Science Applications International - Q2 2025

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the SAIC Second Quarter Fiscal Year 2025 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Joseph DeNardi, Senior Vice President of Investor Relations, Treasurer. Please go ahead.

Joseph DeNardi (SVP of Investor Relations and Treasurer)

Good morning, and thank you for joining SAIC's Second Quarter Fiscal Year 2025 Earnings Call. My name is Joe DeNardi, Senior Vice President of Investor Relations and Treasurer, and joining me today to discuss our business and financial results are Toni Townes-Whitley, our Chief Executive Officer, and Prabhu Natarajan, our Chief Financial Officer. Today, we will discuss our results for the second quarter of fiscal year 2025 that ended August 2nd, 2024. Earlier this morning, we issued our earnings release, which can be found at investors.saic.com, where you will also find supplemental financial presentation slides to be utilized in conjunction with today's call and a copy of management's prepared remarks. These documents, in addition to our Form 10-Q to be filed later today, 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. 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.

The non-GAAP measures should be considered in addition to, and not a substitute for, financial measures in accordance with GAAP. It is now my pleasure to introduce our CEO, Toni Townes-Whitley.

Toni Townes-Whitley (CEO)

Thank you, Joe, and good morning to everyone on our call, which we're doing today from our offices in Huntsville. SAIC has deep roots in the Rocket City, with over five decades of support and community involvement. We are proud to be the third-largest employer, with more than 2,600 employees calling Alabama home. We recently held our board meeting here and will be taking our board members and other leaders to visit the Chamber of Commerce and an amazing high school that we support, the Alabama School of Cyber Technology and Engineering. It is vitally important for us to develop and foster STEM education in our youth to ensure our future workforce can fill critical skills needs now and into the future. We'll also visit key customer sites, where we support some of the country's most mission-critical operations in the space and missile defense sectors.

In our support of the U.S. Army and Missile Defense Agency, we strive to ensure we provide leading-edge capabilities and technology to help them solve their hardest problems and field mission-critical systems to our warfighters and military leaders. Our work includes modeling and simulation, live virtual constructive training, and digital engineering, and I'm extremely proud of this workforce and am committed to our ongoing upskilling initiatives, which will see us grow in expertise and skill to match and exceed our customers' requirements. My remarks today will focus on a quick review of our second quarter performance, followed by an update on the execution of our enterprise growth strategy. Prabhu will then discuss our updated outlook and capital deployment plans in greater detail. Overall, I'm pleased with our solid financial performance on all key metrics and the strategic progress we've made in the quarter.

We reported second-quarter organic revenue growth of 2% year over year, as increases from new business wins and on-contract growth were partially offset by an approximately five-point headwind from contract transitions. Adjusted EBITDA of $170 million and margin of 9.4% reflects solid program performance. Due to revised bid thresholds we've put in place and a focus on improved shop selection, we continue to expect an improved margin trajectory over the next several years. Adjusted diluted earnings per share of $2.05 benefited from an effective tax rate of approximately 19.5% and a 5% year-over-year reduction in our weighted average share count. Second quarter free cash flow of $241 million was very strong due to a continued focus on working capital efficiency and good blocking and tackling from the team.

This brings first-half free cash flow to $262 million, representing over 50% of our full-year guidance. While we still have some revenue challenge in front of us in the second half of the year, as Prabhu will describe later, I'm encouraged by the performance shown in the second quarter and the focus I see inside our company to meet our guidance for FY 2025 and sustain momentum into FY 2026. I'll now provide an update on our enterprise growth strategy execution. We flattened our organization, centralized business development, and implemented our enterprise operating model, designed to optimize investment planning and align our pipeline with growth vectors. We continue to tune across all four pivots: portfolio, go-to-market, culture, and brand. The earliest indicators of progress against our strategy will be improved business development performance, which we believe will unlock significant long-term value for shareholders.

The outcome is a more differentiated, more efficient, faster-growing, and higher-margin SAIC. Simply put, we expect that our execution of the strategy will initially translate into bid more, bid better, win more. The first step, bid more, is significantly increasing the total value of submissions to a level more aligned with our growth aspirations. We continue to see good progress, as evidenced by the $14.5 billion of submission volume in the first half of the year, compared to $17 billion for full year fiscal year 2024, and we have improved visibility into exceeding our submissions target of $22 billion for the full year. The second step, bid better, is aligning our pipeline and bid processes with key strategic and financial objectives.

