Science Applications International Corporation (SAIC) Q1 2019 Earnings Conference Call Transcript — The Motley Fool


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Science Applications International Corporation (NYSE:SAIC)
Q1 2019 Earnings Conference Call
June 12, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by. Good day and welcome to the SAIC Fiscal Year 2019 Q1 earnings call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Shane Canestra, SAIC’s Director of Investor Relations. Please go ahead, sir.

Shane Canestra Director of Investor Relations 

Good afternoon. My name is Shane Canestra, SAIC’s Director of Investor Relations, and thank you for joining our first quarter Fiscal Year 2019 earnings call. Joining me today to discuss our business and financial results are Tony Moraco, SAIC’s Chief Executive Officer, Nazzic Keene, our Chief Operating Officer, Charlie Mathis, our Chief Financial Officer, and other members of our management team.

This afternoon, we issued our earnings release, which can be found at investors.saic.com, where you’ll also find supplemental financial presentation slides to utilize 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 that we may make forward-looking statements on today’s call that are subject to known and unknown risks and uncertainties that could cause actual results to defer 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.

In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors in our press release and supplemental financial presentation slides, including reconciliation to the most comparable GAAP measures.

It is now my pleasure to introduce our CEO, Tony Moraco.

Tony Moraco Chief Executive Officer

Thank you, Shane, and good afternoon. SAIC begins Fiscal Year 2019 with continued momentum in the marketplace resulting in the execution of our long-term strategy, Ingenuity 2025.

In addition to strong performance on revenue growth, earnings per share, and cash generation in the first quarter, SAIC continued to invest in the pursuit and capture of new business opportunities, while also investing in differentiated solutions to enable significant returns in the future.

The team delivered the third consecutive quarter of revenue growth, with first quarter internal revenue growth of 7% as compared to the prior year quarter and 4% as compared to the fourth quarter of last fiscal year.

Year over year growth was primarily attributable to new contracts awarded in mid-Fiscal Year ’18 with NASA and the Environmental Protection Agency, and increased orders in our supply chain portfolio. EBITDA margins of 6.5% for the first quarter were slightly below our expectations due to increased volume of supply chain materials and investments in our platform integration business. Operating cashflow was favorable through the effective management of working capital and strong collections in the quarter.

SAIC delivered a book-to-bill of 0.8 for the first quarter and ended the quarter with $10 billion in backlog. Our $15 billion of submitted proposal value is consistent with the end of the fourth quarter and we continue to be encouraged by the market environment and our ability to capture business opportunities. With congress passing Omnibus Appropriations in the middle of our first quarter, award decisions on our submitted proposals is the most expedient avenue for our customers to obligate their increased budget amounts before the end of government Fiscal Year 2018.

Let me provide you with additional color on our view of the market environment. Since federal fiscal year budgets were passed in late March, we anticipate an increased pace of contract award decisions and expect that pace to continue through the end of September. While this may provide some revenue growth late in this fiscal year, increased contract award activity should largely benefit next fiscal year.

While we government Fiscal Year 2019 to begin honoring a continued resolution, contract award activity could remain at a relatively brisk tempo as a budget baseline is at a higher amount than previous years. With an agreement in place for government Fiscal Year 2019 budgets and customers looking to modernize their capabilities and operations, we are optimistic for increased demand and quicker contract decisions that will enable our customers to move forward with their mission imperatives.

My discussions with government leadership had centered on their desire to adopt existing technologies in order to reduce development costs and risks while accelerating the delivery of mission capability for the end user. I am encouraged by this desire that directly plays to SAIC’s strengths as a technology integrator that can leverage innovative solutions from diverse markets and effectively implement next generation capabilities. We continue to see growth opportunities to modernize both enterprise IT systems and a wide range of mission systems with differentiated solutions.

Training solutions associated with system modernization offers an additional area for growth, especially evident with the demand to improve military readiness. With an improving environment for federal government service providers, there are higher expectations for organic revenue growth, and SAIC is well-positioned to realize market upside. In addition, we are seeing increased M&A activity and market consolidation. As we have stated in the past, we will continue to take a disciplined approach to M&A, with broader customer access and new capabilities being the primary filters when assessing the strategic fit of any company.

We continue to be active in evaluating strategic acquisitions as we execute our long-term strategy, Ingenuity 2025, which calls for M&A to complement our organic growth strategy. That being said, we are in a very strong financial position and are confident we can be opportunistic in creating value through acquisitions.

I will now turn the call over to our COO, Nazzic Keene.

Nazzic Keene Chief Operating Officer

Thank you, Tony. Contract award activity in the first quarter led to bookings of approximately $1 billion, which translates to a book-to-bill of 0.8 for the quarter. With a healthy mix of successful recompetes and new business awards, I am encouraged by these results, despite operating under a continuing resolution for the majority of the first quarter.

