Leidos Holdings Inc (LDOS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter fiscal year 2011 earnings conference call.

I will be your operator today.

At this time, all participants are in a listen-only mode.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Ms.

Laura Luke, Vice President of Media Relations.

Please proceed.

Thank you, Shamika, and welcome, everyone.

Here on today's call are Walter Havenstein, our CEO, Mark Sopp, our CFO, and other members of our team.

During this call we will make forward-looking statements to assist you in understanding the Company and our expectations about its future financial and operating performance.

These statements are subject to a number of risks that could cause actual events to differ materially, and I refer you to our SEC filings for a disclosure of these risks.

In addition, the statements may represent our views as of today.

We anticipate that subsequent events and developments will cause our views to change.

We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

With that, I will turn the call over to Walt.

Thank you, Laura.

Good afternoon, everyone.

The highlight of our first quarter was our strong business development results as we posted a significant improvement in bookings and book-to-bill from recent quarters.

This resulted from continued focus on higher growth markets, increased submissions of bids over the past year, and increased pace of competitive procurement decisions being made by our government customers.

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

Government service market update.

Our assessment of the federal market has not changed since our last earnings report.

In fact, our assessment of the market's direction was subsequently confirmed by Defense Secretary Robert Gates in a speech he delivered last month, and by a number of our competitors in their most recent earnings calls.

To recap our assessment, while federal spending is budgeted to increase modestly this year over the prior year, we expect most of that increase while directed to cover DOD's must pay bills.

Accordingly, we expect only nominal growth this year in our markets.

In addition, we believe the downward pressures from both the administration and Congress on federal discretionary spending, including defense, will persist for the long-term.

In addition to monitoring the direction of the federal budget, we continue to closely examine new developments impacting the government contracting environment.

Since our last earnings call, draft OCI regulations have been released.

The OCI provision as written will require added diligence, both by contractors and the government's acquisition community to ensure every potential OCI situation is understood and resolved.

For much of our business, we expect the OCI issues can be navigated.

However, there may be customer implementations of the final provision that may require more significant actions.

A draft policy letter on what is inherently governmental also was released recently.

The language of the proposed policy is consistent with our expectations, and is not expected to have a material impact on our business.

Its ultimate effect will depend on the policy guidance and its interpretation by federal agencies.

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

Unlike our larger competitors, a handful of defense platform providers, we offer deep customer affinity, combined with the agility of our entrepreneurial culture and organization.

SAIC has significant market discriminators and with each new day we are adding focus to how we integrate and apply them within our high growth markets.

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

C 4 ISR, Cyber Security, health, energy, and logistics.

Deployment of new business resources to higher growth areas, especially Cyber Security product and solution offerings, acceleration of growth in higher growth areas through integration of our recent acquisitions, and a grease sigh cross-selling and continued development of new integrated offerings.

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

I would like to spend a few minutes illustrating our strategy at work in the area of Cyber Security.

We are particularly focused on Cyber Security as a high priority, an enterprise wide growth opportunities for SAIC.

Our Cyber Security business grew substantially in FY 2010.

It also accounted for substantial new contract awards and proposal submissions in this year's first quarter.

We are actively marketing our Cyber Security offerings from DOD and the intelligence community to the broader national security market, which includes the Department of Homeland Security and the Department of State.

We are also actively cross-selling our Cyber Security capabilities in other key markets such as federal IT, health, energy, and C 4.

SAIC's new CloudShield capability has allowed us to penetrate important DOD, intelligence community and DHS Cyber Security programs we would not otherwise have had access to making new partnership and service opportunities available to SAIC.

Today we are actively engaged in over 30 related projects and pursuits across the Company.

To support the growth we are experiencing in Cyber Security, SAIC has engaged in several important human capital and facility initiatives.

SAIC has established a twelve-week program called Cyber Nexus designed to train the nation's first generation of cyber warriors.

Our plan is to train two cohorts this year resulting in 50 employees gaining specific technical and analytical skills as well as all required DOD Cyber Security certifications.

SAIC is also sponsoring an Information Assurance Masters Degree Program through three universities, NY Polytechnic Institute, George Washington University, and Capella University EXCO Resources, all of which are designated as National Centers of Academic Excellence by NSA and the Department of Homeland Security.

Our plan is to have 50 students enrolled in these programs by the end of this year.