Strategically, we will drive outsized growth in the civilian market and within enterprise and mission IT, two of the four growth vectors where we see the opportunity to leverage our strength in the market to gain share. These growth vectors align with our financial objectives to shift our pipeline towards higher-value programs that are more margin accretive. The third step, win more, is driving bookings and backlog growth and eventually revenue growth more aligned with our long-term target. We will accomplish this by increasing our volume and quality of bid submissions, returning our recompete win rate to the 90% range, and sustaining our strong new business performance.

In terms of how long it will take before we start to see results, our expectation is for bookings to continue to improve with a particular inflection over the next two to three quarters, with the associated revenue impact following one to two quarters later. This should translate into a book-to-bill of 1.2 by the first half of fiscal year 2026, with organic revenue growth aligning with our longer-term target of 5% towards the end of fiscal year 2026. I want to thank the team at SAIC for the enthusiasm and focus they bring to the company and the execution of our strategy. Thanks to their efforts, we are well on our way towards building a stronger SAIC for the future. I look forward to sharing further updates on our progress going forward. I'll now turn the call over to Prabhu.

Prabu Natarajan (EVP and CFO)

Thank you, Toni, and good morning to those joining our call. I will now provide a review of our business development results, updated outlook for the fiscal year, and our capital deployment plans. Net bookings of $1.2 billion resulted in a book-to-bill in the quarter of 0.6x and 1.1x on a trailing 12-month basis. We submitted approximately $6.5 billion of total contract value in the quarter, bringing the year-to-date submitted bids value to approximately $14.5 billion. We are encouraged by the momentum and increased velocity we are seeing within our business development organization, and remain on track to exceed our target for $22 billion of submissions this year, with further growth in FY 2026 and FY 2027 beyond our initial estimates.

The processes and metrics we have put in place give me confidence that we will be able to improve our business development and capture outcomes over the next few years. We returned approximately $220 million to shareholders in the quarter, including $201 million of share repurchases, reflecting a planned increase in our pace and opportunistic repurchases on top of that. We remain on track to exceed the high end of our prior target of $350 million-$400 million in repurchases for the year. We intend to achieve this while maintaining sufficient capacity for M&A. I'll now provide an update on our outlook for the year. We are reaffirming our prior guidance for revenue, Adjusted EBITDA, and Free Cash Flow.

We are increasing our guidance for adjusted diluted earnings per share by $0.10 to a range of $8.10-$8.30 due to a lower tax rate and share count, offsetting modestly higher interest expense. Our revenue guidance, which reflects pro forma organic growth in a range of 1.5%-3.5%, continues to assume an approximately 5% headwind from recompete pressures. At the midpoint, this implies an improvement in our second half growth compared to first half results. We expect the improvement to be driven primarily by the further ramp-up in volume on previously won new business and continued momentum from on-contract growth.

Consistent with what we communicated last quarter and based on our expectation for 3Q and 4Q revenue growth as provided on slide seven, we see the midpoint to the lower end of our revenue guidance as more likely than the higher end. We are reaffirming our prior guidance for Adjusted EBITDA in a range of $680 million-$700 million, and margin in a range of 9.2%-9.4%. We are reaffirming our free cash flow guidance of $490 million-$510 million and expect to sustain the momentum we built during a very strong second quarter. Our capital deployment strategy remains focused on maximizing long-term shareholder value. We have confidence that the strategy we are executing will produce free cash flow growth in excess of what is implied by current market valuations.

Given this view and the opportunity we see to drive significant improvement from our existing business, we expect our threshold for M&A to remain high and capital deployment to remain targeted on our repurchase program. However, we retain sufficient balance sheet flexibility to add differentiated businesses to our company should an opportunity meet our risk-adjusted threshold for returns. In closing, I am proud of the team's focus on delivering value for our shareholders and on executing our strategy to drive sustainable growth going forward. The progress we are making is clear and will begin converting into stronger financial performance in the coming years. I'll now turn the call over to begin Q&A.