Over the trailing 12 months, SAIC has produced a book-to-bill ratio of 1.4, which is a strong leading indicator for low single-digit internal revenue growth in Fiscal Year 19 and beyond. First quarter bookings included the recompete or protect win of $108 million contract to continue to support the US Army Human Resources Command and the $98 million contract from our AMCOM customer for IT support services, also in the protects category, with a $73 million award from the US Navy SPAWAR to continue providing architecture and systems engineering support.

As I mentioned, first quarter bookings also included several new business or expand contract awards. Under the GSA OASIS IDIQ vehicle, the US Army awarded SAIC a $205 million task order to provide engineering, program management, and technical support services. One of our largest customers, NASA, awarded us a $58 million task order to manage their cloud-based web services to include the creation, maintenance, and management of websites, web applications, and other related services.

That concludes the most notable contributions to our first quarter bookings, with a balance comprised of other awards and contract modifications across the portfolio. Last fall, SAIC was awarded a contract from the Virginia Information Technologies Agency, or VITA, to be the multi-sourced integrator to assist the Commonwealth of Virginia in modernizing their IT infrastructure.

Subsequent to the end of the first quarter, SAIC was awarded a new task order from the same customer for transition services to VITA’s next generation delivery model. SAIC will provide IT transition services as infrastructure responsibilities are moved from the previous provider to new suppliers under a multi-source approach to IT delivery. We expect this award to contribute to second quarter bookings and Fiscal Year 19 revenue in the third and fourth quarters.

At the end of the first quarter, SAIC’s total contract backlogs sit at approximately $10 billion with funded backlog of approximately $2 billion. The estimated value of SAIC’s submitted proposals awaiting award is $15 billion, unchanged from the fourth quarter of last fiscal year.

Looking into the pipeline of submitted proposals awaiting award and other programs being reviewed, we are seeing increased customer demand for enterprise IT modernization. As we look for opportunities to leverage our strong balance sheet, I am excited about the potential for revenue growth at higher margins.

Including my remarks on business development, let me give you a brief update on the status of our AMCOM task order 33 recompete. Last quarter, I communicated that we were awarded this recompete task order in excess of $700 million, but it was subsequently protested by a competitor. I am pleased to report that the protest has been resolved and we were reawarded this task order. We expect this award to contribute to our second quarter bookings.

Before turning it over to Charlie to discuss the financial details for the quarter, let me comment on two notable efforts in our platform integration business, the Marine Corps AAV and ACV programs. On the AAV program, we are executing the low-rate initial production or LRIP phase of the contract and will soon begin delivering these upgraded tactical vehicles. On the ACV program, the testing and evaluation of our 16 prototype vehicles has been completed and we are expecting a down select decision in the near future for this new Marine Corps platform.

With a strong pipeline of additional platform integration opportunities. We believe the investments we are making today, as demonstrated by the recent announcement of our platform innovation center in Charleston, South Carolina, will enable long-term value creation. We are committed to growing this new line of business in alignment with the defense department’s focus on readiness and modernization.

Charlie, over to you for our financial results.

Charles Mathis Executive Vice President and Chief Financial Officer

Thank you, Nazzic, and good afternoon. Our first quarter revenues of approximately $1.2 billion reflect internal growth of 6.5%, as compared to the first quarter of last fiscal year. Revenue growth was driven by the end user services and NASA OMES programs as well as increased orders within our supply chain portfolio. These revenue increases were partially offset by the completion of certain contracts and other net decreases across the portfolio.

First quarter EBITDA was $76 million, equating to 6.5% as a percentage of revenues. While we expected first quarter profitability to be lower than recent quarters and improving throughout the year, EBITDA margin was primarily affected by increased orders in our supply chain business and investments in our platform integration business.

Operating income of $66 million in the first quarter resulted in an operating margin resulted in 5.6%, insisted with the prior year quarter. Net income for the first quarter was $49 million and diluted earnings per share was $1.13 for the quarter. The effective tax rate for the quarter was approximately 10%, significantly lower than our previously communicated full-year rate of 23% to 25%. Similar to the first quarter of last fiscal year, our current year first quarter tax rate was affected by the timing of equity awards that predominately invest in the first quarter and is based on the stock price at that time. We recognize the tax benefit of $8 million in accordance with the accounting treatment of these equity awards.

Looking to the full fiscal year, we estimate our fiscal year 2019 tax rate to be approximately 20% to 22%, down slightly from our previously communicated expectations. First quarter operating cashflow and free cashflow were $88 million and $82 million respectively. Cash collections were favorably impacted in the quarter by the recovery of delayed payments in the fourth quarter and contingent focus on receivable management. Day sales outstanding at the end of the quarter was 52 days. We expect our DSOs to remain in the low 50s within our normal operating range.

