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SAIC, Inc. (SAI)

F4Q10 Earnings Call

March 30, 2010 5:00 pm ET

Executives

Laura Luke – Vice President Media Relations

Walter P. Havenstein – Chief Executive Officer & Director

Mark W. Sopp – Chief Financial Officer & Executive Vice President

Analysts

William R. Loomis – Stifel Nicolaus & Company, Inc.

Joseph A. Vafi – Jefferies & Company, Inc.

Edward Caso – Wells Fargo

Joseph B. Nadol, III – JPMorgan

Cai von Rumohr – Cowen & Company, LLC

Eric Olbeter – Pacific Crest Securities

Michael Lewis – BB&T Capital

Jason A. Kupferberg – UBS Securities, LLC.

Jeff Houston – William Blair & Company

Presentation

Operator

Welcome to the fourth 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 Ms. Laura Luke, Vice President Media Relations. Please proceed.

Laura Luke

Thank you and welcome everyone. Here on today’s call are Walt Havenstein, our CEO; Mark Sopp, our CFO; and other members of our team.

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 may 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 Walt.

Walter Havenstein

Thank you, Laura. Good afternoon everyone. You can see from our press release that we turned in solid performance in fiscal 2010. For the call today I will cover the market conditions and provide highlights of recent business activity and then Mark will provide the financial details. I will finish up with a longer view of our business strategy which will include our assessment of the market outlook and how we expect to execute within that market.

First, an update on our market conditions. As you know SAIC derives a large majority of its revenues from federal customers so obviously federal spending is SAIC’s most important market driver. Our assessment of federal budget information typically focuses on discretionary spending for Defense and federal information technology. Different from a quarter ago we now have the President’s proposed government fiscal 2011 budget. Our assessment suggests that while federal spending is budgeted to increase several percentage points over the prior year we expect most of that modest increase will be directed to cover DoD’s must pay bills. Accordingly we expect only nominal growth in our market for this year.

In addition, we believe the downward pressures from both the Administration and Congress on federal discretionary spending including Defense will persist for the long-term. Another important factor for SAIC is the overall government contracting environment. In our last earning’s call I characterized this environment as increased oversight with an anti-contractor undercurrent. This characterization remains valid.

New organizational conflict of interest and personal conflict of interest rules are expected to be issued soon. As we see things today we believe we can successfully navigate in this more complex contract environment. After the rules are defined and as our customers begin applying them we can adjust as necessary.

A new definition of what constitutes inherently governmental functions is also being developed and is expected shortly. This will guide how the government accomplishing in-sourcing which encompasses its effort to reduce overall contractors support and expanding the federal acquisition workforce. The implementation of these initiatives has introduced uncertainty in the contracting process. In our view this uncertainty has delayed the contract award cycle at both the front end, the initiation of new opportunities or requests for proposals, and the back end, contract award decisions.

The intelligence market is a good example of how these market factors are impacting our business. In FY10 fourth quarter alone decision delays and protests in this market delayed nearly $1 billion of planned bookings we had expected to win in the quarter. Many of the same market factors are also impacting the broader DoD and federal segments. It is difficult to assess when the log jam will break, whether sooner or later, as there are indicators both ways.

With that market backdrop let me comment on our fiscal year 2010 performance. On balance we had a good year, meeting our main financial objectives. I am impressed with the company’s ability to deliver on tough, transformational initiatives while continuing to perform for our customers. In FY10 our contract performance was strong with high customer satisfaction and customer retention. Our project alignment initiative continued to deliver planned cost savings while improving service quality.

We successfully completed the transition of our government service business to our new financial system platform Deltek without disrupting contract execution and working capital flows. The new system is an important enabler for greater control, flexibility and efficiency. On the other hand, bookings fell short of expectations due to the market factors I just mentioned.

With respect to acquisitions, during the fourth quarter of last year and so far in the first quarter of this year we have closed the purchase of two companies, Cloud Shield Technologies and Science and Engineering Technology Associates. We also purchased two product lines and a key intelligence contract. Cloud Shield’s patented cyber security technology enables customers to inspect, analyze and control traffic on the network in real time in order to provide secure and information assurance. SAIC will use this [deep pack] inspection technology and our combined cyber security capabilities to provide sophisticated IT network services and security solutions to government and commercial service providers.

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