Operator (participant)

Thank you. At this time, we'll conduct the question-and-answer session. As a reminder, to ask a question, you'll need to press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matt Akers of Wells Fargo. Your line is now open.

Matt Akers (Aerospace & Defense Research Analyst)

Yeah. Hey, good morning, everybody. Thanks for taking my question. I wanted to ask about, you know, the comment about book-to-bill getting to 1.2 by the 2026. You know, what gives you confidence to get there? And specifically, just curious if there are any new big kind of new work opportunities that we should watch out for.

Toni Townes-Whitley (CEO)

Hey, Matt, it's Toni. Thank you for the question. Thank you for joining us on the call. Yeah, there are a couple of indicators that get us, more comfortable around that kind of book-to-bill expectation. One is just the, submission, rate, as you've seen. We are at 14.5 now, against last year, with $17 billion full year. We fully expect to surpass our $22 billion expectation, on our submissions this year and feel strong about that. Secondly, we're also submitting, we have a larger qualified pipeline, and we see the size of that qualified pipeline increasing quarter over quarter. We're sitting with about $10 billion of, submitted bids at this point, pending award. And so- and two thirds of those being new business, the third being recompetes.

And so when you look at the shape of our pipe, what we've submitted, the velocity, we feel strongly that we've got all of the indicators that drive to a north of one point oh, into the one point two range of book-to-bill in the next 12 months.

Matt Akers (Aerospace & Defense Research Analyst)

Got it. Thanks. And I think you also called out in the opening remarks, I think civilian, maybe a little bit of a focus area. Yeah, I guess one of the questions I get from people is, you know, depending on who wins in November, maybe the budget shifts, you know, one way versus the other, defense versus non-defense. Is that a consideration? And, just how you think of, civilian versus defense.

Toni Townes-Whitley (CEO)

Yeah. No, thank you for that. Look, we get that question a lot. If you look at our portfolio, we have called out civilian as one of our four growth vectors. We find that to be not only a large addressable market for us, but also one that's fairly accretive to our portfolio. But if you look at where we're positioned in the civilian agencies, agencies like Department of Transportation, Department of Homeland Security, State Department, DEA, and others, we feel like we are inoculated from any major swing post-November from a partisan perspective. We are in agencies that have bipartisan support and have had that for many, many years, and we're positioned in those agencies, both across enterprise IT and sort of mission-critical IT, which tends to be generally funded going forward. So we feel pretty strong there.

In terms of the defense and national security, look, we believe that there'll be political support for defense spending, given, the global, environment and geopolitical, challenges that the country faces. We also happen to be, I would argue, across areas of national defense that are integrating more technology, more, more innovation, and that's where we're positioned. So we feel like in both regards, our portfolio is balanced and stable enough to be able to, continue to move forward and grow, independent of the partisan outcome. Look, defense spending, we think, is gonna be flat. I mean, I think everyone's made that call, and so it becomes a share gain. But again, we feel like we're positioned with the right differentiators in our portfolio. Prabhu, any thoughts you might have on that as well?

Prabu Natarajan (EVP and CFO)

The only thing I would add, Matt, to that, would be that, you know, we are looking to add market share in the civilian space. I would say we are somewhat underrepresented as a percent of market share in that area, and therefore, as we look at our pipeline, it continues to inflect towards higher levels of new business, even in the civilian space. So that's why we're cautiously optimistic that there's a real opportunity to gain market share.

Matt Akers (Aerospace & Defense Research Analyst)

Very good. Thank you.

Prabu Natarajan (EVP and CFO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes to the line of Jason Gursky of Citi. Your line is now open.

Jason Gursky (Equity Research Analyst)

Yeah. Good morning, everybody. Thanks for taking the question.

Prabu Natarajan (EVP and CFO)

Good morning.

Jason Gursky (Equity Research Analyst)

Hey, just a quick question on the bidding activity that's going on. Wondering if you can just give a sense of what the contract types that you're chasing look like and, you know, kind of what the risk around execution is on all the bids that you're chasing at this point, and whether it kind of is any different than what you've kind of wrestled with in the past.