The first quarter ended with a cash balance of $152 million, consistent with our average operating cash balance target of $150 million. During the first quarter, we deployed $54 million of capital, consisting of $32 million of planned share repurchases, representing about 412,000 shares, $14 million in cash dividends, and $8 million of term loan debt repayment. Net debt at the end of the first quarter was approximately $1 billion and our net debt to 12-month bank EBITDA leverage ratio was less than three times, reflecting our strong balance sheet.

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Before moving on, I’d like to provide you with the status of the material weakness that we disclosed in our fourth quarter call and filings. We have implemented remediation actions and testing will be completed in the second quarter to ensure effectiveness. In alignment with our previously communicated expectations, we intend to have the material weakness remediated in the second quarter of this fiscal year.

Now, turning to our forward outlook for Fiscal Year 2019 — we are committed to our long-term financial targets and they remain unchanged. On average and overtime, we expect low single digit internal revenue growth and are confident in our long-term profitability improvement target of 10 to 20 basis points annually. With regards to Fiscal Year 19 specifically and consistent with our previously communicated outlook for the year, we expect revenue growth and margin improvement, as measured by EBITDA margin to be in line with our long-term targets.

As a reminder, we ended last fiscal year with an adjusted EBITDA margin of 7% and we believe we can increase margins 20 to 40 basis points this fiscal year. Despite this first quarter’s lower than expected EBITDA margin, I remain confident in achieving the margin increase through several levers, including a more favorable contract mix and continued cost discipline.

In a similar pattern to last fiscal year, we expect margins to be higher in the second half of Fiscal 19 than in the first half. On our fourth quarter call, I communicated that our new annual free cashflow target increased from $240 million to $260 million, attributable to tax reform passed in December. We expect to increase capital expenditures an incremental $10 million to $30 million this year as we invest in IT infrastructure.

We continue to expect free cashflow of approximately $250 million in Fiscal Year 2019. Our capital deployment strategy remains consistent with the intent to continue distributing excess cash to our shareholders through a combination of dividends, share repurchase, and strategic M&A. Finally, I am pleased to announce that our board of directors has approved our next quarterly dividend of $0.31 per share and will be payable to shareholders on July 27th.

Operator, we are now ready to take questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, to ask a question, please signal by pressing *1 on your telephone keypad. If you’re using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press *1 and we will take our first quarter from Cai von Rumohr with Cowen & Company. Please go ahead.

Lucy Guo Cowen & Company — Analyst

Hi, it’s Lucy on for Cai. Thanks for taking my question. I wanted to just understand the moving parts of AMCOM Express. It seems the protest resolved in your favor on Task Order 33, but Raytheon won one piece out of the three piece recompete. Is there still a revenue ramp down of more than $100 million on this contract?

Charles Mathis Executive Vice President and Chief Financial Officer

Lucy, I think within Task Order 33, it’s the entirety of the recompete. So, there’s continuity for that task order. The set of task orders last year has broken up into three pieces. We had won two of those three. We were unsuccessful on a portion of that, yet we were able to retain the majority of that work. So, that’s been factored into this year’s profile. But the recent activities are not aligned with last year’s recompete, but this does resolve current recompete risk and we’re pleased finally have that award this quarter after the protest last quarter.

Lucy Guo Cowen & Company — Analyst

Are you anticipating the tires recompete to be in Q2 or has that been postponed?

Nazzic Keene Chief Operating Officer

That is being pushed down a bit. This is Nazzic. So, on the tires program, we are in the process of getting an extension for the existing work that will carry us throughout this year and we expect the close the award decision as we get closer to the end of this calendar year.

Lucy Guo Cowen & Company — Analyst

Got it. And then maybe finally, if you can, give a little bit more color on the tone here just in terms of pace of awards accelerating. Are there specific agencies you’re referring to? And then specifically you pointed out enterprise IT modernization. Do you have any large opportunities in mind in the bid pipeline?

Nazzic Keene Chief Operating Officer

If I can touch on that a bit — this is Nazzic again — we certainly are following the budget conversations and have visibility to where the increased budgets are going and flowing based on what’s been communicated. Now, the process of pushing those dollars into the agencies or into the commands is still taking place.

So, although we certainly have a general understanding of the priorities, as Tony mentioned, around readiness, modernization, IT infrastructure, things of that nature, we hadn’t seen, as of yet, an increased pace of RFP or awards, but we do expect over the course of the next few months as the government gets toward the end of the fiscal year to see some acceleration there. But at this particular juncture, we haven’t seen that in the form of increased RFPs or increased awards.

Lucy Guo Cowen & Company — Analyst

Sorry, just one more follow-up, actually, on margins — it would require somewhat of a hockey stick in the second half, closer to 8% EBITDA margin to get to a 30 BP year over year increase at the midpoint. How much of that is coming from restructuring savings that you mentioned — I believe it was $11 million net — and then maybe also address more favorable revenue mix. How many basis points is that contributing?

