the process all the way through to writing a check to pay for it. It is a substance of how we determine who we're buying from, how we're going to source, how we're going to write a contract and it runs through every significant business process.

Now you asked about how we're feeling about the $150 million annualized run rate savings. That's what we've laid eyes on today. And when Prabu and I -- given our background and history, we're going to put a number out that we're very comfortable in meeting. But I would say that over time, we're going to continue to be looking for more opportunity, and we're going to continue to update you as to how those numbers would change.

Jim, right on. And maybe to start where Jim left off, I think our internal aspirations are higher, Sheila. I think, two, in a predominantly labor-oriented business, to answer your question, we would say that you should expect to see a little bit of top line compression, but ORBIT is as much about revenue maximization as it is about finding ways to structurally lower our cost. And we did take out $100 million last year. I'm going to compare that to a little bit of a sugar high because you can sort of with a blunt instrument, take some cost out of the organization.

What I'm excited about vis-a-vis ORBIT is that this is very structural. And I think at a time where customers need more innovation, if you're in a predominantly cost-oriented business, we have to show the ability to actively manage our total cost portfolio and that's exactly what ORBIT is about. I think to Jim's comment, we effectively crowdsourced about 3,500 ideas from across the company, ideas for improvement, ideas from -- all the way from cost savings to revenue maximization. And we had a dedicated team internally made up that worked with a handful of external sharpers that actually helped us navigate the process of sort of streamlining the ideas, bucketizing them allocating some return criteria so that we can evaluate which opportunities need to be prioritized in the waterfall of opportunities that we have in front of us.

And candidly, I think part of getting more efficient is investing a little more in the internal infrastructure, I'm going to say, where for better or for worse, and I'm probably as guilty as anybody else here, that we have to starve certain portions of the infrastructure just to be able to support a business that was simply not growing. So I think part of how you should interpret ORBIT is a sign that we are, I'd say, more excited about the business ahead of us, and we are just getting ready because we all know growing is, I think, harder to execute than contracting. So I think there's a bunch of holistic reasons why we're doing ORBIT. And as I said, I'm going to end where I started, which is there is greater aspiration than is reflected right now in the in the $150 million of annual run rate savings.

Super helpful. And maybe just a little bit more short term as a follow-up. How do we think about the second half margins given they're slated to go down about 100 bps with the implied guidance?

Yes. No, fair question, Sheila. I think what we said in the script is that high 9s is how we see the second half of the year. The reality is we're sitting at 11% in the first half of the year and core performance of this business if I look at excluding the corporate allocations of indirect costs and the incentive comp allocations that we allocate to our segments, the core business out of our 3 -- I'd say, 3 business groups I would say, has been very strong at kind of the low to mid-10% range.

And I think part of the guide reflects some planned investments we make in the second half of the year. but it also assumes that the business groups are going to be closer to 10% than mid-10s to the extent the business groups, and we're putting the incentive -- where it needs to be. If the core performance out of the BGs continues to be in the mid-10s, we're likely to see a little bit of upside pressure to second half margins. But we're going to take it one quarter at a time. and hopefully keep the pressure on the team and not have them get too distracted about next year just yet.

And our next question comes from John Godyn with Citi.

I wanted to follow up a little bit more on ORBIT. You have this -- you have a great couple of slides here, Slide 8 and 9, which have interesting detail on orbit. Obviously, Slide 8 doesn't have all the numbers and everything. And Slide 9 doesn't really have tremendous granularity on FY '28 and '29 margins as we go on this journey. So my question is just maybe spending an additional minute on the shape over the next few years. Is this a situation where the margin improvement is linear? Does it have a different kind of contour to it? Do we step back and then it's kind of back-end loaded? I'm just trying to put these visualizations together and just make sure I'm not too far off in interpreting what you're saying.

John, I appreciate the question. And a full credit to Jon Raviv for dreaming up Chart 8 here and getting us into a place where it's easy to see, visualize how we're thinking about the ORBIT process over the next couple of years. To directly answer your question, I think we put the 11% there because we always sort of want to know where we're driving to. And I think it's really important to communicate to all our stakeholders that this is sort of how we see the business evolving over a couple of years. Some of the trajectory in terms of going from, let's call it, mid 10s next year to 11%.

Ideally, we would say we would want to get 20 to 30 bps higher in FY '29 and then get to 11% in FY '30. The reality is we know life is not linear. And to the extent that we win more work, especially on the new business front that pressures near-term margins that's an okay trade, recognizing 10.5% for next year is probably the right base off of which to work. So I'd love to say ideally linear. The reality is there will be some movement between, I'd say, within 10, 20 bps of 10.7%, 10.8% over the next couple of years. The other way to think about this, John, would be to say that to the extent we make good progress on ORBIT, we would love to be here a year from now and say, we could see these windows moving a year to the left, that will be sort of the ideal scenario from a nonlinearity perspective. So hopefully, that's helpful. But we'll obviously keep you all updated as we navigate over. Jim, would you add anything to that?

Yes. Yes. I just -- the one thing I would add to this is that if you think about the ORBIT processes being a way that we can be disruptive to ourselves in a way that you might expect a company to go look after -- or go after cost opportunities when there's an acquisition involved. Well, that's kind of what we're going through right now. And we're being extremely critical of and how we -- we're being very critical how we look at our own opportunities to enhance margins, reduce cost, increase efficiency and most importantly, make the business operate better.

And really, that's the real focal point and the cost and the opportunities for streamlining drop right out of that. So we're pretty excited about it, and you can tell by the amount of time that we've spent talking about it. But the most important thing is that this gives us an opportunity to invest in growing the business. And that's what's really exciting. So thanks again for your question.

That's great. And if I could ask one follow-up. Jim, you also made clear the importance of revenue and accelerating revenue growth. You guys have that Slide 5, where you show all the leading indicators. They're -- they're not pointing in the right direction yet for the last few quarters, and there are some reasons for that. But my question is kind of piggybacking on the shape of ORBIT, when do we see these charts kind of move in the right direction? When do we see the shape of this kind of change trajectory in your lines eye?

Yes. I mean, our objective is to get on a clear path to stronger growth next year. So we will have the impact of some recompete losses from last year completely floating through the year-to-year comparisons. And when we take a look at what's happening in our proposal shop and our business development function, our recompete win rates are back to where we would like them to be, which is north of 90%. New business win rates are at where we would expect them to be, which is at or above 30%. And right now, what we need to do is to just make sure our customers are continuing to move RFPs through the cycle at the pace that meets their own needs.

Last thing that I would say is that when we really tear-apart where our book-to-bill opportunity is, when you have large recompetes getting moved to the right and contracts extended, that doesn't do much for your book-to-bill, but it certainly does a lot to derisk how you're thinking about revenue growth in the future. And so once the customers get those, we compete back on schedule or at least on an amended schedule where there will be some opportunities for us to have some very large bookings to get book-to-bill back over 1.0x, then I think that you'll be looking at numbers that you'd expect us to be over the long haul.

Our next question comes from Seth Seifman with JPMorgan.

Very nice results. I wanted to start off asking about the contracting type. And I think you mentioned the move to fixed price contracting, and we also had the executive order as a reason why awards have been slipping out. So maybe a little bit more color on how long that process takes. But I thought it was also interesting, you didn't really mention it as a driver of the margin expansion that you expect. And I know we're all kind of wondering how to think a little bit about how much can really happen on this fixed price evolution and when that's going to happen. Should we be thinking that in a couple of years, instead of the current portion of fixed price sales is going to be 500 basis points higher as a percentage of the mix or 10 points higher?

Yes. Seth, it's Prabu here. I'll try to take that question. On the contracting mix question. I would say our FFP right now is about 15% to 18% of our sales. It moves around a little bit inside of that frame. And sometimes, we tend to think about, so what is the mix and the share of the pipeline look like? And the pipeline is actually inflecting to about 1/3 that I'm going to call fixed price. And so I think that's actually a pretty material change in the pipeline. Now that presumes things stay on track, and awards get announced on time and then we can convert revenue from the awards.

But there is a slower underlying shift in the shape of that pipe that suggests that if we win our share of that new work, then we should start to see a little more upside pressure to margin because our Civil business group is where we have, I would say, almost all of our fixed price exposure right now. And our EBITDA margins in our Civil business are running north of 15%. So I think that becomes a good proxy to say, if we take on the right kinds of fixed price work and we execute as well as we're executing right now in our Civil business, that, that should be an incremental lever for margin expansion downstream.

Okay. Okay. That's helpful. And are you seeing that fixed-price work emerge more in the defense and intel portion of the business as well?

I would say the civil customers have been traditionally, I would say, more comfortable with fixed price and outcome-oriented contracts I think our defense and intel customers are slower moving in that direction. But candidly, we are seeing more in the way of, I'm going to say, fixed price cleans contract line requirements inside of cost-plus programs. And so we're starting to see that shift and candidly, some of the newer executive directives will certainly, I think, help accelerate that move. So I would say it is slowly evolving but clearly not at the pace at which we have seen our civil customers move at.

And I think this is sort of the longer-term conversation. One is the more important muscle movements inside the company because I really think we can talk about all the things that are outside of our control, and then we can fix it on the things that are inside of our control. And if you think about what we want to see, even inside of our cost-plus programs inside the company today, we want to see more outcomes. We want to see more metrics because that's the way you build a muscle so that when the customers are ready to actually make that shift at scale, our teams actually ready to make that shift very quickly.

So we are training our PMs on fixed price contracting or contract teams are going through some, I'm going to say, sort of hands-on training. We are training folks on commercial delivery models, our Simpler Edge acquisition from last year is another way to move that muscle inside the company, the ability to quickly pivot from cost plus to I'm going to say, initial prototyping, rapid prototyping, low rate production to full rate production, that's a journey and we are putting in the work right now to ensure that we are ready for that transition when that transition happens. But again, hopefully, upside to margins downstream as long as we're thoughtful in the kinds of programs we take on but it's going to be a longer-term change rather than a near-term fix, I think.

Our next question comes from Gautam Khanna with TD Cowen.

I was just -- on a follow-up to the last question on the fixed price pipeline. Is that just a pit by choice where you guys are actually pursuing more of that business? Is it representative of more civil work? I'm just curious what that? Or if it's just a broader market shift that you're already seeing in the pipeline?

Gautam, thanks for the question. Look, big picture, I think we are seeing a broader change in the pipeline in the market. But I don't want to over-rotate to that. I think there's always some idiosyncrasies inside everyone's pipeline that causes that number to be higher or lower. The reality is we are seeing it in somewhat of a broad-based action, both within kind of defense and intel as well as civilian. At any point in time, I think we're going to have a change in the mix of civil versus DI, both pipeline as well as backlog. So we're seeing a little bit of that happen as well. So it can be a little noisy at times.

But big picture, I do think that regardless of who's in charge of Congress or who's in the White House, the move to more outcome-oriented fixed price is real. And I would say, instead of maybe trying to measure progress every quarter, we may have to zoom out a little and say on a year-over-year basis, are we seeing some changes. And the reality is, I think we are seeing some changes, but they're gradual in some places.

Okay. And just as a follow-up. Earlier, you made a reference to portfolio and MA. And I'm just curious, what is I don't know if there's any big reveal that you're planning, but I just was curious, like what is -- what is still pending that needs to be conveyed to the Street about how the portfolio might reshape over time?

Yes, Gautam, this is Jim. I'll take that. I think that what we've said before, and I'll just reiterate it is through the summer, we've been going through a pretty deep look at what our strategy change might be. And we've been doing what I would now think as being more than a refresh, but I don't think you should expect us to make a huge 180-degree turn either. The things that we're looking at are areas where we can make some more investment that are not too far from our core and spend some more money and some of that will be investment that comes out of ORBIT. Some of this will be investment that's made possible simply by how customers want us to go to contract with them. But I think what I would ask you to do is to sit tighten and way forward, what I would say is a broader discussion about strategy and what our portfolio direction might be looking like that we're going to hold off until our December call.

Our next question comes from Tobey Sommer with Truist.

This is Tyler Barrish on for Tobey. You mentioned the recompete win rate was over 90%. Can you maybe give us an expectation for where you expect that figure to go going forward?

Yes. This is Jim and Prabu might want to pile on with any other observations. But right now, I -- what I have said is that the standard for how we're defining success is for it to be at or above 90%. We've spent a lot of time in how we've organized our proposal activity and the discipline around how we rebid work to expect 90% or better. And that is in concert with the work that we're doing to decide how we're going to pursue new work as well. And we've gone through a pretty extensive [indiscernible] review to make sure that we're spending time and money on things that we have the right to win and we're not chasing butterflies. And so with that, we are expecting to be at or above a 30% win rate on new work. And that's the right place for -- that tells us we're spending our money in the right place. and looking to grow our business in the right places where customers will reward us by paying us for the good work that we do and keeping this onward when we perform well.

Jim, thank you for that. Tyler, the only thing I would add to that is the last 5 years, we've grown 3%, 2%, 7.5%, 3% and negative 3%. And almost every 1 of those years we've had recompete headwinds of between 5% to 8%, sometimes higher of annual revenues. That's because our recompete win rates were materially below 90%. To the extent that we get our recompete win rates, I think per Jim's expectation and our expectation at or above 90%, that would suggest that there is a floor and you start to grow off the floor. And the trick is our new business win rates have been higher than 30% in the past. And if we can get that combination working were news at least at 30%, then you have a flywheel that is going to suggest some upside to revenue growth in the future. But this is a math exercise that I'm responding to right now. The reality is, the teams have to go execute to it every quarter, and that's where our focus is right now.

And our next question comes from Matt Akers with BNP Paribas. .

It's Luke Lean on for Matt. Could you just talk about the overall contracting environment what you're seeing there in the prepared remarks you had mentioned slower RFPs and awards but then mentioned an improving outlay environment?

Yes. I appreciate the question. And so look, I think the outlay environment has been improving. And as I mentioned earlier on this call, there's typically a lag between outlays and revenue growth, and we're starting to see some of the, I would say, the precede months outlay translate into revenue growth right now. Having said that, the reality is the RFP process is still moving in fits and starts. We are seeing some awards go through, but we're not seeing the, I'm going to say, the regularity and a process that is working seamlessly as the government, our customers are trying to do more with less because they are still, I would say, somewhat impacted by the big changes from those last year on the personnel side. So we are starting to -- we are seeing some of that come through in kind of the fits and starts that we're seeing on the awards front itself. .

And candidly, this is one of the reasons our submit volume is down to about $24 billion now for the year, down from about $25 billion to $28 billion. Next year, we think submit volume is going to be in that circa $25 billion to $28 billion, but it still feels early. To the extent things move right, if you're the incumbent on a program, you continue to see organic revenue growth opportunities, but your book-to-business impacted in the near term when those things happen to shift to the right. So again, we're seeing some of that move in that direction. It's hard to really get our arms around when this gets better. We are right now assuming that nothing gets better materially in any sense for the remainder of this year, and hopefully next year feels a little bit better than this year does.

Okay. Got it. And then as we go into the next government year, are you guys assuming a CR and just like any thoughts around that plays out?

We are assuming -- yes, our base case is that we will start the year with a CR. Look, I think what Jim and I have said on prior calls is that we do not need a $1 trillion budget to grow this business. I think we're focused on what's in our control, and there are plenty of opportunities inside of the current budget and but we do and expect to be in a CR to start the fiscal year. And obviously, to the extent budgets are healthier than the $850 billion or $900 billion regardless of how you break it up between base and supplemental and relation there's going to be some upside pressure hopefully to outlays and downstream revenues. But right now, we're not banking on that.

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

Good day, and thank you for standing by. Welcome to SAIC's Fiscal First Quarter 2027 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to Jon Raviv, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining SAIC's First Quarter Fiscal Year 2027 Earnings Call. My name is Jon Raviv, Vice President of Investor Relations. And joining me today to discuss our business and financial results are Jim Reagan, our Chief Executive Officer; and Prabu Natarajan, our Chief Financial Officer and EVP of Enterprise Operations.

Today, we will discuss our results for the quarter ended May 1, 2026. Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call. I refer you to our SEC filings for a discussion of these risks.

In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors. These non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP. A more fulsome explanation of these measures can also be found in our SEC filings.

It is now my pleasure to turn the call over to our CEO, Jim Regan.

Thank you, John, and good morning to everyone joining our call. I'm pleased to say that the year is off to a good start. I want to recognize our 23,000 employees whose relentless commitment to execution excellence made these results possible sustaining strong margins and industry-leading cash flow reflects the team's discipline and focus in a dynamic environment. This is operational excellence in action with our strong underlying results, highlighting our potential to deliver double-digit margins on a sustainable basis.

Since I accepted the permanent CEO job earlier this year, my focus has broadened beyond execution to include spending time with all of our stakeholders, our shareholders, customers and employees. My shareholder meetings made it clear that we have work to do to regain trust by proving that we can grow organically on a sustained basis. This quarter's result is a step in the right direction but I know this is a multi-quarter journey. My customer meetings focused on the value that we continue to bring to enable a wide variety of missions that are increasing in their complexity and velocity.

It is also clear that our industry has to invest to keep pace in a fast-moving environment. Our flexible business model is well suited to these tasks, and we are excited to deliver on these commitments. And my employee meetings highlighted the distinct privilege I have to lead an exceptional group of people working to solve the nation's most critical challenges. I'm grateful to our team for their patience and determination and taking on new roles responsibilities and mindsets to address enduring customer demand and to create value for all of our stakeholders.

So please turn to Slide 3 for our key messages. First, we are built on a strong foundation and operate with an enduring purpose. We deliver critical capabilities to our customers to help them address their most complex challenges. And we do this by developing solutions that enable speed, capacity and decision-making dominance. For decades, we have evolved with our customers as we anticipate their needs and operate at the speed of mission. This evolution requires us to continuously evaluate and refine the portfolio.

Now there is some natural portfolio realignment this year as we digest recompete losses, primarily in the large enterprise IT market. We're also actively controlling our future as we build a premier portfolio of integrated mission-critical capabilities more aligned to budget priorities and more insulated against the commoditization that we have seen in certain parts of the market.

We have initiated a portfolio review and look forward to sharing more information on our December earnings call. You should expect to see a more agile SAIC built for the future underpinned by our mission depth and capability. And as we have shared previously, we initiated a pipeline review to refine our bidding strategy to more closely align with our differentiators and where we enjoy a higher probability of winning. Our qualified pipeline sits at about $85 billion and is more focused with enterprise IT now comprising a smaller share compared to last quarter. This reflects our selectivity in this part of the market.

We're also pursuing opportunities earlier and more deliberately leaning into key areas where we know we can deliver better and faster. This includes our mission and Engineering businesses, which comprise a greater share of our pipeline and are outgrowing the rest of the portfolio due to recent wins and ongoing investments. These dynamics support further organic portfolio realignment. And we continue to evaluate potential additions and subtractions to the portfolio to accelerate growth, enhance margins and further develop high-value areas where we're able to bring our investments to bear.

As I said last quarter, I'm excited by what made SAIC great to begin with, delivering innovative science, technology and engineering solutions in support of the security of the United States and its allies. And there's a lot going on in the world demanding our support. Elevated operational tempo is driving faster decision-making in a variety of hardware and software platforms where we currently play a role. We continue to engage with customers to enhance capability and capacity. And we continue to leverage new tools that help us deliver more effectively and efficiently.

