Paul Levi - IR Anthony J. Moraco - CEO John R. Hartley - EVP and CFO.

Cai Von Rumohr - Cowen & Company Amit Singh - Jefferies & Company William R. Loomis - Stifel Nicolaus & Co. Edward Caso - Wells Fargo Joseph Nadol - JPMorgan.

Good day and welcome to the SAIC Fiscal Year 2015 Q2 Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Paul Levi with Investor Relations. Please go ahead, sir..

Good afternoon. And thank you for joining us for SAIC’s second quarter fiscal year 2015 earnings call. This afternoon we issued our earnings release and joining me today to discuss our business and financial results are Tony Moraco, our CEO; and John Hartley, our CFO.

Today’s call is being webcast at investors.saic.com where you will also find the earnings release and supplemental financial presentation slides to be utilized in conjunction with today’s call.

Both of these documents, in addition to our Form 10-Q to be filed soon, should be utilized in evaluating our results and outlook along with information provided on today's call.

Please note we may make forward-looking statements on today’s call with respect to unknown 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 quarterly reports on Form 10-Q. In addition the statements represent our views as of today and subsequent events may cause our views to change.

We may elect to update the forward-looking statements at some point in the future but we specifically disclaim any obligation to do so. It is now my pleasure to introduce our CEO, Tony Moraco..

Thank you Paul and good afternoon. SAIC’s second quarter results reflects continued progress in the execution of our business and shareholder value provision strategy. Revenue of $939 million and operating margin of 6.3% resulted in dilutive earnings per share of $0.70.

Operating cash flow for the second quarter of $65 million was impacted as expected from the previously discussed contract novation activities. John will discuss the details of the financial results in a few minutes. Since our last earnings call in early June there has not been a significant change in the market environment.

Our customers continue to be guarded with their resources and award dollars and shorter cycles and reduced amounts. There have been a few larger longer term awards issued but many continued to be quickly protested and that’s the way it’s transitioned or in some cases causes customers to restart the entire procurement process.

Several customers have reacted to the protest environment by taking a much more deliberate and elongated RFP development or selection process in an attempt to protest proof their decisions which also contributes to delays in awards.

It is unclear whether government fiscal '14 year-end award activity will accelerate given the current procurement environment and the likelihood that government will start the fiscal year '15 under a continuing resolution.

Award activity in Q2 translated to a book-to-bill of 0.9 and SAIC total contract backlog at the end of the quarter stood at $6.5 billion. As is our practice awards that are being protested are not included in our backlog until the protest is adjudicated in our favor.

At the end of the second quarter of fiscal '15 the value of our submitted proposals is about $12 billion.

This is down from about $14 billion at the end of the first quarter which is driven in large part by the awards to SAIC of a few large IDIQ contracts and the restart of procurement activity on the NASA HHPC contract that was renewed from our submitted proposal backlog.

We continue to develop a pipeline of quality opportunities aligned with our strategy to protect our revenue base expand revenues with current customers and grow into adjacent market where appropriate.

Along with a substantially reduced OCI [disruptions] following the spend our optimized operating structure has enabled us to take current capabilities to new customers. We have many examples of contracts we have bid that we previously did not have the opportunity or focus to pursue.

During last quarter's call I mentioned the award of prime contact position on the DHS Eagle II Vehicle after the end of the first quarter. This award allows us to sustain our DHS revenue base and is a prime example of our efforts in the protect category.

During the second quarter we awarded a prime position on a GSA vehicle named One Acquisition Solution For Integrated Services or OASIS. We were awarded positions in all seven pools available on this contract which affords us the ability to provide a diverse set of capabilities to a wide range of federal customers.

This multiple award government-wide IDIQ vehicle includes program management, management consulting, logistics, engineering, scientific and financial services for a five year period with one five year option. Finally I am pleased to let you know that the contract novation agreement was signed by our government customer in July.

We have received approval to transfer the contracts and are executing the administrative actions of individual contracts. And I'll now turn it over to our CFO, John Hartley to discuss our financial results.

Thank you, Tony and good afternoon. Consistent with my remarks in prior calls my comments today will exclude the minor amount of revenues and cost performed by our former parent which generate no profit and are expected to decline over time as that work scope is completed.

