Executive Summary / Key Takeaways

• Science Applications International Corporation ($SAIC) is executing a strategic pivot towards higher-margin Mission and Enterprise IT solutions, leveraging its deep government relationships and differentiated technology to drive profitable growth and durable cash flow.
• Despite facing near-term procurement delays and customer personnel turnover, the company delivered solid Q1 FY26 results with revenue growth driven by program ramps and reaffirmed its full-year guidance, expecting growth acceleration in the second half.
• SAIC's differentiated technological capabilities, particularly in digital engineering, AI, and secure cloud, provide a competitive edge in winning and executing complex government contracts, enabling efficiency gains for customers and supporting margin expansion targets.
• A robust pipeline of submitted bids, significantly exceeding prior targets, underpins management's confidence in achieving a 1.2x trailing twelve-month book-to-bill target and supporting mid-single-digit revenue growth expectations for FY27.
• The company's strong free cash flow generation, projected at approximately $11 per share in FY26, supports a capital deployment strategy focused on significant share repurchases, signaling confidence in intrinsic value despite market uncertainties.

Setting the Scene: A Strategic Pivot in the Government IT Landscape

For over five decades, Science Applications International Corporation has served as a critical technology integrator for the U.S. government, building a legacy of addressing mission-critical needs and solving complex problems. This history has positioned SAIC as one of the largest pure-play technology service providers in the market, fostering deep and long-standing relationships across the Department of Defense (DoD), Intelligence Community, and key Civilian agencies.

In recent years, recognizing the evolving demands of its primary customer and the broader competitive landscape, SAIC embarked on a significant enterprise growth strategy. Launched approximately 18 months ago, this initiative centers on a strategic pivot of the company's portfolio towards higher-end, differentiated Mission IT and Enterprise IT solutions. This shift is not merely a change in focus but a fundamental realignment designed to leverage SAIC's core strengths in integrating emerging technologies securely into mission-critical operations. The goal is to accelerate and transform secure and resilient digital environments for government clients through system development, modernization, integration, and sustainment.

Central to this strategic evolution is SAIC's emphasis on technological differentiation, supported by its Innovation Factory. This internal organization houses dedicated teams focused on critical areas such as AI, application development, network services, platforms and cloud, engineering, and cybersecurity. The Innovation Factory utilizes automated, cloud-hosted tool sets to rapidly build, test, and deploy solutions. This capability is crucial for delivering enterprise-class solutions, either standalone or integrated, to meet complex customer needs and accelerate digital transformation.

SAIC's technological edge provides tangible benefits. For instance, its digital engineering capabilities were highlighted in securing the Space Development Agency's mission integrator role, demonstrating expertise in driving program success at speed. The company's work in operational AI and secure cloud is designed to enable faster processing speeds and more efficient deployment for critical defense applications. While specific, overarching quantifiable metrics for the benefits of all technologies across the portfolio are not uniformly provided, the strategic intent is clear: these capabilities enable SAIC to deliver solutions quicker and cheaper than legacy approaches, as evidenced by commentary on programs like GMAS, where digital engineering and on-demand software development solutions are used to sustain and upgrade radar systems at rates quicker and cheaper than legacy providers. The development of offerings like DevSecOps sprints, available on commercial terms, further underscores the focus on delivering agile, cost-efficient, and technically advanced solutions. This technological foundation is intended to provide a competitive moat, allowing SAIC to compete effectively on value and performance, not just price, in an increasingly competitive market.

Competitive Dynamics and Market Positioning

SAIC operates within a highly competitive environment, facing off against a range of players from large diversified defense contractors and IT service giants to smaller niche specialists and emerging technology firms. Key publicly traded direct competitors include Leidos Holdings Inc. (LDOS), Cognizant Technology Solutions Corporation (CTSH), and Dell Technologies Inc. (DELL), among others. The market is characterized by increased reliance on competitive bidding processes, including IDIQ and multi-award contracts, which often leads to pricing pressure. Furthermore, the government's renewed emphasis on small business prime set-asides can reduce the addressable market in certain areas.

Against this backdrop, SAIC positions itself as a premier mission integrator, leveraging its scale, long-standing customer relationships, and deep technical expertise to differentiate itself, particularly on large, complex opportunities. While competitors like Leidos benefit from a larger scale and broader market share in some overlapping areas, SAIC aims to stand out through its specialized focus on integrating emerging technologies into mission-critical government operations. Its value proposition is rooted in being a trusted adviser, capable of handling highly complex tasks by deploying the right people and capabilities efficiently.