In recent years, we have helped defense, intelligence and civilian agencies establish data and knowledge standards, develop multimodal AI and build secured data layers that underpin some of the nation's most sensitive missions. Today, we're applying AI to modernize legacy code, generate operational tasking orders, enhanced human machine teaming strengthen data fusion and hardened cyber defenses. The opportunity ahead isn't about delivering an AI product. It's about how quickly we can integrate and operationalize these capabilities in real-world missions.

I appreciate that we can only say so much about the opportunities, and in some cases, the risks that accompany rapid technological shifts. But at the end of the day, it comes down to our ability to put up continued performance as AI adoption increases, I look forward to delivering those results.

And that brings me to top line improvement. Appropriations are starting to flow from last year's legislation, albeit unevenly and we expect another large appropriation for FY '27. While our growth does not depend on a $1 trillion-plus defense budget, it certainly helps. RFPs and submissions are still slowed by environmental factors, although we are on track for awards. Recompete win rates are stabilizing as we expect them to return to the 90% range, and new business win rates continued to perform well above 30% and I'm encouraged by the modest organic growth that we saw this quarter despite our recompete headwinds from last year.

We also continue to build on our margin and cash momentum. Fiscal first quarter margin was a company record, driven by strong program execution. While we could see this margin level offset through year-end by key investments to support growth, these results demonstrate what we're capable of and support our full year guidance. And we saw another good quarter for cash, reflecting our strong execution.

Maintaining this momentum relies partly on the enterprise transformation process we announced in February. Project Orbit will increase our agility and create more capacity for investments to support growth and margin expansion over time. We have sourced over 3,500 ideas from across the company, which our dedicated team is now analyzing and prioritizing for execution. We'll have more information on these efforts on our next earnings call in September.

Taken together, these results and our continued efforts reflect our focus on execution, controlling what we can control and rebuilding our growth momentum. We have raised our guidance to account for some of this quarter's upside, although we are mindful of remaining investments, recompete roll-offs and uncertainties that could impact the remaining quarters. And as I've said before, FY '27 is a year of commitment. We're setting targets that we are confident that we can achieve.

In closing, 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.

Before turning the call over, I do want to address this morning's announcement that Srini Attili is leaving SAIC as we make a leadership change in our civilian business group to support our positive momentum. We thank Srini for his contributions, and we wish him well. Our CFO and EVP of Enterprise Operations, Prabu Natarajan will serve as interim head of the civilian business while we identify a permanent replacement.

Prabu's experience running complex businesses and driving execution excellence makes him well suited for this expanded role. He has my and the board's full confidence. Our civilian business delivers industry-leading capabilities to critical clients and is a strong performer in our portfolio. We are strongly committed to our efforts in this market and focused on keeping the momentum going.

And with that, I'll turn the call over to Prabu.

Thank you, Jim. I appreciate the opportunity to support the civilian segment during this transition period while continuing my other responsibilities. There are strong teams in place in our civilian segment, in finance and in enterprise operations. I'm grateful for their dedication to the mission and to SAIC, and I'm confident in our ability to continue delivering for all stakeholders.

As our Q1 performance reflects, the Civil segment is operating from a position of strength, delivering leading technology solutions supporting a variety of critical missions. This includes our enterprise IT capabilities where we operate largely under outcome-based contracts that are creating value for SAIC and for our customers. I'm excited about our opportunities in this business and for continued margin strength.

One key opportunity is the Vanguard recompete, which we have been closely engaged in for years. As we previously shared, Vanguard supports the Department of State's global IT infrastructure and generates roughly $250 million of annual sales at above average margins. The new program, EVOLVE is a multi-award contract vehicle with a $10 billion ceiling over 7 years. It is bigger and broader than Vanguard as it consolidates work beyond our current scope. We look forward to competing on the task orders as we incrementally derisk this recompete over the course of the next several quarters. We have delivered excellence for 15 years, and we look forward to many more with EVOLVE supporting this highly critical mission and customer.

Now let's get into the results. Turning to Slide 4. We reported first quarter revenue of $1.9 billion, representing organic growth of 50 basis points better than expected due to timing of materials and the risk extension. We are encouraged by this result as we see the growth environment improving, although it's still uneven. As a result, we remain cautious around the unknown unknowns that could still impact the year as they did in FY '26.

We reported robust adjusted EBITDA of $222 million in the quarter. Adjusted EBITDA margin reflects strong program execution, some benefit from our ongoing cost efficiency efforts and a $12 million gain associated with the IPO of a venture investment. Our venture strategy is to back early-stage innovators that accelerate our long-term growth. Although we have divested our ownership position, we continue the commercial relationship with the company in line with our objective of bringing enhanced capability to the government market. The sale added 60 basis points to our EBITDA margin in the quarter and approximately $0.20 to EPS.

Adjusted diluted earnings per share was $3.23 in the quarter, benefiting from better margins and a lower share count. Free cash flow was $118 million in the quarter, a strong result as we remain focused on maintaining our peer best cash conversion and deploying the capital to maximize long-term value for all stakeholders. Net leverage is within our target range, down to 3.1x this quarter. We expect to continue to naturally delever as EBITDA improves in the years ahead.

Please turn to Slide 5 to review our forward indicators. As Jim mentioned, our pipeline is now more focused on our differentiators. And while customer disruptions continue to pressure submissions, as was the case in FY '26, the environment is now improving and our BD teams are on target for the year as we plan to accelerate submissions. We are encouraged to see submits and awards recovering even with a smaller pipeline, highlighting the benefits of our enhanced focus.

Net bookings of $2.1 billion reflected a mix of new and recompete including an important $200 million recompete win in our DHS business, where we integrate our software expertise with purpose-built hardware to support safer and more efficient ports of entry. This resulted in a quarterly book-to-bill of 1.1x or 1.0x on a trailing 12-month basis. We are encouraged by the momentum we're already seeing in the current quarter and we expect to achieve our annual targets.

Please turn to Slide 6. This quarter's organic growth of 0.5% was better than expected. While we acknowledge that our comps get easier as the year progresses, we are maintaining our sales guidance as we continue to take a measured approach to the year, appreciating that there were timing benefits this quarter and that there are still uncertainties in a dynamic environment.

A key driver of our sales trajectory this year is the unsuccessful rich recompete, which we expected would be a $200 million headwind in FY '27 as it rolled off in F 2Q. However, our protest was only recently adjudicated, so Ritz will likely now roll off in F 3Q. Partially offsetting our recompete headwinds this year is on contract growth or OCG which we expect will remain at 2% to 3% in FY '27. This is in line with what we saw in FY '26 and is below the 6% to 8% we saw in FY '24 and FY '25. We are encouraged by the improved OCG we saw in F 1Q, although some of this was timing. Roughly half of this year's planned OCG comes from a handful of programs we won over the last 2 years that ramped slower than expected last year.

As I said last quarter, those programs generated $350 million last year, and we are planning for $500 million this year. We're on track as these programs are currently running at an annualized rate of about $400 million through 1Q. And as we continue to position the company for long-term growth, we are making targeted investments in several high-priority mission areas where customer demand and strategic relevance continue to accelerate. This includes advancing next-generation command and control capabilities to enable faster, data-driven, multi-domain decision-making, modernizing legacy radar capabilities to support evolving needs and expanding our work with loitering munitions and other autonomous systems by establishing domestic production lines to broaden the industrial base capacity. We continue to take a disciplined approach to these efforts focused on where we can earn the most appropriate returns.

Please turn to Slide 7. We are maintaining our sales guidance since it is still early in the year. We also want to account for recompete headwinds and environmental uncertainties. However, we expect to finish at or slightly above the midpoint of our sales guidance due to the Ritz extension. We will revisit our sales guidance on our next call, but we are well positioned to meet our sales commitments. We are increasing our EBITDA guidance to account for the venture investment gain and other performance items that benefited F 1Q which adds 20 basis points to the full year margin guidance, which we now see at 10.1% to 10.3%.

As previously mentioned, we continue to see meaningful opportunities to improve margins in the future while also investing in growth. We also see upside on tax rate as a few outstanding issues resolved in our favor. As a result, our adjusted EPS guidance increases by approximately 4% to a range of $9.90 to $10.10. Our free cash flow outlook of greater than $600 million is unchanged, even as we plan to invest in discrete opportunities in support of growth. We continue to see at least $14 free cash flow per share this year and at least $13 of free cash flow per share next year in FY '28 as historical tax assets roll off.

We know that an increasingly favorable budget backdrop is only relevant if we can improve enterprise-wide performance. We are off to a good start, but there's more work to do. I'm confident that our efforts will continue to translate into significant value creation for our stakeholders in the coming years.

With that, I'll turn the call over for Q&A.

[Operator Instructions] Our first question comes from John Godyn with Citi.

Great quarter. I'd love to just revisit and dig into the organic growth outlook a little bit. You had mentioned that there were some timing benefits in the fiscal first quarter, some business rolling off later in the year, but you were encouraged by the momentum you're already seeing. Just that chart, that great chart on Slide 6 with the positive organic growth on the toughest comp of the quarter, it just makes it hard to bridge to negative 2% to negative 4% for the full year.

There might be conservatism. It's been a choppy backdrop. So I don't think anybody would hold that against you guys. But I was hoping we could just kind of dialogue about the shape of the year, how you see it and whether there's upside to that guide, it seems maybe a little bit obvious that there may be.

John, Prabu here, and thanks for the question. Big picture, obviously, we're pleased with the way Q1 turned out. And we also recognize that Q1 had by far the tougher comps relative to last year, where we at where we actually grew the business about 3%. So I think really big picture as you began to allude to it, John. I think we are being, I would say, cautious given what we saw last year and just the volatility we saw between the quarters.

I'd say I would not probably quarrel with the math that a minus 2% to minus 4% becomes harder to comprehend given the solid start we had to the year. I think we're just firmly got our conservative hat on right now on the revenue guide, recognizing that there's 9 months left in the year, and there was enough choppiness last year that, if anything, we've learned the lessons from the last couple of years and recognize that we're in a relatively solid place on guidance. And as we said in the script, we'll revisit guidance on the organic growth side on the second quarter call.

John, we also added in the script, as you might have noticed, the view that we expect sort of revenue to be sort of closer to the midpoint, maybe a little bit ahead of the midpoint on the guide. So we are nudging it up, you would say, qualitatively inside of the current guide, but recognize there's probably some tailwinds here. And Q1 really benefited from strong on-contract growth at 5%. And last year's Q1, just to be clear, it was about 8%, and then we saw OCG tail off over the course of the year last year. And our view is given we don't have full insight into what might happen over the next 2 or 3 quarters, let's take it slow and revisit the guide in Q2, but would not quarrel with the math that 4% contraction certainly looks like an outlier at this point.

Got it. Okay. That's super helpful color. Appreciate it. And Jim, in your prepared remarks, you had mentioned portfolio review possibility of additions and subtractions to the portfolio. I'm sort of asking the question at a very high level. But I'd love it if you could just kind of elaborate on the thoughts there.

Sure. Well, thanks for your question. When I took the job back in October, I was really focused as an interim CEO on just the tactics, thinking that strategy could be left for the person that came in to be permanent, and that person is now me. So for the past couple of months, we've been really focused on strategy. And part of that is going to mean that we're going to look at the opportunities where we can meet customer needs that the customers are coming to us for speed. They're coming at us for agility, both of which we are well suited to deliver on. But we've signaled already that we're probably not going to continue investing quite as heavily in the more commoditized enterprise IT areas. That's just one example.

And we're going through the entire portfolio and a refresh of our strategy to look at the areas where customer needs probably don't show up in the fast current anymore. And we're going to try to make sure that the emphasis that we put on where we're investing is going to be -- whether it's internal and organic growth, what we're looking at investing in our bid pipeline, but also as we think about what M&A looks like, for the next 12 to 18 months, making sure that we're aligned with the speed that the customers are looking for areas where we can round out our capabilities as well as customer penetration for the coming investment cycle. Hopefully, it helps, John.

That's great. That's great color. Appreciate it.

Our next question comes from Jonathan Siegmann with Stifel.

Maybe just to talk a little bit about appropriation starting to flow and on-contract growth improving. Can you talk a little bit about where you're seeing specifically the areas where that improvement is occurring? And are there areas where it's not that we should know.

John, I appreciate the question, Prabu here. So let me maybe paint the color here inside of the defense market. I would say, really big picture. I think we are starting to see appropriations flow inside of our Navy business. I think they continue to see that tailwind from appropriation. So -- and as you all know, we have a Navy business that's over $1 billion and continues to grow nicely for us.

I think we're actually starting to see within pockets of the Army, some of that increased appropriations, I think we're especially think about next-gen command control programs, think loitering munitions on the Navy side, I think more a increment 4 on the Army side. So we are seeing a handful of different areas where we're seeing that money start to flow through recognizing we've not seen much, if any, of the big beautiful bill reconciliation yet. So there's certainly certain upside there.

Space and Intel, I would say we're seeing a little more in the way of appropriations money coming on the I would say, digital range modernization program. We are seeing some of the benefit come through our GMASS radar sustainment program where we are continuing to see some really top-notch performance on our sustainment work on the legacy parks and UW radar. So we are seeing some real value creation there for the customers. And so we are seeing a couple of different pockets.

I think part of the reason, and I recognize this is probably a little bit of a derivative of the first question we got is, since we're starting to see some of that benefit, we are cautiously optimistic that we will continue to see that flow. And one of the key goal posts that we're looking for is by, let's call it, mid-summer this year. where are the agencies and the departments relative to the full year monies that they need to spend. And we think I'm cautiously optimistic that there's probably more to come in the second half of the year.

So I think the caution is we're in an election year heading towards some uncertainty there, and we just want to be appropriately thoughtful and prudent in the way we're thinking about it. But broad-based I'm going to say, movement on the appropriations bond. And the reality is we're just taking it 1 month at a time right now. And hopefully, we continue to see the trend sustain.

Jim, would you add anything to that?

No, I think you've covered it well.

And maybe just on capital allocation. So $188 million in share repurchases, large relative to the last year's quarterly run rate. Just wondering if uses of cash is under the scope of the portfolio review.

Well, I think that the buybacks we did were I think, timely and prudent. And in the lack -- in the absence of other things to invest in the best place that we thought we could invest in it ourselves. That said, we're actively looking at some opportunities in the market that are aligned to our strategy and opportunities to round out capabilities where we see customer demand but also opportunities to move into customer areas that an acquisition would accelerate our strategy versus trying to do it organically.

Thank you, Jim. John, the one thing I would add to that is our view that we want to be generally very disciplined about our cap deployment has not really changed. We are focused on the internal investments we're making. And the reality is, I think the investments we're making in key partnerships and the tuck-in M&A that Jim referred to. And not to mention kind of the opportunities we see within certain of the domains that we're operating in.

I think there's probably plenty of opportunity for us to continue to invest in the business. And our buyback program has always been opportunistic. And when we saw the kind of dislocation to the stock price, I think it's really our fiduciary do to do the right thing for our shareholders, which we did. And we've not changed our full year buyback plan of, let's call it, roughly $400 million. So you will see some change in the buyback volume in the second half of the year, especially if the stock continues to trade up the way it has today.

So again, very opportunistic. And I would say we are continuing to actively invest inside the company around digital infrastructure and obviously, the AI-related investments we're making inside of the company. And then the last comment I would make is relative to project orbit that Jim referred to in the earnings script.

Part of the thesis behind Project Orbit is to free up investment capacity. We recognize that running EBITDA margins at over 10%, it's hard to -- I'm going to say, invest at scale out of profit. So we are creating investment capacity inside the company so we can actually improve the capabilities we can bring to the war fighter. And I think that's probably the ultimate driving force behind Project Orbit. As we said on the call, we'll provide you all a more detailed update on the second quarter call.

But think of that as a way that is going to allow us to invest more in the business in a way that no amount of CapEx or profit ever could. And we're managing about $7 billion of costs across the enterprise. And even if we can get a small sliver of that to go back into reinvestment for customers, I think that's probably the most bullish signal we can send because we are not waiting for funding to be available or creating the resources to be able to fund the business.

Our next question comes from Matt Akers with BNP.

I want to kind of follow up on the portfolio questions hardware and how big that could become as a share of SAIC kind of hasn't been a big focus, but I heard you guys talk about command and control and radars, loitering munitions, so just how big do you think you can get? And is that more of a organic growth opportunity or something you could invest in to maybe partner with somebody else?

Sure. Thanks for the question, Matt. We have always had a very disciplined capital-light approach to how we deploy, including investments in the kinds of things that you just mentioned. And we do great work in places like Crane, Indiana, where we support the production of the Mark Torpedo, the loading ammunitions work that we do in Charleston and in other places and that's going to continue to be -- that kind of work is going to continue to be part of what we deliver to customers and deliver on their needs.

Now that said, I don't think that you should be looking for us to make huge large-scale investments in building new large plants, but we are certainly ready and we actually have proposals in front of customers to upscale the production rates on the kinds of things that I just mentioned, and we're prepared to invest more to meet those customer demands.

So I think that what you're really going to see is a lot more in rapid prototyping upscaling the kind of work that we're doing and meeting the customer needs for a much elevated operational tempo given the conflicts that are currently ongoing.

Thank you, Jim. Matt, if I can add to that. I think we do a fair amount of work touching hardware I think, as Jim correctly pointed out, upgrading at that intersection of hardware and software is where historically the engineering strength that this company has been. And so you should expect to see us do that I think the segway into that kind of work comes typically out of some of the sustainment work we're doing.

So for example, radars, we called out because we won the GMASS radar sustainment program and our engineering teams have really have delivered some phenomenal performance out of those legacy radars with software. So our capacity to understand hardware architecture along with, I'm going to say, software-defined hardware and given all the software shops we bring and given the infusion of AI into the software, we're actually moving a little more quickly and it has given us a real opportunity to differentiate ourselves. The Mark 48 heavyweight Torpedo, the work that we do there for the navy, it began as a small sustainment contract and has grown into a large production contract.

So we're going to be really disciplined about where we want to touch hardware, but I think of this as a way for us to begin in services or sustainment and move upmarket or up the vertical stack, if you will, on hardware. But as Jim said, don't expect us to become a hardware prime I think we know our sweet spot and we know what we're good at, and we have to stay disciplined.

Great. Great. And then if I could ask on the margins, I guess, Q1 EBITDA margin, even if I back out the $12 million gain on sale were quite strong. So just curious how you're thinking about that? And could that maybe persist for the rest of the year?

Yes. Matt, I appreciate the question. Look, I think as you pointed out, the sale of the venture investment, margins were, I'm going to say, comfortably mid- to upper 10%. And what's implied in the guide is probably mid- to upper 9%. The teams have done a fabulous job so far, just putting their heads down and executing.

Our objectives have not changed, as I would point out our incentive comp metric does reward outsized EBITDA margin rate performance. That was 1 of the changes we made this year. So I think the incentives are aligned for the teams to continue to drive. But again, I would say just recognizing we're still early in the year, we want the teams to have the elbow room to go execute and do the right things. And the reality is when we set aggressive targets early in the year and the teams are chasing, you end up taking on some bad business.

