What happened
Shares of Science Applications International (SAIC 4.03%) fell on Friday following the defense tech company's earnings release. Results weren't bad, but the guidance threw investors for a loop. As of 1:07 p.m. EDT, shares were down 18%.
So what
After markets closed Thursday, Science Applications International reported fiscal fourth-quarter adjusted earnings of $1.67 per share, easily beating the $1.45 estimate. But revenue came in a little light, and a lot of that beat was tied to tax rates and other non-operations factors.
The real disappointment was the company's outlook. It said it expects fiscal 2022 adjusted earnings between $6 and $6.25 per share on revenue of $7.1 billion to $7.3 billion. That's well below the consensus estimate of $7.20 per share on $7.62 billion in sales.
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The company's book-to-bill, a measure of how much business came in during the quarter compared to how much was billed out, was an anemic 0.4. In the quarter, Science Applications International adjusted its backlog down by $2.2 billion due to "open unfulfilled contracts, that in our judgment, may not be converted to future sales."
The forecast caught Wall Street off guard, prompting a downgrade at Stifel to hold from buy, and a price target cut at Citi to $105 from $115.
Now what
The market is rightfully reacting to the company's surprising pessimism. It seemingly went out of its way to reset expectations for 2022 and beyond.
There is at least some reason to hope things are not as bad as suggested, and that Science Applications International is being overly conservative. The company has very little business up for recompete in the coming quarters, meaning the bookings and backlog numbers should be stable. Revenue could end up conservative if some of that $2.2 billion in backlog adjustments eventually does get fulfilled.
Looking past fiscal 2022, government IT companies like Science Applications International have significant opportunities to pick up new business as the Pentagon and other agencies try to cut costs by off-loading systems management work to third parties. It is also a sector that has seen a lot of consolidation, although Science Applications International -- with its $4.5 billion market capitalization -- would be a big morsel for a competitor to swallow.
In the meantime, the company does expect to generate solid free cash flow of $430 million to $470 million in fiscal 2022 to help ride out the storm. There is a lot of risk here, but for those with patience and tolerance for the uncertainty, this could be a great opportunity to pick up shares.