Second quarter revenues of $939 million were in line with our expectations and resulted in a 7% contraction as compared to the second quarter of last year. This contraction is also in line with the comments I made on our last quarter's call where I spoke of the quarterly revenue profile for this year.

Our second quarter revenues were down 2% from the sequential prior quarter. This is largely due to the Memorial Day and 4th July holidays and summer vacation time taken by our employees. We continue to expect third quarter revenues to be down slightly from the second quarter with fourth quarter revenues again softening due to the holiday season.

Operating income of $59 million in the second quarter resulted in operating margin of 6.3%. We are encouraged by this performance as it is indicative of early success from our focus on margin improvement.

We remained committed to enhancing profitability with the objective of 10 to 20 basis points of average annual margin improvement over time until we reach a level more normative of the markets where we operate. Net income for the second quarter was $34 million which resulted in diluted earnings per share of $0.70 for the quarter.

Our tax rate for the quarter of about 38% is aligned with our go forward expectations. Moving to the balance sheet and cash flows our day sales outstanding were 61 days at the end of the quarter, which is an increase from the first quarter by five days.

This increase was primarily due to the timing of contract novation activities from our former parent that Tony referenced earlier.

As you will recall I discussed its potential impact in last quarter's call as customers complete the administrative actions necessary to move the contract vehicles and payment mechanisms from our former parent to our company. This temporary disruption of about $30 million peaked at quarter end and has largely returned to normal as of today.

Despite this event we end the first quarter with $247 million of cash and our cash flow from operations was $65 million for the quarter. We continue to place emphasis on our cash flow optimization programs. Capital expenditures for the quarter were $3 million, in line with our long-term expectation of less than $20 million annually.

And finally in the capital deployment arena we announced today the approval of a recurring cash dividend of $0.28 per share payable on October 30. Additionally, consistent with our desire to deploy cash in excess of operating needs we have increased our share repurchase activity during the quarter.

We ended our first sixth months of our repurchase program in mid-June and deployed about $50 million over that period. Then during our open trading window opportunity in mid-June we began deploying cash for share repurchases at about twice the previous pace.

This approach resulted in share repurchases of approximately 920,000 shares and deployment of about $39 million in the second quarter. Since the initiation of our share repurchase program in December and through the end of the second quarter we have repurchased approximately 2 million shares for a total of $77 million.

Before I turn the call over for questions I'd like to reiterate the long-term financial targets that we expect to accomplish on average and overtime. First, low single digit organic revenue growth. Second, operating margin expansion up 10 to 20 basis points annually.

Third, return of capital in excess of operating needs absent higher return, capital deployment opportunities and finally financial leverage appropriate for a company with SAIC investment requirements and cash generating characteristics. Operator we are now ready to take questions. .

(Operator Instructions) And our first question will come from Cai Von Rumohr with Cowen and Company. .

Yes, thank you very much and good quarter. You mentioned that you had some delays.

Could you kind of give us a little more color on the impact it had in the quarter in terms of subcontractor and material revenues and on profitability?.

Thanks Cai. Yeah, the delays have been pretty consistent with the prior quarters. There is not a big shift in any of our subcontract or materials flow as we all kind of expected with the last quarter on the government side, you would expect some of that material pickup, I haven't seen that as of yet. We still have a couple of weeks to go.

So overall the value add that we talked about and the new sub mix in the past quarters is increasing slightly compared with the subcontractor mix but overall I’d say that it is on a pretty consistent mix between the value add with sub in the materials.

The contract delays, again not being unusual, just really tied to the overall procurement process that we see unfold in the last year or two..

Okay. Thank you. And maybe you sound somewhat cautious, do you expect -- I assume you expect some kind of pick up in the current calendar quarter, is that the case or is it still not very solid..

It's possible but I would say that we are this far with only a few weeks to go, we have not seen award decisions at any material volume in the last couple of weeks and we expect again some lift as we get the final commitments.

The trends perhaps is that customers continue to be pragmatic with all their contract decisions, may stretch that out over multiple quarters.

