Science Applications International Corp
NASDAQ:SAIC
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Science Applications International Corp
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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.
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 be utilized 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 differ 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, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures.
It is now my pleasure to introduce our CEO, Tony Moraco.
Thank you, Shane, and good afternoon. SAIC begins fiscal year 2019 with continued momentum in the marketplace, resulting from 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 continue to invest in the pursuit and capture of new business opportunities, while also investing in differentiated solutions to enable significant returns in the future.
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 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 cash flow was favorable due to 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 of 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’s 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 expect government fiscal year 2019 to begin honoring that continuing resolution, contract award activity could remain at a relatively brisk tempo as the budget baseline is at a higher amount than previous years.
With an agreement in place for government’s 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. Our discussions with government leadership has centered on their desire to adopt existing technologies in order to reduce development costs and risks, while accelerating the delivery of mission capability to the end user. I am encouraged by this desire to directly play the SAIC 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’ve 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 that we can be opportunistic in creating value through acquisitions.
I’ll now turn the call over to our COO, Nazzic Keene.
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 re-competes 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 month, SAIC has produced a book-to-bill ratio of 1.4, which is a strong leading indicator for low single-digits internal revenue growth in fiscal year '19 and beyond.
First quarter bookings included the re-compete or protect win of $108 million contract to continue to support the US Army Human Resources command and the $98 million contract award from our AMCOM customer for IT support services. Also, in the protect category was $73 million award from the US Navy's 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 $205 million Task Order to provide engineering, program management and technical support services. One of our largest customers, NASA, awarded us $58 million Task Order to manage their cloud-based Web services to include the creation, maintenance and management of Web sites, Web applications and other related services.
That concludes the most notable contributions to our first quarter bookings with the 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 multisource 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 multisource approach to IT delivery. We expect this award to contribute the 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 backlog stood 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.
Concluding my remarks on business development let me give you a brief update on the status of our AMCOM Task Order 33 re-compete. Last quarter, I communicated that we were awarded this re-compete 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 re-awarded 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 of 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 that the investments we are making today, as demonstrated by the recent announcement of our Platform Innovation Center in Charleston, South Carolina, we’ll enable long-term value creation. We are committed to growing this new line of business and align it with the Defense Department's focus on readiness and modernization. Charlie, over to you for our financial results?
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 EPA 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 of 5.6% consistent with the prior year quarter.
Net income for the first quarter was $49 million and diluted earnings per share was $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 predominantly vest in the first quarter and is based on the stock price at that time. We recognized 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 cash flow and free cash flow 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 continued focus on receivable management. Days 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 cash balance $152 million, consistent with our average operating cash balance target $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 repayments. Net debt at the end of the first quarter was approximately $1 billion and our net debt to trailing 12 month EBITDA leverage ratio is less than three times, reflecting our strong balance sheet.
Before moving on, I would like to provide you the status of 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. An alignment with our previously communicated expectations, we intend to have a 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 basis points 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 basis points 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 cash flow target increased from $240 million to $260 million, attributable the tax reform passed in December. We expect to increase capital expenditures, an incremental $10 million to $30 million this year, as we invest in an IT infrastructure. We continue to expect free cash flow 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.
Thank you [Operator Instructions]. And we will take our first question from Cai von Rumohr with Cowen and Company. Please go ahead.
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 re-compete. Is there still a revenue ramp down of more than a $100 million on this contact?
Lucy, I think, there is -- within Task Order 33, it’s the entirety of the re-compete so there’s continuity for that Task Order. So the set of Task Orders last year has broken up into three pieces, we have won two of those three and one successful 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 re-compete, it just does resolve current re-compete risks, and we're pleased to have finally get that re-award this quarter after the protest last quarter.
You are anticipating the tires re-compete to be in Q2, or has that been postponed?
That is being pushed out a bit. Hi Lucy, this is Nazzic. So, on the tires program we are in the process of getting an extension to the existing work that will carry us throughout this year. And the award, we expect to disclose the award decision as we get closer to the end of this calendar year.
And then maybe finally just 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?
