Leidos Holdings Inc (LDOS) 2012 Q2 法說會逐字稿

Good afternoon.

My name is Tam, and I will be your conference facilitator today.

Welcome to SAIC's second quarter fiscal year 2012 earnings conference call.

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

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Paul Levi, Senior Vice President of Investor Relations.

Please proceed.

Thank you, Tam.

Welcome, everyone.

Here on today's call are Walt Havenstein, our CEO, Mark Sopp, our CFO, and other members of our leadership 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 discussion of these risks.

In addition, the statements 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.

I would now like to turn the call over to Walt Havenstein, our CEO.

Thank you, Paul, and good afternoon, everyone.

For the call today I'll cover market conditions, highlight recent business development results, talk about acquisitions and divestitures, and share a special recognition that SAIC recently received, then Mark will provide the financial details, then of course, we will take your questions.

At the outset, while continued uncertainty in the markets we serve adversely impacted our performance this quarter, I am encouraged by our contract win rate, our increasing pipeline of new opportunities, our record level of outstanding proposals awaiting decision, and the growth we are seeing in our energy and health market areas.

Additionally, we are hopeful that the work of the so-called Super Committee of Congress will set us on a path of increased budget certainty into the next year.

With that said, in the short-term, as you can see from our earnings release, we continue to experience challenges in converting new contract awards to revenue.

The overall Federal Government acquisition process, and the ability and willingness of our customers to ramp up new programs, and provide funding for existing programs, continues to be negatively impacted by the uncertainty caused by the government budget situation.

As a result, spending levels since April government fiscal year '11 budget resolutions were enacted have been below our expectations.

As Mark will cover later, revenues contracted in the quarter, and we are reducing our expectations for the year to reflect the short-term outlook, which is impacted by the current government uncertainty.

The overall government solutions and services market is entering a period where we expect spending to be flat for the next couple of years, and most likely, low single digit declines in spending for each of the several years afterwards, as our country makes the tough but necessary spending decisions to reduce the federal deficit.

This view broadly reflects the $350 billion in defense reductions over the next 10 years, that have been enacted by the government, plus up to another $500 billion over 10 years, that is on the high side of expected reductions, with a second tranche to be decided by the Congressional Special Commission by this December.

These numbers reflect reductions to previous OMB spending estimates, which projected increases in defense spending over the next 10 years.

The effect of these cuts, in essence, renews the previously planned growth in the DoD budget and results in a relatively flat to modest decline compared with today's spending levels.

Importantly, short-term instability issues aside, this long-term defense spending outlook is consistent with the view we previously shared and is consistent with our current strategy.

In whatever manner the macro budget challenges are resolved, we continue to believe there will be areas of growth in the markets we serve, in order to provide solutions to our country's most critical and pressing missions.

We are continuing to invest in those areas, to ensure we bring the best solutions to our customers, in support of these missions.

Regarding our contract awards, bookings totaled $2.3 billion in the second quarter, and produced a net book-to-bill ratio of 0.9.

Combined with the 1.3 book-to-bill we achieved in the first quarter, we have produced a Q2 year-to-date book-to-bill ratio of 1.1, which is respectable and encouraging in this contracting environment.

This ratio reflects our key recompete win on the 10-year NASA Integrated Communications Services contract in the first quarter, along with six additional wins of large definite delivery contracts, each in excess of $100 million so far this year.

We ended the quarter with $17.7 billion in total backlog, of which $5.3 billion was funded.

As compared with the first quarter, funding backlog increased by 5%.

As compared with the second quarter of fiscal 2011, total backlog increased by 12%.

I am very encouraged that we achieved a 65% total dollar win rate on business opportunities pursued and awarded through the second quarter.

Our high win rate is attributable to our well-targeted investments in business development.

This win rate is slightly ahead of last year's first half, which is also encouraging, considering the increased amount of bids submitted, and the increasing competition.

Additionally, submitted proposals awaiting decision continue to increase, and now stand at a new peak of $29.2 billion, including $20.3 billion in IDIQ bids, and $8.9 billion in definite delivery bids.

This is over $10 billion higher than Q2 a year ago, which should produce growth when the procurement and funding environment stabilizes.

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

We won 6 opportunities valued at more than $100 million each in the second quarter of this year.

We added to the 12 opportunities of this size won in the first quarter.

That represents a 50% increase in greater than $100 million awards, compared with the first half of last year.

4 additional wins of this size have been achieved, following the end of the second quarter.

That brings the total of greater than $100 million wins for the year to 22, 7 of which have been definite delivery awards.

As you can see in our earnings release today, there were significant awards this quarter.

Let me take a moment to highlight 2 of these wins, that each of which, has an expected value to SAIC of greater than $100 million.