This start has allowed us to be very measured about the kinds of work we want to do over the course of the year. and into next year. But I would not argue with the math that we should do better than perhaps what's implied in the guide, but we have to go deliver. And every day, every week here brings a level of uncertainty that we hadn't seen before. So we just have to be measured and give the teams the room to go operate because obviously, they are the ones delivering frontline performance, and we want to make sure they have the room to operate.

Our next question comes from Seth Seifman with JPMorgan.

Just maybe to follow up -- just a little bit more granularity about the margin. the benefit from the sale of the venture investment, assuming that, that was in the corporate section. And we saw, I guess, some particularly strong results in each of the segments. Is there anything you'd highlight that was particularly unique about the operational performance in either of the segments this quarter. I think this is the highest Civil margin that we've seen that we have data for.

Yes. I appreciate the question, Seth. And I'm able to start with the Civil part of this. Really big picture, we saw broad-based outperformance across the portfolio. That's including our Defense Intel business as well as our Civil business. Maybe I'll start with the civil commentary first, maybe perhaps a little selfishly, but a couple of years ago, this business was operating at about 12%, 12.5%. And what we said at the time was expect that mid-12% to be the trough for that business that we would expect this business to operate consistently at 15% or so.

And here we are at 15% in the second quarter. And I think the team continues to exceedingly well perform. As you know, the vast majority of the T&M and fixed price work in the portfolio sits in our Civil business, and the team has done a fabulous job, I think, really executing and we're really hoping to execute to that continued margin momentum.

On Defense and Intel, I would just say, over the last, I would say, 3, 4, maybe even 5 years, we have consistently moved the bar on margin rate performance inside the business. We constantly revisit thresholds that we want the businesses to bid at. We are always looking at the pipeline to say, is the work accretive or dilutive to the enterprise. And every year in the last 3 to 5 years, we've actually moved the required thresholds for work even on cost-plus programs. In other words, we were expecting, and we've talked about this in the past on prior calls around just bidding to more profitable elements of the portfolio and we're starting to see some of that benefit come through.

Again, I don't want to get too pollyannish on a single quarter's performance. The reality is we have to sustain this momentum. And if we do end up performing better than what's implied in our guide, as Jim said, and as I've said, there are opportunities for real investment in the business that we can now have the, I'm going to say, luxury of investing more in the business and hopefully secure some important, not just recompetes, but also new work that's out there.

So again, this is the benefit of giving yourselves the operational levers to be able to outperform. And we've not really had that the last couple of years or so. And what I personally love about this quarter is that we've got some more levers this year that we didn't have the last couple of years. So all good, but we have worked to do that, and I'm never going to get ahead of where the reported results are.

Great. Great. And then maybe as a follow-up, Jim, I think there's a perception that there are some competitive headwinds emerging for services across the industry that the administration is a bit ambivalent about the role of services for the government. Can you talk a little bit about the types of -- the feedback that you've been getting from customers kind of where you see opportunities now.

And also maybe to the extent that we do see strong budget growth in '27, is there -- does that kind of bring the industry and SAIC along with it? Is there a world where there's really robust growth in appropriations in '27 and the company does not participate in that?

Well, I think as I said during the prepared remarks, the direction that the budget is going and whether you believe $1 trillion, $1.25 trillion or kind of $1.5 trillion, any of those scenarios give us opportunity for growth. And then -- and where we see the opportunities where the government is clearly not endivalent about the role of a company like SAIC. It's in the areas where it's not just radar sustainment but radar modernization.

There's plenty of opportunity, for example, there we've talked about areas of munitions, the Mark 48 torpedo program, as an example, loading munitions that we mentioned on the -- in the prepared remarks as well. just by way of giving you some ideas. And then also our intimate knowledge with how the customer operates give us the opportunities we are executing on now are around data fusion data integration, battle space management, the acceleration of decision-making in areas of -- I would say about space execution are a few of the examples where I don't think that the government is showing us any signs of ambivalence.

I think the areas where we want to scale back a bit, and we've talked about it on the last call, and we were reiterating it here is anything that's commoditized on the IT side, where customer loyalties are more focused on price than they are execution and capabilities is where we're probably going to spend a little bit less emphasis on them. You want to...

Just one thing to add there, Jim, that was really good. I think, Seth, this business has always seen, I'd say, good competition. And we would say the administration's call for companies to put more skin in the game is probably exactly the right thing to do. There are plenty of opportunities for us to invest in the did, and we are doing that. Technology and to some extent, AI can be deflationary. So what we have to do is, as we've done over multiple decades is ensure that we can do more with less using technology to drive outperformance.

I think part of why we've always said the move to outcome-based contracts is a good thing for the sector is because we have demonstrated the capacity to deliver strong margins in an outcome-oriented environment. So I think all of those things on the macro side are good. I think the other thing that Jim was alluding to is just as important. I think we want to be at the intersection where the systems are converging. And legacy distinctions between Title 10, Title 50, Title 18, they're all starting to merge. And to be operating in the data layer where the data is not owned by individual companies, but it's fully democratized, so we can bring the best of the tools that are available to get the most out of the architectures in place as well as the data that's being generated.

So there's a unique role for companies like SAIC to operate sort of at this hybrid, I'm going to say, hardware, software intersection I'm going to say, a platform data intersection that's really unique and somewhat exciting. And I think that's where our focus is. And ultimately, we run these systems for the government. We believe the government owns the data to these systems and delivering the best value for these programs. It remains our topmost priority.

Our next question comes from Sheila Kahyaoglu with Jefferies.

I was feeling lucky, 6 questions and no one asked about Civil margins crushing it, but Seth killed it. So Prabu, I appreciate how you talked about a few years ago, they were at trough levels at 12%, and now they're up 15%. Maybe if you could give a little bit more detail. I know you're great at costs and controlling everything. How are you thinking about that in terms of civil and these margins? What customers are driving it? Maybe if you could talk about the specific contracts.

Yes, Sheila, I appreciate the question. And look really big picture. I would say the Civil portfolio has had, I'd say, broad-based improvement on the margin front over the last few years. And I really want to acknowledge the hard work that the team has done to put us in this position. I would say, because that portfolio is almost 100% fixed price and T&M work. The reality is they have more levers that our Defense and Intel business simply does not have given their preponderance of cost-plus work.

So I'd probably start there at the biggest level. The Civil business, DOJ was hard in the industry, but the civil business has actually held their own the last couple of years on top line. And they have not seen the contraction we saw in the rest of the market. but it is not what I would call a growth supportive environment right now. Now we are hopeful that, that changes. And our message to the teams internally is at this point, you could go chase $1 of revenue where the win or the [indiscernible], if you will, is not very high or you can put your energy to work at delivering a margin of $1 of EBITDA.

And the teams have actually done a really nice job. And it's that focus that we want to continue to drive inside the business and position ourselves for when that growth starts to inflect in the portfolio. The work we do at Department of State, the work that we do at DHS patents, Department of Commerce interior. They all tend to be good contracts that are delivering good sized EBITDA growth for us, and that's what the team is focused on and not chasing top line.

And the message internally has also been that to the extent top line starts to inflect up and we are delivering more growth out of the civil business then let that growth drive margins down. And that's an okay trade to make over time because you're ultimately growing EBITDA dollars there. So that's how we've approached it. Again, it's come together really well this quarter but I don't want to get too far ahead of what the rest of the year brings.

Okay. No, that's super helpful. And then if I could ask maybe 1 more big picture one. As you thought about setting your fiscal '27 guidance, you talked about the low-margin enterprise IT work kind of removing that from your -- kind of from your pipeline and submits and then your revenue. How do we think about it impacting those 3 as we think about it progressing through the quarters this year? How do we think about that impact? Do we think about it impacting your pipeline and submits it all as well?

Yes. Big picture, Sheila. I think our pipelines come down, I would say, from this time last year by about 25%. The vast majority of that contraction has been in our enterprise IT portfolio. And I want to be really crisp about how we save this. I think we're not saying that, that market is not an important market for us. I think we simply want to say that we're going to be very calibrated and selective on the opportunities we chase inside of that market. And our Civil business is predominantly enterprise IT work. So we know how to do that work well.

But chasing enterprise IT work in the more commoditized parts of the market where it's cost plus and not outcome-oriented is not the right band diagram that we are trying to strike here. So that's where the focus is. As we cycle through the remainder of the year, I think our expectation would be that enterprise IT will always be an important part of it. but probably not the predominant driver of the quality of the portfolio in this company.

Yes, exactly. And just to reiterate, the enterprise IT work done for our civilian customers because the contract formats are more outcome-based and they give us opportunity to drive better results for our customers, lower cost for our customers, but also higher margins for us. And that would be a great model if we could have it everywhere, but we can't, at least not in the short run. And so we're going to be, again, emphasizing the parts of the enterprise IT market, where we have an opportunity to perform well get rewarded by our customers and see higher recompete win rates, quite honestly, where in some parts of it because it's so commoditized, that gets really hard.

Our next question comes from Toby Sommer with Truist Securities.

I was hoping if you could comment on what you're hearing and seeing from your NASA customer amid some news of potential in-sourcing. And then over the medium term for Civil, do you anticipate significant Department of War spending increases as pressuring the civil side, given that we're already in a relatively stretched fiscal condition?

Tobey, let me maybe take a first crack at this. I think really big picture, I would say, civil funding right now is at a crop I would say, if we had to bet, we would say it's probably not going to materially deteriorate from here. I think we're going to see some modest changes here and there, but not a -- our view at least is that it's going to have a material reduction at the funding levels for the civil agencies.

So the question on does DOW funding pressure. So well, I mean, look, I think that's always a trade that gets made sometimes. But I do think that these critical systems, this critical infrastructure has to be maintained, has to be robust and especially with the threats posed by AI to have the right architectures in place and the right sort of, I'm going to say, cyber hygiene, they're all critical to the national security.

So I think it would be our expectation that funding remains relatively flat. At some point, it will inflect up when the threat actors recognize where the vulnerabilities are and we have to work to counteract that. But big picture, that's our view on where the budgets are right now.

Yes. And again, I think we're fortunate to be placed in the civilian market, we're well placed with the things that have enduring need. We have great positions in Homeland Security with customs and border protection, providing critical infrastructure for supporting the mission of people that are keeping the bad guys out of the border. We also have great positions in work that we do with the FAA. And just -- for example, Department of Treasury. So these are the kinds of areas as Prabu said, have enduring need. And probably, we're fortunate that we're not in the places that are going to see the lion's share of any kind of budgetary pressure on civilian agencies.

And then as a follow-up, I'd love to ask a question on the great margin performance in Civil, do you think that, that kind of profitability is sustainable over time?

Tobey, I appreciate the question. Look, I think is 11.6% sustainable for this business where it sits today? No. Could we consistently be at the -- and we've said that our expectation is that over time, we will drive this business to mid- to upper 10s bordering 11%. That is where we want to take this portfolio.

A couple of years ago, 3 years ago to be precise, we were mid- to upper 8%. And that kind of organic change takes time, and it does not. And if you took the time to get this right, it will not require you to do irrational things starving the business development and [indiscernible]. So we're trying to do it the right way. But I do think that this portfolio, there's no reason. If I look at the fee we earn on the labor component of our business, that would imply that our margins should get to mid- to upper 10s, but it's going to be a multiyear journey. And we want to balance that against investments we are making in the business.

And Tobey, I realized I didn't answer the first question on NASA. I think reality is we have a very little of the NASA business that's left for better or for worse. And so obviously, could that happen in other agencies? Sure. I think it's a possibility, but we're going to have to navigate it and take it agency by agency. And again, historically, the government's not been effective in sourcing critical capabilities and -- but that's a pendulum that swings back and forth.

So we're going to have to see where that plays out in certain agencies and obviously, we're committed to doing the right thing for our government, and we'll work with our customers to figure out the right solution for them and for us.

[Operator Instructions] Our next question comes from Gautam Khanna with TD Cowen.

I was wondering if you could characterize the bookings environment since the quarter end, so in the last month. And also if you could help us quantify the sequential headwind on IT in the third quarter relative to the second and in the fourth quarter relative to the third.

Gautam, maybe I'll try to take the first part of the question and -- on the -- if you think about the bookings environment, I mean, I would say there's a good amount of proposal activity going on right now. So I would say there's probably increased up tempo, and I just have to go down to the fourth floor of our building and our teams are incredibly busy working on proposals. So we do expect a very healthy level of submissions both in the second quarter and the third quarter this year before perhaps starting to tail off, which is a typical pattern we see just given the seasonality of this business.

So that feels like it's the right tempo for us to get to our submissions number of $25 billion to $28 billion for the full year. So that's sort of how we are seeing it. In terms of the decisions, we are I think for the larger awards, we're seeing maybe those take a little bit longer as those awards go through multiple levels of review inside of the government. But they are starting to break through in the system, and we are hoping to see that volume stabilize in terms of decisions, which is why we feel good about the 1.1 book-to-bill in the first quarter and we do expect to complete the year comfortably over 1.0, I would say, on net book-to-bill.

I think on the IT impact and the seasonality impact I would say we start to see some impacts from the rich recompete tailing off, starting, I would say, Q3 maybe towards the end of Q2 into Q3. And think of the headwind as sort of being in the circa 3% range for organic growth in each of Q3 and Q4. So think of it as roughly level loaded in the second half of the year at about 3%. and we contracted about 6% in the second half of this year. So think of Ritz as being approximately half of that, so we should apples-to-apples contract about 3. And then given on contract growth performance, ramp on new, those become the, I would say, the inputs to determine what organic growth looks like in the second half of the year. Hope that helps.

Our next question comes from Max Miller with UBS.

This is Max Miller on for Davin [indiscernible]. I was hoping to get a little bit more information about the new state department of all vehicle. Obviously, a lot of competitors across a few different buckets there, but also more than just Vanguard rolled off into that contract. I was hoping you could talk about how much of the increased scope is addressable relative to the previous run rate. Maybe you want to assume the guidance and, I guess, timing around when you expect task orders to start rolling through on that vehicle.

Max, Prabu here. I appreciate the question. On Vanguard, the run rate is about $250 million a year, and we said above average margins right now on that program. If you took the total value of the ceiling of that EVOLVE program, that's about $10 billion over 7 years, that would imply if the funding is there, that the run rate on the new EVOLVE program is over $1 billion a year, SafeNet. And I think for us, there are 5 work streams and evolve. We have bid and won a seat at the table on 4 of the 5 work streams.

We did not bid 1 of the 5 because of certain organization conflict interest issues. And so we have been selected, and you've seen some of our peers talk about it. I think we are very much in the same boat as them. with the capacity to bid and win new work. To be clear, as the interim head of the Civil business, I would say my expectation and that of my leadership team is we would love to hold on to the work we have on Vanguard in terms of volume, but there's a real opportunity for us to improve on that capacity.

But again, we will take this one task order at a time. And there is some upside as well as some downside on that program. And the way we've calibrated our guidance is it's probably unlikely to have any material impacts to guidance this year. It's more of a next year, which is why in the script, we said we'd like to derisk Vanguard evolve over the course of the next several quarters. So that's our approach to it.

Again, there's some downside. There's also some upside. We just have to see how all of this plays out, but it does open up some areas that we are not currently in, and hopefully, they represent some side. But right now, I think pets down and keeping as much of the work we have is our #1 priority.

That concludes today's question-and-answer session. This concludes today's conference call. Thank you for participating. You may now disconnect.

Good day, and thank you for standing by. Welcome to SAIC's Fourth Quarter Fiscal Year 2026 Earnings Call. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Jon Raviv, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining SAIC's Fourth Quarter Fiscal Year 2026 Earnings Call. My name is John Raviv, Vice President of Investor Relations, and joining me today to discuss our business and financial results are Jim Regan, our Chief Executive Officer; and Prabu Natarajan, our Chief Financial Officer. Today, we will discuss our results for the quarter that ended January 30.

Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call. I refer you to our SEC filings for a discussion of these risks. In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors. These non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP.

A more fulsome explanation of these measures can also be found in our SEC filings. It is now my pleasure to turn the call over to our CEO, Jim Regan.

Thank you, John, and thanks to everyone for joining our call. I'm happy to be here as CEO, and I'm grateful to our Board, to our team and to all of our stakeholders for the faith that they've 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 national executive search firm, the Board concluded that, among other things, maintaining continuity and leadership along with deep industry knowledge, was essential to SAIC'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 didn't 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, Prabu Natarajan whose leadership has been invaluable.

So while accepting the permanent role was not my original intention, I'm humbled and honored to have this opportunity. Since joining the Board in 2023, my appreciation for SAIC'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'm excited to continue building on our strong foundation to deliver meaningful results to all of our stakeholders.

FY '27 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 SAIC 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've done for decades, and this is what we will continue to do.

SAIC'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're 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're going to be more focused with our bidding in FY '27, and we're 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 3 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'm encouraged by our margin performance despite this top line choppiness with FY '26 margin of 9.7%, and you see improvement ahead as we guide to 10% adjusted EBITDA margin at the midpoint for FY '27, 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 fishing 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 '27, largely due to recent recompete losses in the large enterprise IT market.

While we're 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's hard to differentiate. Instead, we are focused on opportunities where clients establish clear outcomes that enable SAIC 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've supported for 15 years.

Looking ahead, we're 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's a shrinking piece of the pie from 17% of company revenues in FY '25 to an expected 10% in FY '27, and we have good visibility into most of this remaining portfolio. It includes the T Cloud takeaway, which has 4 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 SAIC 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 GMASS program sustains and upgrades radars 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 war fighting 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 SAIC with increased investment capacity to support innovation, growth and margins. We're 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'll turn the call over to Prabu.

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 '27 and the meaningful opportunities we see to create value for shareholders.

Turning to Slide 4. 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 6. 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 '26 targets we shared about 3 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 7. 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 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 '27. We expect to partially offset this headwind with the continued ramp-up of new business wins from FY '25 and FY '26. 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've 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 '27 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 '27 guidance reflects approximately $70 million in nonrecurring cash tax benefits from recent legislation. Even without this benefit, in FY '28, 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 '26, and we are assuming $500 million in FY '27 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 $1 trillion 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 8. 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'm confident that our efforts will continue to translate into significant value creation for our shareholders in the coming years.

With that, I'll turn the call over for Q&A.

[Operator Instructions]

Our first question comes from John Godyn with Citi. .

This is Jeremy Jason on John Godyn's team. I just want to kind of hit things off by saying, Jim, congrats on new role. I just want to ask now that you've 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, like what's the message you want to say to the investor base or trying to bridge that gap between your experience and the specific issues like recompete have hampered growth in recent years.

Yes. 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'm actively engaged in right now.

I think it might be premature for me to announce any strategic pivots other than 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've been seeing over the last year has been the things that are more commoditized where you're not only finding it more difficult to differentiate and keep customers, but it's also more difficult to get paid for the hard work that we do on some of the more vanilla enterprise IT things. I think that we want to continue doing to the extent we've got it, but also to deemphasize it as kind of a strategic imperative.

So that, I think, is the first epiphany that it didn't take very long for me and probably 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 is one thing. We think that the the things that we've 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're working to leverage that.

We'll probably have more to talk about in terms of any further strategic pivots as we work through the strategy process through the season. Prabu, you got anything to add there.

Our next question comes from John Siegmann with Stifel.