Yes, so 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 command is still taking place. And so although we certainly have a general understanding of the priorities, as Tony mentioned around readiness, modernization, IT infrastructure, things of that nature, we haven’t seen as of yet an increased pace of our peer awards. But we do expect over the course of the next few months, as they get towards -- the government gets toward the end of fiscal year, to see some acceleration there. But at this particular juncture, we haven’t seen that come in the form of increased RFPs or increased awards.
So 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 sturdy 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?
This is Charlie. Let me just get back on the EBITDA margin. So the EBITDA margins of 6.5%, there’re two main drivers to the margins. First, the margins were impacted by approximately $5 million of investments in our platform integration program. This had about 40 basis points impact on EBITDA margin for the quarter. And then the higher volume, the supply chain orders, lowered the overall margins by about 10 basis points. And despite this lower quarter, we remained confident, as I said on script there, that 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.
Our next question will come from Jon Raviv with Citi. Please go ahead.
Tony, can you opine a little bit more on your perspective on what’s driving a lot of the consolidation, you termed in an increased pace of M&A in the industry. And then also related question, your M&A has been tight. I mean you outlined the filters that you’re going for. But do you feel like you need something in order to improve your chances at the upcoming enterprise IT modernization demand that you saw accelerating, because some of your competitors say that’s what you need is more scale in order to compete there.
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 around this 12 to 18 month sales cycle. So 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 needed us a bit more of a driver as we see higher demand. There’s still some consolidation in some of the technical areas and the cloud and cyber components.
In particular there's always mission areas that, on a niche play, also come into that. So I think the pace is through a combination of optimism and positioning as well as our appetite in the context of enterprise IT modernization. There is some merit to have broad portfolio, the enterprise IT modernization whether you’re leveraging managed services across a bigger base as a service type contracts, sometimes that products scale can be a complement. We are seeing large entrants, AWS, Microsoft and 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 and scale for [indiscernible] modernization.
Probably less so as we move up the value chain and modernization on applications and application migrations within the cloud, data analytics, probably less so on scale play. So we’re looking to balance probably more emphasis on the latter with mission capabilities and application development, and analytics that play into the mission side and try to stay out of the more commoditized, this broad enterprise IT, where I think scale is a bit more relevant.
And then something there like, Vanguard. Where would you put Vanguard in that spectrum? I know there's a potential re-compete coming up down the line.
Well, Vanguard does give us a large scale program. The benefit of delivering end to end services allows you to move across from architecture and redesign, recapitalization, understanding the general operations where there’s some efficiencies that the customers and the suppliers can benefit from. And then application development where you see -- these interfaces or modernization is still applicable. So those are programs offer end-to-end services, which are very attractive. And so I think the combination of seeking out a multiple, such as our contract base, not only the state department but at AMCOM and the NASA is those broad account bases that are attractive, and not so much on the sheer volume but the end-to-end services allow us to navigate the customer demand over a multiyear period of time.
And then in terms of addressing these sorts of things, I mean, how much -- how do you approach your make/buy decisions. I mean there seems to be a way where you can partner with people more effectively in order to address up the government ones, bring in more outside technology, and there's also that of course are buying. So how do you approach that?
I think, overall, we're probably biased on a partner play. So I guess in some sense, I characterize buy in that case not so much acquisition, but actually partnering with the vendors that plays right into our technology integration strategy. So we bundle the supplier capabilities as an integrator. We make the solution set on a bundled basis that we can then sell on differentiated basis. And that's the primary strategic intent to back to marketplace and differentiate.
The buy side on a strictly acquisition scenario, I think is a time to market. We’re seeing elements around the intelligence community, 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. So I think the bright side is limited when you’re trying to get the market faster. You might have missed the contract vehicle, cycle and so yes -- well, that solidify acquisition wise.
Otherwise, it's strictly integration where you’re bundling solutions, relying on supplier base as we've developed strategic partnerships, and we've been creating advantage to deliver mission capabilities that are mature. As a tech transfer play, as our customer speak lower risk, lower cost and a faster delivery mechanism to avoid long development cycles. So we think this is a perfect market position for us to be in and the customer demand signals on that type of integration and that transfer is very much in line and what we’ll continue to do.
And we’ll take our next question from Joe DeNardi with Stifel. Please go ahead.