The Integrated Justice Systems International LLC, a joint venture of SAIC and Tetra Tech, received a multiple award IDIQ contract to provide worldwide civilian police and criminal justice assistance to the Department of State's Bureau of International Narcotics and Law Enforcement Affairs.

The 5-year contract has a ceiling of $10 billion for all awardees.

This award is important, as it represents our first major win in what we refer to as a smart power business area, with more in the pipeline.

SAIC also received a multiple award IDIQ contract to provide a broad range of IT services to the Department of Veterans Affairs under the Transformation 21 Total Technology Program.

The 5-year contract has a ceiling value of $12 billion.

I would now like to take a moment to highlight SAIC's approach for driving growth in the health IT business to become a leading systems integrator and professional services Company in the federal and commercial health markets.

In driving towards this goal, we intend to maintain our leadership position in the military health system, and expand our position at the Department of Veteran Affairs and the Department of Health and Human Services; leverage our information integration, data analytics, cyber security, cloud, and modeling and simulation capabilities, to drive new health solution-based offerings for both federal and commercial health plans; and capitalize on new opportunities as federal and commercial health markets converge.

We are investing our capital in this strategic growth area, most recently through our acquisition of Vitalize Consulting Solutions, Incorporated, a leading prime provider of clinical business and information technology services for healthcare enterprises.

The addition of Vitalize will expand SAIC's health solutions portfolio, in both commercial and federal markets, to help customers better address electronic health records implementation, the combination of Vitalize's expertise and integrating commercial off-the-shelf software for electronic health records and systems with SAIC's information integration, data analytics and cyber security capabilities creates a powerful combination in the marketplace.

As a quick update to the divestiture announced early in the year, during the second quarter, the Company completed the sale of its operations focused on providing IT services to oil and gas companies to Wipro, Limited, for proceeds of about $170 million.

We plan to redeploy those proceeds, consistent with our overall cash deployment strategy, which will include targeted M&A in our strategic growth markets.

Before I turn the discussion over to Mark, I want to close by sharing a special recognition SAIC recently received.

SAIC was awarded the Champions of Veterans Enterprise Award, from the National Veterans Small Business Coalition for exemplary commitment to working with veteran-owned small businesses.

The award is given in recognition of SAIC's strong support and use of veteran-owned and service-disabled veteran-owned small businesses as subcontractors and suppliers.

It is the only award given to the industry by veteran-owned small business community.

With that, Mark will now cover the financial details for the second quarter of fiscal 2012.

Thank you, Walt.

As discussed, we saw 7% internal contraction in revenues in the second quarter, 2 percentage points of which were attributable to the VirnetX royalty payment we received last year, which of course did not recur this year.

Revenue contraction was driven by foreseen lower product deliveries and anticipated reductions in programs like the Brigade Combat Team Modernization, BCTM, and also finishing up our installation of CityTime.

We also saw reduced demand for materials under existing programs, lower ramp-ups on recently-awarded contracts and slippage on new award decisions.

These 3 elements are indicative of the ongoing stressed business conditions in the government acquisition process, which in our view, did not materially improve since the passage of the government fiscal '11 defense budget in April.

On the positive side, the revenue decline did not have much of an impact on operating profitability, where performance and relatively stable labor-based revenues enabled margins above 8%.

Consistent with our strategy, and our conviction that some of these conditions are temporary, we continue the year-over-year and sequential spending increases in business development and internal R&D to produce business prospects for the long term.

Revenue contraction was concentrated outside of our target strategic growth areas, particularly in Systems Engineering and Technical Assistance, SETA, and lower-end contracted services categories.

We did see growth in some areas, our energy business grew about 11%, and our health business grew about 4%.

Our operating margins were 8.1% for the quarter, reflecting strong program performance across the enterprise, a relatively light mix of higher margin product deliveries, and as I said, increased business development and internal R&D costs.

As mentioned in the earnings release, we did execute the planned sale of a property in Northern Virginia, resulting in a $21 million operating gain.

On the other hand, we reached a proposed settlement agreement on the NCCIPS legal case and recorded a $22 million charge in Q2 to resolve that matter.

We deemed part of that charge as non-deductible for tax purposes, explaining the effective tax rate being slightly above our normative rate in Q2.

Diluted earnings per share from continuing operations contracted 24% over the prior-year quarter.

The VirnetX royalty last year was a primary cause for this reduction.

Absent that item, EPS from continuing operations would have essentially been flat year-over-year.

Excluding the royalty, we had about 8 percentage points of EPS erosion from lower revenues, higher interest expense, and a higher tax rate.

This was offset by an 8% lift in EPS from a reduced share count from an ongoing share repurchase program.