We are seeing the shorter cycles and reduced amounts continue and in end we have seen this constant, slightly below one book-to-bill as we work with this recurring, get funded on these shorter cycle times that they will see as I would say collectively it’s not likely to be dramatic from the last year or two..

Okay, and then the last one you know other -- one of your peers have noted continuing tough pricing resulting in lower margins on re-compete wins and on takeaway wins. Is that something are you -- that you are seeing, does that seems to run in contract to your plan to have margins trend upwards by 20 basis points..

Yeah, I would say the price pressures are still there by evidence on price and this total competition in the solutioning ability to compete with all the components of the prices on labor, the rates and the margins we are comfortable that we can control the amount of margin.

So I would say collectively the price sensitivity is having some impact on top line as we see customers maybe pull back scope, maybe take a 10% reduction in the total contract value but as we have managed our cost structure we feel we can still manage the margins at the levels that you talk improvement will come in to that 10 to 20 basis points improvement overtime as far as that contract mix..

Thank you very much..

Thanks Cai..

And next we will take a question from Jason Kupferberg with Jefferies..

Hey guys. This is Amit Singh for Jason. Just wanted to come back on the budget flows expectation for this year. How are you expecting budget flows this year to be especially compared to last year? And then if you can just tie that with it seems like the year-over-year comparisons for revenue for the second-half seemed slightly easier.

Should we expect that there is a chance that we could see modest year-over-year revenue growth in second-half?.

You know let’s say there are maybe modest transition as we look at the revenue strength. The single-digit contraction from year-over-year, we are seeing that flattening occur in the revenue stream going forward. We are pretty comfortable that, that will move through the system on the overall pipeline and award activity and the outlook.

Again most of it’s aligned on the book to bill, very little of it will have a direct impact on near term revenues. But as we see moving to next fiscal year those awards will be I’ll say much more important.

But overall, I think it’s been a fairly consistent approach and I don’t see any dramatic change over the year in the activities that we saw last year or the year before..

All right, great. And just kind of back on margins, your long-term target is 10 to 20 basis points year-over-year improvement. But during the year I mean your 6.3% -- this operating margin was 6.3% this quarter, and they were 6.1% last quarter.

So do you expect similar trend to continue and then I mean if that’s the case with 2015 operating margin would year-over-year improve more than 10 to 20 basis points?.

We came off of normalized after removing separation cost we came off of FY ‘14 at about 6% and we expect to grow the 10 to 20 basis points off of that FY ’14. So that would put you into the 6.1 to 6.2 range.

It’s going to ebb and flow as we go throughout the year depending on volume and other items that occur but we expect to be in that range for this fiscal year..

All right, great. And just one last one, total operating cash do you expect in fiscal ’15 -- I know you have previously said that $200 million per year is sort of your target.

Do you expect to reach that target this year?.

Yes, if we are able to continue to deploy our capital the way we see it, we could approach that target towards the end of the year. We would also look to lower that average minimum cash need down by about $50 million as we get more and more comfortable with our cash flows being a separate company.

So we're trying to get down to that level and we've got plans in place or we've got ways to do that. So you will see that in the coming quarters as we try to get close to that 200 and then have that available $50 million in addition to deploy as well into FY ‘16. .

All right, perfect. Thank you very much..

Thank you..

Our next question will come from Bill Loomis with Stifel. .

Hi, thank you. Good afternoon. Just looking at the book-to-bill in the quarter it was 0.9 which is pretty good for this quarter and better than last year's I think 0.7 and your first quarter results were a lot better than the year ago but yet you sound like you're somewhat disappointed on the level of contact award activity.

Why is not a 0.9 book-to-bill so far this year a good thing? Why is it -- why are you still saying award activity seems to be below your expectation?.

No, we're definitely proud of the 0.9 this quarter in the context of trying to drive this to get to an occasional quarter of north of 1.0 we are just trying to watch those trends. But we're very confident that’s a [miss] delivering our [inaudible] that pipeline. We don't see any dramatic shift in our competitive win rates.