Toni Townes-Whitley (CEO)

Look, when we think about our bid, sort of our bid profile, we are tracking and increasing our bidding into our growth vectors. We are bidding more into civilian, we are bidding more into Enterprise and Mission IT than we have. Each of those has its own sort of characteristic in terms of with Enterprise IT, the risks that go from end-to-end IT operations all the way through cloud at an enterprise level to mission-critical IT, which has its own risk portfolio. We are bidding more fixed-price than we have in our backlog. In our current contract portfolio, we're bidding more fixed-price deals, and that is another area that we said was part of the pivot to move more into some fixed-price engagements.

We are about 10 points up on the difference between what's in our backlog and what's in our bid pipeline on fixed-price. Overall, we're also bidding, as I mentioned, into the growth vectors in areas of differentiation. We are tracking the bids with the use of our five differentiators, and we see an increase in uptick in the use of those differentiators across operational AI, digital engineering, secure cloud, as well as some of the work that we're doing with data platforms, secure data platforms.

So when we think about the complexion of our bid type of our bidding, we see ourselves bidding more strategically, bidding more margin accretively, which we've seen a higher bid margin in what's going out the door than what has been in prior years. And we see ourselves bidding in areas that leverage our differentiation. So in that regard, I feel like. And obviously, fixed price. So in that regard, I feel like the future bodes well. We still have to win them. So let's just acknowledge this is, you know, we're bidding more, we feel better, we're bidding better, but we still have to win. We have to execute. You mentioned execution risk. We're also tightening with our enterprise operating model, our execution expectations with our program managers.

And so we are really refining and adding more metrics and more review and more monitoring and quality assurance as it relates to executing these bids, particularly our mission-critical work. Prabhu, any thoughts there?

Prabu Natarajan (EVP and CFO)

Toni, that was perfect. Jason, the only thing I would add is that, you know, over the course of the last few years, as we do the debriefs on our wins and losses, we know that on average, we tend to do just fine on cost, and, you know, we've fallen short on technical differentiation. So part of the enterprise operating model is to get the solution architects working directly with the capture teams to ensure that we are crisply putting together a technical proposition that we can execute to. Our history with fixed-price work is actually pretty good. We've actually executed the work at good margins. So for example, most of the civilian portfolio happens to be fixed price in T&M work, and as you can see, we're comfortably in the double digit EBITDA margins there on that work.

So I'd say it's a little more of, let's not be that cost conscious. Let's actually focus on getting the right solution in place, and then how do we start executing in a way that gives us comfort that we can actually get to the thresholds that we are anticipating the program teams to get to? So a lot of work going around, just the muscles required to execute effectively. But I think the most important thing I would say is, we wanna take good shots, and that means not being rash. We're not chasing growth for the sake of growth, as we've said on calls before, it's vitamins, not calories. Thank you, Jason.

Jason Gursky (Equity Research Analyst)

Right. Okay. And if you don't mind, just a quick follow-up to that to double-click a touch on the firm fixed price bids that you're chasing. The you know, firm fixed price development hasn't you know, been such a great story across the industry over the last number of years. I'm just kind of curious, how mature the technologies are that you are leading with on some of these firm fixed price bids, and how much work you think you've got ahead of you to still develop some of the solutions that you're trying to solve for?

Toni Townes-Whitley (CEO)

Jason, I think it's a fair statement. When I look at our portfolio, though, why we made some investments, quite frankly, in the differentiation coming out of the factory is that we would lead with that differentiation, where we've been able to build up our capability. Prabhu has said we've got a track record of delivering fixed-price with solid, you know, estimates that complete meeting the financial profile, meeting the customer expectation. We don't have sort of disastrous fixed-price programs as many organizations have had to face. We're leading with our secure multi-cloud, we're leading with our digital engineering capabilities, we're leading with our data platforms and our operational AI capabilities generally, when we're introducing new solutions into this space.

And quite frankly, we're ensuring that we have the right human capital answer, meaning individuals, program managers who have led fixed-price engagements, and tightening all of the controls around how we deliver a fixed-price engagement and monitor it over time. So right now, we're not feeling overly concerned about increasing our fixed-price portfolio, but of course, we've got quite a bit of attention to day-to-day execution to meet the customer expectation.