Financially, SAIC's latest TTM metrics show a Gross Profit Margin of 11.83%, Operating Profit Margin of 7.36%, and EBITDA Margin of 8.67%. Comparing these to available competitor data (e.g., LDOS TTM Gross Margin ~17%, Operating Margin ~11%, EBITDA Multiple ~13.13; CTSH TTM Gross Margin ~34%, Operating Margin ~15%, EBITDA Multiple ~10.62; DELL TTM Gross Margin ~22%, Operating Margin ~7%, EBITDA Multiple ~9.71), SAIC's profitability margins appear somewhat lower than some IT services peers like Cognizant, which benefits from a different business model and global delivery. However, SAIC's operating and EBITDA margins are more comparable to defense-focused integrators like Leidos and hardware providers like Dell. SAIC's focus on increasing the proportion of higher-margin Mission and Enterprise IT work, including a push towards fixed-price contracts where it has a track record of delivering healthy margins (as seen in its Civilian segment), is a strategic response aimed at improving its profitability profile over time.

SAIC's competitive strategy also involves developing repeatable offerings and managed services in a more commercial business model, which is expected to enhance its ability to compete effectively on price while improving margins. The company's emphasis on strong program execution and developing new pricing and business models is critical in this environment. While the market is competitive, management notes that procurement still seems to prioritize "best value" over "lowest price technically acceptable" (LPTA) trends seen in the past, suggesting that technical differentiation and proven performance remain key competitive factors where SAIC believes it holds an advantage.

Financial Performance and Operational Execution

SAIC's recent financial performance reflects the ongoing execution of its strategic pivot within a dynamic market. For the three months ended May 2, 2025 (Q1 FY26), the company reported revenues of $1,877.0 million, a modest increase from $1,847.0 million in the same period of the prior year. This growth was primarily attributed to the ramp-up in volume on existing and new contracts, although partially offset by contract completions.

Operating income for Q1 FY26 was $121.0 million, resulting in an operating margin of 6.4%, a decrease from $131.0 million and 7.1% in Q1 FY25. Adjusted operating income was $158.0 million (8.4% margin) compared to $165.0 million (9.0% margin) in the prior year period. This decrease in operating and adjusted operating margin was primarily due to timing and volume mix in the contract portfolio, including the typical seasonality of investments (such as higher bid and proposal costs) and an unfavorable profit adjustment on a fixed-price program in the space business. Management noted that the impact from the space fixed-price program was approximately $3 million to $5 million and, combined with higher bid costs, accounted for about a 50-60 basis point impact on the quarter's margin.

Segment performance showed divergence. The Defense and Intelligence segment saw a slight revenue decrease ($1,433.0 million vs. $1,436.0 million) due to contract completions, with adjusted operating margin decreasing (8.0% vs. 8.6%) due to mix. In contrast, the Civilian segment demonstrated strong revenue growth ($444.0 million vs. $411.0 million) driven by program ramps, and saw an increase in adjusted operating margin (11.7% vs. 11.2%), which management attributed to the ramp-up in volume and better control of the cost baseline.

Net income for Q1 FY26 was $68.0 million, down from $77.0 million in Q1 FY25. Diluted earnings per share (EPS) was $1.42, compared to $1.48 in the prior year, impacted by lower net income and a higher effective tax rate (20.6% vs. 19.0%), primarily due to lower tax benefits from employee share-based compensation.

From a liquidity perspective, SAIC generated $100.0 million in net cash provided by operating activities in Q1 FY26, an increase from $98.0 million in Q1 FY25. This was driven by higher cash from the MARPA facility and lower incentive compensation payments, partially offset by working capital timing. Free cash flow was negative $44 million in Q1 FY26, impacted by the timing of receivables on two programs, which shifted approximately $70 million out of the quarter. Management stated these delays were due to new personnel and processes at customers, not program performance, and do not expect it to impact full-year guidance. As of May 2, 2025, the company had $47.0 million in cash and cash equivalents and total debt of $2,289.0 million (net of current portion $1,876.0 million), with $285.0 million drawn on its revolving credit facility classified as current debt. The company remains in compliance with its debt covenants.

SAIC's capital deployment strategy remains focused on returning value to shareholders. During Q1 FY26, the company repurchased approximately 1.2 million shares for $125.0 million. This follows the December 2024 authorization of a new $1.2 billion share repurchase program, signaling management's confidence in the company's cash flow generation and intrinsic value.