So we will win our fair share. Happy about the 0.9 compared to last year but really not being overly optimistic that we're going to blow through that 1.0 but there are -- to make a point there are some very large deals that have been won and processed that in and of themselves could drive it 0.2, 0.3 just on their own.

So we're going to float around at that 0.9. We will hit some deals that will push us over the top in coming quarters, so that’s how I would characterize the book-to-bill based on the award decision process right now. .

On your big IDIQs like recent one delayed, this Eagle II, have you seen task order flow on these new ones yet?.

I am not sure I am not having seen anything on the DHS, nothing on OASIS coming through the vehicle. There are alternatives in place today and it generally takes some time for task orders and customers to transition there roughly.

So they are in place and the migrations will be fairly natural as we finish off current vehicles and move on with those new ones. .

And what about -- have we seen the steady ramp up in some of the other contracts you won like the Army Human Resources Contract, the Federal Thrift Investment Board contract, have those ramped up per your expectations over the last several quarters?.

Yes, they have. Great kudos to the team on the transition activities on the HR and the staffing side. But I would say that those programs are active run rates, we’re still responsive on some [surge] activities, on some vehicles as well. So there is still some capacity and will require the team’s performance on this program as we go forward.

So high confidence on those and the run rate is what we would have expected. .

So you are not seeing the customers holding back on funding on awarded contracts that are generally seem to be ramping up as expected or are you seeing some hold back on some programs?.

They are still being conservative in what they do but given the vehicles that they own they still have the work to do and their comfort increases based on their priorities and then the monies they have committed. So pretty natural process but in place, the customers are using our vehicles.

The delays that we talked about do present through the new contract awards as you have heard us talk about..

Any change in trend on how your customers are talking about their comfort level on funding environment or anything that you could shed light on?.

As I said I think they're being conservative. They know they had a two year window. They are coming up on at the end of that first window with the threat of sequestration in 2016.

How that sequestration manifests itself is yet to be seen but it is legitimate threatening their lives [inaudible] talked to, so I think they all understand the new budget baseline is that they need to get to, to avoid sequestration and I think you see in all the customers prioritize and rationalize it with commitments to be on that trend line based on the department and agency requirement.

So it will trend out but I'd say they are being practical but conservative. I see that as a positive environment and they are taking actions accordingly..

Okay, great. Thank you..

Thank you..

Our next question will come from Edward Caso with Wells Fargo..

Hi. Thank you. Thanks. Solid quarter, great.

Just to be really clear do you expect your clients to spend to their ‘14, the government ‘14 budgets?.

Ed, I would expect that they do but it's not a guarantee that they will. Some may still be adjusting to the multiyear view to try and ramp to a ‘15 number. I don't think we’re going to see any [inaudible] in place of ‘14 to get in to ’15.

There is still expectation that CI will be, at least the first round will be fairly short, but I think in all regards there will be some the new baseline budgets that they are heading towards and you are seeing the requirements, the budget allocation and the [inaudible]..

I guess what I am trying to figure out is the first, there was almost no activity in the December quarter. The government's first quarter very slow in the March quarter, so to sort of spend the number you have to really spend a lot of money here at the back end of the year.

Yet I am hearing in general that things are just sort of moving along at pace in prior years. So shouldn't there be a very noticeable surge in spend here to reach that those government ‘14 appropriated levels..

Yeah, I think there should be. But we haven't seen that volume, the mid volumes are there, but frankly the award decisions are still very slow across the entire industry and I think you are seeing that reflected.

So you would expect it and my only speculation would be you look at ‘14 and ‘15 together the new budget environment and baseline we are trying to drive to. We may just see in the outcome of some of that slowdown as they reduce their overall spend..

The ISIS [counter] lately, are you seeing any change in your client behavior as we start to sort of ramp up our activities against this terrorist group..

With the customers they're looking globally at all the different threat deployment opportunities. I would say there are a number of contingency plans underway trying to assess in terms of supply chain logistics where are the assets today and how might they be deployed across the globe and how the government may insert in those areas.

But we haven't seen any direct task order or specific task needs to serve that activity at this time but lot of contingency plans are underway. .

Last question can you remind us about your OCO exposure?.