Jason Gursky (Equity Research Analyst)

Great. Appreciate the time today.

Toni Townes-Whitley (CEO)

Thank you, Jason.

Prabu Natarajan (EVP and CFO)

Thank you, Jason.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Seth Seifman of JPMorgan. Your line is now open.

Seth Seifman (Executive Director)

Hey, thanks very much, and, good morning.

Toni Townes-Whitley (CEO)

Good morning, Seth.

Prabu Natarajan (EVP and CFO)

Good morning, Seth.

Seth Seifman (Executive Director)

I wanted to ask, you know, you mentioned probably exceeding the goal for submitted bids this year, and you know, it would seem you're very much on the way to doing that. I guess what led to the submitted bids in the first half being so much higher? Is there a particular reason why you see the opportunity set in the second half being so much lower? I mean, it would seem like you're probably on a pace to have submitted bids on par with what you're looking for in fiscal 2027, right here in fiscal 2025.

Toni Townes-Whitley (CEO)

We appreciate that forecast, though. Let me first say that, you know, why the focus on, and what's happened in terms of submitted bids. Part of centralizing the business development function, when I first came in, Seth, was to get to a standard process and set of protocols, quite frankly, into how we bid, and the acknowledgement that over the last three years, our bid velocity had been dropping, and that we needed to reverse that if we were gonna underpin the kind of growth that we are setting as expectations for ourselves. In doing that, the centralization allowed us to allocate resources much more dynamically across the full enterprise towards the bids that needed our attention.

The quick determination of whether a bid was qualified, so increasing our conversion rate from an unqualified to a qualified bid. And again, the resource allocation of our talent towards those bids. That's all improved our submission process in terms of the number of bids, and quite frankly, I would argue changing some thresholds in terms of the role of the ELT, our executive team, in reviewing our bids, and many more bids that we take a look at on a weekly basis, have improved the quality of those bids and setting a measure of what a good bid looked like. When we look at the year, we are pleased with our progress. There's absolutely no question that we are on a great pace.

We have bids that move out, as you know, every quarter, and we have a few key bids that are right on the cusp, large bids that are on the cusp of our fiscal year. And so those of us who've been in the industry for a while know that when you start to get to the cusp, on fourth quarter bids, you start to sort of almost have to handicap that amount, that number, to make sure that you can, you know, really pull them into the fiscal year. So do I feel good about us exceeding 22? Absolutely, I feel good about it. Do we overstate, do we change that? Right now, no. We're halfway through. We see it. We've got line of sight. We feel good about it.

As we go into next year as well, we've got quite a bit of submitted bids that are pending, and we're excited about what that might mean for fiscal year 2026.

Seth Seifman (Executive Director)

Okay. Okay, excellent, and then just maybe following up, taking to the next step, you know, beyond bids to the awards and, you know, you have an outlook for book-to-bill. When you think about what's in front of us in terms of CR and it's most likely, and an election, and, you know, the protests that we often see around all kinds of contracts, you know, to what degree is there still risk around your kind of book-to-bill targets for those items? Or do you feel like you've kind of, you know, handicapped all of those fairly, you know, fairly well in the book-to-bill outlook?

Toni Townes-Whitley (CEO)

Hey, Seth, I'm gonna let Prabhu speak to that, and I'll add any color. Go ahead.

Prabu Natarajan (EVP and CFO)

Hey, Seth. So look, I think as we think about where our backlog is right now and the volume of the bids that are awaiting adjudication, we've tried to calibrate our expectations around book-to-bill for the year based on, you know, many things, including the things you mentioned. So I think that's the way we're thinking about it. Thankfully, you know, we're sitting in a place where there's enough volume in the pipeline that, you know, one or two things moving out of the year would not have a material, outsized, negative impact on our expectations for book-to-bill. As Toni, I think, correctly pointed out, I think our expectation is to get to a book-to-bill that's comfortably north of one and hopefully keep the volume up.