SAIC's facility efforts include our Cyber Demonstration Center and Cyber Center of Excellence, both located in Columbia, Maryland.

SAIC is also building new secure facilities along Maryland's I-95 cyber corridor to house the hundreds of new employees we expect to hire to support recent and anticipated Cyber Security wins.

I would now like to turn my comments towards how SAIC is poised to help support disaster response, such as our nation's reply to the tragic oil spill in the Gulf of Mexico.

SAIC is uniquely manned, equipped and positioned to support recovery from the immediate and long-term challenges associated with natural and man made disasters.

Over the years, SAIC has assisted with our country's response to many disasters such as Hurricane Katrina, to terrorist attacks such as 9/11, and to major oil spills such as the Exxon Valdez event.

SAIC takes pride in responding to needs of urgent national importance, and we were always prepared to help mitigate these types of crises, bringing together specialized skills in sciences and applications to the problem at hand.

Our company can bring to bear nationally recognized expertise in many critical aspects of oil spill remediation including geo spatial imagery and analysis, ocean circulation modeling, oil spill trajectory analysis, and the environmental impact assessment and remediation.

RW Beck, one of our recent acquisitions, is participating in the initial response to the Gulf oil spill.

As they recently did for the floods in Nashville and the tornadoes in Oklahoma.

We are currently performing work in the Gulf region to train 900 clean-up volunteers and support emergency operations and we're prepared to support other state and local community cleanup and long-term environmental services as needed.

Moving onto business development results, bookings in the first quarter were $3.2 billion for a book-to-bill ratio of 1.2.

This ratio reflects much higher awards for new business, especially in Cyber Security.

In fact, 90% of the value of our first quarter wins came from new business.

We ended the quarter with over $16 billion in total backlog, an increase of over $475 million from Q4.

$5.6 billion of our backlog was funded, an increase of roughly $350 million during the quarter.

In addition to higher bookings, we maintained high win rates and continued to grow submittals.

We achieved an 88% total dollar win rate on all recompete business in Q1.

We also earned a 68% total dollar win rate on all new business we sought to capture.

These high win rates are consistent with our past performance despite increasing competition, which reflects the value proposition we offered to our customers.

Submittals in Q1 were up $2.4 billion or 37%, compared with Q1 a year ago.

We began the first quarter with $16.3 billion in outstanding submittals.

During the quarter, we added $8.7 billion in new submittals and received decisions on $7.7 billion, leaving us with $17.3 billion in submitted proposals awaiting decision at the end of the quarter, up sequentially from last quarter.

Over 50% of the $17.3 billion is for non-IDIQ opportunities.

This level of proposals awaiting decisions exceeds the comparable amount at Q1 last year by over $6 billion providing a bow l wave of potential bookings for SAIC during the remainder of FY 2011.

Our focus on winning larger opportunities continues to yield good results.

As of the recent date we had won ten opportunities valued at at more than $10 million each in FY 2011 and had over 200 $100 million-plus opportunities in our pipeline.

In summary our business development performance in the first quarter was significantly improved over the fourth quarter.

This performance reflects our efforts to capitalize on the many outstanding competitive discriminators we possess at SAIC.

Turning to the next topic, the integration of our acquisitions continues on track.

We were working to leverage their differentiated products, technologies and capabilities across the enterprise.

Our acquisition of CloudShield is helping us build market share in Cyber Security.

As we discussed, our acquisition of Beck Disaster Recovery is enabling us to address remediation and recovery opportunities.

Our acquisition of Science, Engineering and Technology, SET Associates brought us the CounterBomber system.

During Q1, this system successfully passed formal government testing at the White Sands Missile Test Range and Yuma Proving Ground.

In addition to completing two years of successful US Marines operation in Afghanistan and Iraq and currently undergoing operational tests with the US Air Force and Army in Afghanistan.

The US government also recently approved the sale of CounterBomber to the Dutch MOD, leading to CounterBomber's first international sale.

We have leveraged our purchase of an online interactive virtual environment software platform, known as Olive, to win a new prime contract with the US Department of Agriculture, in support of the virtual government concept, USDA is teamed with the Air Force, Department of Homeland Security and National Defense University to provide virtual world services to all government agencies, to support multi-site collaboration, education, and training.

That provides some insight into our market and our operational highlights and Mark will now cover the financial details for fiscal 2011 first quarter.

Thank you, Walt.