Charles Mathis Executive Vice President and Chief Financial Officer

Hey, Lucy, this is Charlie. Let me just get back on the EBITDA margins. The EBITDA margins is 6.5%. There were two main drivers to the margins. First, the margins were impacted by approximately $5 million in investments of investments in our platform integration program. This had about a 40-basis points impact on EBITDA margin for the quarter.

And then the higher volume of supply chain orders lowered the overall margins by about 10 basis points. Despite the slower quarter, we remain confident, as I said on the script there, that we can achieve the 20 to 40 basis points year over year, increase that we communicated last quarter. And in that 20 to 40 basis points included the restructuring savings that we mentioned last year of $11 million. Does that help?

Lucy Guo Cowen & Company — Analyst

It’s great. Thank you. I’ll pass it on.

Operator

Our next question will come from Jon Raviv with Citi. Please go ahead.

Jon Raviv Citi — Analyst

Good afternoon, everyone. Thanks for taking the questions. Tony, can you opine a little bit more on your perspective on what’s driving a lot of the consolidation U-turn with an increased pace of M&A in the industry? And then also a related question — your M&A has been tight. You sort of outlined the filters that you’re going for, but do you feel like you need something to improve your chances at the upcoming enterprise IT modernization demand that you saw accelerating? Some of your competitors say that’s what you need is more skill to compete there.

Tony Moraco Chief Executive Officer

I think the increased M&A pace, I think with improving market conditions, there’s optimism around further growth. I think we collectively see positioning ahead of that and M&A in some cases can facilitate contract access since we’re on this 12 to 18-month sales cycle. Positioning for customer access through M&A is one way to then be a catalyst for organic growth. The expansion and capabilities, again, in this marketplace, maybe that’s a bit more of a driver.

As we see higher demand, consolidation in some of the technical areas in the cloud and cyber components in particular. There’s always mission areas on a niche play also come into that. I think the pace is through a combination of optimism and positioning. Relative to our appetite in the context of enterprise IT modernization, there is some merit to having a broad portfolio of enterprise IT modernization, whether you’re leveraging managed services across a bigger base as service-type contracts sometimes have broader scale can be a complement.

We are seeing large entrants — AWS, Microsoft, others. So, there’s a capacity component. So, I think at the infrastructure level, there is a sense that maybe more scale gives you that economy of scale for strictly modernization, probably less so as you move up the value chain and modernization on applications and application migrations within the cloud, data analytics, probably less so of a scale play.

So, we try to look at a balance, probably more emphasis on the ladder with mission capabilities and application development of analytics that play into the mission side and try and stay out of the more commoditized as broad enterprise IT, where I think scale is a bit more relevant.

Jon Raviv Citi — Analyst

Okay. Something like Vanguard, where would you put Vanguard in that spectrum? I know there’s a potential recompete coming up down the line.

Tony Moraco Chief Executive Officer

Well, Vanguard does give us a large scaled program. The benefit of delivering end-to-end services allows you to move across from architecture and redesign, recapitalization, understanding the general operation where, again, there are some efficiencies that the customers and the suppliers can benefit from. Then application development, where you see user interfaces or modernization is still applicable.

So, those kinds of programs offer end to end services, which are very attractive. So, I think a combination of seeking out a multiple such as our contract base not only at the State Department but at CENTCOM and NASA, it’s those broad account bases that are attractive and not so much the sheer volume, but the end-to-end services allow us to allocate customer demand over a multi-year period of time.

Jon Raviv Citi — Analyst

In terms of addressing these sorts of things, how do you approach your next buy decision? There seems to be a way in which you can partner with people more effectively to address what the government wants, bringing in more outside technology, and there’s also the buying. So, how do you approach that?

Tony Moraco Chief Executive Officer

I think overall, we’re probably biased on a partner play. So, I guess in some sense, I’d characterize buy, in that case, not such acquisition, but actually partnering with the vendors. That plays right into our technology integration strategy. So, we bundled the supplier capability as an integrator. We make the solution set on a bundled basis that we can then sell on a differentiated basis. That’s the primary strategic intent to attack the marketplace and differentiate.

The buy side on a strictly acquisition scenario, I think, is a time to market. We’ve seen elements around the intelligence community as one example, tough to grow organically as you try and cross agency boundaries. So, that continues to be an area where acquisitions facilitate creating some capacity and some volume in a portfolio. So, that portfolio can, in some cases, stand on its own. I think the buy side is limited where you’re trying to get to market faster. You may have missed a contract vehicle cycle. So, that’s where the buy acquisition lies.

Otherwise, it’s strictly integration, where you’re bundling solutions, relying on a supplier base which we’ve developed strategic partnerships and we can create an advantage to deliver mission capabilities that are mature as a tech transfer play as our customers seek lower risk, lower cost, and a faster delivery mechanism to avoid long development cycles. We think this is a perfect market position for us to be in and the customer demand signal is on that type of integration and tech transfer is very much aligned to something we do.

