SAIC's 2026Q2 Earnings Call: Contradictions Emerge on On-Contract Growth, Market Volatility, and Margin Strategies

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

Date of Call: None provided

Financials Results

• Revenue: Revenue declined 2.7% YOY; on‑contract growth slowed to 3% in Q2 (from 8% in Q1), with ~3% YOY headwind from Cloud One Compute & Store.
• EPS: Adjusted diluted EPS $3.63; benefited from a favorable tax settlement (YOY change not disclosed).
• Operating Margin: Adjusted EBITDA margin 10.5% (underlying 10.2%), up 180 bps sequentially and 80 bps YOY.

Guidance:

• FY26 revenue cut to $7.25B–$7.325B (organic -2% to -3%); expect organic declines ~5.5% in Q3 and ~4% in Q4; NASA East/Cloud One losses annualize in H2.
• FY27 revenue growth 0%–3% (assumes 2%–3% on‑contract growth, modest new wins, typical transitions).
• FY26 adj. EBITDA margin ~10 bps lower (Section 174 state/local tax); FY27 adj. EBITDA margin 9.5%–9.7% reiterated.
• FY26 adj. EPS raised to $9.40–$9.60; FY27 EPS $9.00–$9.20.
• FY26 FCF >$550M; ~$12/share in FY26 and $13–$14 in FY27; Section 174 cuts cash taxes by ~$200M across FY26–FY28.
• Cost-efficiency actions underway; details Q3; not embedded in guidance.
• Book-to-bill >1.0 in Q2; YTD 1.4; minimal near‑term benefit assumed from new wins/on‑contract growth.

Business Commentary:

* Revenue Challenges and Strategic Adjustments: - SAIC reported a 2.7% decline in revenue for the second quarter, below expectations. - The decline was attributed to slower conversion of on contact growth opportunities due to funding uncertainty and a more challenging government environment.

• Profit Margin Improvement:
• The company achieved an adjusted EBITDA margin of 10.5%, representing an increase of 180 basis points quarter-to-quarter and 80 basis points year-on-year.

• This was due to strong program execution and favorable legal settlements, despite a headwind from an increase in state tax impacts.

• Delayed New Business Awards:

• Delays in new business awards contributed to the revenue shortfall, particularly with significant awards like 10 Cap Hope with the Air Force valued at approximately $350 million.

• The delays were attributed to increased scrutiny in government spending, workforce turnover, and higher scrutiny for new business wins.

• Cost Efficiency Initiatives:

• SAIC is taking action to align its cost structure with the more challenging revenue environment, focusing on efficiency initiatives to mitigate EBITDA and free cash flow impacts.

• These actions are part of a broader strategic plan to maintain margin improvement and invest appropriately for growth and value creation.

• Market Conditions and Strategic Focus:

• The company is focusing on more commercial-like terms and conditions, including fixed price and outcomes-based approaches to meet government efficiency goals.
• This approach aligns with the government's focus on efficiency and solid levels of funding in areas like border security and homeland missile defense, while acknowledging potential budget timeline dynamism.

Sentiment Analysis:

• “Results in the quarter were mixed with revenue below our expectations, declining 2.7% year over year, but profit margins rebounding...”; “we are lowering FY26 revenue to a range of $7.25B to $7.325B”; “we are increasing our FY26 adjusted EPS guidance to $9.40 to $9.60”; “second consecutive quarter with a book‑to‑bill comfortably over 1.0, driving our year‑to‑date book‑to‑bill to 1.4”; “cost efficiency initiatives… to mitigate the impact on EBITDA and free cash flow.”

Q&A:

• Question from Jonathan Siegling (Stifel): Where are on‑contract growth headwinds most pronounced, and are they share shifts or genuine government efficiencies?
  Response: Impacts stem from government-driven efficiency and transformation causing delays (e.g., Army initiatives, Treasury tCloud, Space Force), not share loss; near‑term improvement is unlikely and guidance reflects that.

• Question from Seth Seifman (JPMorgan): How might customer changes affect industry structure, players, and returns?
  Response: Market should normalize over time; more fixed‑price/outcome‑based work and new entrants are emerging, which SAIC welcomes; no major T&C shifts yet.

• Question from Seth Seifman (JPMorgan): Is the Huntsville disruption temporary given missile defense focus?
  Response: Yes; near‑term disruption from Army transformation but long‑term opportunity remains strong with SAIC well positioned.

• Question from Tobey Sommer (Truist): What cost actions enable margin expansion without hurting growth?
  Response: Rolling out AI-enabled enterprise operating model and execution improvements while protecting bid submissions; margin lift targeted without starving growth engines.

• Question from Tobey Sommer (Truist): How is industry portfolio shaping evolving amid disruption?
  Response: SAIC is accelerating shift to mission integration and differentiated tech, moving away from undifferentiated labor models to protect margins and win rate.

• Question from Colin Canfield (Cantor Fitzgerald): Bridge to FY27 growth across on‑contract, new programs, and transitions?
  Response: FY27 guide 0%–3%: growth from backlog, 1%–3% on‑contract, modest new‑business ramps; ~$1B of wins post‑quarter pending protests.

• Question from Colin Canfield (Cantor Fitzgerald): Will you lever above ~3x for buybacks given valuation?
  Response: Target ≈3x (flex slightly above/below); plan $350M–$400M repurchases in FY26 but will balance with EBITDA compression risk.

• Question from Colin Canfield (Cantor Fitzgerald): Are efficiency disruptions near‑term or longer dated?
  Response: Primarily FY26 effects; expect stability into FY27; base case is a CR, not assuming improvement yet.

• Question from Gautam Khanda (Cowen): Expectations for fiscal year‑end flush and potential shutdown impact?
  Response: Flush is limited; base case CR. A typical shutdown would have marginal revenue impact (<~1% for a month) and minimal lasting cash impact.

• Question from Max Miller (UBS): Any incremental change in past 90 days, and what turns you more constructive?
  Response: No discrete shift; three pressures persist—on‑contract growth delays, award delays, slower ramps. Upside would come from relief on those plus faster adjudications.

• Question from Max Miller (UBS): Does FY27 assume funding improves during the year?
  Response: Baseline is similar to FY26 with potential improvement in the back half; detailed cadence to come in December.

• Question from David Strauss (Barclays): Are contemplated cost efficiencies in guidance?
  Response: No; savings are not embedded and will be detailed next quarter.

• Question from David Strauss (Barclays): Why does SAIC seem more impacted than peers?
  Response: Footprint in higher‑volatility programs and larger transformative awards drives outsized delays; SAIC is taking a prudently conservative stance.

• Question from David Strauss (Barclays): Recompete exposure and assumed win rates?
  Response: Assuming 80%–90% recompete and 30%–40% new‑business win rates; main known FY27 headwind is AFIMS (~0.5%–1% of revenue).

• Question from Noah Poponak (Goldman Sachs): Is this a multi‑year structural shift or temporary delay, and how are you managing structurally?
  Response: Assume tough budgets and longer disruptions; accelerate pivot to mission/enterprise IT and commercial integration, manage costs, and aim to grow EBITDA/cash.

• Question from Noah Poponak (Goldman Sachs): EPS/FCF bridge—pre‑tax vs tax impacts in FY26–FY27?
  Response: Lower EBITDA is offset by Section 174 cash tax benefits (~$60M FY26, ~$110M FY27); EPS delta largely tax rate (14% FY26 vs ~23% FY27, ~$0.10 per point).