As we indicated in the call last March, lower bookings last fiscal year led to flat revenue growth expectations for the first half of this fiscal year.

Our results for Q1 were consistent with that expectation with total revenue growth at 1% and internal revenue contracting by 1%.

We were pleased, however, to see progress in business development during the first quarter as Walt mentioned, with bookings doubling sequentially from Q4 to $3.2 billion, producing a book-to-bill ratio of 1.2.

As Walt indicated, we also continued to grow the value of outstanding submittals sequentially from last quarter which now stands above $17 billion.

Our first quarter bookings and the increased level of outstanding submittals provides a platform for growth potential in the quarters to follow.

In the first quarter, we produced internal revenue growth in our logistics business and in our systems engineering and integration solutions for the Armed Services.

This was, however, offset by reductions in demand for materials on a variety of programs, lack of new contract starts and reductions in IT services for federal, civil, and commercial customers.

Labor mix rose to 60% of revenues reflecting lower demand for materials than we have seen in recent quarters.

We believe some of this is timing related and will recover in future periods.

Contract type mix was not materially different from recent quarters.

Operating margin came in at 7.7%, on par with the first quarter of last year.

We incurred $3 million of charges related to the transition of the Scottish Tower contract, which hit operating margin by 10 basis points.

Flat revenues coupled with higher investments and bid and proposal and internal research and development costs held back margin improvement but we expect to improve that over the course of the year with planned revenue volume increases.

As discussed in our last call in March, we had reclassified some costs from SG&A, sales, general and administrative expenses, to cost of revenues to be consistent with changes we have made in our cost submissions to the government.

Prior periods were not restated on this basis.

The effect of this was an increase in cost of revenues and a decrease in SG&A both by about 1% of revenues.

There is no net effect to operating margin as a result.

In a nonoperating area, our effective tax rate for the quarter was reduced considerably to 34%.

In the first quarter, we resolved a number of uncertain tax positions, and appropriately reversed associated reserves, reducing our tax provision by about 4.5% from what it otherwise would have been.

We expect to return to a normative rate in the quarters to follow.

Also, we continue to reflect the research and development tax credit as not being extended by Congress in calendar 2010.

That will be upside to fiscal 2011 if that occurs.

We reduced the share count considerably quarter over quarter by deploying excess cash.

The weighted average diluted share count went down by about 5% or 19 million shares from 397 million diluted shares in the first quarter of last fiscal year to 378 million this quarter.

This primarily reflects share repurchases made over the course of last fiscal year and to some extent, repurchases made this last quarter.

For the quarter just ended, we repurchased roughly 16 million shares.

However, those were back end weighted, and had the effect of reducing the weighted average share count in Q1 by only 5 million shares.

We'll see the full impact of those repurchases take effect in the remaining quarters of the year.

Diluted earnings per share from continuing operations totaled $0.32, up from last year by 10%.

Without the Scottish Tower charge of $3 million, EPS would have rounded up by another $0.01.

We provided a schedule in the earnings release today showing this effect and will continue to do that for the next few quarters when this charge is expected to be more significant.

Cash flows from operations were reasonably strong at $140 million for the quarter with day sales outstanding, DSOs registering at 69 days, just above Q1 of last year.

We deployed $140 million for acquisitions and deployed almost $300 million for share repurchases in the quarter.

Together these actions decreased our cash balance from $860 million as we exited fiscal 2010 to $570 million at the end of this quarter.

This resulted in less excess cash at April 30, down considerably from previous quarters, but still a conservative and healthy capital structure position.

With that I will finish up with our forward financial expectations.

Last quarter we revised our internal revenue growth, operating margin, and earnings per share growth expectations downward for this fiscal year.

We had no changes to those expectations today.

To reiterate them, we expect internal revenue growth in the 3 to 6% range for the year, operating margins to improve 10 to 20 basis points above last year's full result, which was 8.0%, and we expect diluted earnings per share growth from continuing operations to grow between 8 and 14% over fiscal 2010.

We also expect our operating cash flow to roughly equal our expected net income plus our depreciation and amortization costs, a model consistent with prior years.

I would like to note that our guidance excludes two significant items.

First, as consistent with our previous discussions and disclosures, our guidance excludes the estimated total fiscal 2011 costs of $20 million to $30 million related to our transition out of the Scottish Tower contract in the United Kingdom.

