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SAIC, Inc. (SAI)

F2Q10 Earnings Call

September 2, 2009 5:00 pm ET

Executives

Stuart Davis - Senior Vice President for Investor Relations

Kenneth C. Dahlberg - Chairman of the Board, Chief Executive Officer

Mark W. Sopp - Chief Financial Officer, Executive Vice President

Analysts

William R. Loomis - Stifel, Nicolaus & Company

Jason A. Kupferberg - UBS

Laura J. Lederman - William Blair

Joseph B. Nadol III - JPMorgan

Cai von Rumohr - Cowen and Company

Tim Quillin – Stephens Inc.

Presentation

Operator

Welcome to the second quarter fiscal year 2010 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Stuart Davis, Senior Vice President for Investor Relations. Please proceed.

Stuart Davis

Thank you, Operator, and welcome everyone. Here on today’s call are Ken Dahlberg, our Chairman and CEO and Mark Sopp, our CFO. During this call, we will make forward-looking statements to assist you in understanding the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially and I refer you to our SEC filings for a discussion of these risks.

In addition, the statements made represent our views as of today. We anticipate that subsequent events and developments will 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.

With that, I will turn the call over to Ken.

Kenneth Dahlberg

Thanks, Stuart and good afternoon, everyone. As you can see from our press release for our second quarter it marked another quarter of steady, solid execution that I firmly believe has become our hallmark. We are navigating well in a relatively tough environment based on our good positioning and aggressive posture in the market. Mark will provide color on the financial details in a few minutes after I describe the market dynamics and our key business drivers.

We are reasonably optimistic about the prospects for passage of the government’s FY10 budget with only minimal periods of a continuing resolution. With other pressing topics such as the healthcare debate there is a lot on the Congress’ agendas when they return next week but the appropriations process seems to be on track and the mark ups are generally consistent with the President’s submission earlier this year.

Earlier this summer Congress passed the FY09 supplemental. Although the bill was somewhat delayed which pushed back some awards the funds are now flowing. That supplement supports our critical work in MRAP as well as intelligence, surveillance and reconnaissance.

Besides the overall level of spending, the two biggest potential market drivers are the evolving trends on organizational conflict of interest (OCI) and government in-sourcing. On the OCI matter, the DOD should issue guidance in response to the Weapons Systems Acquisition Reform Act shortly. Some customer organizations such as the National Reconnaissance Office are moving out aggressively to define their own OCI guidelines. We expect this will leave some companies who have significant businesses with these customers to divest work that creates conflicts with their strategic direction.

Most of our customers and competitors are taking a wait-and-see approach until the final DOD guidance is published. So it is still too early to tell the ultimate impact for the OCI issue. For the areas in doubt, we as a company are setting our businesses and preparing our approach. Depending on how the guidance is written there could be a substantial reshaping of the competitive landscape as most large contractors have a mix of development and advisory work with the intended firewalls and OCI mitigation plans.

In this case, we would expect to both acquire and divest businesses and participate on both the development and advisory side depending on the customer. The road ahead could be bumpy but ultimately we expect clearer OCI language to be a net positive for our company since we are platform independent, services and solution providers.

On the topic of in-sourcing, at the end of July Office of Management and Budget Director Orszag directed agencies to cut their contract spending by some 7% over the next two years. In a series of three memos, OMD directed agencies to accelerate in-sourcing of inherently governmental work to restore a proper balance between federal and contractor employees on government programs that rely heavily on contractors and to share contractor performance reviews with other agencies. Although the in-sourcing trend provides headwinds to the entire contractor base we believe there are some positives in the approach being articulated.

First, OMD is appropriately focused on the front end of the procurement process. Second, OMD calls on agencies to cut spending on cost based contracts by 10% in 2010. Transitioning cost reimbursement contracts to fixed price contracts once the needs and costs become clear should provide the right incentives for both government and contractors and could lead to better profitability if we can manage work efficiently. Third, the insistence on agency properly reporting and checking contractor past performance should reward contracts who perform best. Later this month OMD will issue further guidelines that define what is inherently governmental work, when it is appropriate to outsource work and when it is appropriate to use different kinds of contracts.

We see some evidence of in-sourcing pressures across our federal government business base but there are certainly no clear trends as yet either by customer or by type of work. We will continue to monitor this trend and expect that the September memo may provide some urgency. To date in-sourcing is relatively minor to our overall picture. In fact our voluntary attrition rate is a scant 9.3%. We have lost about 200 people to the government, a few more than in the second quarter of last year, compared to about 1,700 new hires in the quarter.

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