Jon Raviv Citi — Analyst

Thanks for the extensive perspective there, Tony. I’ll hop back in the queue.

Operator

We will take our next question from Joseph DeNardi with Stifel. Please go ahead.

Joseph DeNardi Stifel Financial Corp. Managing Director

Yeah. Thanks very much. Two questions for Charlie, I think — correct me if I’m wrong. I think you mentioned that you’re expecting low single-digit-type growth over the next few years. How do I reconcile that with kind of the budget, which seems to be growing at a faster rate than that? Are there some risks or some offsets that we should be considering?

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Charles Mathis Executive Vice President and Chief Financial Officer

Yeah. I think the low single-digit revenue growth is, again, what we stated as a long-term financial target. We continue to watch the developments in the budget, as Nazzic pointed out, and we will update that when we see that coming.

Tony Moraco Chief Executive Officer

This is Tony. As Nazzic said, we’re still looking at — we’re mid-year now and to try to get the contract awards through and watch the book-to-bill, we’ll see maybe some uplift in that growth this year. We think we, again, have some upside to outperform last year’s 2.5% growth. So, we’re above that level of low single-digits. I think there’s still time to tell as we finish out Q3, Q4, maybe Q3 in particular, to being able to update that into low single or mid-single digits, but that’s premature to address that profile for government ’19 and our Fiscal 20.

Joseph DeNardi Stifel Financial Corp. Managing Director

Okay. Yeah. That’s fair enough. Charlie, just on your expectation for 10 to 30 basis points of margin expansion, is that still a reasonable goal even if the platform side of the business starts to ramp up?

Charles Mathis Executive Vice President and Chief Financial Officer

Yes. That’s currently our expectation. We feel pretty comfortable with the actual 20 to 40 basis points in this fiscal year. That’s over the 7%. That’s despite the lower quarter. That’s driven really by this contract mix. A lot of the programs that Nazzic pointed out, movement to higher margin type of programs and the continued cost discipline that we’ve seen. If you look at the ramp up, we’ve messaged that the second half margins would be higher than the first half. That’s pretty consistent with the prior year. So, if you go back and look and see how that occurred, it’s somewhat similar in what we project this year.

Joseph DeNardi Stifel Financial Corp. Managing Director

Okay. Thank you.

Operator

Our next question will come from Greg Konrad with Jefferies. Please go ahead.

Greg Konrad Jefferies & Company — Analyst

Good evening. I just wanted to follow-up on the consolidation question. When you just look at the market today, in the markets that you compete in, have you seen maybe new competitors come to the market or kind of any changes in terms of the competitions?

Tony Moraco Chief Executive Officer

Probably the biggest change is in the IT component and modernization, where the last couple years, we’ve seen the cloud migration and infrastructure play with AWS or Microsoft. Commercial entrants, I wouldn’t quite put them in a nontraditional, but with the growing budgets, I think those types of firms see an opportunity. There’s really a demand. It may not be core on the commercial side, but it surely is attractive.

So, we’re seeing that more on the IT side of entrants. We tend to partner, then, with them so that we can bring the mission capability and that knowledge base to bear as they bring some of the broader infrastructure play. Again, it’s probably less so at the mission application level. It’s less so on the system engineering side. I think we still see similar resources, similar companies, even though there’s consolidation movement on the smalls and some of the mid-tier. We see it pretty consistent relative to the competitive landscape on the mission side.

Greg Konrad Jefferies & Company — Analyst

Thank you. And then just clarification — you mentioned the headwind from platform integration cost in Q1. Does that come down as we go throughout the year and that’s why margins improve or is that something else that drives that improvement?

Tony Moraco Chief Executive Officer

So, the investment in the Q1 was a discreet event for Q1. We don’t see that return again. The margins increased, if you separate that out, are really driven by the portfolio mix, the contract mix that we have on the last supply chain orders and volume, and again, more fixed price contract mix and our continued cost discipline that we have similar to last year. That’s what’s really driving the margins in the back half of the year.

Greg Konrad Jefferies & Company — Analyst

Thank you.

Operator

The next question will from Edward Caso with Wells Fargo. Please go ahead.

Edward Caso  Wells Fargo Securities Managing Director

Good evening. Can you talk a little bit about your exposure to federal agencies that the President does not like?

Tony Moraco Chief Executive Officer

Well, Ed, can you be specific on which ones those are? I don’t want to presuppose.

Edward Caso  Wells Fargo Securities Managing Director

I think anything that doesn’t have to do with national defense.

Tony Moraco Chief Executive Officer

We don’t see major shifts yet, at least I haven’t, with the portfolio. I will say that maybe there’s a slight tendency on the Fed side to be a little slower, a little bit more conservative. Maybe it’s a reaction to that skepticism of, “Is it going to hold?” as we get into government FY19. But we haven’t seen any dramatic changes based on administration rhetoric or actions at this point. We’ll track it.