One of the benefits of, I was gonna add, the benefit of increasing the qualified pipeline and the backlog of submitted bids is that's not a motion in perpetuity. In other words, there's a point at which you've got enough pipeline, and you've got enough in the way of submitted bids. It becomes a question of, can you replicate that consistency in volume over multiple years? And candidly, one of the, you know, the riches of having a rich backlog is that you get to actually improve the kinds of things you go after. So I think there's more of a focus on the quality of what's in the bag- backlog in the pipeline versus just increasing the absolute volume there, so.

Seth Seifman (Executive Director)

Great. Thank you very much.

Prabu Natarajan (EVP and CFO)

Sure, thank you.

Operator (participant)

Thank you. One moment for next question. Next question comes from the line of Bert Subin of Stifel. Your line is now open.

Bert Subin (Managing Director)

Hey, good morning, and thank you for the questions.

Toni Townes-Whitley (CEO)

Hey, Bert.

Bert Subin (Managing Director)

Maybe just to start, I guess, following up on Seth's questions there. I mean, if we look at the fiscal second quarter, you know, coming in at 2% organic, I guess this is really like 7% organic. 'Cause Prabhu, you've called out five points of recompete headwinds, and maybe normally in a year you would have some headwinds, so maybe it's like 6% organic, but that seems pretty good. Can you just break down, you know, maybe what the components that are driving that is versus, you know, from new awards ramping to on-contract growth to other items?

Toni Townes-Whitley (CEO)

Yeah. So but we, as we think, look at Q2 and even looking forward to H2, we've got ramping of existing programs, right? That have been won earlier in the year or prior year, that we see on the civilian side, we see with the T-Cloud in our Air Force business. You've seen with our AOC and our Cloud One, probably just recently seeing an extension of our Cloud One business at $262 million, I think, as we put it there. So we have these sort of ramps that are happening, and then we have on-contract growth occurring, particularly in our civilian and our Army businesses, and some significant on-contract growth that's occurring there.

It's a combination of those that not only provided the uplift on the second quarter, but it's what we anticipate to help us close the year, as we've indicated. We even have a new business win in our combatant commands that is going to probably start to ramp, even if towards the end of this year, that will add a little bit of relief. But what we have to be aware of is that there's still risk. There's still risk. We have that five points that you mentioned, that we'll have throughout the full H2, that five-point headwind, that we are dealing with.

We know it'll ease going into fiscal year 2026, but we have to. It's really an all-hands-on-deck feel that everybody is pushing for growth with their existing contracts, ramping, and obviously ramping in an environment where there's, you know, a lot still happening politically, a lot happening in Congress, and so, and a lot happening with our customers. We're trying to be thoughtful about how we think about revenue growth here, but we are still fairly positive that we can stay within the guidance that we have offered.

Prabu Natarajan (EVP and CFO)

Thank you, Toni. And hey, Bert, the only thing I would add is, you know, DTAM is expected to ramp a little more in the second half relative to the first half. That's a program we won, you know, earlier this year, so that program has not ramped in any material sense. T-Cloud will be a growth driver for us in the second half of this year, and of course, the program that Toni just referred to in our Air Force Combatant Command business, that is also expected to ramp in the second half of this year. So we've got some good momentum on things that are either already in backlog and we expect to grow off of or things that we are winning. We're not just focused on on-contract growth here. There are some good growth drivers.

Bert Subin (Managing Director)

Thanks for that, Toni and Prabhu. Just one follow-up. You know, the 2% organic, particularly with the recompete, you know, is positive, and then when you put it into the context of O&M outlays only being up 1% in that quarter, you know, it looks certainly better. As we think about this current quarter, can you give sort of any early indications to what you're seeing? I know you've given the 1%-3% viewpoint, but outlays were up 19% in July. You know, we have the potential for maybe a significant budget flush going into an election year. So I'm just curious, you know, from an on-contract perspective, do you think there may be more opportunity out there?

Prabu Natarajan (EVP and CFO)

Hey, Bert, I'll take that first part of the question here. So in terms of outlays, I think you're exactly right. I think you know we are expecting outlays to be normal as one might define normal. We do think that you know we started to see a little bit of a pickup in the outlays you know maybe in the July time frame. Our sort of internal view is that that typically translates to maybe higher levels of revenue growth in about three to six months. So as we you know sort of you know close out the year starting next year we will expect to see some of that outlay you know inure to our benefit. Obviously last year was a fantastic year for outlays and this year feels a little more normal.