Second, guidance excludes any pickup from the favorable settlement and proceeds due SAIC from the recently announced VirnetX versus Microsoft intellectual property case.

As discussed in our recent Form 8-K filing, we cannot yet adequately quantify the net amount SAIC will retain from this settlement as we owe our former customer a commercially reasonable royalty on the net proceeds that we receive.

This royalty amount was not definitized years ago when the development contract was executed.

As soon as this can be reliably determined we'll convey it at that time.

That wraps up my financial comments for the quarter.

I will turn it back over to Walt for final remarks.

Thank you, Mark.

I would like to take a moment to acknowledge three milestones SAIC reached over the past several months.

Barron's recently rated SAIC number 3 among the 500 largest publicly traded companies in the United States and Canada, based on three equally weighted measures of growth, three year cash flow return on investment, change in the latest year's CFROI relative to the three year median and sales growth adjusted for divestitures.

SAIC received Barron's top rating on all three criteria.

Fortune recently named SAIC to its list of world's most admired companies, ranking SAIC number 3 in the information technology services industry among all Fortune 1000 and Global 500 companies.

And Washington Technology recently ranked SAIC number 5 among its top 100 federal government contractors, based on prime contract sales during fiscal 2009.

SAIC advanced two positions in the rankings this year.

In closing, we delivered results in line with expectations and saw a nice improvement in bookings in our first quarter.

We have a team of highly motivated and dedicated colleagues and a leadership team committed to deliver on our objectives.

I remain very enthusiastic about our company, and I am fully confident that we will continue to deliver strong performance and value to our shareholders in FY 2011 and beyond.

Shamika, we're ready to take questions.

Thank you.

(Operator Instructions).

Your first question comes from the line of Bill Loomis of Stifel Nicolaus.

Please proceed.

Thank you.

Walt, you mentioned OCI, and I just want to try to understand, sounds like you're talking about it differently than you have in the past.

How big of an issue could it be for SAIC either as a percent of revenue or relating to clients and so forth and over what timeframe do you expect it to be resolved and whichever way you choose?

Well, Bill, I think it is difficult to give you a percentage at this point because I think as I have said before, my expectation is that these rules, and more importantly, the policy that generates these rules will have different interpretations throughout the government and specifically different agencies within the Department of Defense.

I suggest that's about an 18 to 24 month process before all of those are well understood.

Having said that, there have been several agencies who have already stated their position, and we have adjusted, what I refer to as navigated, successfully as they make those declarations, and if you remember we saw a declaration like that back in the fall with respect to one of our three letter customers, and we had to make a choice as to which side of the fence we were going to sit in or stand on, and in that case we decided to stand on the implementation side as opposed to the government seat side, so I suspect you will see some of that from some of the agencies being that precise, and from some of the agencies I think they will -- because I think the rules allow them to be fairly flexible, they will take a different view.

So right now as we look at it, just like we did last fall, we see opportunities where we think we can navigate.

It may be, though, that one or two of our customers or maybe several of our customers take a position that will force us to take explicit action around that position, but right now, I think the -- our posture is to be able to agilely deal with each one of those customers as they state their position.

Based on the awards in the quarter, obviously this didn't impact -- OCI didn't impact your business to win a lot of new business this quarter.

Did you have clients in the quarter that pushed back on awards or you had to pull back an RFP or a bid rather or anything like that?

Have you seen it so far this year?

Not explicitly in this quarter.

I think you have to keep something in mind.

We deal with OCI every single day.

We're making bid/no-bid decisions throughout the year based upon our interpretation and our communication with our customer around the OCI, so they're probably -- and I am just going to estimate, based on my experience at SAIC, there have probably been a couple of hundred opportunities where we have decided not to bid because of the potential OCI implications, and I think that is frankly one of the strengths of this company, and that -- the contracts community and the business development community stay closely linked so that when we see potential OCIs, that we adjudicate them, resolve them within the Company, and make the appropriate decision to bid/no-bid those opportunities.

We're making those decisions every single day.

Thank you.

Your next question comes from the line of Edward Caso of Wells Fargo.

Please proceed.

Hi.

Thank you.

My question is around share repurchase.

Obviously you have been very active in the past quarter and recent quarters, and now with the cash level getting down towards that prior comfort level of about $500 million, I am curious how active you plan to be because both in share repurchase and also in acquisitions.

Hi, Ed.