The demand is still there. I think they’ve got to try to rationalize what budgets they do have. But there may be some that are holding back. I think that’s part of the explanation of they’ve had the money about a month, still a short period of time given the process we go through. So, it’s a little early to say who’s going to be a bill payer, but I think our exposure is limited in that we’ve got a very diverse portfolio and the positions we have in those agencies tend to get on the mission side, even though the modernization is still competitive on end to end services.

Nazzic Keene Chief Operating Officer

This is Nazzic. The only thing I would add to that — I totally agree with Tony said — we are seeing, to your point, that some of those may be a little more cautious and a little more trying to really get more certainty around what that looks like. There’s certainly some of that, but we haven’t seen it manifest itself in any decisions on awards or funding, at this juncture.

Edward Caso  Wells Fargo Securities Managing Director

The supply chain upside this quarter, the number you put in the press release, is that the year over year change or is that the absolute dollars?

Tony Moraco Chief Executive Officer

That’s the year over year change.

Edward Caso  Wells Fargo Securities Managing Director

Okay. And then does that — if you’re still thinking you’re going to hit 20 to 40 basis points, was that a sort of pull forward of what you thought you would get throughout the year or could you possibly get more?

Tony Moraco Chief Executive Officer

Yeah. So, that was how we had began, planned it, and anticipated that the supply chain would be in this quarter. Again, the line of site that we have to the back end is less of the supply chain business and, again, as I say, the contract mix is changing in the back half and that’s where we see the margins increasing.

Charles Mathis Executive Vice President and Chief Financial Officer

I’d add that where we sit today, we think the 20 to 40 kept us back on from last year’s performance to that long-term 10 to 20. So, we’re catching up a little bit from last year. We acknowledge that. That’s a target. But I also want to make sure that we’re making the appropriate investments organically and putting some of that money back in to put the bids in place, build out the differentiated solutions so that we can actually take advantage of this cycle. So, I think it’s a balanced approach where we’re kind of making up our margins from last year, yet also being able to invest appropriately for this cycle going into next year.

Edward Caso  Wells Fargo Securities Managing Director

I was hoping to get an update on the AAV program. Where are you in this, I think it was $1+ billion opportunity? How much have you captured? What is the next data point milestone award opportunity that we should be looking for? Is the new Charleston facility relate to this or is it one of these building space in anticipation of maybe the ACV award?

Nazzic Keene Chief Operating Officer

This is Nazzic. Let me try to capture a couple of those. So, in the AAV, we are in the LRIP phase, the limited rate production phase with delivery of the first few of those vehicles in the next quarter, as we look to our Q2. So, we’re in the early stage of production, the LRIP phase. That phase will go for about 18 months or so, 18 months to two years, and then we’ll go into full rate production.

So, that’s just to give you a sense of where we are from a production standpoint. So, we’re still in the early stages of production. So, the investments that we’ve made are to support that phase. So, as you mentioned, the facility, production infrastructure, materials, and the labor associated with LRIP.

As it relates to the new facility, that is to support, certainly to support AAV as well as our broader portfolio integration portfolio as we look to building our pipeline and also supporting other opportunities across not just the Marine Corps, but the Navy and the Army as well.

Edward Caso  Wells Fargo Securities Managing Director

When might they make a decision on the next full rate production? My memory is you have about 50 vehicles that you have a contract for now but potential for hundreds more?

Nazzic Keene Chief Operating Officer

That’s right. So, we’ve got 50 that are in the LRIP, the limited rate production. The decision timeframe — I may have to get back to you — I believe it’s late this year, early next year calendar, but I can certainly confirm that.

Edward Caso  Wells Fargo Securities Managing Director

Thank you.

Operator

We will now take our next question from Krishna Sinha with Vertical Research Partners. Please go ahead.

Krishna Sinha Vertical Research Partners — Analyst

Hi, a couple of questions for you here. I think Nazzic mentioned in her remarks that you guys were maybe expecting some higher margins from modernization down the pipe. If I look at something like cloud or cyber and what commercial entities are getting for that type of work, it’s something like mid-twenty percentile-type margins, I have a hard time believing that the government is handing out 25% margin contracts.

So, I guess my question is what are you seeing in terms of what the government is willing to give in terms of margin for that type of work. Then to what extent are you seeing direct competition from commercial entities in that market. For example, I think we saw Amazon stand up a pretty big government entity within their cloud department. So, are you seeing direct competition from these guys? Then again, what are the margins you’re seeing on that next gen type of technology work?

Nazzic Keene Chief Operating Officer

So, on the margin side, what we do see is in the types of opportunities where we can couple what I’ll call the commercial-like IT modernization with mission knowledge, with the knowledge that we can bring specific to the customer’s mission, we do see the opportunity to see higher profits than we currently run today, but I totally agree with you, the government is — I haven’t seen a scenario where the government is going to support the commercial-type profitability models.

