SAIC Q3 Deep Dive: Margin Expansion and Portfolio Restructuring Take Center Stage

Government IT services provider Science Applications International Corporation (NASDAQ:SAIC) met Wall Streets revenue expectations in Q3 CY2025, but sales fell by 5.6% year on year to $1.87 billion. The company’s outlook for the full year was close to analysts’ estimates with revenue guided to $7.3 billion at the midpoint. Its non-GAAP profit of $2.58 per share was 20.2% above analysts’ consensus estimates.

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StockStory’s Take

Science Applications International Corporation’s third quarter was marked by a significant positive market reaction, as management’s focus on operational efficiency and cost containment stood out. Interim CEO Jim Reagan credited improved program execution and the successful integration of SilverEdge, an AI-focused acquisition, with helping to offset ongoing challenges in government spending. Reagan highlighted that, despite a year-over-year revenue decline, the company’s margins benefited from internal restructuring, stating, “We are implementing efficiencies... and will redeploy savings to fuel growth and improve profitability.”

Looking ahead, management’s updated guidance reflects confidence in margin improvement through targeted reinvestment and disciplined capital allocation. CFO Prabhu Natarajan emphasized that ongoing cost actions and further integration of SilverEdge are expected to drive profitability, while also cautioning that federal civilian budget pressures will likely persist. Reagan noted, “There is substantial value to be created from turning up the focus and attention on the core fundamentals of this business,” pointing to sharper execution and portfolio alignment as central to SAIC’s growth strategy.

Key Insights from Management’s Remarks

Management attributed quarterly performance to enhanced program execution, cost discipline, and the strategic acquisition of SilverEdge, while acknowledging continued headwinds in federal civilian spending.

• SilverEdge acquisition impact: The addition of SilverEdge brought new AI capabilities to the portfolio, which management expects will improve win rates on future bids and enhance margin performance as these advanced solutions are deployed across more contracts.
• Cost efficiency initiatives: SAIC identified over $100 million in annual indirect spend to be redeployed into higher-return areas, supporting both margin expansion and targeted investments in business development and account management.
• Civil segment stabilization: Although the civil portfolio experienced a temporary year-over-year revenue decline, management emphasized improved margins and highlighted agency-specific funding tailwinds, particularly with the Federal Aviation Administration (FAA) and Customs and Border Protection (CBP).
• Business development momentum: Proposal submission volume increased significantly versus last year, with a focus now shifting from quantity to quality and alignment with areas where SAIC has competitive strength, aiming to boost future contract win rates.
• Organizational restructuring: Recent leadership changes and consolidation of business groups are expected to streamline operations, reduce overhead, and position the company for more agile and profitable growth moving forward.

Drivers of Future Performance

SAIC’s forward guidance is underpinned by ongoing cost efficiencies, portfolio repositioning, and the integration of higher-margin capabilities like AI.

• Margin improvement focus: Management expects non-GAAP EBITDA margins to approach 10% in the near term, with cost efficiency actions and higher-value contract wins driving profitability. Additional upside is anticipated as further operational streamlining is executed.
• Civil and defense market mix: SAIC anticipates continued pressure on federal civilian agency budgets, but expects defense-related spending to remain stable or grow moderately. The company’s positioning in well-funded agencies is seen as a buffer against broader market headwinds.
• Portfolio and business development strategy: The integration of SilverEdge is expected to enhance SAIC’s competitive edge, while ongoing portfolio review may lead to further divestitures of lower-margin or non-transformable businesses. These moves, along with increased investment in targeted growth areas, are viewed as key to sustaining organic revenue growth and margin expansion.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team is watching (1) the pace and effectiveness of cost efficiency initiatives and their impact on margins, (2) the integration and revenue contribution from SilverEdge and other potential tuck-in acquisitions, and (3) the outcome of major contract recompetes, particularly in the defense segment. Execution in realigning the portfolio and maintaining business development momentum will also be critical to track.

SAIC currently trades at $102.60, up from $87.53 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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