But there's, again, that's why the focus on making sure that we're bidding the right kinds of work, and overall, we expect the environment to remain supportive, but we're not bullish about that happening anytime soon.

Toni Townes-Whitley (CEO)

Yeah. And Bert, I think you heard with the Q3, if you're looking at a Q3 outlay environment that you think is slightly increasing, you know, Prabhu has just indicated, that's not a one-for-one by timing. There's about a three-month lag. You can see that our Q4 guidance suggests a, you know, higher growth in Q4 than Q3. So we're aware of the outlay environment. We think it's reflected in the call.

Bert Subin (Managing Director)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Toby Sommer of Truist. Your line is now open.

Toby Sommer (Managing Director)

Yeah. Hey, good morning. This is Jack Wilson on for Toby. Can we just double-click on sort of the growth trajectories for some of those bigger contracts that were mentioned, sort of the Air Force work and the GMASS work specifically?

Prabu Natarajan (EVP and CFO)

Sure. Sure, I'll do that, Jack. I'll take a first stab at it. I think, you know, DTAM was a program we won earlier this year. It's a $450 million program, roughly. The way the program works is two technical directives, so we call them TDLs in our business, and that takes a little bit of time to ramp as we, you know, sit with the customer and sort of plan out the year with them. And so that program is expected to ramp in the second half of the year. T-Cloud was obviously a big win for us, a little over a year ago, and, obviously, we are well on the ramp.

We said T-Cloud will get to between 1%-1.5% of total company revenue this year, with some expected growth, to maybe up to 2% next year. So that one is a growth driver. And then the one in, Air Force, that's a, that's a new takeaway win, and, that's expected to add about, you know, let's call it $30 million or so a year, starting hopefully in the Q3 time frame. So we'll, certainly provide a little more color, but that's just a sample of the two or three things that we called out.

Toby Sommer (Managing Director)

Okay, and maybe as a quick follow-up, can you just speak to how the space franchise compares to sort of the rest of the company as a whole in terms of growth, growth and margins?

Prabu Natarajan (EVP and CFO)

Sure. So I think, as you know, you know, we've got a good chunk of space C2 work at many of the restricted customers. That is a really good portfolio that is solidly, you know, margin producing, as well as a good cash generator for us. So we like our positioning. Having said that, I think the team there is doing a really nice job continuing to inflect that portfolio towards non-SETA work. Obviously, DTAM is an example of that win capability, that we can take some of the expertise we have in the SETA space and go build a market outside of SETA. So that one was an important win. GMASS was another program we won last year.

That was a takeaway from one of the primes, and that is another program out there the team's executing on that is really interesting. And then, of course, we've talked publicly about BMC3, which is real-time software development for the SDA. So there's a good balance I think we are developing between SETA and non-SETA, but our objective is, you know, the SETA business is a really high-quality business, and we're developing a non-SETA business as we go here.

Toni Townes-Whitley (CEO)

I would say that non-SETA business is moving into Mission IT, and that's the important part of our portfolio shift, is what we believe to be the more critical and more tech-heavy, if you will, tech-enabled Mission IT within space, which will be more accretive over time.

Toby Sommer (Managing Director)

Thank you very much.

Toni Townes-Whitley (CEO)

Thank you, Jack.

Prabu Natarajan (EVP and CFO)

Thank you, Jack.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Kai Von Rumohr of TD Cowen. Your line is now open.

Kai Von Rumohr (Managing Director)

Yes. Thanks so much. So, the 1.2 book-to-bill, is that... are you defining that as trailing twelve-month or in the second quarter? And then secondly, what does that assume about your win rate?

Prabu Natarajan (EVP and CFO)

So, Kai, the first part of the question, it is trailing 12 months. And I think in terms of what it implies for win rates is, I think it assumes that our new business win rate, and we've said this publicly before, it is higher than 30%, comfortably higher. And so I think we expect our new business win rate to be sort of where the industry is on new business, and we are expecting to get our recompetes back to what's normal for the industry. Let's call it, you know, high 80s, approximately 90%. So that's what we're assuming. At this point, the only known recompete headwind going into next year is NCAPS. And that's about a little over 1%.