Two questions for Charlie, I think. Correct me if I am 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 the budget, which seems to be growing at a little bit of a faster rate than that? Are there some risks or some offsets that we should be considering?
I think the low single-digit revenue growth is again what we stated is the long-term financial target. And we continue to watch the developments and the budget that Nazzic pointed out, and we will update that when we see that coming.
I think as we look, as Nazzic said, we're still looking at almost we’re at midyear now and to try and get the contract awards through and launch the book-to-bill, we’ll see maybe some uplift in that growth this year. We think we can have some upside to outperform last year's 2.5% growth, so we’re above that level of low single-digit. I think there’s still time to tell as we finish out Q3 and Q4, Q3 in particular, to be able to update that as a low single and mid single digit. But that's just premature to address that profile for government ’19 and our fiscal point.
And then, Charlie, just on your expectations for 10 to 30 basis points of margin expansion. Is that still a reasonable goal even as the platform side of the business starts to ramp-up?
Yes, I mean, that's currently our expectation. And we feel pretty comfortable with the actual 20 to 40 basis points in this fiscal year, that's over the 7%, and that's despite the lower quarter. And that's driven really by this contract mix, so lot of the programs that Nazzic talked about and 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 will be higher than the first half as pretty consistent with the prior year. So if you get back and look and see how that occurred, it’s somewhat similar and what we project this year.
Our next question will come from Greg Conrad with Jefferies. Please go ahead.
Just wanted to follow-up on the consolidation question. I mean, when we just look at the market today -- I mean, in the markets that you compete. And have you seen maybe new competitors come to the market, or any changes in terms of the competition?
Probably the biggest change is in the IT component and modernization where the last couple of years we’ve seen the cloud migration and infrastructure play with AWS or Microsoft. Commercial entrants was -- I wouldn’t quite put in a non-traditional, but with the growing budgets, I think those types of firms see an opportunity, there truly is demand. It may not be poor on the commercial side, but it surely is attractive. So we’re seeing in 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 IT infrastructure play. Again, it’s quite less so with mission application level. It’s less so on the system engineering side. I think we still see similar resource system or companies, even though there’s consolidation movement among the small and some of the mid tier. We feel pretty consistent relative to the competitive landscape on the mission side.
And then just clarification, you mentioned the headwind from platform integration costs in Q1. Does that come down as we go throughout the year, and that’s why margins improve, or is that something also drives that improvement?
So the investment in the Q1 was an discrete even for Q1 and we don’t see that recurring again. The margins increased if you separate that out are really driven by the portfolio mix, the contract mix that we have with less supply chain orders and volume and again more fixed priced 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.
Next question will come from Edward Caso with Wells Fargo. Please go ahead.
Can you talk a little bit about your exposure to federal agencies that the president does not like?
Well, that can be specific on which ones those are, I don’t want to presuppose…
Well, I think anything that doesn’t have to do with national defense, right?
If we can come in a bit, we don’t see major shifts yet as we’re still having with the portfolio. I will say that maybe there’s a slight tendency on the fed flip side to be a little slower and little more conservative, maybe is in reaction to that -- also that skepticism of is it going to hold as we get into FY -- government FY’19. But we haven’t seen any dramatic changes based on administration, rhetoric, or actions at this point. But we’ll track it, the demand is still there. I think they’d rationalize the budgets they do have but there may be some that are holding back. And I believe that’s part of the explanation of they’ve the money, about a month, still a short period of time given the process we go through. So it’s little early to say who’s going to be a real player, but I think our exposure is limited and that we’ve got a very diverse portfolio and the solutions we have in those agencies and again beyond the missions side you know some modernizations still on end-to-end services.
The only thing I would add to that is I totally agree with what Tony said. We are seeing to your point and some of those maybe a little more cautious and a little more -- trying to really get more certainty around what that looks like. So there’s certainly some of that that we haven't seen it manifests itself in any decisions on awards or funding at this juncture.
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?
That's a year-over-year change.
And then does that -- if you're still thinking you're going to hit 20 to 40 basis points. Was that a pull forward of what you thought you would get throughout the year, or could you get more…
So that was how we had again planned and anticipated that the supply chain would be in this quarter. And again, the line of sight that we have to the backend is less of the supply chain business and again that's why, as I say the contract mix is changing in the back half and that's where we see the margins increasing.
