SAIC's Q2 2026: Contradictions Emerge on On-Contract Growth, Fiscal Year-End Sweeps, and Procurement Attitudes

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 4, 2025

Financials Results

• Revenue: Q2 revenue down 2.7% YOY
• EPS: $3.63 adjusted diluted EPS; benefited from a favorable tax settlement

Guidance:

• FY26 revenue: $7.25–$7.325B (organic -2% to -3%); expect organic revenue -5.5% in Q3 and -4% in Q4.
• FY27 revenue growth: 0%–3%, assuming 2%–3% on-contract growth and modest new business.
• FY26 adj. EBITDA margin reduced ~10 bps due to Section 174 state/local taxes; FY27 adj. EBITDA margin reiterated at 9.5%–9.7%.
• FY26 adj. EPS: $9.40–$9.60 (ETR ~14%); FY27 EPS: $9.00–$9.20 (ETR ~23%).
• FY26 FCF: >$550M; FY27 FCF: ~$600M; Section 174 to cut cash taxes by ~$200M over FY26–FY28.
• Cost efficiency initiatives underway; more details on Q3 call.

Business Commentary:

* Revenue Decline and Market Conditions: - SAIC reported a 2.7% decline in revenue for Q2 fiscal year 2026, driven by a 3% headwind related to Cloud 1 Compute and Store revenue. - The decline is attributed to slower conversion of on-contract growth opportunities into revenue, increased impact from program disruptions, and delays in new business awards.

• Profitability and Margin Improvement:
• Second quarter adjusted EBITDA was $185 million, resulting in an adjusted EBITDA margin of 10.5%.

• Improved profitability was supported by strong program execution and a favorable legal settlement, despite an impact from state taxes related to the One Big Beautiful Bill Act.

• Cost Efficiency Initiatives:

• SAIC is implementing cost efficiency initiatives to align its cost structure with a changing revenue environment expected over the next several quarters.

• These initiatives are aimed at mitigating the impact on EBITDA and free cash flow from lower revenue, supported by a variable cost structure and leveraging AI for core operations.

• Budget Uncertainty and Market Dynamics:

• SAIC is experiencing revenue softness due to funding uncertainty and changes in government spending priorities, affecting on-contract growth and new business wins.
• Delays in new business awards are attributed to increased scrutiny of government spending and a government workforce dealing with higher turnover.

Sentiment Analysis:

• Management lowered FY26 revenue to $7.25–$7.325B (organic -2% to -3%) and expects organic declines of ~5.5% in Q3 and 4% in Q4. CEO: “revenue below our expectations, declining 2.7% year-over-year” and “a more challenging environment than we had previously forecasted.” Guidance assumes “very little contribution from additional new business or on-contract growth.”

Q&A:

• Question from Jonathan Ladewig (Stifel): What customer areas are most impacting on-contract growth, and is this share loss or government efficiency/deferral?
  Response: Delays driven by government efficiency efforts and staffing turnover (e.g., Army transformation, Treasury cloud, Space Force) are slowing conversion; not share loss; guidance prudently assumes little near-term improvement.

• Question from Seth Seifman (JPMorgan): How might customer changes alter industry structure, players, and returns?
  Response: Expect more fixed-price, outcome-based work and new commercial entrants; SAIC welcomes this and sees normalization toward FY27; no material T&C changes yet.

• Question from Seth Seifman (JPMorgan): Huntsville/Army Missile Command—temporary disruption or longer-term issue?
  Response: Near-term transformation disruptions are slowing conversion, but SAIC sees medium-term upside, including potential from Space Force moves; well positioned locally.

• Question from Tobey Sommer (Truist): Details on cost efficiencies and balancing with growth investments?
  Response: Accelerating AI-enabled enterprise efficiencies while protecting BD submissions; actions underway to support margin expansion without impairing growth; civil margins already improved.

• Question from Colin Canfield (Cantor Fitzgerald): Bridge to FY27 growth (on-contract, new programs, transitions)?
  Response: FY27 outlook 0%–3% assumes 1%–3% on-contract growth, backlog conversion, modest new wins; ~$1B additional wins pending protest could help.

• Question from Colin Canfield (Cantor Fitzgerald): Leverage tolerance for buybacks/ASR given valuation?
  Response: Target ~3x net leverage with some flexibility; plan $350–$400M repurchases in FY26, potentially retiring more shares at current prices while staying mindful of EBITDA compression.

• Question from Gautam Khanna (TD Cowen): FY-end “flush” expectations and shutdown exposure?
  Response: Flush limited; base case CR. A month-long shutdown historically <1% revenue impact; cash timing recovers within billing cycles.

• Question from Max Miller (UBS): Any incremental 90-day change driving guide cut, and what would turn outlook more constructive? FY27 cadence?
  Response: No step-change; delays in on-contract growth, awards, and ramps worsened revenue conversion. Upside requires resumed on-contract growth, adjudicated awards, and faster ramps; 2H FY27 likely smoother.

• Question from David Strauss (Barclays): Are cost efficiencies in guidance? Why larger impact vs peers? Recompete assumptions?
  Response: Efficiencies not included in current margin guide. SAIC more exposed where customers face major transformations/large award delays; taking a prudent stance. Recompete win-rate assumed ~80%–90%, new business 30%–40%; key headwind is AFM (0.5%–1%).

• Question from Noah Poponak (Goldman Sachs): Is disruption temporary or structural, and how are you managing the business? EPS/FCF tax bridge?
  Response: Strategy accelerates shift to differentiated, fixed-price, commercial integration; managing for EBITDA growth even if revenue pressure persists. FY26 EPS aided by ~14% ETR; FY27 assumes ~23% ETR. Section 174 drives ~$200M cash tax relief over FY26–FY28; FY27 FCF ~ $600M.