But we do see the opportunity as we engage more mission and also as we approach contracts in a more fixed-price outcome base. It allows us the opportunity and the levers to really deliver outcomes and then have less control in the way that we staff programs and we kind of structure opportunities.

So, those are really the levers that we see, the combination of mission coupled with the IT modernization as well as the opportunities to drive, as Charlie mentioned, to a different type of contract over time affords us the opportunity to see improved margins.

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Krishna Sinha Vertical Research Partners — Analyst

And are you seeing commercial competition in those?

Nazzic Keene Chief Operating Officer

We are in some cases. I think there’s still a good balance and probably more interest in partnering than going direct, but certainly there’s some opportunity if the particular RFP just calls for what I would call more infrastructure types, where the mission and some of the advantages that a company like SAIC can bring to bear. But for the most part, we’re seeing more partnering in that domain.

Tony Moraco Chief Executive Officer

It’s probably more of an entry, access point, more on the civilian side that the commercial folks can still gain access without the clearance burden within the intelligence community or defense side. So, it would probably be a little heavier on the federal civilian agencies than we see in intel and defense. So, still robust market access, but it’s probably biased on the civilian side because that extra layer of security elements that preclude some of the commercial guys to be in there on a sustained basis.

Krishna Sinha Vertical Research Partners — Analyst

And you mentioned contract type, like driving toward more fixed price. My kind of inference there is isn’t cloud or cyber or some of these — they’re not really a very mature area compared to the legacy IT work. So, is it a bit risk just in terms of the scope of work to drive like a fixed price cloud installation as opposed to the legacy-type fixed-price contracts you guys have been doing?

Nazzic Keene Chief Operating Officer

I think it can absolutely vary. To the extent that we can, working with a customer, have some influence that helps guide toward an outcome base, that certainly allows us to give both the customer and us more flexibility and the type of contract. Certainly, to your point, if you can’t really define the outcome and it was a more collaborative learning environment or exploration environment, then the fixed-price absolutely has a little more risk to it.

Tony Moraco Chief Executive Officer

There is repeatability in the processes as well. Think about cloud migration, it’s probably maturing quickly or has matured to the point where the repeatability of that drives a more fixed price or advantaged component about it gets to that outcome faster. I think the customers are still mixed results on the ability to release fixed price proposals. So, that’s a challenge on the acquisition side. So, it’s a combination of maturing the technology, the people processes, and then the acquisition maturity itself to align on what needs to get done.

So, the larger programs end to end, we sometimes see a mix, where you can do a traditional service level agreement on a fixed price basis and some of the modernization may be done on a cost reimbursement or by materials basis. So, it’s a mix as the customers and the technologies mature.

Krishna Sinha Vertical Research Partners — Analyst

And then one more question on your recompete picture for the year. Can you just talk about any major programs — I know you talked about AMCOM a little bit — and whether you’re seeing bridge contract extensions that are greater than usual? I know some of your peers have seen that.

Nazzic Keene Chief Operating Officer

Yes. So, the tires were a good example. That was one that was a sizable recompete for us. As I mentioned earlier, the award decision has been pushed out toward the end of this calendar year. So, we are in a position of executing against a bridge to get us actually into next year. So, that’s a good example. We are seeing certainly some bridges, but that’s a normal course of business. I’m not certain that we’re seeing more than normal, but there are cases in which the government exercises that option. Certainly, for us, that puts us in a good position.

Krishna Sinha Vertical Research Partners — Analyst

Okay. Thanks.

Operator

Ladies and gentlemen, once again, it is *1 to ask a question. We’ll take our next question Tobey Sommer with SunTrust. Please go ahead.

Kwan Kim  SunTrust Robinson Humphrey Analyst

Hi, this is actually Kwan Kim on for Tobey. Thank you for taking my questions. First off, on new contracts with NASA, are you seeing growth in the addressable market for SAIC and NASA being kind of challenged by greater competition and what is your outlook or goal on taking market share at NASA in other service lines in addition to cloud and how does it fit into your EBITDA margin growth target of 10 to 30 basis points. Thank you.

Nazzic Keene Chief Operating Officer

I’ll try to capture some of this. In NASA, we are a substantial provider of services, both in the IT space as well as on the mission side. We’re in a strong position there and we have realized some growth across the portfolio certainly with the onset of OMES last year. So, we support on both sides, the mission side and the IT space. We continue to look for opportunities to drive growth. We’re consistent with our strategy and consistent with our position.

Tony Moraco Chief Executive Officer

On a broad basis, I think we’ve got mission capabilities in the broader space market. You have Air Force, NRO, and NASA. So, whether it be in ground services launch, mission operations, command and control. So, it’s really more on the mission side, where I think there’s addressable market areas as NASA budget moves and shifts, exploration is a component of that. We see growth on that mission side.