It is Mark Sopp.

We will continue to evaluate the opportunities that present themselves with deploying our capital.

We have been consistent with that message, and while we don't have a lot of excess cash exiting this quarter, we expect to generate free cash flows in amounts that you well understand which present the opportunity for future repurchases if conditions warrant, and that will be based on the same criteria that we have used heretofore, which involves our few of capital needed for M&A and our view of our intrinsic value, and where our stock is trading, so we like to have flexibility as we look at those attributes going into each quarter, and we place bets accordingly based on those opportunities, so really no major change in philosophy at this time.

My other question is for Walt.

You talked when you came on about 100-day strategic review and that you would come out with some direction for us.

Obviously you have told us about the five growth markets.

Anything else or is this just has the 120 days become sort of a rolling review?

Well, the emphasis on those five key areas is in essence the strategic road map for the Company.

That's not to say we around constantly looking at opportunities within those areas and any inflections we see in the marketplace that would cause us to move, but I think the real value creation aspect of our strategy is to drive horizontal integration of capabilities to address bigger opportunities and larger market share.

It is as simple as that.

The characteristic of SAIC of having many, many, many discriminating capabilities, and the ability as we're driving to integrate those capabilities to offer solutions that are distinctive, I think is really at the heart of our strategy.

Historically we have grown small pieces at a time and it is only been over the last few years that we have really taken on very, very large opportunities, and been successful where we have been able to leverage capabilities, various capabilities across the Company.

That has got to become not the exception but the rule, and that is the fundamental element of our strategy when you look at those five specific growth areas.

Thank you.

Your next question comes from the line of Jason Kupferberg of UBS.

Thanks.

Good afternoon, guys.

Wanted to start with a question on the win rate on the non-renewal side.

I think you said it was 68% this past quarter.

Sometimes we get into the debate of what is sort of the optimal win rate.

Is this a number that in your mind is perhaps too high?

Do you need to bid on more work?

It sounds like you have a lot in the pipeline and threw out some pretty big numbers, but I guess, Walt, from your perspective do you want to see that number be lower because that will mean that you're chasing more opportunities and bigger opportunities or are you pretty comfortable with where that number is?

I would love for that number to stay right where it is while we continue to bid more, while we continue to bid larger efforts.

If because we are taking more challenging positions and dealing with more challenging opportunities, for it to stay at that level will be extremely gratifying.

Okay.

And can you talk a bit about the pricing environment in your end markets?

I know you have been talking for the last few quarters about some of these longer term budget pressures that you guys see and what I am trying to just get a sense of is how much of this is sort of spending volume versus actual pricing pressure that you might be seeing, whether it be on new contracts that you're bidding on or renewals.

To what extent is there incremental pricing pressure just given some of the tightness in the procurement environment and is that just sort of part of the new reality if you will and is that factored into your thinking on margin expansion for longer term?

It is in fact part of the new reality.

It will be that new reality will continue to evolve.

I expect there to continue to be pressure on margins.

We have seen in instances, especially in some of our recompetes, where there is some pretty challenging margins that we're having to deal with, so that does add to the pressure for overall margin expansion, but we have taken that into consideration as we put our plans together.

The answer is, yes, it is a new reality.

I don't think for a second that we probably won't see a new reality again next year, but we're dealing with it as we see necessary, and for the most part, we're maintaining our fee positions.

Okay.

Last one for me, just on the security product side.

I think last quarter you guys had pointed to a 10% plus revenue growth target for that business in fiscal 2011.

Is that still on plan and anything new on the legislative front that could help catalyze additional demand for those products?

I will let Mark talk about the growth as we see it in there, but I don't see anything specific on the legislative front that would cause that market to change.

On the growth rate, Jason, we certainly have the opportunity to post double-digits as we have done, but we may fall short of that.

We'll see.

We've got some outstanding opportunities we're trying to get.

I am comfortable it will be above 5, but we also are seeing continued improved margins in that area which we're really delighted to see from strong leadership there, and we have our revenues roughly equally weighted across the year, this year in this space.

There has been some volatility there in previous years, so we expect to be fairly even this year in case you were interested in that as well.

Okay.

Thanks for the color, guys.

Your next question comes from the line of Joseph Vafi of Jefferies & Co.

Please proceed.

Hi, gentlemen.

Good afternoon.

I was wondering if we could revisit bookings a little bit in the quarter.