This is actually Sebastiano Rivera for John Siegmann. Congrats to Jim as well on the full-time position now. I guess would love to kind of hear your thoughts regarding the the FY '27 guidance, roughly $35 million of CapEx here. It doesn't suggest too much change relative to last year, and I believe that FY '26 number was about $4 million lower than the year prior.

And I guess, I would have thought the change environment today kind of creates incremental opportunities to invest, but would love to kind of get your thoughts there.

Sure. And appreciate the question, Sebastian. 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 locations for the programs where we actually make things. But I think that in Prabu's remarks, you mentioned that we have a flexible business model. And we're 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've 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're 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's any reason to update it in the future, we'll certainly let you know. So I think that the short answer to your question, Sebastian, is, we have a business model and we're prepared to flex it, and we're prepared to spend more money on additional capacity to the extent that our customer comes to us and ask for it.

Sebastian, Prabu 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 the highest levels on some of these opportunities. .

I would also think of the $100 million in 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 of 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're actively building capabilities, whether that's mission labs or our mission data platform or our classified networks. There are areas that show up beyond CapEx line that we are investing in.

And finally, I would say I 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 old 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 pipeline somewhere.

Our next question comes from Gavin Parsons with UBS.

Jim, I mean you've been sharpening the BD process for a few months now. I know that's ongoing. How 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.

Yes. It's a great question, Gavin. I think that there's kind of 2 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 at 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 an even more disciplined around how the finished product comes out that can move the needle on win rates within 6 months.

I think it's 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 -- in the most recent quarters, has been in line with our expectation and industry averages. So I think that we're really pleased with that.

And with less exposure in FY '27 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 lapped out the impact of these recompete losses that we've recently experienced. I think that the last comment that I would have and Prabu might want to amplify on this as well is that one of the things that I think that we're 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're going to be seeing out of the business initiatives that we've been outlining.

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

Thank you, Jim. Gavin, I 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 '27. That is consistent with our 2% to 3% last year, which was the lowest of the 5 years that I've been here in the company.

So while we're not expecting things to get better. We don't expect things to get worse either on OCG. And therefore, on balance, I would say, biased to the upside to the extent that the enacted budget translates into tangible procurement action over the course of the next 3 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 noncommoditized 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 doesn't [ help lose ] through 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're 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 the message internally as well as externally, but we've got to keep every recompete that comes our way and we have to keep up the win rates on you, and that's where the focus is for the team.

Our next question comes from Sheila Kahyaoglu with Jefferies

Congrats. Jim and to Joe as well. Maybe 2 questions, if I could start. The first question would be just on the what do you think on the enterprise IT work? And I know you probably did a good job of this at the conference.-- like what changed? Was it an SAIC decision? Does the competitive landscape change? And then as we think about the $25 billion pipeline, how do we think about SAIC getting on the offensive?

I will start, and I think probably might amplify on my enterprise IT answers, I think that what we've seen is increasingly customers there's 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're looking for, where it's heavily embedded with network management network uptime, help desk support things that are harder to differentiate than in the things that blend more of a mission focused in with the IT side.

Think about on the -- maybe on the more to mission IT, it's probably supporting networks, to support the war fighter networks to 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 of 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're probably going to deemphasize in our pipeline going forward. Prabu, do you have anything to add?

Yes, Sheila, a couple of things I'd probably want to add. I think the recognition that being selective on 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 look at the track record of where our largest recompete challenges have been and it doesn't take a bunch of research to get to [ NASA Aegis ] parts of Cloud One, USCENTCOM, [ Army Ritz ]. 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's just a recognition that we've come to. We also had perhaps more of that enterprise IT work in our pipeline 5 years ago than we do today. So that's 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, 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 restore, I would say, and reestablish the legacy of this company.

So I think it's an evolution of what we've come to in terms of our own portfolio. Broadly speaking, I'd say if you looked at competitors and where win rates are for enterprise IT versus nonenterprise IT work, you will see some of the same, I'm 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 one thing I would add to the comment that we're playing more offense than defense, is the fact that our pipeline is inflecting to higher levels of non-EIT work, mission work and 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've done it for 15 years.

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

Our next question comes from Gautam Khanna with TD Cowen.

Congratulations, Jim and John and Joe. I wanted to just ask on within the midpoint of the guidance, maybe if there's any parameter you could tell us on how much you have to quite go get? You told us about on-contract growth. But based on the backlog you have today, how do you get -- 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 of $400 million of repeat losses abates, when's the last quarter that, that becomes the headwind, the headwind moves of the numbers?

Gautam, Prabu here. Thanks for the question. I'll take the one. In terms of the negative to the negative [ 4% ] 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's 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's 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-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 DOGE and other procurement disruptions over the course of the year.

So I think it's 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's fair to assume that the headwinds are going to persist with us for the first -- for all 4 quarters of the year. I think that's probably the most sensible way to think about it. Naturally, there will be some, I'm going to say, some changes over the course of the quarter as we lapped on some programs and lap into some other programs, but the reality is you should assume that there's about 4 quarters of headwinds and that Q1 of next year is probably going to be the cleanest quarter on a compare basis.

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

Maybe focusing on [ FAR ] 3.0. If you could talk a little bit about federal acquisition regulation and essentially what you're hearing in terms of kind of the next set of objectives look like, what that means for Saic and any sort of kind of timing around outcomes.

Sure. I had a chance to be with a senior department [indiscernible] official about that just this past privy along with some other CEOs in a small forum. And I think that, first of all, there's tremendous urgency that we haven't seen in decades around procurement reform in general, including updates and upgrades to the far. There's 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 OTAs and 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's available, and we're 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's 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.

It. Got it. And then maybe as you think about kind of your feature as a hardware integrator. Can you just perhaps talk about kind of your relationship set, and your opportunity set across the branches. We've seen obviously a lot of capital start to flow into [ BC ] developed products but not as much focus on kind of the integration of all of the capabilities, right? Is this the leading players, but you still have a lot of stuff that's kind of Series B, Series C that fundamentally will need something like SAIC's kind of acquisition pipeline or the [indiscernible] 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 SAIC's ability to go and integrate a lot of these kind of earlier-stage products?

Colin, Prabu here. I'll take that one. I think you're hitting on something that is incredibly important that 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 SAIC 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 don't think that, that demand signal is going to look any softer in the next 5 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's 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're 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, 60 years, and I don't 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. And 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.

our next question comes from Tobey Sommer with Truist.

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

Tobey, I appreciate that question. I think at least once or twice every week, I get an e-mail from one of our 23,000 employees applauding what we're 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're seemingly mundane but still important.

Some of them are things that I wouldn't have been made aware of had not someone sent me an e-mail directly. And I look at that. I read it, I send it to the team in the program office that's running this. So I would say that the employees are saying finally, we're doing some things to get some of the gunk out of the system. It's a -- gunk is a technical term for me on this, and we're 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're able to be a bit more nimble.

So I would say that there's tremendous receptivity to this. And I think that it's going to allow us to make decisions faster, get stuff done faster, but also take a lot of the cost that's going to fall out of that and reinvest it into the things that we've 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's probably oen of the most important things that we're going to get done this year.

Our next question comes from Noah Poponak with Goldman Sachs.

Is it possible to give us the details of recompetes of size that you have in your fiscal '27 and fiscal '28, just kind of cover the next 2 years, which programs, when and how big are they for you now in revenue?

Noah, Prabu here. I'll 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 '27, okay? And that program, as we know, the scope of the program has increased. We're on year 15 of that program, and we've been qualified to bid and compete for work on 4 of the 5 work streams.

The 1 work stream that we chose not to bid because it would have created OCI for us for the other 4 work streams. So that is the single largest recompete that we have. Beyond that, we always have programs that are in the, I'm going to say, [ 75 to 150 ] range, let's call it, 1% or 2% a year. We always have 1 or 2 of those every year. But in reality, we're 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 sort of significant recompete risks.

I think the reality is the way we're approaching this, Noah, is keep as much of the work share on Vanguard as possible, hopefully, even eke out a little gain there. But our baseline assumption right now for this year is that we've accommodated all kinds of contingencies into the minus 2% to minus 4%, but Vanguard is probably the only one that's worth calling out right now.

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

Yes. So we will be going through a recompete cycle on Vanguard. Again, it's going to go by work stream to work stream. There are 4 work streams that will get recompeted over the course of this year. We are the incumbent. We will be competing for all 4. We've been qualified to compete and we are in the down selected category. And so it's unlikely to materialize on -- in terms of impact to revenue any time, 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'd 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, maybe, felt next year and not this year. So that's how I would probably preface it.

Okay. And then would it be possible to talk about how the funding environment has evolved year-to-date? I know that's 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'm just curious if that improved through the quarter, it got worse through the quarter? Is it better or worse today or the same versus how the year ended?

Yes. I'm 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 there is what we've seen. I think it is true that January for outlays was better than the preceding 3 months for sure. I think on outlays, as you know, there's probably about a 3-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're tracking to is a milestone in the second quarter of our fiscal year, sort of the June, July, August time frame, certainly, by 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're 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's 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's very much a question of timing and how quickly is the spigot going to open up. And this is where the sort of the constraints on the government procurement functions have been difficult to size and estimate. But hopefully, things get better here in the -- certainly in the second half from the summer time through the end of the fiscal year, Noah, then perhaps immediate change in the first quarter of this fiscal year for us.

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

Okay. Thank you very much, guys. We are going [Audio Gap] with SAIC. You may have seen the -- there was a release earlier today that SAIC put out. So we will talk a little bit about that. We have with us the CFO of SAIC, Prabu Natarajan. And thank you very much for coming. I know...

Thank you, Gautam.

Busy day, lots going on. And so I want to just leave it open at the outset to just say like, okay, there was an 8-K filed today and just kind of the genesis behind that, the reduction in guidance and the like.

Sure. Absolutely. First of all, thanks for the interest and the opportunity to be able to have this conversation. I think big picture with the 8-K, we started out last -- at the end of last year in December, we said we expect growth to be flat to plus 3%. And then we said we're likely to be at the lower end of that range if we lost an Army Corps of Engineers recompete, which is about 3% of the top line.

And of course, we lost that about a few weeks ago. And then we lost Cloud One, which is another recompete, roughly 1% of revenue. So nominally, we were sitting at about minus 1% growth for FY '27, calendar '26. I think as we looked at the Q4 revenue environment, I think we began Q4 at a reasonable pace, Q4 being kind of the November, December, January months for us. We're normal company plus 1 month. And growth rates were fine in November and they were fine in December, but they were certainly compressed in January, which is the 12th month of the fiscal year.

And I think it was important for us to recognize that there is some unevenness in the funding environment. And even if you have contracts that have adequate ceiling, that the money isn't moving through the system as efficiently as it used to. And so I think recognizing that, we said, let's take the assumptions around on-contract growth we had baked into the flat to 3% previously. And now we're assuming more nominal amounts of on-contract growth as well as ramp on the new programs.

And we won a ton of new work last year, but the ramp on those programs have been incredibly slow. And so in order to just think about this risk this year as a year where we can set up for the FY '28 discussion, we said, let's derisk the year as much as we can, focus on the things that we control inside the company. The macro environment is confusing, but what we can do is to remain really focused and make sure that we can communicate this story crisply to our shareholders and hope them -- hopefully, they'll bring them along for the conversation here.

Actually, to that point, the Q4 revenue was -- it appeared light by about 2%. Is that right? So that was a function of January -- the month of January in your view. It was not a function of shutdown-related noise from early November?

There was a little bit in the way of shutdown noise, remnants of it, about $5 million or $10 million from shutdown that sort of stretched into January because the recovery didn't fully occur. There was a little bit of disruption from Hurricane Fern and the winter weather we had in the D.C. area where D.C. governments were shut down for close to a week here at certain customers.

So a combination of that. And I think the third, perhaps more important factor is that we had some materials which have been really hard to predict this year on timing, materials that we were expecting to see in Q4 of this year that has slipped out of Q4 into Q1 of this current FY '27. So those 3 things added up to the miss of that 2% relative to what we previously signaled.

Okay. And just to be -- again, strictly speaking on the guidance revision for fiscal '27, so January of 2027 for everyone, it was about a little -- it was about a 5% reduction, if I'm right, on sales approximately. And what you described earlier, the Cloud One RITS -- Cloud One and then the RITS, which is what's it called now CASTLE-NET, sorry. Those 2 aggregate to about 4% of sales, correct? So it was slightly in -- the guidance reduction was slightly in excess of the 2 recompete losses.

That's right.

The CASTLE-NET presumably, there's some transition period as well. So you will carry some of that revenue. It's not a full 3% loss, right, in fiscal '27. So maybe if you could walk around the mechanics of that.

I will do that. Okay. So I think what we've assumed right now in the revised guidance is that there will be about a $200 million impact from CASTLE-NET on a year-over-year basis, recognizing that we probably do have some transition period built in that will probably take us through at least the first half of Q1 and possibly into the second half of Q1, but hard to tell where we're sitting right now.

So that's $200 million. And then on top of that, we had Cloud One, which is about $75 million, give or take, that's $275 million. And then we simply took down our assumptions around the robustness of on-contract growth and the ramp on new work that we've already won, and that adds another 1% to the total mix. So between RITS of 3 roughly, 1% Cloud One and then 1% between on-contract growth and ramp on new, that's your 5% effectively.

Okay. So big picture, what is sort of the visibility to returning to growth? Obviously, some of these headwinds have to roll through. That is nothing you can do. But the inflection beyond that?

Yes, it's a good question. We talk about it a fair bit inside the company. I think as we navigate the rest of this year, I think we're looking for maybe a couple of signposts. One, are we seeing on-contract growth recover in the second half of the year. I think right now, we are assuming that we're going to be pretty level loaded on contract growth between 1% and 3% throughout the year. That is going to be about as low as it has been in the 5 years that I've been with SAIC from a high of maybe 7% or 8% on contract growth.

To the extent we see on-contract growth trends stabilize and actually start to improve in the second half of this year, you should start to see some tailwinds. I think factor number two, we are assuming that the new business we've won, whether that's Air Force TENCAP, it was a $1 billion program we won last year; Navy ATSO, $350 million over 5 years, $75 million a year roughly; as well as Army OSINT, open intelligence work that we do for the Army, new work takeaway from BAE Systems, about $75 million a year. None of those programs have come anywhere close to where we expect them to be 6 months into the program in terms of just the slowness of the ramp.

I think when we start to get the right signals that those programs are starting to ramp, I think those become, frankly, tailwinds to growth. Right now, in the revised guidance, we've assumed nominal amount of contribution from those 3 programs. To the extent that we get better than nominal growth from them via on-contract growth or just the ramp on the new, then we'll start to see better revenue trends, I think, from the second half of the year.

And the most important factor is we will eventually lap out both Cloud One as well as RITS. And at that point, we should -- the absence of a headwind effectively becomes a tailwind in the next year. So that's how we're thinking about it. But I think the signposts are within on-contract growth and the ramp on the new stuff.

Yes. And just for the audience, the 3 big contracts that you've mentioned, the takeaway win from BAE, et cetera, were they all takeaways? Or what -- was there anything that was new, new work to the industry?

Yes. So 2 of the 3 that I mentioned, both TENCAP-HOPE as well as Army OSINT were new takeaways. Navy ATSO was new, new work that were shaped into a Navy vehicle that we effectively went on contract for towards the end of last fiscal year. And none of those programs are anywhere near the ramp we expect them to be at, but the funding is there. The programs are appropriately factored and sitting in backlog, which, by the way, was incredibly healthy through the first 3 quarters of the year.

We were trailing 12 months of 1.2. We expect to finish this fiscal year, FY '27 -- FY '26 rather, at a book-to-bill trailing 12 month north of 1.0. And we're still obviously scrubbing our numbers for year-end here. And so we haven't actually put a number out, but we expect to be north of 1.0. And so we will have the backlog to be able to convert backlog into revenue in this environment, it's just taking a little bit longer.

Got you. And on the transition of that BAE contract, is it just because they haven't transitioned it from the incumbent contractor over to SAIC? Or is it a function of something else?

It's a function of something else. Here's how I would say it. I mean the contract is transitioned. The individual contract then requires technical directive letters to be issued, where we're not negotiating fee, but we're negotiating the scope of the work that needs to be done for a point in time inside of the contract. When we have fewer contracting officers and customers able to sit down and negotiate the technical packages, it tends to take longer to put that work on contract.

And so even though the ceiling is there, the funding is there, the work just has not taken off in the -- at the pace that we would want it to take off. And that's inherently, I'd say, perturbation on the customer side. And we are assuming that it will get figured out at some point this year, but it hasn't happened yet.

Okay. And the defense budget was actually passed into law earlier this month. Is that -- have you seen any change in behavior since that? Or has that not been a meaningful catalyst one way or the other?

Not a meaningful catalyst yet. I do think that at some point, I think we'll start to see money being put to work, and we haven't seen that yet. And our going-in assumption right now is we should not assume any of that to be a tailwind yet in our guidance. And again, I think last year was, I'm going to say, sufficiently unpredictable that I think we're just taking this a quarter at a time and bringing investors along with us to say, how do we calibrate investor expectations so that we are telling you as much as we know about what's going on inside the business in a way that is transparent.

And yes, we took some medicine today. The reality is, I think there was a lot happening in the market. But I think I feel good about being able to communicate this narrative and say we do expect to return to growth once we get through this year.

And just to be clear, on other kind of risk items out there, are there any other -- what percentage of the business is up for recompete from here over the next 12 months? Are there any concentrated recompete contracts?

I'd say the big picture answer is there's nothing anywhere near the size of a RITS that is going through recompete right now. I think we typically tend to have programs in that 1% range of revenue. But candidly, we also have a very healthy pipeline, and we're bidding work actively. So I'd say nothing that stands out in the way RITS did coming into this fiscal year. So I'd say that's the big picture.

And I think our submit volume is another one we're watching just to see how effective the procurement environment is going to be for this year. There was a time in the first couple of quarters of last year where things were really active and things were -- seem to be getting on track. And then we began to see some of the effects from the shutdown and our submit volume really went down over the course of the second half of last year, and we are expecting it fully to bounce back early this year.

Okay. So the company has gone through quite a bit over the last 5 years. There's been a CEO change to an interim CEO. What are sort of the lessons learned -- I mean, I'm sure every contract loss has a different explanation, but is there any broad takeaways that -- lessons learned that you guys have kind of put back to your BD folks to make sure that you address them?

I think there may be a couple of things that -- one of the threads we're pulling on today through the filings we've had in the 8-K is that we're seeing maybe more commoditization, if you will, of some parts of the enterprise IT market. And I think it tends to be more prevalent within the DoW where customers are, I'd say, more comfortable buying enterprise IT on a cost-plus basis. The FedCiv customers, I think, are more comfortable, if I can generalize, buying enterprise IT on T&M or firm fixed price basis. We make very good margins. It's a win-win, I think, for us and our customers.

Where we're seeing larger, commoditized enterprise IT contracts within DoW, customers are reluctant to go to fixed price, which makes it harder for us to differentiate our offering from somebody else's offering. And if I look back, if I zoom out just a little bit and look at the history of our recompete losses over the years, the one common thread across most of them has been large EIT cost plus DoW. And so to me, I think part of the message today is that we are focused on being more selective.