Operating cash flow for the second quarter came in at $56 million, down about $50 million from last year.

This decrease was primarily attributable to absence of the royalty payment, but also an uptick in days sales outstanding, DSOs.

DSOs were 74 days at the end of the quarter, up from 66 days a year ago.

There were several contributing reasons for this, including payment delays on some individual contracts, foreseen startup activities on new energy contracts, and negotiated government withholds tied to more lengthy and vigorous BCAA audit programs.

For capital deployment, we acquired about 10 million shares in the quarter under our ongoing buyback program, and completed the Patrick engineering acquisition, together totaling about $200 million in funds used for these purposes.

We closed the Vitalize acquisition just after the second quarter.

I'll now cover the operating results for our 4 segments, Defense Solutions; Health, Energy and Civil Solutions; Intelligence and Cyber Security Solutions; the Corporate and Other segment.

Revenues for the Defense Solutions segment decreased 6% in Q2 compared with last year.

This revenue decline was mainly attributed to the foreseen wind down of a CityTime contract and reduced activity on the BCTM program I mentioned earlier.

Government acquisition delays and less demand for materials constrained new revenues that were planned to offset those declines.

The Defense Solutions segment operating margin was 8.1% for the quarter, an increase of 10 basis points over Q2 last year.

The increase continues to be driven by effective cost management and strong program performance.

Revenues for our Health, Energy and Civil Solutions segment decreased 2% in the quarter, aided by acquisitions.

Internal revenues contracted 7%.

Drivers of the revenue contraction were concentrated on the federal Civil Solutions side, where we've seen a particularly stressed funding environment, and also a slow quarter in the timing of delivery of security product sales, which are expected to increase through the remainder of this fiscal year.

As previously mentioned, we experienced positive revenue growth in our energy and health markets, which we expect to be bolstered in future quarters by the recent Patrick Energy Services and Vitalize Consulting acquisitions.

Operating margins for this segment was 9.1% in Q2, consistent with last year, despite increased amortization expense, lower product sales, and higher internal R&D spending, primarily focused on next-generation security product systems.

Cost efficiency gains enabled that offset.

For the Intelligence and Cyber Security Solutions segment, total and internal revenues decreased 1% compared with last year.

This decline was primarily due to the conclusion of an integrated security system contract in theater, partially offset by growth on certain Intelligence analysis and airborne surveillance programs with DoD customers.

Operating margin for the segment was 8.9%, an improvement of 80 basis points compared to a year ago.

Similar to the first quarter of this fiscal year, we continued to see higher margins attributable to increased sales of intelligence proprietary products, strong contract fee performance, and cost savings from internal streamlining actions.

Cost savings were reinvested to increase internal R&D to build discriminators in the ISR space.

For the Corporate and Other segment, revenues declined in the second quarter, due to the episodic revenues from the VirnetX royalty payment last year.

This segment does not normally have revenues.

The Corporate and Other segment had unallocated corporate costs of $14 million in the quarter, fairly normative, arising from recurring costs like unallowable and stock option expenses.

That covers Q2 financial performance.

Now I'll turn on to forward guidance.

As you'll see in our second quarter 10-Q filing, which we plan to file either tonight or tomorrow, we fully disclose the current situation and risks associated with the CityTime contract.

As the disclosure provides, we believe a loss on this matter is probable, but we cannot reasonably estimate the amount at this time.

Therefore, there's no estimate of loss in the following guidance provided.

This quarter, we are updating our revenue and earnings per share guidance to reflect our second quarter results, and the more cautious view of the short-term market conditions during the remainder of this fiscal year.

For revenue, we now expect full year revenues to come in between $10.6 billion and $11.0 billion.

Our corresponding range for diluted earnings per share from continuing operations on the lower revenue expectations is $1.30 to $1.40 per share.

Our estimate for operating cash flow remains unchanged from the previous guidance at $600 million or above.

With that, I'll hand it back to Walt.

Thanks, Mark.

I would like to conclude my written remarks by thanking the more than 41,000 employees who remain focused and dedicated to solving our clients' most difficult requirements.

Their dedication and commitments provides the foundation for our continued success.

With that, we'll turn it over for questions.

Tameka, we are now ready to take questions.

Thank you.

Yes, sir.

(Operator Instructions).

And your first question comes from the line of Mike Lewis with Lazard Capital Markets.

Please proceed, sir.

Good afternoon, guys.

It's actually Mike Spencer for Mike Lewis.

Quick question.

Regarding the guidance, is there one particular segment that's experiencing more of an impact than the others?

Can you talk a little about that?

Also, finally, on ground combat vehicles, can you potentially quantify any impact to the guidance that may have?

Thank you.

Hi, Mike.

Mark Sopp here.