A good book-to-bill here, how should we read that relative to overall end market demand?

How many maybe large contracts maybe helped the bookings number out more than maybe you think overall end market demand really is at this point, and they then secondly, would you still expect to see a little bit more of a normal seasonal trend here as we move towards the end of the government fiscal year and higher book-to-bill?

That's an excellent question.

I think we still see a fairly significant number of large contract opportunities, and our growth in our pipeline is reflective of that, so my sense is the demand is still there.

Now, let me give you at least my thoughts on this government fiscal year.

It is clear that, at least the rhetoric is clear that the Department of Defense is going to be looking for ways to cut their overhead.

All right?

So they're going to be looking at things probably in the last quarter of their government fiscal year to constrain a possibly constrained some spending, so where historically we might have seen a lot of sweep-ups in spending, it probably won't look that way.

Having said that, we still have a significant amount of spending, especially with the -- use my term, the DOD supplemental coming in in July, that will still put a fairly significant demand on the contract side, so I think on balance it may not be as robust as we have historically have seen in the summer months, but it will still be I think it will still be pretty good.

From the demand side.

Okay.

And then just was there anything that was dramatically large here this quarter that you just reported that we should kind of take into account when we assess book-to-bill this quarter relative to the end markets here?

Yes.

Good question.

Let me just give you a little color there.

If you looked at our top three contract awards for the quarter, they totaled about $1 billion.

So you put that in the context of the $3.2 billion, even without those significant wins, we had a fairly strong bookings quarter when you compare it to Q4 of last year.

Oh, by the way, we see more and more opportunities of $100 million-plus, and have bid more opportunities, significantly more opportunities, the $100 million-plus kind than we have in the past year, so frankly if we can keep our win rate up, we should continue to see some fairly healthy bookings driven a good bit by those larger programs.

Okay.

That's helpful.

Maybe one final question.

I know you did deploy a fair amount of capital and buyback this quarter.

I guess just in the last couple of days we're seeing news out of big defense primes on potential divestitures due to OCI.

Given probably your market intelligence and knowing that maybe some of this was coming down the pike in terms of potential divestitures, how did that play into your capital allocation decisions in the buybacks this quarter relative to maybe potential M&A opportunities that might result from OCI here over the next few months?

Mark, do you want to comment?

Sure.

As you would expect us to do, Joe, we will be studying those opportunities very diligently, and if we develop a view that something is to be done there, we'll need the capital to get something done, so that will inform us based on our investigation of those opportunities as we always do each quarter, and we may change our tactical approach to repurchases for that reason, but that's not different than any other quarter as we evaluate the M&A opportunities right in front of us.

Right.

I would just add a comment on what Mark had said earlier, and that is we still have a very, very healthy balance sheet.

We still have a lot of capacity if we decide to make a significant acquisition as a result of the opportunities that come from OCI or any other condition in the marketplace, and that healthy capacity, that strong capacity, is keeping with an investment grade rating, so I think we have an awful lot of flexibility here, and yet at the same time, when something is not immediately in front of us doing the right thing with respect to our cash.

Thanks very much, guys.

Your next question comes from the line of Joe Nadol of JPMorgan.

Please proceed.

Good afternoon.

It strikes me reading between the lines here that you guys may have had some pretty big cyber classified wins in the quarter, maybe two of them and is there anything you can tell us about that and tell us what you can about strategically how this positions you?

Joe, the answer is no.

I would say this.

I am very confident in our strategic position.

Let me just put it that way.

As you know, there is some appropriate restrictions about what we can and cannot say about certain contracts.

So no, no meaning no you can't say anything, not meaning no you didn't win them.

No, I can't say anything.

Understood.

That was my question.

Thanks.

Thank you.

Have you a question from the line of Tim Quillin of Stephens Inc.

Please proceed.

Good afternoon.

Just to want clarify your thought process on the OCI issue.

Are you going to take the position that you will position the Company either on the seat aside or the mission support side or are you saying that's going to be more of a customer by customer decision?

I think for SAIC today, that is a decision we'll make customer by customer.

When I say customer by customer, I mean major customer by major customer.

The behavior tends to be based on an acquisition command or a service position, as opposed to an individual contract, although we are seeing individual contracts reflect varying degrees of OCI mitigation or avoidance.

And you really don't have a sense right now of what portion of your business might be potentially have to be divested?