We're not going to walk away from enterprise IT. That is not the message. But to say, let's focus on vitamins and not calories is a healthy message inside the company. It is a healthy message that we can communicate to customers to say, look, we want you to transform. We're not here just to run the network. And we need their help to be able to set up contract terms that allow us to bring real automation, real AI, which we're able to do on the FedCiv side, but we need to be able to do that because part of what is going on is incumbency risk on enterprise IT contracts.

If I can earn 12%, 13%, 14% margins, I'm okay taking a little bit of incumbency risk. What you cannot do is make 6% or 7% margins and get thrown out 5 years later. And so I think given that lack of differentiation within parts of that enterprise IT segment, I think we're just going to be really crisp about which ones we want to bid and hold the teams accountable to it. If I look at the non-EIT part of the business, just over the same time frame over the last 5 years, our win rates on recompetes have been compellingly high, close to the industry benchmark of 90%.

They're between 85% and 90% on non-EIT work. And on my new work, that I'm chasing in that market, my win rates are close to 50% or above 50%. So which means I know that this company can be really successful working on the mission side of it. And that's the legacy of SAIC. We're a very proud mission-oriented engineering company. And our win rates suggest that we should be reallocating capital from larger cost-plus enterprise IT programs, which are getting more commoditized towards things that are either fixed price or towards mission and engineering. And that's where, frankly, the budget dollars are going to be over the next few years. And we think we're actually positioned well to be able to capitalize on it.

Do you have a sense for what percentage of the company today revenues are still kind of enterprise IT as you would subject to commoditization over time?

Yes. I think we -- in the filing today, we referred to large enterprise IT as roughly 10% of the company, about $700 million out of a base of $7 billion, easy math. And of that $700 million, which includes both cost-plus and fixed price and T&M, about $200 million is Department of State VANGUARD program, which we all know is going through a recompete process. It's getting broken out into 5 components. You can bid the first work stream, which is -- if you do that, then you're prevented by organization conflict of interest rules from bidding the other 4 work streams.

So we're bidding the other 4 work streams. We've been qualified in all 4. We're going to keep our share of VANGUARD. We're performing really well, bringing real automation into the networks here. The second large program is Department of Treasury TCloud, which was a takeaway from one of our competitors, and we have 4 years left on that program. So as I look at the tail of what's left in enterprise IT, large EIT, we only have 2 contracts left in the company. And we have our share of smaller EIT programs, but I think we're performing really well. Our track record is we can hold our own on these more small, more differentiated, more fixed price-oriented enterprise IT programs.

Okay. But on the DOT, the treasury and the state, do you -- how do you play defense to make sure that, that work doesn't move away so that you prevail on whatever terms...

Yes. They're slightly different. So on Department of Treasury, TCloud, we are on year 3 of that program, and that program continues to ramp really nicely for us. It was a $1.3 billion program, and we are not at full run rate yet. We are expecting that program to grow FY '26 into FY '27. So that program, I think we feel really good about how much that team has done inside of that program. VANGUARD Department of State, look, our performance scores are stellar inside that environment.

I think we know we are going to be difficult to dislodge in the VANGUARD environment. Having said that, we also know that it's going to be heavily competed, and we're going to win our share of work, but likely maybe not 100% of the work we have today. I think the one saving grace is the VANGUARD program is going to actually become a larger program because other incumbent work is also coming into the program.

So even if our percentage of the new VANGUARD evolve is smaller, the denominator is actually bigger. So we should be able to hold our own on VANGUARD. So -- and I take comfort in the fact that we're actually doing really good work on T&M or fixed price and the customer is consistently recognizing the quality of the work we're doing there. So I feel good about it.

Okay. No, that's good to hear. And we obviously -- there's always like malaise in the sector, but yet the Department of War is asking for as much as $1.5 trillion in the '27 budget. Do you have any view on what the pockets of opportunity incrementally would be for SAIC?

Yes. So I think big picture, we're going to let Congress sort of navigate the budgeting side of the challenges. But between base and reconciliation, we think the number is likely to be north of $1 trillion. I don't know if we get to $1.5 trillion, but I think as some combination of that, we're probably going to get north of $1 trillion comfortably. I think in terms of the priorities, I think there are probably a few different areas that we would really be focused on.

One, I would say all things mission data, I think we have some very specialized offerings that allow us to be very differentiated in the mission data area. Two, we have a program called cloud-based command and control, where we do that for the Air Force. And we, on a single pane of glass, effectively reflect the entire NORAD airspace in a single pane of glass, that program went from ideation to full execution in 30 months. It is very unusual to see programs like that in the DoW. And so we are well positioned on all things cloud-based command and control.

So if I think about enterprise IT, the higher end of the stack is cloud-based command and control. So we tend to think of that as sort of the right place in that market. We're well positioned. We have a program called GMASS, which was a takeaway from one of the primes a couple of years ago. That program is on its way modernizing legacy radar systems built by the primes. We are getting more performance out of those legacy radars, which we think is going to be really critical for Golden Dome relative to the performance that the customer was getting without the updates through this program.

So we think we're well positioned in parts of that market. And we have a really good SETA business. And to the extent that the customer is on buying new space systems, the SETA work that we do for some of the 3-letter agencies really help us advise the customer on what procurements make sense, what requirements we need to look like. And to me, that part of the market is doing pretty well as well. So we've got multiple areas of exposure.

I think it's for us, it's now that we've figured out where we want to spend our attention because the hardest thing sometimes is deciding what not to do more than figuring out where you want to be. And for us, I think the team is fully aligned with Jim and ensuring that we are crisp about where the attention needs to be. And then we're putting additional resources into areas where we do see budget dollars grow, and we are bringing some inherently superior technical skills to those areas. And I think our win rates over the last 5 years demonstrate that we can hold our own there.

Right. No, that makes sense. Looking at the portfolio, like you said, areas you don't want to be areas you want to lean into, are there any obvious capability gaps to really get into those growth vectors that you want to lean into that you would fill either via M&A or organic, what have you. What is missing, if anything?

Yes. I mean, look, I think any management team worth its salt would say the portfolio is never where it needs to be. So I think we go through this process over and over again. And I would say, as we move upmarket, if you will, I think consistently improving on the capabilities we bring is going to be important. So I would say we're deadly focused on bringing AI, I'm going to say, little AI to real automation inside the company and inside customer environments where we can execute missions with AI. It is nowhere at the scale that it needs to be at and AI just isn't there yet, notwithstanding the market's concern about it, AI just isn't there.

So taking our inherent mission knowledge and being able to build small AI to execute missions is, I think, part of where the focus is going to be. Two, things that are data related. [Audio Gap] I think there is an inherent need to separate platforms from data so that we can actually have other companies that are more agile that focus on the data level so we can create these decision [ panes ] for commanders. I think -- so to me, I think it really is very much a data-intensive exercise. And I would say, look, I think we would love to add some intel capabilities to the portfolio.

We are predominantly SETA right now if we can figure out a way to get a little more development exposure, and we bought this company called SilverEdge a few months ago, predominantly at ODNI, about half their business is there. But they also have a really interesting commercial, I'm going to say, software development as a service model. So they don't actually do software. They do software development as a service within mission environments.

So -- and it's a really interesting business model. So I think you'll continue to see us experiment with some business models. And at the very end, I would say, for about 5 years now, we've had a venture program, and we invest in venture companies and they are small companies. We typically like to be effective in the capital structure. So we tend to pick a top 5 position in the capital structure because you can actually influence the tech roadmap for these companies relative to our space.

And so we made 2 or 3 investments just last year. One of the investments we made just went public through a SPAC. And so that's a market where I think we don't suffer from the hubris believing we have to invent at all. I think bringing the ecosystem together so we can get capability on an accelerated fashion over to the customer is where the priority is.

And any acquisition that allows us to do that, I would say, bring it on. But we're clear eyed that we are heavily discounted as a stock. And therefore, the threshold for acquiring somebody has to be really high to justify allocating capital there versus buying your own stock. And so to me, I think it's just a process of navigating it. And we're excited about what the next 12 months can bring because I think there's some real potential here.

Well, it's interesting just on M&A versus buybacks. And we've asked this of many hardware companies in the defense space because there's an EO that's talking about restricting buybacks and dividends. Does that influence your calculus at all on capital allocation, the EO?

Yes. I mean, look, we've read it. We think that the underlying spirit of the EO is if you are underperforming on your contract, and you're underinvesting in your production line, then you perhaps ought to, this is the DoW's message, perhaps ought to prioritize investment in the war fighter needs more than share buybacks. I think thankfully, so far, we are not on the Naughty list. And therefore, we don't have any real communications from the government. But look, it is going to be a factor in the way we allocate capital. But again, I think we're performing well on our program. So I'm hopeful that we're not on any list like that. But it's one we have to navigate, and we'll wait to see what comes out of it.

And with respect to M&A pipeline, you mentioned the data-focused AI opportunities and intelligence. Are there such opportunities that you're coming across? Or is this still very much an emerging kind of...?

So we are seeing -- I think the hardest thing in M&A is scarcity value. And I think we just see too many assets that just look like too much we've seen already. And I think it's really hard to find that rare one thing that can really make a difference in the portfolio. So I think we're going to be very selective. I think the second thing that we will want to see inside the company is ensuring that whatever it is we buy, what is the alignment between that company and the pipeline we've got inside the company.

If a target creates a strategy, that's probably not a good fit. You need to have a strategy that is then informed by a target list. And so we're doing the Venn diagram to say, how much of the pipeline overlaps with my M&A target list. And where is the budget money going. And I think when we start to do that, you end up with volumes that are much lower than your initial screen of companies. So I think if we do 1 or 2 tuck-ins a year, which we have capital to allocate, inside of the free cash flow we generate every year, that's okay. That's okay. We have done large M&A. I think it's hard to do large M&A in our space. I think you can be much more effective doing small M&A because you're bringing real capability into the company, and that's where the priority is right now.

Fair enough. I have to ask about the CEO search and where you guys stand? Where are we with respect to the permanent CEO search? When would you anticipate having an announcement? And what attributes are you searching for?

Yes. I mean, look, big picture, the Board is in the middle of that process. So I'm not going to comment beyond saying. Jim is part of the search committee. The Board is on their way. And I think we're going to wait for them to make -- go through that process. I think in terms of time line, I don't know for sure, but I would say within the next few quarters, you should expect to hear something from us. And in terms of the qualities that they're looking for, I think probably a couple of things are really important.

One, a track record of creating real shareholder value. I think a track record of getting the most out of the portfolio we have today. I think just execution-oriented is going to be really important. And one of the things that Jim and I, frankly, have talked about for 6 months now is just focus on what's in front of you, focus on what you control because that is all you get to do in this environment.

I think the Board is very much of the view that we need an execution-focused CEO that can bring some real shareholder value. And I do think that there's long term, there are some real opportunities in the way of portfolio transformation, but we need somebody permanent in place to be able to navigate the next few steps. But the Board is at it, and we'll get there.

It's interesting, though, SAIC, we remember the history of it very -- I don't want to get into that. But the point is it would actually -- I would think it would benefit from an insider as opposed to an outsider. That's my personal view, but I wonder like does that make a difference?

I don't know that it's part of the calculus for the Board. I think they will look inside and they'll go external. And I think at the end of the day, we have a business that is in the midst of a transformation. We have a sector that is also going to be transforming. Services changed from 2013 to now, and it's likely going to change again over the next 10 years. And I do think that what you're likely to see companies do is focus less on calories, winning large programs and juicing up revenue growth rates and really focused on what is it that I want to be known for. And I think the next CEO's job at SAIC is figuring out what is it that we want the next 10 years of SAIC to be like? And what portfolio pivots do I have to make in order to get to the budget dollars that are out there. To me, that's the challenge.

Now one other question, we always think about it as a people business, right? You want to retain your best talent and the like. And the stock and the company have gone through a tougher time of late as of many of the peers. It's not unique to SAIC. How do you keep culture, if you will, or spirits high, I don't know, retention high. Is there anything the company is doing to kind of address that potential risk?

Yes. I mean it's a great question. And it's one of the most important things we can do, especially over the next 12 to 24 months as we're in the middle of this transformation. And I think we have some top-notch folks in the company. And I think we are much more crisp about the top talent in the enterprise and saying, what is it that we can do to ensure that they are here to see the success of this enterprise over the next few years.

And so we are paying a fair bit of attention. We're going through a fair bit of training for our program managers. We're investing in people through technical training and the like to ensure that when we make the investment in our people, our people see that as an investment that the company is making in them. So I think there's a fair bit of investment going into that.

One of the things that we talked about in the 8-K filing is we have a set of charts informing that we're beginning this transformation process. Since the split in 2013, we really haven't seen an end-to-end reorientation of what SAIC could look like. We're just beginning that process. And we've got our best people, not the ones that are looking for coverage, our best people working on this project because we want to make sure we can redo this enterprise top to bottom in a different way. So we set ourselves up for the next 10 years, but importantly, give ourselves the flexibility to invest a little more in the business. And so I think we're dead focused on getting it right. I don't want to sound pollyannish. We don't always get it right, but it's really important to remember that it's one of the most important things we can do.

I appreciate it. Thank you very much...

Thanks for having me.

Thank you.

Good day, and thank you for standing by. Welcome to the SAIC Fiscal Year 2026 Q3 Earnings Conference Call. [Operator Instructions]Please be advised that today's conference is being recorded. I would now like to hand over to your speaker today, Joseph DeNardi, Senior Vice President, Investor Relations and Treasurer. Please go ahead.

Good morning, and thank you for joining SAIC's Third Quarter Fiscal Year 2026 Earnings Call. My name is Joe DeNardi, Senior Vice President of Investor Relations and Treasurer. And joining me today to discuss our business and financial results are Jim Reagan, our Interim Chief Executive Officer; and Prabu Natarajan, our Chief Financial Officer.

Today, we will discuss our results for the third quarter of fiscal year 2026 that ended October 31, 2025. Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call. I refer you to our SEC filings for a discussion of these risks, including the Risk Factors section of our annual report on Form 10-K and our quarterly reports on Form 10-Q. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures. The non-GAAP measures should be considered in addition to and not a substitute for financial measures in accordance with GAAP. It is now my pleasure to introduce our Interim CEO, Jim Reagan.

Thank you, Joe, and thank you to everyone for joining our call. Before I begin, I want to take a moment and welcome Silveredge to SAIC. Having personally spent time with leaders at Silveredge, I'm excited about the value we can create by combining their differentiated technology and commercial go-to-market approach with the breadth of SAIC.

Building upon their success at bringing sought-after AI capabilities to life for the intelligence community, I expect strong continued growth as we deploy their incredibly talented people and solutions across the broader SAIC portfolio. This acquisition represents a good example of our ability to invest in differentiated IP capable of solving customer problems.

I will begin with a brief review of our third quarter results and updated outlook, but we'll leave the more detailed walk-through to Prabu. I will then discuss my top priorities as interim CEO and the compelling potential to create value for our shareholders while investing to better serve our customers and create opportunities for our employees.

Third quarter revenue of $1.87 billion declined 5.6% year-over-year and included a roughly 1 point headwind related to the government shutdown. Adjusting for this impact, revenue results were modestly ahead of our prior guidance as we've seen encouraging signs of stability across the market in recent months. Adjusted EBITDA of $185 million for a margin of 9.9% was driven by strong program execution. As I highlighted in the earnings release and as I will discuss in more detail, I see meaningful opportunities to further improve margins in the coming years while increasing internal investments to drive profitable growth.

Adjusted diluted EPS was $2.58 reflecting our strong margin performance and a favorable tax rate in the quarter. Third quarter free cash flow of $135 million was strong despite being impacted by the government shutdown which resulted in certain collections moving into our fourth fiscal quarter. Overall, the financial results we reported in the quarter were ahead of our prior guidance but I firmly believe that we can deliver stronger revenue performance over the long term.

Since being appointed interim CEO by our Board on October 23, my top priority has been to drive increased focus across the company and take decisive action that will position SAIC for long-term shareholder value creation. My prior industry experience and time on the Board have allowed me to hit the ground running, and I believe the actions we are taking will produce demonstrable results in the coming quarters.

Let me provide greater detail and examples around what we're doing and how we're measuring impact. SAIC's legacy of innovation and commitment to U.S. national security is undeniable and represents an incredibly valuable asset for the company. However, in recent years, we've struggled to convert this into revenue and EBITDA growth in line with the market due primarily to below-average business development and capture performance. The changes we have implemented over the past 24 months across business development are steps in the right direction and have contributed to our improved book-to-bill year-to-date.

We're 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. We have discussed in the past that SAIC spend several hundred million dollars annually on indirect functions including shared services, finance, human resources, marketing, communications and others. We're implementing efficiencies across this category of spending, including our recent organizational restructuring and we'll redeploy savings to fuel growth and improve profitability.

We have identified over $100 million in annual spend that we're actively working to reinvest into higher ROI areas across our business and increase margins. This should result in a more efficient SAIC with increased investment directly driving growth and margins approaching 10% in the near term, with additional potential upside in FY '27 as we drive further efficiency across the business. In addition, I see opportunities to refocus our attention on near-term execution and the aspects of our performance, which we control. While there is value in aligning to a long-term corporate strategy, this needs to be balanced with a keen focus on executing to and delivering on our near-term commitments.

My impression during my first several weeks as interim CEO is that our leaders want and will embrace this shift in priorities. I'm challenging leaders across SAIC to focus on execution, make an impact on the business and deliver results, and I'm confident in their ability to step up. Lastly, we have shared with you our focus on increasing business development throughput and have shown strong progress against this having increased the volumes from $17 billion in FY '24 to $28 billion in FY '25. While I believe this is an appropriate level for a business our size, we will now focus our shift from targeting throughput to prioritizing quality and alignment with the markets where we have the strongest right to win. This will drive improved decision-making, more efficient resource allocation and a stronger SAIC in the long run. As I look at some of the larger business development pursuits that have not gone our way in recent years and the lessons learned, there is substantial value to be created from turning up the focus and attention on the core fundamentals of this business.

Before turning the call over to Prabu, I want to take a moment to thank Toni Townes-Whitley, David Ray, Josh Jackson and Lauren Knausenberger for their contributions and service to SAIC. The recent changes we made were necessary to position the company for longer-term success but required difficult decisions impacting some very high-quality individuals. I also want to acknowledge the tremendous honor it is to lead SAIC, a company with a deep legacy of supporting our country. I look forward to serving in this interim capacity working with the leadership team to implement the priorities I just outlined and assisting the Board in its search for a permanent CEO.

We have begun that process, which is being led by a search committee comprised of Board members working in conjunction with a leading external search firm. Our ideal candidate will be someone who shares this company's commitment to serving our nation and our customers and has a proven track record of operating excellence and value creation. I can speak for our Board in saying that we see significant opportunity to drive value for our shareholders, greater opportunities for our employees and improved outcomes for our customers, our nation and its allies. And with that, I'll now turn the call over to Prabu.

Thank you, Jim, and good morning to those joining our call. I will discuss our business development results in the quarter, followed by a review of our updated outlook, including some additional detail regarding the margin improvement efforts that Jim discussed.

