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SAIC, Inc. (SAI)

F1Q11 (04/30/10) Earnings Call

June 4, 2010 5:00 pm ET

Executives

Laura Luke – VP, Media Relations

Walt Havenstein – CEO

Mark Sopp – EVP and CFO

Analysts

Bill Loomis – Stifel Nicolaus

Edward Caso – Wells Fargo

Jason Kupferberg – UBS

Joseph Vafi – Jefferies & Company

Joe Nadol – JPMorgan

Tim Quillin – Stephens Inc.

Jeremy Devaney – BB&T Capital Markets

Erik Olbeter – Pacific Crest Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter fiscal year 2011 earnings conference call. My name is Shamika and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of today’s conference. (Operator instructions) I would now like to turn the presentation over to your host for today’s call Ms. Laura Luke, Vice President of Media Relations. Please proceed.

Laura Luke

Thank you, Shamika, 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 disclosure 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.

Walt Havenstein

Thank you, Laura. And good afternoon everyone. The highlight of our first quarter was our strong business development results as we posted a significant improvement in bookings and book to bill from recent quarters. This resulted from continued focus on higher growth markets, increased submissions of bids over the past year, and increased pace of competitive procurement decisions being made by our government customers.

For the call today, I will cover the market conditions and outlook and provide highlights of recent business activity, then Mark will provide a recap of our overall performance for the first quarter.

Government service market update. Our assessment of the federal market has not changed since our last earnings report. In fact, our assessment of the market’s direction was subsequently confirmed by Defense Secretary Robert Gates in a speech he delivered last month and by a number of our competitors in their most recent earnings calls.

To recap our assessment, while federal spending is budgeted to increase modestly this year over the prior year, we expect most of that increase will be directed to cover DoD’s must-pay bills. Accordingly, we expect only nominal growth this year on our markets. In addition, we believe that downward pressures from both the administration and congress on federal discretionary spending, including defense, will persist of the long term. In addition to monitoring the direction of the federal budget, we continue to closely examine new developments impacting the government contracting environment.

Since our last earnings call craft OCI regulations have been released. The OCI provision, as written, will require added diligence by – both by contractors and the government’s acquisition community to ensure every potential OCI situation is understood and resolved. For much of our business, we expect the OCI issues can be navigated. However, there may be customer implementations of the final provision that may require more significant actions.

A draft policy letter on what is inherently governmental also was released recently. The language of the proposed policy is consistent with our expectations and is not expected to have a material impact on our business. Its ultimate effect will depend on the policy guidance and its interpretation by federal agencies.

With respect to the implementation of our strategy, success within this market environment requires a sound strategy to market by greater investment in and focus on a selected few high growth areas where the Company can apply its distinctive competitive discriminators. Unlike our smaller competitors, most IT service companies, we offer significant thought leadership and leading-edge technology along with our ability to deliver large-scale integrated solutions that include physical infrastructure.

Unlike our larger competitors, a handful of defense platform providers, we offer deep customer affinity and combined with the agility of our entrepreneurial culture and organization. SAIC has segment market discriminators and with each new day, we are adding focus to how we integrate and apply them within our high growth markets.

In addition to flawless execution in all aspects of our business, our strategy is actively pursuing expansion of strategic development activities in the five market areas where we have the potential for up to 15% annual growth

C4ISR, cybersecurity, health, energy, and logistics; deployment of new business resource to higher growth areas, especially cybersecurity products and solution offerings; acceleration of growth in higher growth areas through integration of our recent acquisitions; and aggressive cross-selling and continued development of new integrated offerings.

Our goal for this strategy is to produce business development performance that outpaces our competition. Accompanies by improved operating margins, continued sound working capital management, and strong growth in free cash flow on a per-share basis.

I would like to spend a few minutes illustrating our strategy at work in the area of cybersecurity. We are particularly focused on cybersecurity as a high priority, enterprise-wide growth opportunity for SAIC. Our cybersecurity business grew substantially in FY10. It also accounted for substantial new contract awards and proposal submissions in this year’s first quarter. We are actively marketing our cybersecurity offerings from DoD and the intelligence community to the broader national security market, which includes the Department of Homeland Security and the Department of State. We are also actively cross-selling our cybersecurity capabilities in other key markets such as federal IT, health, energy, and C4.

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