Well, we have -- let me answer it this way.

We have a fairly good sense of where we sit on either side of that at the enterprise level, but I think it is probably inappropriate for me to comment on what that looks like, because until you understand the what I will call the sea state, you may not know what makes the best value sense for the enterprise in terms of whether you navigate or you simply steam out of those troubled waters, and so I am not going to even suggest to you what we might be considering in terms of portfolio shaping.

Okay.

Fair enough.

And just lastly on CloudShield, which I think maybe is the best example of bringing horizontal expertise that you can leverage across the Company, first can you say where their revenue levels are right now and then talk maybe more specifically about strategies and leverage that you might get out of that and I think you mentioned 30%.

I didn't know if that was Cyber Security in general or CloudShield specifically but maybe if you could expand?

Thanks.

The 30% is CloudShield specific leveraged opportunities.

Mark, do you have the thoughts on the current numbers?

I will just say, Tim, the revenue expectation is less than $100 million for this enterprise, so we're getting started with it if you will, but we're focused on great opportunities ahead.

I got to tell you, this has had a tremendous amount of pull across the enterprise through our customer facing organization.

By the way, it is probably the most demonstrable horizontal capability, but it is by far not the only horizontal capability for driving to the market.

Thank you.

You bet.

Your next question comes from the line of Michael Lewis of BB&T Capital Markets.

Good evening, gentlemen.

This is Jeremy Devaney on for Mike Lewis.

Just had a couple of quick ones here for you and a little bit deeper question.

First, head count for the quarter, where did we wind up with that?

Joe, we were down like due to the Scottish Tower transition and also some work we lost at NASA with respect to the breakdown of that contract into four pieces.

So we were down net head count, down about 900 from variety of sources, but those are the two biggest drivers.

Excellent.

Also along the accounting line here, fixed price cost plus T&M mix, do you happen to have that today?

It was a very minor shift of 1% here and there, so we had cost plus go down by 1% and T&M actually rose by 1%, which was a little different than what you have heard elsewhere in the community.

We consider fixed price level of effort the same as T&M, and so that was the driver of that T&M category going up just a notch for us but not a major shift in the overall mix.

Talking sequentially or year-over-year?

I am talking sequentially.

Great.

Thank you.

And then lastly, looking at cash levels, there is a lot of discussion around cash usage, but I was curious are you looking to end the year near a particular number?

Last year we saw a peak of up near $1 billion.

Where are you anticipating the year ending?

Jeremy, we don't have a specific target.

We do have a desire to use our excess cash, but the M&A will determine that very significantly, and as you know you can't predict what's going to happen with M&A all the time, so the short answer is we're not going to box ourselves into a specific number, but we certainly,when we don't have immediate opportunities on the M&A front, we do intend to deploy excess cash for obvious reasons.

Great.

That's very helpful.

Thank you very much.

Your next question comes from the line of Eric Olbeter of Pacific Crest Securities.

Please proceed.

Good afternoon, guys.

Just another quick question on bookings.

Really good numbers year-over-year in sequential.

Just looking through towards the rest of the year, are you seeing any acceleration in bookings across the entire -- your customer mix, or is there one particular agency or customer where you're really seeing a lot of acceleration?

No.

I wouldn't say we have seen acceleration.

I think it is getting to be a little more steady state, and so where we saw some things that didn't happen last year they're finally now starting to get decided.

My sense is that it is across the enterprise and across our customer community pretty consistent, and so I think you can tell that by virtue of how we continue to grow the submits, even with the good book-to-bill, we continue to grow submits, so what that is saying is we're starting to see that new reality manifest itself in just the longer procurement cycle.

I think it is starting to settle down, where the three months ago or six months ago we were kind of uncertain as to that overall length of time.

I don't see any particular part at this point being different, frankly.

So there is not any one particular agency that is slowing down, your realization of bookings that you see for the rest of the year?

I don't think so.

The reality is I think we see some of -- we just see a longer trend, and in any given procurement you have to keep in mind any given procurement can have its own anomalies and all you got to do is look at the tanker.

I mean, how do you put that in your forecast?

Right.

Okay.

Thank you.

There are no further questions in the queue.

I would like to turn the call back over to management for closing remarks.

Thank you, Shamika.

On behalf of the SAIC team we want to thank everybody on the call for their participation and their interest in the Company.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.