Yeah, the OCO we started at about $100 million last year. It's moved down closer to $50 million this year and as we look to those monies we may see that bounce around plus or minus $10 million or so as we look for support in different theatres, that's all I’ll add today..

Great. Thank you..

You're welcome. Thank you..

And next we'll go to Joe Nadol with JPMorgan..

Thanks. Good afternoon. First question is just on the revenue mix.

Could you provide specifically what we'll see in your queue when you file it on direct labor related revenue, what percentage of your revenue was that?.

You'll see that our direct labor, our labor related revenue will be about at 45% compared to about 33% for subcontract related and 22% for materials.

If you just take the materials out that shows a consistent run of about 58% of just as a percentage of our labor and subcontract-related labor which is consistent with the prior quarter, which is also up from the FY ‘14 rates. So we are seeing some progress in moving to our organic labor and we put a lot of emphasis on that.

Again it takes time to move the needle but we are seeing a trend in the right direction that’s a little ahead of our expectations at this point..

What’s the key to really moving the needle? Is it internal training on how to approach contracting? Is it just the timing of contracts, certain types of contracting rolling off but what are you seeing as I guess the biggest obstacles to really pushing that agenda?.

Yeah, I would say the training is largely complete. Our bid review we have largely put in our expectation of the amount of SAIC labor that should be in the bid.

We’ve developed who our strategic partners are going to be that, so that we are very explicit now in our bid reviews on what we are going to partner for versus what capabilities we will provide. And so I’d say that’s largely in place. The biggest hurdle to that is just the elongated award cycle of 12 to 18 months.

If we look out at our submitted proposals under evaluation we see that our submitted awards are in excess by a fair amount of our current portfolio. So that means we are bidding in the right direction. Of course we have to win those in order to move that but that’s going to be case regardless.

But we do see that on the horizon that it’s headed in the right direction. The other thing is as we approach task order by task order as those are renewed or as we evaluate our current contract portfolio we have limited capability to switch from subcontract labor to SAIC labor but we have seen a number of successes in that area as well..

Okay.

And then the national human health situation any update on what’s happening there?.

Well procurement is back in and this is traditional cycle with [formal] activities with governments seen in discussions within private sector and just preparing for a resubmit based on that procurement cycle in that space..

Okay. So timing this would seem to be certainly, something I guess hard to say precisely given what’s happened but partly is being planned….

The RFPs proposal activities are underway but it’s hard to say what the timing will be on the final submissions and then obviously the award activities. But is on track, with [inaudible] but it’s hard to quantify that on schedule..

Okay.

And then just one more you mentioned that that as usual you keep protested but awarded contracts out of your backlog, I was just wondering if you could cite how large that number will be right now and how that compares to the last few quarters, has it has been going up?.

The backlog on the protest side we have got big deals. There are a huge number of protests but the ones that we have been involve with are fairly large scale in HHPC and some of the other more recent ones. So they are material they do move the backlog number and the book to bill I mentioned earlier.

But overall we just treat those as an extension of that procurement process. I do feel confident in the protest activities that for those that are strategic and at scale that at least on the full [trial] we come out as an award winner and just work in support of customers who would have [inaudible] actions there they are trying to undertake..

Okay. And I have actually just one more, OASIS is there a way of you know since it’s multiple award, is there a way of quantifying the opportunity or at least giving us a sense of what you think might be the competitive landscape there particularly since as you mentioned there are other contracts vehicles that it will essentially complete with..

Yeah, it’s kind of hard to say how that’s -- it’s very tough to quantify now based on how those customers will migrate our vehicle. It will take time.

I’d just like to give a couple of quarters to begin to realize which customers find it most advantageous and then so somebody will be able to align the pipeline and give maybe more clarity but the nature of the work and the customers that [inaudible] is on a more relative basis. I can’t give you a number now..

Okay, understood. Thank you..

You are welcome..

Thank you. .

And that does conclude our question-and-answer session at this time. And I’d like to turn the call over to Paul Levi for any additional or closing remarks..

Thank you very much. I'd like to thank you all for your interest in SAIC and participating in the call today. And I wish you all good evening. Thank you..

And once again that does conclude our conference call for today. Thank you for your participation..