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Science Applications (SAIC) Surpasses Q1 Earnings Estimates

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Science Applications International Corp. (SAIC - Free Report) reported first-quarter fiscal 2019 earnings of $1.13 per share, which beat the Zacks Consensus Estimate of $1.02 and increased 4.6% from the year-ago quarter.

Moreover, revenues increased 6.5% from the year-ago quarter to $1.175 billion and beat the Zacks Consensus Estimate of $1.124 billion. Internal revenues increased 7%.

SAIC, a technology integrator providing entire life cycle related services and solutions, is performing well on the back of new contracts from NASA, the Environmental Protection Agency (EPA) and an increased number of orders in the company’s supply chain.

Quarter in Details

Net bookings for the quarter were approximately $1 billion, which reflects a book-to-bill ratio of approximately 0.8 in the quarter. At the end of the quarter, Science Applications’ estimated backlog of signed business orders was approximately $10 billion comprising $1.9 billion funded ones.

Total backlog was down 1.2% and funded backlog decreased 0.85% sequentially. The estimated value of proposals submitted by the company remained constant on a sequential basis at $15 billion.

Notably, the company won several Expand Awards during the quarter from the U.S. Army and the General Services Administration (GSA) and NASA. It also secured Protect Awards from the U.S. Army Human Resources Command, U.S. Army Aviation and Missile Life Cycle Management Command and the U.S. Navy.

Operating income margin contracted 10 bps to 5.6% in the reported quarter. Adjusted EBITDA margin contracted 20 basis points (bps) on a year-over-year basis to 6.5%.

The year-over-year contraction in profits was primarily due to increased orders in the supply chain business, which generate low operating margin. Additionally, ongoing investment in platform integration is also a concern.

Balance Sheet & Cash Flow

Science Applications ended the quarter with cash and cash equivalents of $152 million, up from $144 million reported in the previous quarter.

Operating cash flow was $88 million and free cash flow was $82 million. The company had delivered operating cash outflow and free cash flow of $88 million and $84 million in the previous quarter, respectively.

Science Applications spent $46 million in cash dividends and for share repurchases.

Guidance

For fiscal 2019, Science Applications expects revenues to be slightly positive. Management expects EBITDA margin to increase by 20 to 40 bps from 7% recorded in fiscal 2018. Free cash flow is expected to be around $250 million in fiscal 2019.

Further, Science Applications expects to increase capital expenditure by $10 million to $30 million with increasing investments in IT infrastructure.

Conclusion

Management is optimistic about the government’s inclination to adopt  technologies that will reduce costs and improve efficiency of the system.

Further, as the federal fiscal year budget was passed in late March, the company expects an accelerated pace of contract awards to continue till the end of September. This, in turn, will be beneficial for its revenue growth in the later part of the fiscal as well as in the future years.

The company is also banking on the submitted proposals, which are yet to be awarded, as it shows surging demand for enterprise IT modernization. Management is also positive about the ongoing investments in differentiating solutions and platform integrations, which are expected to reap long-term benefits, though these are proving to be a drag on margins currently.

Zacks Rank and Key Picks

Currently, Science Applications has a Zacks Rank #3 (Hold).

Some better-ranked technology stocks include NVIDIA Corp. (NVDA - Free Report) , Western Digital Corp. (WDC - Free Report) and Micron Technology, Inc. (MU - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here..

Long-term earnings growth rate for NVIDIA, Western Digital and Micron is currently projected to be 10.25%, 19% and 10%, respectively.

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