And I'd like to add that where we sit today, comment on trying to be position in this marketplace, we think the 20 or 40 gets 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. So that's the target. But I also want to make sure that we're making the appropriate investments organically and putting some of that money back into -- really put the bids in place, build off a differentiated solution so that we can actually take advantage of this cycle. So I think it's a balanced approach where we're making up margins from last year, yet also being able to invest appropriately for this cycle going into next year.
I was hoping to get a update on the AAV program. Where are you in this? I think it was $1 billion plus 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 -- you're building space in anticipation of maybe the ACV award?
This is Nazzic, let me try to capture a couple of those. So on AAV, we are in the LRIP phase, a limited rate production phase, and with delivery of the first few of those vehicles in the next quarter or so as we close out or as we look to our Q2. And so we're in the early stage of production of the LRIP phase and that phase will go for about 18 months or so, 18 months to two years. And then we'll go into four rate production, so that's -- just give you a sense of where we are from a production standpoint. So we're still in the early stages of production and some of the investments that we've made are to support that space.
So as you mentioned, the facility, production infrastructure and 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 platform integration portfolio as you look to building our pipeline and also supporting other opportunities across, not just the Marine Corps but the Navy and the Army as well.
When might they make a decision on the next the full rate production? My memory is you have about 50 vehicles that you have a contract for now, but potential for 100 more?
Yes, that's right. But so have -- we've got 50 that are in the LRIP, so it’s a limited rate production. And the decision time frame, 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.
We’ll now take our next question from Krishna Sinha with Vertical Research Partners. Please go ahead.
Couple of questions for you here. I think Nazzic mentioned in here remarks that you guys were maybe expecting some higher margins from modernization works 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-20 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? And then to what extent are you seeing direct competition from commercial entities in that market? For example, I think we saw Amazon have a pretty big -- standup a pretty big commercial -- government entity within their cloud department. So are you seeing direct competition from these guys? And then again what are the margins that you’re seeing on that next gen type of technology work?
So on the end margin side, what we do see is in the types of opportunities where we can couple the -- what I'll call, the commercial like IT modernization with mission knowledge, with the knowledge that we can bring specific to the customers mission, we do see the opportunity to see higher profits than we currently run to that. 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 model, 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 to lever -- to really deliver outcomes and then have less control the way that we staff programs and we try to structure opportunities. And so those are really the levers that we see, the combination of the mission coupled with the IT modernization, as well as the opportunities to drive, as Charlie mentioned, to a different type of contract overtime forward with the opportunity to see improved margins.
And are you seeing commercial competition in those?
We are in some cases. So it's -- I think, there is still a good balance and probably more interest in partnering than going direct. But certainly, there are some opportunities. It's a particular -- the particular RFP just calls for, what I would call more infrastructure types where the mission and some of the advantages that company like SAIC can bring to bear. But for the most part, we’ve seen more partnering in that domain.
Just probably more of entry access point on a civilian side that the commercial folks can still gain access without the clearance burden with an intelligence community or defense side. S it’d probably be a little happier on federal civilian agencies than we might 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 and have a sustained basis.
And you mentioned contract types like driving towards more fixed price. I mean, my inference there is, isn’t cloud or cyber or some of these contract -- like there’re not really a very mature area compared to the legacy IT work. So is it a bit risky 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?
I think it can absolutely vary. So to the extent that we can have working with the customer have some influence to help guide towards the outcome base, that’s certainly a lot of us good folks with customer and us more flexibility in the type of contract. Certainly to your point, if you can’t really define the outcome and that is more collaborative learning environment or exploration environment then the fixed price absolutely has a little more risk too.
Well, there’s repeatability in the processes as well. I believe our cloud migration and it’s probably been turning quickly or has matured to the point where the repeatability of that drives a more, I’d say, fixed priced or advantaged component of that to get to that outcome faster. I think the customers are still mixed result on the ability to release fixed price proposals that challenge on the acquisition side.