As a critical provider on the enterprise IT side, like we’ve talked earlier, there’s opportunities with system on their application migrations and on modernization as an incumbent on those contracts. As we talk about it, characterize it more as an expand and we protect that base, expand services we’re already providing, and then that allows us to give some modest growth within that account.

Kwan Kim  SunTrust Robinson Humphrey Analyst

Got it. Thank you very much.

Operator

Our next question will come from Brian Ruttenbur with Drexel Hamilton. Please go ahead.

Brian Ruttenbur  Drexel Hamitlon Analyst

Yes. Thank you very much. Can you talk a little bit about what you anticipate happening at the end of this government fiscal year? I’ve been talking to several companies about this, both private and public that everybody’s now anticipating a CR for a period of time, maybe through the election cycle, and how that could potentially impact you, and what happens in 2020. I know I’m looking way far out there, but it appears the next two quarters are going to be fantastic for bookings but then there’s going to come another round of CRs and question marks around the budget cycle.

Tony Moraco Chief Executive Officer

I think we do expect a CR because that’s how the trend has been. The duration, given the election, there’s higher probability there will be a CR at least through the election. We’ll see how the outcome plays and how that may shift the orientation. I think everyone is optimistic that it will be a single quarter of CR or some variant off of that, unlike last year where it got really extended.

So, I think everyone’s motivated to have a short CR, but it’s likely to carry through the election. The government fiscal year, with government ’19 and coming off of ’18 at the higher budget levels off the recent deal, everyone’s optimistic about capturing that at the end of this fiscal year. So, under CR, they get their money committed this year in ’18, then they’ll be able to navigate through Q1 at that same funding level. So, there will be less impact and we’ve kind of seen that trend. So, we don’t see the CR affecting the profiles. We’ll watch the bookings on the front end. That will translate to revenues that first year or two. Then to address the 2020, the challenge we always have is you’re up against the BCA and there will be a fourth deal to try and mitigate sequestration. So, that’s probably the biggest challenge. I think you’re seeing customers at least anticipate good budget numbers in ’18 and ’19 and reverting back to a lower level in government ’20, I don’t think that’s a sustainable level.

So, they’re trying to get as much mission capability and IT modernization as fast as possible. I think that serves us well. Faster deployments and faster implementations of existing capability, they want to get in front of that, that potential down cycle. It may just flatten out, though I don’t believe it will be catastrophic, but it’s still going to decompress off of what people are planning on this coming fiscal year and next.

Brian Ruttenbur  Drexel Hamitlon Analyst

Thank you very much.

Operator

We will now take a follow-up from Jon Raviv with Citi. Please go ahead.

Jon Raviv Citi — Analyst

Thanks for taking a follow-up. Can you be a little more specific on the platform investment this quarter? Was it on the AAV side, the ACV side, or new stuff?

Tony Moraco Chief Executive Officer

Yeah. So, as Nazzic mentioned before, we’re moving into this pre-production cycle with the platform integrations. We don’t really talk about specific platforms for competitive reasons, but the engineering, we’re in the late stages of that. We’re moving into the pre-production activities where we’re going to start delivering vehicles for LRIP. That’s where we’re making most of the investments at this time.

Jon Raviv Citi — Analyst

When do you anticipate making money on AAV? Is it going to be a function of volume or not really until you get to the full rate contract?

Tony Moraco Chief Executive Officer

Yeah. It will be, again, we said, and most people are familiar with the industry, the early stages are less profitable than the later stages and I think that we went through the EMD phase and completing that, going into LRIP. I think most of the profits will be made in the full rate production phase when we get to there.

Jon Raviv Citi — Analyst

Alright. Thanks so much.

Operator

And there are no further telephone questions at this time. I would like to turn the conference back over to Shane Canestra for any additional or closing remarks.

Shane Canestra Director of Investor Relations 

Thank you very much for your participation in SAIC’s first quarter Fiscal Year 2019 earnings call. This concludes the call and we thank you for your continued interest in SAIC.

Operator

Again, this does conclude today’s conference. Thank you for your participation. You may now disconnect.

Duration: 54 minutes

Call participants:

Shane Canestra Director of Investor Relations 

Tony Moraco Chief Executive Officer

Nazzic Keene Chief Operating Officer

Charles Mathis Executive Vice President and Chief Financial Officer

Lucy Guo Cowen & Company — Analyst

Jon Raviv Citi — Analyst

Joseph DeNardi Stifel Financial Corp. Managing Director

Greg Konrad Jefferies & Company — Analyst

Edward Caso  Wells Fargo Securities Managing Director

Krishna Sinha Vertical Research Partners — Analyst

Kwan Kim  SunTrust Robinson Humphrey Analyst

Brian Ruttenbur  Drexel Hamitlon Analyst

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