And so I think maybe even to Bert's question, on earlier on the call, you know, when we have 1% or 2% recompete headwinds, then organic growth tends to be, you know, mid single digits, and we demonstrated that last year with 7.5% organic growth, with a headwind of 1%-2% on recompete. So that's what we're assuming in terms of the math. Obviously, a lot that goes into what's getting bid and what we're expecting to show up before the end of the year, but that is what we've assumed, Kai.

Kai Von Rumohr (Managing Director)

In terms of recompete, I mean, you mentioned I don't know whether that was Evolve, you know, what is the status of that recompete? And also, very importantly, S1, because that's your biggest contract, what is the status of that potential recompete?

Toni Townes-Whitley (CEO)

So, Kai, I heard the first part of your question on Evolve. I may have to ask you to repeat the second part of the question. The first part of the question on Evolve, as you know, that's an ongoing procurement. We're super pleased about our current performance with that contract and with that customer set. As it continues to move right, we expect that there will not be any award activity until beginning of next year, possibly, and even that followed by an extended protest period that would probably have any revenue impact or change late fiscal year 2026, maybe early fiscal year 2027. So as that continues to move right, we're focusing on our performance on that contract. As you know, that's a consolidation of many contracts, so there's upside potential there.

There's obviously, there's risk on recompete there. But, overall, we're very pleased with what we're hearing from the customer on our performance there, and we think we're positioned, but don't see that having a 2026 impact immediately. What was the other deal you asked about?

Kai Von Rumohr (Managing Director)

The second one was the Army S1 contract. I believe that you're-

Toni Townes-Whitley (CEO)

Yeah. We happen to be sitting here in Huntsville, so it's appropriate for us to comment there. So look, the timing of that we believe is probably on the cusp towards the end of our fiscal year, beginning of the next fiscal year, is our timing. We feel very, very solid about our performance to date, and obviously, this is the first of a series of contracts of recompete for the next eighteen, 24 months with this customer set. But for this and one of the largest of the recompete, we feel very, very solid about it, but the timing, we are now sort of thinking about it in the fiscal year 2026 timeframe in terms of an actual award.

Prabu Natarajan (EVP and CFO)

Kai, the only thing I would add is, last time on the AMCOM recompetes, as it was known about five years or so ago, we went four for four. The team's doing an amazing job and great relationships here, and, we're hoping to keep the streak alive.

Kai Von Rumohr (Managing Director)

Mm-hmm. And refresh my memory, is this going to be bid similar to the way AMCOM was bid in terms of separate packages, or, you know, what's the structure that you, you're looking at for this bid?

Toni Townes-Whitley (CEO)

I think we're looking at a very similar structure. We have four separate contracts, and this is the first of the four, Kai, that shows up, as I said, in the January, February timeframe, is when we're expecting an award.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of David Strauss of Barclays. Your line is now open.

Josh Corn (Director)

Hi, good morning. This is Josh Corn on for David. Thanks for taking the question.

Prabu Natarajan (EVP and CFO)

Hey, Josh.

Josh Corn (Director)

Just wanted to ask about the drop in civilian margins over the last two quarters and sort of what the trajectory is there, how variable those would be over time? Thanks.

Toni Townes-Whitley (CEO)

Yeah. So Josh, just to put it in context on civilian, the year-over-year compares, we had a major, a high revenue activity that happened last year, one time, a sort of an anomalous surge of revenue in one of our programs that was not repeatable this year. As well as, the ramp-up on some of our new programs in civilian has been, has had a lower margin start. We fully expect this as a tailwind, as the margin is coming up over time on those programs. As we talk about, moving into H2 with contract-on-contract growth as well as ramp up, the civilian portfolio is ramping up, and the margin expectations on execution are higher than where we started.

We feel like we'll be back in the range, the appropriate range for civilian, minus that one-time event of prior fiscal year.

Josh Corn (Director)

Great, thanks. I'll stick to one.

Toni Townes-Whitley (CEO)

Okay. Thanks, Josh.

Operator (participant)

Thank you. I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.