So it’s a combination of the maturity of the technology, the people, processes and then acquisition maturities so to align on what needs to get done. So the larger programs and then we sometimes see a mix or you can do traditional service level agreement on a fixed price basis, and some of the modernization might be done on cost reimbursement at time materials basis. So it’s a mix as the customers and the technologies mature.
And then one more question on your recomplete picture for the year. Can you just talk about any major programs? I know we 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.
Yes, so tires is a good example. So that was one that is a sizeable re-compete for us. And as I mentioned earlier that the award decisions has been pushed out towards the end of this calendar year and so we did -- we are in the position of executing against the bridge to get us actually and grow next year. So that’s a good example. We are seeing certainly some bridges but that’s a normal course of business. I am not certain that we’re seeing more than normal, but there’re cases in which the government exercises that option. And certainly for us that’s where the income is, and that puts us in a good position.
[Operator Instructions] We’ll take our next question from Tobey Sommer with SunTrust. Please go ahead.
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 at NASA being 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 this fit into your EBITDA margin growth target for 10 to 30 basis points? Thank you.
So I’ll try to capture some of this. So in NASA, we are a substantial provider of services, both in the IT space as well as in the mission side. And so we’re in 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, and we continue to look for opportunities to drive growth. We’re consistent with our strategy and consistent with our position.
And on a broad basis, I think we’ve got mission capabilities in the broader space market; the Air Force, AMRO and NASA; so whether be in ground services launch, mission operations, command and control. And it’s really more on the mission side where I think there’s addressable market areas as NASA budget moves and shifts an exploration, is a component of that. So we see growth on that mission side.
And then as a critical provider on the enterprise IT side, like we’ve talked earlier there’s opportunities of system on our application migrations and our modernization as an incumbent on those contracts. So as we talk about it, I think I’d characterize as bit more as expand or protect that base, expand services we’re already providing and then that allows us to give us some modest growth leaving that account.
Our next question will come from Brian Ruttenbur with Drexel Hamilton. Please go ahead.
Can you talk a little bit about what you anticipate happening the end of this fiscal -- government fiscal year. I’ve been talking to several companies about this, both private and public, that everybody that 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 am 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 potential question marks around the budget cycle.
Well, I think we do expect a CR and that’s how the trend has been. The duration and then given the election there’s higher probability there’ll be a CR at least through that election. We’ll see how the outcome plays and how that may shift, and everyone is optimistic that’ll be a single quarter of CR or some varying off of that. Unlike last year, we’ve got really extended. So everyone is motivated to have a short CR, but likely to carry through the election.
With government fiscal year with government ’19 and coming off of ’18 at the higher budget levels of the recent deal, everyone is optimistic about capturing that near the end of this fiscal year. So under a CR, if 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 would be less impact and we've seen that trend. So we don’t see the CR affecting the profiles. We’ll watch the booking on a front end and that will translate to revenues that first year or two.
Then to address the 2020, the challenge is always that is that you’re up against the [BCA] again, and you need the force deal to try and mitigate sequestration. So that's probably the biggest challenge. And I think you’re seeing customers at least anticipate good budget numbers than ’18 and '19, and reverting back to lower level in government '20 is I don’t want to think that’s a sustainable level. So they’re trying to get as much mission capability and that key monetization and staff as possible.
And then that's again serves us well on faster deployment and faster implementation of existing capabilities. So they want to get in front of that potential down cycle. It may just flatten out, I don’t believe it’ll be catastrophic, but it's still going to be compressed off of what people are planning on this government fiscal year and next.
And we’ll now take a follow-up from Jon Raviv with Citi. Please go ahead.
Can you be a little more specific on the platform investments this quarter? Was it on the AAV side, the ACB side or new stuff?
So as Nazzic mentioned before, we are moving into this preproduction cycle with the platform integrations. And 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 preproduction activities where we’re start delivering vehicles for LRIP. And that's where were making a most of the investments at this time.
And when do you anticipate making money on AAV, is it going to just function of volume or getting -- or not really until you get to the contract?
Yes, it will be -- and 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. And I think most of the profits will be made in the full rate production as we get there.
And there are no further telephone questions at this time. I'd like to turn the conference back over to Shane Canestra for any additional or closing remarks.
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.
Again, this does conclude today’s conference. Thank you for your participation. You may now disconnect.