As you can see on Slide 4, we delivered 3Q net bookings of $2.2 billion, resulting in a book-to-bill in the quarter and on a trailing 12-month basis of 1.2x. Our 3Q awards included a 5-year recompete with the Air Force, with a total contract value of $1.4 billion. And on the new business side, a 5-year $413 million contract with the U.S. Army for its open source intelligence enterprise or OSINT program. In the third quarter, we submitted proposals with a total contract value of approximately $3 billion, bringing our year-to-date submissions to approximately $21 billion. While the government shutdown has slowed our pace of proposal submissions, we expect this to normalize in the near term and continue to target submitting bids totaling over $30 billion in FY '27. The incremental investments we expect to fund out of our cost efficiency efforts will go towards strengthening our solutions and overall big quality.

I'll now turn to our updated outlook for FY '26 and FY '27. We are increasing our FY '26 total revenue guidance to reflect the acquisition of Silveredge and reaffirming our organic revenue growth guidance despite the roughly 1 point impact to 3Q revenues from the government shutdown. Our guidance continues to assume a roughly 4-point contraction in organic revenue growth in the fourth quarter. We are increasing our guidance for FY '26 adjusted EBITDA margin by 10 basis points due primarily to our strong program performance year-to-date. We are increasing our FY '26 adjusted diluted earnings per share guidance by $0.40 largely due to the increased earnings and a lower tax rate as we now assume a roughly 10% effective tax rate for the year. We are maintaining our FY '26 free cash flow guidance of greater than $550 million.

For FY '27, we are increasing our revenue guidance by approximately 1 point to include the acquisition of Silveredge and are reaffirming our organic revenue growth guidance of 0% to 3%. This outlook reflects an assumed contribution from recent new business wins, including TENCAP-HOPE and OSINT partially offset by known recompete headwinds of approximately 1% to 2%. As we have discussed, we are in the recompete phase for one of our largest programs, which represents just over 3% of annual revenue with an expected award in the next few months. A favorable outcome on this would position us well in the 0% to 3% range while a loss would likely make the lower end of the range more likely based on what we know today.

We are increasing FY '27 margin guidance by 20 basis points at the midpoint to a range of 9.7% to 9.9%. The key drivers behind this are the acquisition of Silveredge, which adds roughly 10 basis points and the initial 10 basis points impact from cost actions taken to date. Our bias for adjusted EBITDA margins in FY '27 and beyond remains to the upside as we see meaningful opportunities to drive efficiency and improve performance, which are not reflected in our updated guidance. As we return to revenue growth in the coming quarters, we anticipate that the efficiency efforts being implemented now will strengthen our ability to increase EBITDA faster than revenue. We are increasing our FY '27 adjusted EPS guidance by $0.50, reflecting the addition of Silveredge, increased operating margins and a lower share count. We are maintaining our guidance for FY '27 free cash flow of greater than $600 million or approximately $13.50 per share. As a reminder, FY '26 and FY '27 free cash flow benefits from changes related to Section 174 under the One Big Beautiful Bill Act, which results in minimal cash taxes this year and next. Given our strong free cash flow, clear visibility into margin improvement and a return to revenue growth, we see returning cash to shareholders via our repurchase program as a compelling investment and now expect to repurchase approximately $500 million in each of FY '26 and FY '27. This $1 billion of total share repurchases represents approximately 25% of our market value.

As Jim indicated, we see opportunities to create significant value for shareholders and are acting decisively to execute on our plans. While we appreciate the market's awareness with some of the uncertainty facing our end market, our FY '26 revenue performance and our leadership transition, we have conviction in our ability to further improve execution, deliver sustained profitable growth and create long-term shareholder value. Realizing the potential of SAIC requires focus and a commitment to delivering on what we say. I am confident that we can accomplish this and demonstrate clear progress against this in the coming quarters. I will now turn the call over for Q&A.

[Operator Instructions] Our first question will come from the line of Gautam Khanna from TD Cowen.

I wanted to ask if you could maybe describe what you're seeing in the procurement environment more broadly right now post the shutdown? And with respect to our incoming RFPs, pace of adjudication and the like.

Sure. Thank you for the question. In big picture, as we alluded to the point on -- in the earnings script, I think we did see a slowdown in submit activity and a slowdown in the RFPs coming through the door as a result of the shutdown. We do expect that to normalize, I would say, over the course of the fourth quarter, recognizing that Q4 tends to be the softest book-to-bill quarter for the industry in general. So I would say it's getting back to normal. I don't think fundamentally, if you normalize for the shutdown, it hasn't materially changed from where it was in the Q2 time frame, where award decisions are taking a little bit longer, but the RFP activity has stayed more or less on pace.

Got you. And I also wanted to ask if there was any residual impact from DOGE. I know it's been a while since we've talked about that. But DOGE and just the pricing environment broadly.

Yes. On the DOGE environment, I would say no material changes to what we've disclosed before. We said about 1% of full year revenues for this year. So that really has not changed. That we also alluded to, the broader DOGE effort, I would say, has morphed into sort of more mini DOGE reviews inside of the different agencies and the departments based on their funding situation. But that's, frankly, a feeling that we're used to navigating historically speaking. So I would say it has remained fairly stable, I would say. And so I would say, not a lot in terms of pricing pressure. Our margins were very healthy in Q3. We really have not seen a ton of pricing pressure either via the RFPs that are coming out. We're seeing a little more fixed price in some areas, but I would not call that a trend broadly but really have not seen a ton of pricing pressure at this point. .

Our next question will come from the line of Sheila Kahyaoglu from Jefferies.

Congratulations, Jim. Maybe just on Silveredge as it becomes embedded into the portfolio, how do we think about the opportunity of Silveredge and integration within SAIC?

Yes. Thanks for the question, Sheila. It's good to hear from you. I would tell you, after being here for 9 or 10 weeks, I am wildly enthusiastic about what Silveredge is going to be able to do, not just as a stand-alone part of our business, but as we integrate it into the portfolio, what it can do to accelerate the differentiation of a lot of the bids that we have, not just within our intelligence community customers but more broadly across the whole portfolio. We expect that Silveredge will be accretive next year, both on a -- it will push our margins up a bit but also be accretive on EPS and provide -- I think that the broader portfolio of opportunities within our company will give great opportunity, not just for us to win more and deliver better solutions, but also great opportunities for the employees of Silveredge that are now part of the family.

Great. And maybe if I could just ask on the civil growth or the civil decline in the quarter, that segment appears to be down 7% year-on-year. Can you just provide more detail on those programs? Was it a few specific programs? Or are you seeing across the board? And how do you think about the trajectory over the next few quarters?

Sheila, Prabu here. Thank you for the question. I would say big picture, within every quarter, I think you're going to have a little bit of seasonality that creates a little bit of lumpiness. If you zoomed out a little and looked at the 9 months, for the first 9 months of the year, our Civil business has been roughly flat and margins are up pretty materially. I would say there are no single program-related drivers in the civil business. I'd say the 9-month story is probably a better reflection of where that portfolio is rather than the 3 months because the 3-month story is always, I think, harder to explain given changes in compute and store volume, et cetera. So I would just say, think of the 9 months is a better reflection. We are in agencies that are seeing some incremental funding, whether that's CBP, DHS or frankly, the FAA. And I'm really proud of what the team is doing on margins. We said a couple of years ago that the mid-12% is probably the trough for this business and that we would expect to get the business back to the 14% range, and they are driving hard towards it. They were having to make some hard decisions, but they are doing all the right things we want them to do to get this portfolio back growing again next year, but also getting margins back up to about 14%.

Our next question will come from the line of Jonathan Siegmann from Stifel.

Hoping if you could share thoughts on the Department of War announced reforms and talk about some of the available options the team has to pivot the business to better align with those aspirations? And then to follow on to that, just I would love to hear from you, Jim, just given how dynamic the environment is, what drove the decision to change direction of the company now given all the moving pieces? And nice to engage with you again.

Jon, thanks for the question. First, in terms of how the department award has been making some announced changes and how it's going to do procurement. We are ready to help the Department of War implement the changes that it needs to make. We welcome the opportunity to see greater speed in the procurement process, which is really their objective, to put the department more on a faster war footing to keep us ready for all adversaries. The use of different contracting vehicles, for example, OTAs that's something that we have been doing for some time, and we're ready to expand the use of those kinds of alternative or innovative contracting vehicles that will provide greater speed of not just the procurement process, but greater speed of implementing solutions. One of the things that's interesting that we've been hearing is in the interest of speed, 80%, 90% adherence to requirements instead of 100% is becoming acceptable. Now how they're going to implement that, there's a lot of guidance that still needs to be issued. But we're planning on spending a lot of time with our customers to help them implement this in a way that achieves their objectives of speed and efficiency. You also asked about the dynamic environment. We're ready -- and I would say that the acquisition of Silveredge is just one proof point of the things that we're doing to be ready for increased AI content in solutions that our customers are looking for, and we're always looking for ways to continue innovation in our business. The spend -- our spend on innovation is going to be more clearly mapped to opportunities in the pipeline and what the customers are telling us they're looking for. And then the third thing, I think you asked about was why change now. I think that the focus of this business and the marching orders that I've received from our Board is to double down our focus on execution, not just execution in how we deliver solutions -- our program results to customers, but also enlisting more carefully to customers so that when we submit a proposal, our likelihood of winning is higher and that our ability to accelerate growth into the next couple of years will be kind of a proof point coming out of that focus.

Our next question will come from the line of Seth Seifman from JPMorgan.

I wonder Jim or Prabu, you mentioned the $100 million of savings that you were looking at. How should we think about how much of that gets diverted toward investment and new bids on work that should be -- drive growth and be accretive to margin? How much of it should flow through to the bottom line? And how much of that contributed to the increase in the EBITDA expectation for next year?

It's a great question, Seth. Thanks for asking it. The way I would -- I'll kind of take the question you've asked the last part of it first. The guidance that we have in for next year reflects the work that we've already done to exit the current fiscal year at a lower cost run rate. It does not -- next year's number doesn't include more work that we think we need to do and are undertaking at the beginning of the calendar year. We're launching a new program in January that will continue the work that we've been doing around the consolidation of our business groups and taking out a lot of the overhead in connection with that. So the amount of reinvestment out of the $100 million number that we're talking about will be what doesn't go to improving margins. So I would call it there will be a substantial amount of that $100 million that will go to resources that we need to add to the business around account management, more business development leadership as well as some improvement that we want to fund in the actual process of developing winning proposals. I hope that answers your question.

Yes. Absolutely. That's helpful. And as a follow-up, I think you talked about business development and execution as areas of improvement. I guess when you look at the portfolio and you think about the core competencies of SAIC and the things that really can drive value in the business and the core of what's there. What do you see as you like?

You know what I see that I like is a lot of very deep understanding of what the customer's pain points are in delivering mission. Science is part of our name. And we are a company of strong scientists, strong application development and application integration capability and people that understand mission. The passion for what we do runs deep in the 57-year history of our company, and it's something that I'm very proud of. So I think and I've already had some conversations with customers who acknowledge our ability to help them be successful. I think that -- what we can do better is, as I've said, get a more intense focus on marrying the investments that we make in innovation, the investments that we make in R&D to the opportunities that our customers are putting in front of us that we're going to be bidding on in the next 24 months. So we're going to improve that as well as doing a little bit better job of listening to our customers tell us not what they need today on programs that we're executing. But really, what are they going to look to us to do tomorrow that's different from what we're doing today. Everything we're capable of doing. But in listening to that, I need them to see our listening showing up in the proposals that we submit.

Our next question will come from the line of Tobey Sommer from Truist.

Curious if you and the Board expect the pressure on federal civil spending to largely conclude in 2025? Or do you consider this a longer-term headwind that you are planning for?

I think that there's probably going to be continued pressure on civilian agency budgets. That's just a fact of life that we see going forward as the the federal budget priorities do put greater emphasis on improving readiness and that will show up in bigger budgets for the DoD. That said, as Prabu mentioned a little bit earlier, we believe that we're kind of in the fast current of the civilian agencies. The places we're at where the faster currents of civilian agency spend are, things like CBP and FAA are the two good examples that Prabu had mentioned earlier. So I feel really good about where we're placed within the civilian agency space. But -- and I'm also very pleased at how we're executing there in terms of delivery of results for customers that are reflective of expanding margins.

And given that response, how do you feel about and think about portfolio shaping to increase the probability of being able to achieve your organic growth and margin objectives.

There's always opportunities to shake portfolio, and we've done that in a couple of cases in the last 3 or 4 years. And I'm never going to say never. I wouldn't say that there's a target that you can expect to hear us announcing a portfolio shaping move in the next couple of quarters. But we're always looking at opportunities to do that. .

And Tobey, the only thing I would add to that is that to the extent that we are reviewing the portfolio and looking at areas of the portfolio that are unable to be transformed. In other words, where they tend to be predominantly lower-end services oriented. I think that you'll see us actively think about that conversation because I think the capacity to transform is just as important to make sure the portfolio stays fresh.

Last question, if I could sneak in a third one in. Given the turbulence in the end markets and in budget in this year, and potentially going forward in civil. Would you like to toggle the leverage down a bit over time? Or are you going to stick with this leverage target? Because I think the group is down a bit over the last 1.5 years or so.

Yes, fair question, Tobey. I mean, look, we actively talk about the leverage, both inside the company as well as with our Board. 3.0 is sort of a leverage area that we are roughly comfortable with. We try to stress test our assumptions on EBITDA and cash flow to ensure that we can deliver and stay at that 3.0. We routinely talk about whether deleveraging is an appropriate thing to do in the environment. I think I would say, given the M&A market where I would say, by and large, it still has tended to be a seller's market, it is very hard, I think, to justify acquiring businesses that 12, 13, 14x when we're being traded at 8, 9, 10x. So I think you'll see us stay disciplined on that front. But frankly, I think we tend to be astute in the way we manage our capital. Share repurchases are always market conditions permitting. And where we tend to see, I'm going to say, a higher return on the buybacks, we will see us deploy capital that way. But where we think that the incremental return from that buyback is perhaps lower than maybe just levering down, you'll see us make that trade. The reality is we have to be nimble and agile. There's no formula to buybacks other than we are trying to generate as much value as we can for our shareholders. And fundamentally, we have incredible visibility into the cash flow. So that's what gives us confidence on the current capital allocation, obviously.

Our next question will come from the line of Colin Canfield from Cantor.

Going back to maybe the portfolio shaping conversation, can you just maybe talk about how you think about either pairing or adding pieces in terms of the magnitude of portfolio shaping? And then maybe kind of if you want to talk about kind of some of the larger private assets and that around how you think about maybe adding to larger defense and intelligence capabilities versus going after some of the more civil exposure? And then just kind of within that construct, if you can maybe talk about kind of how you think about defense budget growth, not so much the outlays, right? The outlays are baked in, but the budget growth over the kind of multiyear period versus the civil budget growth and how you kind of like weigh that risk reward to the upcoming midterms.

Yes, there's a lot to unpack in that question, Colin. I think the way I would start with is in your question about portfolio shaping. I think that our appetite for portfolio shaping in terms of magnitude, it's going to be more focused on -- it could -- anything that we do is going to be more focused on what opportunities get unlocked because we're refocusing the business in other areas. And -- or maybe taking out an area of the business that causes conflict in our ability to grow in other parts. It's hard for me to put a dollar figure on that at this point. And I'll ask Prabu to also pile on with any thoughts that he's got. But just in terms of where the defense budget is going. I think that the stated objectives and the ways that the current Department of War is -- has articulated what it needs to be ready for, for the next 3 or 4 years is really going to put some upward pressure on the DoW budget. If you think about the budget as a percentage of GDP, it really -- even at the targets that have been announced, it really isn't too far out of line with what you've seen in the last 100 years. So it might feel like it's a big increase. But in terms of the needs that the department has today to increase readiness for where it sees the potential conflicts going over the next 5, I think that there's going to be plenty of opportunity for us and our industry to be growing their businesses as a result.

Thank you, Jim. That was perfect. On the first part of the question, Colin, on PE-owned assets. I mean, look, I think we have to demonstrate that we can organically grow this business. As Jim said, the focus is tuck-ins that can help us accelerate our growth rate. At this point, our cup runs over in terms of M&A. And so I think we're just going to be astute in terms of what we're focused on there, and we are not looking at scale-based M&A at this point. On the DoD budget, the only thing I would add is base budget flat to slightly up. And then we're going to need some reconciliation money to get closer to that $1 trillion. And how frequently that happens over this year and the next year is going to drive, I think, the health of the defense budgets. I think to Jim's earlier comment, I think the which currents you're part of, whether that's -- or DoD is going to be a really important consideration. And we appreciate the fact that the Department of War has given priority areas out there, whether they are tech areas or mission areas. And we're just ensuring that the portfolio is as well aligned to those areas as we can possibly be over the next couple of years. But that's our prognosis. Our guidance for next year assumes that things don't change dramatically to the upside or the downside, things are going to be stable, more stable than they have been this year.

Got it. Got it. And then in terms of the civil budget growth, how do you kind of think about FY '27 comparison to, call it, FY '19 right, where it was initial kind of deficit hawk focus, taking a back seat to Defense Hawks and then in order to get kind of key policy objectives done, the Defense Hawk's working with kind of across the aisle to drive dollar-for-dollar deals of discretionary defense and nondefense spending. So maybe just kind of a little bit on how you think about the multiyear civil budget growth outlook and how that's shaping where you're kind of approaching the savings plan?

I appreciate the question, and it's a complex one to be sure, and I'm going to leave some folks that are way better qualified to answer it. I think our baseline assumption is that civil budgets will continue to be pressured. And your level of pressure is going to be dependent on what baseline you use to compare. If you compare it to the '19 baseline versus the '24, '25 baseline, you may get to a slightly different place. But our assumption is nothing changes in the near term, but civil budgets will be pressured, recognizing that there is real need for modernization within the civilian agencies. But I think in this environment, we just don't see a ton of opportunity for real budget growth. And whether the one-for-one happens, that's going to be a function of things that are way out of our control, and we're just going to monitor it and see where it goes. But our assumption for next year is budget will remain pressured. We are telling our teams internally that assume things will remain hard for the next 12 to 18 months on the budget front and how can you consistently deliver good performance and on contract growth, to me, it's going to be very much a blocking and tackling exercise because there are elements of this conversation that are beyond our ability to control and the message coming into this call was focus on what we can control as an enterprise.

And with that, this concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

Good day, and thank you for standing by. Welcome to the SAIC Fiscal Year 2026 Second Quarter Earnings Conference Call. [Operator Instructions]. Please be advised, today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Joseph DeNardi, Senior Vice President, Investor Relations and Treasurer. Please go ahead.

Good morning, and thank you for joining SAIC's Second Quarter Fiscal Year 2026 Earnings Call. My name is Joe DeNardi, Senior Vice President of Investor Relations and Treasurer. And joining me today to discuss our business and financial results are Tony Townes-Whitley, our Chief Executive Officer; and Prabu Natarajan, our Chief Financial Officer.

Today, we will discuss our results for the second quarter of fiscal year 2026 that ended August 1, 2025. Please note that we may make forward-looking statements on today's calls that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call. I refer you to our SEC filings for a discussion of these risks, including the Risk Factors annual report on Form 10-Q. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

In addition, we will discuss non-GAAP financial measures and other metrics, which -- formation for investors and both our press release and supplemental financial presentation slides include reconciliations to comparable GAAP measures. The non-GAAP measures should be considered in addition to and not a sub financial measures in accordance -- it is now my pleasure to introduce our CEO, Tony Townes-Whitley.

