SAIC Earnings Call Insights: Flat Contract Activity, Strategic Growth Strategy

On Thursday, SAIC, Inc. (NYSE:SAI) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s a look at what executives shared with analysts and investors.

Flat Contract Activity:

George Price – BB&T Capital Markets: Nice job in a tough market. Wanted to ask you just a couple of questions, if I could, just on backlog and bookings; funded backlog was little bit better than expected. Bookings also given the environment were definitely solid. I was wondering if you could maybe talk about the funding trends you’ve seen over the past few months and did you see contract award activity pick-up materially in April because certainly competitors have generally reported pretty weak bookings in general for the March quarter. I recognize you pointed out some differentiating factors, but just wondering if maybe we’ve seen some improvement more recently in the environment?

A Closer Look: SAIC Earnings Cheat Sheet>>

Mark W. Sopp – EVP and CFO: George, Mark here. I would say we have seen a pretty flat level of activity in contracts for our first quarter, which ended April 30. We did not see a noticeable change in the month of April, at least for us, for all contract activity. But we’d also say, I mean compared to last year, the funding environment is more stable, we don’t have the continuing resolutions going back and forth this fiscal year, so we’re pleased to see that, and we see customers funding the business in a pretty healthy basis and consistent, albeit in shorter and smaller increments than the good old days, but nonetheless across our contract base, pretty healthy at this time.

Strategic Growth Strategy:

Timothy McHugh – William Blair: You gave us some numbers, but how much of the business would you say now is in those strategic growth areas versus the other ones and as we think about the margins, in general talk about the margin trends between the kind of more strategic growth areas than the rest of the business?

K. Stuart Shea – COO: Well, the mix in the strategic growth areas is 55% to almost 60%. As we finish up this fiscal year, I think we’ll be closer to that 60% with higher growth we’re seeing in that area. So this is what we would’ve expected when we started laying out our strategic growth strategy couple of years ago. In general, the margins are more attractive in this area, for a variety of reasons. There’s some higher technology involved on one hand, but there’s also more of our products in the strategic growth areas and also a little more fixed price mix as well. So, those were all factors that I think are favorable with respect to that part of the business. That said, this is the area where we’re investing. IR&D, which you saw go up substantially last year and will continue to be strong this year, and in the M&A side as well, that’s where you’ll see all of our focus.

Timothy McHugh – William Blair: Then, in terms of the capital structure, you didn’t repurchase any stock this quarter and you said you’ll pay off the debt when it comes due. Are you awaiting more clarity on the government budget environment to kind of finalize your plans with that or is it just the timing of it, you’re just not ready yet to make a conclusion on what you want to do?

K. Stuart Shea – COO: I think the salient points on our capital structure, capital deployment is, we’ve initiated a very meaningful dividend and that’s our first priority for capital deployment with roughly a third of our annual free cash flow, if you will. The remaining two thirds is up for grabs for M&A and repurchases as opportunities are presented to us. I’d say we have a bias toward growth and therefore M&A but stars have to lineup on the M&A front, you have to have strategic fit, you have to have cultural fit and you have to have economic attractiveness, which sitting here at $10 or $11, the hurdle rate for M&A becomes little bit more challenging appropriately vis-a-vis repurchases. So, we evaluate that continuously and a lot depends on what opportunities are available to us in the M&A pipeline. and from those things, that kind of dictates our overall capital structure.