Outlook and Future Trajectory

Looking ahead, SAIC's management has reaffirmed its fiscal year 2026 guidance, projecting revenues in a range of $7.6 billion to $7.75 billion, representing organic growth of approximately 2.5% at the midpoint. The expected trajectory is for slower growth in the first half (1-3%) accelerating to 2-4% in the second half. This acceleration is anticipated to be driven by the continued ramp-up of new business wins and sustained on-contract growth, offsetting a more modest headwind from contract transitions in the fourth quarter compared to earlier in the year.

Management reiterated its guidance for adjusted EBITDA in the range of $680 million to $700 million, resulting in a margin of 9.4% to 9.6%. Despite the Q1 margin pressure, the expectation is for recovery throughout the year, supported by improved performance on the space fixed-price program as it enters sustainment, continued margin expansion in the Civilian segment, and the cumulative effect of bidding higher-margin work across the portfolio. Management believes the combination of improving Civilian margins, disciplined higher bidding in Defense, and growth in commercial offerings (targeting $100 million revenue by FY28 with commercial margins) creates the opportunity to incrementally improve overall margins by 10-20 basis points annually.

Free cash flow guidance for fiscal year 2026 remains strong at $510 million to $530 million, equating to approximately $11 per share. Management has also expressed visibility to $12 per share in fiscal year 2027. This robust cash flow generation is a key component of the investment thesis, supporting the company's capital deployment strategy, including the targeted annual share repurchases of $350 million to $400 million, with additional capacity for tuck-in M&A or further buybacks.

A critical indicator for future revenue growth is the company's book-to-bill ratio. SAIC is targeting a 1.2x trailing twelve-month book-to-bill in the coming quarters. This target is supported by a steady backlog of pending awards, approximately $20 billion, and a robust pipeline of submitted bids. While procurement delays, particularly for larger awards, could push the timing of reaching the 1.2x target by one to two quarters, management does not currently expect these delays to materially impact the revenue performance in fiscal year 2026 or 2027, assuming the broader operating environment remains stable. Management believes achieving the 1.2x book-to-bill target should support a 4% to 5% revenue growth rate in fiscal year 2027.

Risks and Challenges

While SAIC's strategic pivot and operational execution show promise, several risks and challenges could impact its trajectory. The operating environment remains fluid, with higher rates of customer personnel turnover contributing to procurement delays and shifting award timelines. Budget negotiations and the implementation of strategic priorities by the administration could lead to uncertainty, including potential challenges for certain segments like the Army business, although SAIC's portfolio balance is intended to mitigate this. Decreases or delays in contract awards, changes in government spending priorities, contract terminations, or stop-work orders could adversely affect future revenues and profitability.

The competitive landscape remains intense, with increased pressure from competitive bidding and small business set-asides. While SAIC believes its technical differentiation and value proposition are key advantages, the need to compete effectively on price persists.

Operational risks include the potential for unfavorable adjustments on fixed-price contracts, as experienced in Q1 FY26, although management is focused on improving execution and transitioning programs into sustainment phases. Delays in receivables collections, while not performance-related in recent instances, highlight potential working capital volatility influenced by customer processes.

Legal and regulatory risks include ongoing government investigations, audits, and reviews, such as the DOJ Antitrust investigation and DCAA indirect cost audits. Adverse findings could lead to disallowances, penalties, or even suspension/debarment, which could materially impact the business given its reliance on government contracts. Trade restrictions could also impact supply chain costs, although SAIC's business is predominantly U.S.-focused.

Conclusion

Science Applications International Corporation is actively reshaping its business to thrive in the evolving government technology market. The strategic pivot towards higher-margin Mission and Enterprise IT, underpinned by investments in differentiated technology and operational efficiency, is the core narrative driving the investment thesis. While the near-term environment presents challenges in the form of procurement delays and market uncertainties, SAIC's solid Q1 FY26 performance, reaffirmed full-year guidance projecting second-half acceleration, and robust free cash flow outlook demonstrate resilience and execution capability.

The company's ability to convert its significant pipeline of submitted bids into awards and successfully ramp up new programs will be critical to achieving its book-to-bill and revenue growth targets for FY26 and FY27. The focus on improving margins through a favorable portfolio mix and disciplined execution, particularly in the growing Civilian segment and through commercial offerings, provides a path for profitability expansion. Despite competitive pressures and inherent government contracting risks, SAIC's established market position, technical expertise, and commitment to shareholder returns through share repurchases position it as a compelling consideration for investors seeking exposure to the government services sector, provided they are comfortable with the execution risks associated with the strategic transformation and the dynamic nature of the market.