Thank you, Joe, and thanks everyone for joining on our call. Overall, our results in the quarter were mixed, with revenue below our expectations, declining 2.7% year-over-year, but profit margins rebounding in the first quarter by strong program execution. In addition, we delivered a second quarter with a book-to-bill comfortably over 1.0, driving our year-to-date book-to-bill to [ 1.4 ]. Our qualified pipeline, plant levels and backlog of pending awards all remain strong. and we believe the investments made and business development processes implemented in recent quarters position us well to capitalize on a rich set of opportunities.

As you can see from our revenue performance in the quarter and our updated outlook, we are seeing a more challenging environment than we had previously forecasted. There are 3 drivers behind this. First, slower conversion of on-contract growth opportunities into revenue, second, an increase in the impact from program disruptions; and third, delays on our new business awards. As we highlighted on our first quarter call, our prior revenue guidance for the year of 2% to 4% growth assume several points of contribution from a combination of on-contract growth and new business wins ramping up within time frame.

While recent new business, including 10 cap hope with the Air Force and the key program with Navy, valued at approximately $350 million will contribute modestly to this year and further ramp in fiscal year '27 on contract revenue growth has been impacted by funding uncertainty added scrutiny room to efforts to reduce government spending and a government workforce dealing with increased turnover. These headwinds have been more pronounced at customers working through particularly meaningful transformation or facing greater budget uncertainty.

As you will recall from our first quarter call, we indicated that delays in new business awards would require a greater contribution from on contract renew in order for us to meet our plans for the year. Based on trends we've seen in recent months, we now see that is unlikely to materialize. And we've updated our guidance for fiscal year '26 and full year '27 accordingly. Our revised outlook for fiscal year '26 revenue assumes that current transform revenue through the remainder of the year with very little contribution from additional new business or on-contract growth.

While we believe that much of the revenue headwind we are facing is temporary and will normalize over time, we are taking purposeful action to align our cost structure with a more changing revenue environment expected in the next several quarters. As we highlighted on last year's Q3 call, our cost structure is variable and the preparation we have taken in recent quarters positions us well to respond appropriately with cost efficiency initiatives to mitigate the impact on EBITDA and free cash flow from lower revenue.

While some of these initiatives are already underway, we will discuss the specifics or detail on our third quarter call. The savings resulting from these initiatives give us great confidence in our ability to continue to deliver margin improvement while investing appropriately for growth and value creation in the coming years.

Given the relative magnitude of our revision to revenue, I want to be very clear that the revised outlook assumes that impacts from on-contract growth and new business award delays continue, which we believe is a prudent option given the current market. As a result, we see the empty guidance range as appropriately derisked based on our current assessment of market conditions. Now while the current market volatility and the impact it is having on our near-term revenue is disappointing, I'm encouraged by the signs of progress we're seeing in the execution of our strategy.

When I became CEO approximately 2 years ago, the strategy review we completed indicated that substantial changes were needed across many facets of the business in order for SAIC to regain a position of leadership and my's my long-term value to our employees, customers and shareholders. We knew that the path towards regaining the leadership would not be linear. While this quarter's results, revised outlook and recent market volatility have been challenging, and we are addressing them head on.

I will draw your attention to factors that are most relevant for our success beyond this period of revenue softness and over the long term. Our year-to-date recompete win rate is in line with our target. And our planned recompetes over the next 12 months are fairly typical with a handful of programs in the 1% to 3% of revenue range. We expect to show continued progress over time in sustaining our recompete win rate at current levels. Our win rate on new business is also roughly in line with our target as we have been successful on 2 of the 6 larger pursuits adjudicated year-to-date. As I indicated earlier, our pipeline of expected awards in the coming quarters remain solid.

Restoring our recompete win rates to our target range and winning our fair share of new business pursuits, while increasing our submit levels is a good formula for sustainable growth over the long term. We are encouraged by the political support to provide solid levels of funding in areas, including border security, FAA modernization and homeland missile defense.

However, we expect this administration's focus on efficiency to continue and suspect that budget time lines are likely to be dynamic in the coming quarters. We remain confident that our strategy and business model position us well to adapt and win by delivering outcomes at speed for our customers. We are seeing increased opportunities to drive greater efficiency across our business as we leverage artificial intelligence for core operations. We expect this to materialize as an incremental tailwind to margins and savings for our customers in the coming years.

I want to conclude by thanking our employees for their dedication and focus. During our recent quarterly review of the business, I emphasize to our teams the importance of culture, leadership and employee engagement as we continue to navigate a dynamic market and more challenging near-term revenue outlook. I am proud of how we've shown up for our customers and each other over the past several months. Our culture anchored around our dedication to the mission of national security positions us well to grow and create long-term value for all of our stakeholders.

I'll now turn the call over to Prabu.

Thank you, Tony, and good morning to those joining our call. 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 -- the variance when compared to our first quarter growth rate and prior expectation is primarily a lesser contribution from on-contract growth slowed to 3% in 2Q from 8% in 1Q and a modest increase in the impact of program disruptions.

Second quarter adjusted EBITDA was $185 million, resulting in adjusted EBITDA margin of 10.5%. The results benefited from strong program execution and a favorable new settlement, which was offset by an impact of state tax related to the One Big Beautiful Bill Act. The underlying margin adjustment for these 2 items of 10.2% reflects improved profitability across our contract portfolio and represent an increase of 180 basis points quarter-to-quarter and 80 basis points year-over-year. Adjusted diluted earnings per share of $3 [ degree ] benefited from a favorable tax settlement and increased adjusted EBITDA in the quarter.

Second quarter free cash flow of meaningfully from first quarter to $150 million, though we continue to see some challenges related to the timing of invoice payments across a small set of contracts. As Tony indicated, we are updating our guidance FY '26 and FY '27 to reflect a more challenging revenue environment. We are lowering FY '26 revenue to a range of $7.25 billion to $7.325 billion, representing organic contraction of 2% to 3%. We expect organic revenue to decline by approximately 5.5% and 4% in 3Q and 4Q, respectively. Our revised FY '27 revenue guidance 0% and 3% assumes a more due contribution from on-contract growth of 2% to 3% and a modest benefit from new business and a more typical headwind from contract transitions. Note that we will annualize the headwinds related to the NASA East -- and the Cloud One computing store program in our third and fourth quarters perspective.

FY '26 adjusted EBITDA margin guidance is being lowered due to the onetime impact from Section 174 changes to our state and local taxes, which represents a 10 basis point headwind this year. We are reiterating our FY '27 adjusted EBITDA margin guidance of 9.5% to 9.7%. Tony indicated, we will look to mitigate the impact of lower new with cost efficiency initiatives, which increase our confidence in the year-over-year margin improvement plans we've outlined. We will update you on our Q3 and Q4 calls regarding the implementation of these plans and the potential upside to our margin targets they could drive. We are increasing our FY '26 adjusted EPS guidance to a range of $9.40 to $9.60, which benefits from the tax settlement in 2Q and a revised full year effective tax rate assumption of 14%. Our revised FY '27 EPS guidance of $9 to $9.20 assumes a more normalized effective tax rate of approximately 23%. We are increasing our FY '26 free cash flow guidance to greater than $550 million, which reflects a reduction in cash flow due to lower expected EBITDA, offset by lower cash taxes due to Section 174 and we are assuming a similar dynamic in FY '27. We are still finalizing our planning and the relative impact on cash taxes between FY '26, FY '27 and FY '28 but expect the 3 years combined to see a reduction in cash taxes of approximately $200 million.

We are on track to deliver nearly $12 in free cash flow per share in FY '26 and between $13 and $14 in free cash flow per share in FY '27, both higher than prior estimates. Our capital deployment plans over the next few years remain focused on driving long-term value for shareholders with sufficient capacity to support this with both share repurchases and capability-focused M&A.

I will now turn the call over for Q&A.

[Operator Instructions]. Our first question comes from Jonathan Ladewig with Stifel.

The disaggregation, how you broke down the revenue outlook change is helpful specific to on-contract growth. Can you comment a bit more on what type of work or customers you're seeing the greatest impacts? And does the loss of this mid-single digit on contract growth represent a share shift to someone else or a deferral of that potential work? Or is this a real efficiency that government is driving?

Yes. Let me take both the first and second part of your question. In terms of -- as we -- so as I mentioned in the script, in some of the areas for on-contract growth where we've seen challenge in converting that to revenue, the delays and the environmental, if you will, conditions. We've seen that in areas where there's great transformation across government, particularly in the Army where we had the Army transformation initiative, which was launched earlier this year, which represents a double-digit cut to the Army and in specific areas, some areas where SAIC is supporting in programs like S3i for us in Huntsville. In these areas, we see a slowdown, if you will, a delay in our ability to grow and present new capabilities and opportunities to our customers timing switch turnover in personnel, new processes, new norms, new reviews and that is creating some of this delay.

Other areas in some parts of the civilian space, for example, the Department of Treasury, where we have a large keycloud program, that too has experienced significant delays in our ability to increase our on-contract position. And then I could offer up a couple of other programs, maybe in the Space Force arena. So we're seeing it across government. Look, is it related to a share battle with competitors versus an efficiency of the government, I would argue for the latter. The efficiency which, in many ways, we have to acknowledge that the government, OMB and other parts of government GSA have been very diligent in driving government efficiency efforts. Many to the benefit of the U.S. taxpayer. And so we have to applaud many of those efforts, but the day-to-day reality on the ground is that it has caused delays. And as we navigate those delays, our ability to convert revenue from those opportunities has stalled. And hence, we have tried to show a prudent framework for how we look at the rest of the year, assuming that, that environment continues, and we believe that it will normalize over time over the next few quarters, which is why we've tried to derisk, if you will, our guidance to you at the Street relative to assuming little to no improvement on the on-contract growth or in a change, a fundamental change in the award of new business over the next 2, 3 quarters. So that's what's represented in our call.

Our next question comes from Seth Seifman with JPMorgan.

Okay. I wanted to -- maybe a follow-up on that a little bit. Do you think -- you're talking about some changes in the customer approach here. Does that Tony, how do you think that should affect kind of the structure of this industry over time and the number of players and what type of returns that people can expect.

Yes. Let me take a first swing and I'd like Prabu also to respond as well. Look, I think we have all acknowledged the volatility in the market over the last few quarters. with changes of fundamental reduction in the government personnel and I would say a disproportionate impact on government acquisition personnel, which is the channel to the private sector. And, hence, delays and changes in process, escalations for approvals. I think that should dissipate. It should have been anticipated. We brought that forward, and I'm sure our peers have brought to you.

In terms of whether that resets the market in any structure, a, I would say it would be very -- it would be too soon to tell. But b, I would suggest to you that I think all are trying to react to this new environment and delay does not mean that we don't expect things normalize over time. As we look into fiscal year '27 for us would be in the next few quarters, we are starting to see signals of, I would say, normalization does anyone have a crystal ball exactly when that will convert revenue as we've seen in the past? No. But I would say things have started to settle. And we are expecting that they will in fiscal year '27. We're actually encouraged in some of the clarity we have on where the government is putting budget priorities that line up with some of the investments in areas of our capability. And we are also encouraged that we see reform of acquisition that we think will be positive for many parts of our market as well.

So I don't want to suggest to you that this is a durable effect over time, but I would suggest to you that organizations like ourselves who will be prudent and want to be conservative in our view are going to try to explain and express this environment, I'd say, for the next 2 to 4 quarters. Prabu, do you have any other...

Thank you, Tony. That was perfect. On the structural question, I'd sort of break this down into 2 components. One is sort of players in the industry. Clearly, there, we are seeing news in the market, non-traditionals with more commercial orientation to them and I then would break down the other component of change being more commercial terms and conditions, maybe a little more expectation that contractors bear a little more risk on fixed-price programs. So I'd sort of bifurcate the structural changes potentially underlined as in those 2 buckets.

Obviously, we've talked about the benefit of having more fixed price in the portfolio. Our civil business is predominantly fixed for T&M and obviously, we're delivering very healthy margins from that business. So I think they're almost welcoming the chains to more fixed price orientation, more outcome-based orientation to programs. And as far as the structural change with new entrants, I think we welcome newcomers in the industry as a mission integrator. I think we believe sincerely that the offerings from commercial vendors still will require mission integration at its core to be able to operate inside of the government environment. So we welcome the competition in the industrial base, and we are looking forward to the change.

And then last footnote, I would say, we're not really seeing any significant changes in the terms and conditions yet. And therefore, I would say there's probably more rhetoric than reality right now on the expectation for terms and conditions to change dramatically. So while we're watching the change, and we're navigating as best as we can in an uncertain environment, our fundamental focus is growing EBITDA and growing cash for our shareholders and remaining order friendly.

Okay. Okay. That's very helpful. And then maybe just a follow-up on that. I think during the -- earlier, you mentioned Huntsville, and took of that as an area where due to the Army Missile Command being there a place where we should be seeing a lot more resources flowing into given the focus on missiles and missile defense. So is that something -- maybe some temporary. Is that more of a temporary disruption there and a place where you see opportunity over time?

No, I think that's fair. I think there is a mixed reaction there temporarily and what we have sort of by the too, we do have challenges on the day-to-day changes there. There's been quite a bit of transformation happening there, as you know, within the Army, but particularly when Army the Missile Command. But as you've also heard, it's basically moving to Huntsville, there's a lot of opportunity moving in that direction as well. And we are very well positioned, as you know, with a significant footprint there. and engagement in immunity. So we see upside. But I think, again, it's prudent for us to at least communicate to you that the environmental day-to-day experience is one that has changed our ability to convert revenue from our existing contractual footprint, and we expect that to improve over time. And obviously, we'll come back to you with any updates to guidance as we see greater improvement on our on-contract growth.

Our next question comes from Tobey Sommer with Truist.

I was wondering if you could talk about the cost efficiency measures that you cited to allow you to get year-over-year margin expansion? And maybe speak to the tension between doing something on the cost side now and the revenue top line is sort of tepid as long as you think that's story and that's sort of a multiyear in nature?

I appreciate the question and the 2 dimensions of the question first in terms of what we're doing and then the balance that should be there that is not reactive, but actually part of -- that we are still commissioning to continue to invest in certain parts of our value creation for the business. If I was to describe sort of broadly, and I think we said in the script that we would come back to you next quarter to give some more specifics. But at this age, I'd like to characterize leveraging our enterprise operating model, which was part of our strategic input over the last 2 years to really build rigor in a full-scale enterprise operating model. To accelerate the adoption of AI across our core functions. That's really one of the areas that we think has the ability to have margin improvement, both what we provide for our customers, but also, quite frankly, for our shareholders.

And that said, we have a full-scale program of how that's being rolled out across the organization. And we can give some more detail there. But it is important to suggest that, that has been part of our strategy throughout. I believe the market -- across the market companies are looking at this kind of capability and whether that be Agentic or generative or various forms of AI and automation. We're building that into our core infrastructure and expect that to have some results over the next few quarters. And again, to the extent that we can continue to do that, have that as a lever as we go forward, it gives us greater confidence that we can meet the expected -- EBITDA expectations of the Street if revenue continues to be compromised on the top line.

Tobey, the only thing I would add to that is that we -- the actions have begun. We are sort of on our way there. The reality is, I think we're going to take the rest of the year to calibrate against expectations for next year. The one area, and I want to be really clear about this, in the PowerPoint charts that we attached to the earnings release, we said there are 2 variables here. We don't really want to impact the submissions that we are committed to make this year or next year. So I think if there's a bias, there's a bias towards ensuring that we don't decelerate on the submission volume, we are continuing to put in good bids. We're winning our share of recompetes and new. So the focus is keep that up while we get efficiencies elsewhere in the business to be able to fund and pay for that. And the reality is that's where the focus is now. And we are continuing to be very specific on our expectations on recompetes margin. Our expectations for new business margin as well as execution margins and the operating model is allowing us, just spend a little more time with the program teams on generating more margin from the portfolio that we have today, and I will simply call out the Civil business that is really delivering mid- to high 13% margins now up nearly 100 basis points year-over-year. So we have some real opportunity but what you're hearing from us is a lot of focus around where the attention should be spent and what we expect to get out of the portfolio we have, instead of hoping for a portfolio we don't have. So the focus is running the business effectively day-to-day.

And I kind of wanted to ask a follow-up on a previous question with respect to industry composition, consolidation, portfolio shaping, not just from an SAIC perspective, but broadly, this experience with those and a change in the way the market has historically operated. Do you think that management teams and the industry have had enough time with it to develop action plans for sort of composing the business in a portfolio of exposures in a way that they have a direction for the longer term? Or are we still in sort of a wait and see an information-gathering phase.

I think we see -- it's a very fair question. I think I would kind of find a midpoint between your 2 bookends there. Have we had -- have we seen some information? Has there been clarity on budget in terms of budget priorities as there've been indication of going commercial, commercial direct and that type of demand signals that are being sent. I think we've seen those and we started to collate, I think as all companies are in this market, we've adapted to those demand signals where we're encouraged, I would suggest to you is in the nature of the work we do, when we call ourselves a mission integrator, we are encouraged when the market also acknowledges that as a need across various government agencies.

As we've seen with an award we mentioned last quarter with FDA or the space agency as part of looking for a mission integrator to help with the management of the satellite program. We've seen that in the recent requirements from the Department of Defense as they revised their requirements process to ask for mission engineering and mission integration as the key touch point to the private sector for new capabilities being brought. And we've seen that even in the conversations with FAA if they look to modernize what they've asked for is integration.

So in many ways, we feel like what we do and what we said we do well is be showing up in demand sales across the government. So that part and the -- programs has become clear. To Prabu's earlier statements for our new entrants there is a clear signal for commercial capability and as an integrator of commercial capability. we see that as a tailwind, not a headwind, notwithstanding the current environment where we have some challenges in revenue conversion, we still see, I would argue, still bullish about the portfolio we have to Prabu's point being conservative in the frame of how we speak to on-contract growth and newness over the next few quarters doesn't suggest that as we start to see signals, we can adjust that guidance back to the street.

The only thing I would add to that is, I think those in sort of the related disruptions in fairness, I think, would be a good wake of call for industry. And I do think that there are -- of the market where if you're focused on pure labor-based services without differentiation, in sort of either enterprise IT or gen IT is hard to differentiate, you are vulnerable for recompetes. And I think that has been our experience. And I think it would be a crisis that's wasted by industry. If we don't step up and change the way we go to market, approach labor-based models and frankly, convert more of labor based into differentiated tech offering for our customers. And I think that is what the new entrants are promising. Now query can anyone you deliver at scale in the way that the traditional, I'm going to say, players deliver. I think to me, that's the challenge for industry, and we are determined to not waste this crisis.

And the news I'll just add is the final consoles, but we started this conversation 18 to 24 months ago. We started in the conversion of our portfolio towards mission, differentiated mission and enterprise IT. You see our venturing increase in all things we've been doing commercial. So not only is a crisis on you don't want to waste, but we want to be ahead of that in terms of not just reacting, but really driving our -- and maybe accelerating parts of our strategy that we put in place, as I said, about 18 to 24 months ago.

Our next question comes from Colin Canfield with Cantor Fitzgerald.

Maybe following up -- question. Could you maybe quantify the kind of the bridge for '27 growth, so essentially like the 3 buckets of on-contract growth new program growth and efficiency headwinds. Maybe if you could break that out quantitatively kind of -- or maybe just high level, like what are the kind of big moving pieces '26 to '27.

Yes. Colin, I appreciate the question. I'll take a first crack at it here. Big picture, flat to 3% is our guide, and I'm going to try and bridge us to the midpoint of that number, about 1.5%. I think we are fully assuming that growth will come out of backlog. So we expect to end the year with, I'm going to say, roughly between 70% and 90% in backlog that's going to convert into revenue next year. And I would say, on top of that, we are assuming about, I'm going to say, 1% to 3% of on-contract growth, more in line with where we expect this year. In other words, our baseline junction is that things don't get worse, but they remain stable. And obviously, to the extent on contract growth recovers next year, then obviously, there's potential for us to do better inside of that range at this point on the [ 3%, 0% ] to 3%. On new business, all we are sort of factoring right now are wins that we over have in our midst and that we expect to come to revenue. And those are a couple of programs that Tony referenced in his script that have been slower to ramp this year. And we are hoping those programs begin to ramp up.

The only other note I would make here is that, since the end of the quarter, we have about another $1 billion of wins that have cleared protest windows. So we're sort of out there but it's another $1 billion potentially to our bookings in Q3. So a combination of those 3, but fundamentally, a clear-eyed conservative view of, I would say, what growth looks like with no expectation that things dramatically improve on contract growth. Tony?

Yes. The only thing I would add there are the levers that are in place. We've tested these levers. And obviously, we've had conversations with the stream out these levers. And I guess, Prabu mentioned, we have a way to understand whether this condition, the environmental condition is changing, and we can make any changes to update this guidance. When I look at our underlying levers for book-to-bill, obviously, we feel good at where we are this year. We had mentioned 1.2 by H1. We still see line of sight to that within this fiscal year. Our submit holding and sustaining our win rates at target for both recompete and new business, which was a question we had, I would say, a couple of years ago that we feel good that we turned that corner and a pending backlog that's still covers at the $20 billion. I think those are the levers that are there that suggest that when we can address the delay environment, we have enough in the cadence, if you will, to start to drive to within the range we've offered as well as hopefully be able to improve upon it.

Got it. And then maybe focusing on leverage. I appreciate the kind of commentary around the presentation around 3 times. But you've gone above that in the past, and obviously, shares are off today. And like given the kind of Section 174 benefits, I think it's 14% free cash flow yield on 27% free cash flow per share. So how do you think about going above 3x net debt-to-EBITDA to do something like an accelerated share repurchase or more repo?

Yes. Colin, a fair question. I mean, Look, I think what we've signaled in the past is targets about 3 that we don't mind being a little bit over or a little bit under 3x. Obviously, we approach our share repurchases with the grid in place and we get to update the grid forward. And to the extent price reacts negatively, we have the capacity to buy more shares. So fundamentally, no change to capital deployment. I think given the compression we've seen in our EBITDA, I think it's only fair to ensure that we don't run leverage up to a place where we are not comfortable in an uncertain environment. So I think that that's the balance.

But I would say, big picture, we're on our way to buying between [ $350 million and $400 million ] this year, and we'll probably end up retiring more shares at these prices than what we previously contemplated, but I'm cognizant of leverage.

Got it. And just one more. A lot of focus on efficiency on this call, but I think it's probably worth differentiating between like what I would call is 1/2 calendar efficiencies, which is folks ripping up contracts and trying to rip up contracts and then post lean on Twitter. And then kind of second half position fees, which is government officials trying to kind of shake the FY '26 budget process and that taking some kind of slowness dynamics that are -- that come with new administration. So maybe just digging into it, can you maybe differentiate how much of the efficiency dynamics you're seeing or what we would call kind of 1/2 disruptive efficiencies or more kind of second half FY '26, FY '27 shaping efficiencies?

Yes. I'm going to maybe take a first crack at this. I would say, by and large, the disruptions have been through our current fiscal year. We, I think, are expecting that the flavor of the disruptions probably continue into the end of the year for us in our end of our fiscal year. But I would say, if not yet disruptions that we believe are about FY '27. So more of a '26 flavor to it, which is why I think we are of the view at this point that the environment is stable, so we would love for it to improve. That has not actually happened. And the trades that our customers are making frankly, our trades with respect to current government fiscal year that ends at this end of September. And our expectation is that we're going to be in the CR to start the new fiscal year. So I think that's our assumption, but it's mostly '26 focused.

Yes. I would say I agree on the '26 and would suggest that don't see improvements also don't see a decline. When we say stable, this is why we're holding to again, a prudent view of '26 and carried into '27 in terms of what the stability. And quite frankly, some of the signals on the ground for efficiency. And I want to make sure when we speak to that, while it has had volatility on our day-to-day with our customers, we do see progress the government is making towards overall increases in efficiency across the various agencies, and we're partnered with the government to that outcome.

Our next question comes from Gautam Khanna with TD Cowen.

Good morning, 2 questions. One, I was just curious if you could frame what expectations are for the government fiscal year-end flush if we have one? And then secondly, if you could speak to exposure in your contents if we do go into a shutdown of some protracted length, call it, a month, how would that show up? And how would that impact the P&L?

Yes. Let me -- I'll take the first part of that on the flush environment and have Prabu speak to expectations relative to -- or contingencies relative to a CR environment. Look, I think we all talk about sweeps and flush at the end of a government fiscal year. I would suggest to you that it has been irregular relative to prior fiscal years, given the reconciliation and all that has happened with budget reconciliation in many ways, what might have been a flush environment portend increasing on-contract growth for various organizations have actually gone in very specific line items relative to reconciliation. And so we have not seen significant opportunity in that environment towards the end here of the government fiscal year. Relative to the CR, Prabu, do you want to add?

Yes. Gautam, thanks for the question. I think we have a few different precedents over the last handful of years. And I would say the longest was, if I recall, 38 or 39 days and the revenue impact that year was a little less than 1% for a full month, if you will. And I think query, if that scenario plays out, would you be able to recover that in the fiscal year. I think our assumption is we're going to have a CR at year-end. And to the extent it we end up with a shutdown that's -- and certainly, we'll have to talk about it on the December call. CR is our base case. There was an impact to cash, but generally, cash tends to recover within a couple of billing cycles. So I would not really expect a material impact to cash. So I would say, a marginal impact on revenues and probably a little -- no impact on cash, if it's a traditional shutdown, if you will.

Our next question comes from Gavin Parsons with UBS.

This is Max Miller on for Gavin. A 2-part question for you. A, has there been an incremental change in the customers' attitude towards procurement over the past 90 days specifically that led you to revisit the guide. And then, b, looking forward, it's clear you expect the back half to be stable but not necessarily improve what would it take for you to become more constructive on the outlook and that recovery in on-contract growth? It sounds like there are some signals of normalization that you're already seeing?

Yes. Fair questions. I think on the front end was the question about on-contract growth. Actually, remind me of the first up, sorry, come back one more time on your first part of your question.

Just if there's been an incremental change in the past 90 days specifically that led you guys to revisit?

Yes. I wouldn't say an incremental change over the last 90 days. I think we started in the last quarter, speaking to a roughly 1% impact on program cuts and that we could track that. And we are still tracking to something in that range in terms of rom cuts. I think what we started to see the environment was the effect of delay, delay in our interaction with our customers, our ability to add to our current contract footprint. So on contract growth was the first sort of big signal for us that we were going to have revenue compression. We also hedged in our first quarter earnings call that our guide and our call were going to be particularly dependent on new business landing in a specific time frame. And we still see delays in that new business, as you can see in our pending award backlog.

Third, I think we also mentioned and have seen now slow in the ramp of new business that we have won. And so we mentioned a program like Ten Cap and others, where we have new business wins, we assume a ramp on that and those ramps have also been slower. So those 3 indicators, I think, are what we've seen that have adjusted a revenue guide. Would I say they octane to 4 in last 90 days, no, I think some of the group probably efforts were there, root causes were there, but they started to show up across our various programs. And so we felt it prudent to obviously address that.

I think the second part of your question was what would it take -- what would be the indicators in the second half and/or as we look forward to adjust guide in a more constructive manner. Look, I think it's the same indicators are there on contract growth and the engagement that we have with our customers, our ability to convert to revenue on existing contracts, will there be a very significant indicator for us. And improvements in that environment, improvements on the timing and the conversion of that revenue would be an indicator and a direction up on new business and we're getting awards actually adjudicated.

We always put in some understanding of some time line we protest given our protest environment. But even with that, getting awards actually adjudicated and again, assuming that win rates hold as we've seen at target level, that would portend that we would have potential upside to the guidance that we've offered. Getting those awards adjudicated and then, quite frankly, the third would be being able to increase our ramp and our velocity on exist programs that are new, and we've mentioned a couple of those. Those will be the indicators that help us understand if we can, if you will, improve upon the guide that we've offered.

Got it. That makes sense. And then for 2027, it sounds like the base assumption is that the funding environment is mostly similar to this year. Is there any intention that it improves later on in the year? Or is the assumption right now that it's similar for the majority of...

Probably, Max, a glide path here where the latter half of '27 probably does improve if we are in a CR. I think that's math if we believe that it has to improve. I think our baseline assumption, I don't want to get into the cases of providing quarterly just yet for FY '27. We'll do that on the December call. But I do expect that the second half of '27 will be smoother than the first half of '27, but that is with the health warning that we don't know everything we need to know in order to provide that guidance crisply.

Our next question comes from David Strauss with Barclays.

Just Wanted to ask about the cost efficiency measure or contemplate. I wasn't clear, but I think you're seeing that though not contemplated in your updated EBITDA margin, EBITDA guidance? Is that you haven't actually included those potential cost efficiencies?

That is correct, David.

Okay. And then if you look at yourselves relative to your large peers, I mean, certainly, some of your large peers have highlighted impact from dose and budgets and all the things that you're saying today. But it looks like you're seeing a larger relative impact, what would you attribute that to? I mean, I know the business mix plays into this. But what we attribute the extent of the impact you're seeing relative to your peers?

So look, I would call out a couple first. I think as we talk about on contract growth, that is particularly program-based. So where we have footprint with specific customers on specific programs. And we mentioned, I think I mentioned in the earlier script, that where we see large transformation occurring or where there's great budget uncertainty, we see a higher correlation of the on-contract growth environment being more challenged.

So we could compare footprint to footprint, but I think it is more meaningful and profound to suggest that the market is experiencing some of these delays and where we see the greater challenge is where our customers are, quite frankly, in the highest volatility.

As you talk about new business awards, I think, again, the entire market is experiencing some delays on the new business awards, we have some large awards, and we see a larger -- a longer delay relative to large transformative awards. And so to the extent that, that populates your pipeline, I think you're going to experience that maybe disproportionately.

So I would suggest you program ramp, I don't think that is particularly unique for us as well on new programs. But to the extent that we are I think also trying to, as we have, I think, historically, give a very unvarnished position, fairly prudent position on what we think the environmental conditions are, how long we think they will be in place and the impact that they're having, I think that is probably how I would take away how we are communicating versus or in relation to some of our peers.

Okay. And my last question on the recompete side, I think you mentioned that you have a number of recompetes kind of in the 1% to 3% range. Could you just size, what your total recompete, the recompete bucket is in fiscal '26 and fiscal '27? And what you've kind of assumed within that in terms of recompete win rate that's baked into your revenue guide for both years?

David, I'll take that one. In terms of -- maybe I'll start with the second part of it first. In terms of our assumptions around recompete, we would say, if you think about it, 80% to 90% would be a pretty good recompete win rate for next year. and new business, we would say 30% to 40%. That's probably the going-in assumption right now. In terms of what is specifically factored in, we traditionally don't get into the eaches on the recompete. So that's why we've sort of called it out as a handful of programs that are in the 1% to 3% range, which is pretty normal. If I had to zoom out a little, I would say, 10% to 15%, which is typically our run rate I would note that our recompete win rates have stabilized pretty significantly in the last couple of years, and we are back to what is assumed to be a traditional industry standard of about 90% and as we sit here, the only known headwind is Atom, which is the Air Force, where we had a pre-award protest a couple of months ago. That is the only known recompete headwind because NASA East lapse out of Q3 and Cloud One, where we walked away, frankly, from going after that program that also lapse out about Q4. So only one known program right now that is probably worth about 0.5% to 1% for next year, but that is really the only known headwind in the -- had extended for a couple of years. So I'd say it looks cleaner than it has looked in the last couple of years.

Our next question comes from Noah Poponak with Goldman Sachs.

Hopefully, you can hear me okay, a little background music where I am. But I guess this is a nit, but the biggest question is just duration of what's happening in your end markets? And is it temporary? Or is it structural in multiyear or something in between? And I guess -- it seems like the customer is clearly you go through a major reprioritization across government spending and [ FedCiv ] whether dose, the 26 request, the DoD memos. Tony, you gave an example of programs actually reduced in size, not just delayed government moves slow, other spending downturns historically or can be fairly long. I guess I'm a little surprised that you're still referencing as delays in timing and change in administration. And ultimately, I guess the question is, when you're riding multiyear financial outlook and maybe more importantly, how you manage the business and cost in its structural size, how are you thinking about an debating internally this being a 3- to 5-year structural shift versus a 3- to 5-year quarter -- sorry, 3 to 5 quarter temporary issue.

I think it's a fair question. Let me go back to where I started the conversation earlier on this call. The strategy that we put forward involves the shifting of our portfolio towards enterprise and mission IT. And that was prior to an administration change, the belief that we needed to move to more differentiated capability in stickier revenue and longer term and more mission-critical environments and quite frankly, to integrate more commercial technology and introduce more camera technology into those mission environments. That was in place. And in many ways, that continues. There's no signal that we've seen from the current administration that suggests that, that strategy is the wrong one. In fact, if anything, we've probably had to accelerate that.

The other part of our strategy was getting our own go-to-market in place with a business development engine that is, I would argue, delivering at least on the key, getting us back to target on win rates, increasing our submissions, improving the accretive nature of our recompete bids and unable to sustain a pending award backlog. So the elements of the business, both the go-to-market as well as our portfolio, I would argue there is nothing structurally that should fundamentally change, if not just accelerate. We've got a temporal -- what we would argue to be a temporal condition relative to how we engage with customers on growth delays and how we adapt to an environment that has delays and new changes and new norms.

Then Prabu spoke to the conversation and the demand signal. How are we listening to the demand signal for direct commercial pots, commercial business models as well as commercial tech being brought. How do we go into more share as-a-service offerings or share and savings offerings or again, more commercial. So we are absolutely accelerating those capabilities, fixed price and outcome-based contracting, our ability to deliver. We've had a very solid track record in fixed price and T&M contracts and our ability to deliver that.

So I would argue that in many ways, we are taking the strategy we had and accelerating it in this environment. We are making more bets on the venture side. We are partnering with nontraditional defense contractors, and we are highlighting mission integration in an open environment with investments in Mission labs and the ability to do end-to-end integration with more and more commercial tech.

So the strategy itself is a multidimensional strategy that would suggest we've got to have in the short term the ability to, if you will, bridge this current environment, which is challenging for us, and we are doing that both in terms of looking at AI adoption across another ways that we make sure that we contain and hold our cost structure in place as well, we are also making sure we continue to invest in the differentiation that Prabu spoke to in terms of IP and other capabilities. and disrupting in some ways, our own labor model, which we believe is going to be a challenge going forward in terms of a market that will look for more product-like capability. All of that was sort of envisioned in the strategy. In many ways, we are accelerating that in this current environment, and we see in setting some targets for the future I would argue that as we move into the second horizon of this strategy, we actually will be lined up with where supply and demand should hopefully intersect in what we built and what the government is asking for.

So I would say this is -- this environment has forced, if anything, has forced us to accelerate our strategy and has forced us to further clarify our efforts and create more levers, if you will, to offset in a revenue type environment to offset by holding to our cost structure.

If I might add to that. No, the assumption on how we operate the business. I think the budget assumption would be that it's going to be a difficult budget environment and flat to low single digits would be probably a reasonable assumption, it's probably not a perfect assumption. And that even within the flat to low single-digit growth rate, there will be efforts to reprioritize where the budget dollars go. That is the baseline budget assumption. As far as the -- how we manage the business question, I think we have to assume that things get worse before they get better, and part of the -- that one's brought to the team around AI, around bad execution is really to ensure that we are staying ahead of whatever revenue compression we see in the market. That means committed to delivering EBITDA dollar growth consistently to the Street, which is why we're holding our guide right now for next year or 9.5% to 9.7%. So our focus is assuming that the disruption continues longer than 3 to 5 quarters, how would you manage this business, and that's the conversation we're having, and those are the plans we're making. And importantly, part of the plan will be to see where is the greatest source of compression inside of the portfolio relative to the next 2 to 3 years. And as Tony rightly said, labor-based models will be disrupted, maybe not linearly, but in some fashion, they will be disrupted. And I think part of our effort is to essentially ensure that we can, if you will, cannibalize our own labor base to ensure we are delivering more differentiation, hence more value and hence, more earnings and cash for our shareholders how we're working about opening the business and planning to ours.

I really appreciate the thoughtful and detailed answer there. Prabu, just one more -- can you break out for '26 and '27 EPS and free cash flow guidance for each of those 4, what's the change in the net income versus what's the change in tax.

Sorry, I should say net income from the pretax.

Yes. So I'll give you the components of it. Noah and Joe can certainly give you a little more detail for FY '27. I think the way we're thinking about the updated '27 guide is we are going to see a reduction in top line relative to our prior assumption, which is going to lower the EBITDA we generate from the business, and think of that as a $30 million to $40 million reduction to cash and then offset by Section 74, which is a $110 million offset for next year. So the net change is an increase to free cash flow to about $600 million, which is our current expectation for free cash flow in FY '27. Similar dynamic for '26, where we are lowering the EBITDA dollars generated from the business, but offsetting it with, I would say, implied $60 million of cash tax benefit from Section 174.

And right now, the big change on EPS between '26 and '27 is that this year, we are going to benefit from an incredibly low tax rate about 14% hence, the $9 change guide for this year. Next year, our current assumption is that I will have immense confidence in our tax team. Our current assumption is 23% for next year and any point on the tax rate is worth about $0.10. It's a dime. So a 9% change to the tax rate is worth the early above in EPS. So if we deliver the same tax rate next year as we did this year, we'd be $1 higher on EPS stated for let this year were more like next year, we'd be $1 lower.

That is super helpful. And the cash tax reversal that you get in -- do you hold that for a while? Or does that decline over time? Or what happens to that over time?

Yes. So we expect big picture to get back about, let's call it, $200 million, a little over $200 million which is the 174 taxes we paid out over the last 3 years. Our current expectation, as we prefaced on call, is that we'll get about $60 million back this year, another $110 million back next year and Matt would suggest we should get a little more back in '28. And then we'd have to come back to you and we'll update for '28 a little bit later in the year. But I think a normal run rate for free cash flow, you should think of that as being in that $530 million, $540 million range for FY '28. So more normalized.

I really appreciate all the detail.

And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. You may now disconnect, and have a wonderful day.