The industry conditions are affecting all of the segments to varying degrees.

I would not say it is greatly impacting one compared to the others, in a large sense.

I will say the Fed/Civ market is probably the weakest.

And another weak area we are seeing, hopefully we're clear in my remarks, are where we have materials on the broad scale contracts which exist across our segments, we're seeing particular weakness there from our customers.

But that's really the only area we focus on, are the Fed/Civ areas, and then the Contracted Services segments, like SETA, as I mentioned in my remarks.

With respect to ground combat vehicle, we have excluded revenues from -- or previously planned revenues from that program in this guidance, so it is excluded entirely.

Doesn't necessarily mean that we're out of the running, but that's obviously the correct position at this time.

Thank you.

Operator, are you there to proceed with the next question, please?

Thank you, your next question comes from Mr.

Edward Caso with Wells Fargo.

Please proceed, sir.

Thanks for taking my question.

A couple of guidance clarifications.

The Vitalize acquisition that closed after the quarter, is that in guidance, and if so, what's the impact?

It is included in guidance and its impact is less than $100 million.

Okay.

And the guidance on operating margin, what would that be now?

We do not provide, as you know, official guidance on operating margin, but consistent with the remarks at the beginning of the year, we don't expect to be materially off of the 8% range.

So we're fairly consistent with that from the beginning of the year.

Consistent with my remarks, much of the revenue shortfall, both year-to-date and the risk we have in the second half, is materials at lower fee.

So we don't see a dynamic range in operating profitability compared to the range you see in the revenue guidance.

Great.

Organic growth, I think before was 0 to 4% positive.

What's the implied organic growth now, please?

The guidance range is minus 1% to minus 4% internal growth.

And (multiple speakers) --

(multiple speakers) I should say minus 4% to minus 1%, depending on where you start.

Previously on the DSOs, you talked about a normal level of about 70 days, this has obviously been a big -- it's been trending up, but a big shift year-over-year.

Could this be a new permanently higher level, given the audits and things like that, or do you sense it moving back down towards 70 days?

Our expectation, Ed, is to be around 70 days and the current conditions are temporary, just a question of how long.

Great.

Thank you very much.

Thank you.

Your next question comes from the line of Mr.

Cai von Rumohr with Cowen and Company.

Please proceed, sir.

Yes.

Thank you, gentlemen.

So you said you're not out of the running on GCV.

Have you protested, and so that's still pending, or kind of what did you mean by that?

Yes, we have protested and that's still pending.

Okay.

And then so you've taken the revenue guidance down, but kind of as I look at the numbers, if I use the midpoint of your guidance, it looks like if margins hold at where they were in the second quarter, that you'll come in at a roundly, $1.38, at the upper end of your estimate.

And yet you said security sales should be higher in the second half.

You also said that where one of the areas of weakness is material, i.e.

pass-through's, which are lower-margin business, so it kind of looks like the margins are more disappointing than they should be for the level of revenues you're guiding to.

Can you give us some help in understanding that?

Sure, Cai.

I would say that our margin view in the second half, as we wind up the year in this environment, within the guidance, is conservatively stated.

But that said, there are a couple of elements you should understand.

First, we do expect to increase indirect spending in the areas of business development and internal research and development in the second half, at a pretty good increased pace.

Secondly, we do have some programs starting up that are new and large and long-term, that historically have lower margins at the beginning side of the equation, like Vanguard and others.

And we're also winding down some programs that have had very attractive margins over the history, BCTM being one of them, but others as well.

And so that reflects a little bit of headwind there.

Other than that, the security products will indeed help us in the second half, as we earlier said.

But there are these other factors that we have to consider, giving us the more cautious view.

Hopefully we'll outperform and beat it.

Okay.

And then, last one.

On CityTime, can you give us some sense as to where you are in negotiations with the City and kind of the District Attorney?

And kind of what's the time frame over which we should expect this might get resolved?

And kind of what are the things we should look for to give us some comfort that it's getting out of the way?

Well, Cai, I could simply say that we continue to work with the ongoing investigation and the US Attorney in New York.

It would be still premature for us to comment as to when or what that final state will look like, frankly, because the process will probably take a little longer than we originally thought; but by the same token, we want to make sure it is thorough, and that our views get properly considered.

And frankly, at this point, it's probably too difficult to handicap either the time or outcome.

Okay.

Can you give us sort of a range?

Are we talking three to six months, or two years?

I mean, sometimes with claims, things go on for years and years.

(multiple speakers) -- after 12 months?

No.

Okay.

Thank you very much.

Thank you.

Your next question comes from the line of Mr.

Robert Spingarn with Credit Suisse.

Please proceed, sir.

Good afternoon.

You've seen declining growth across the board here.

Walt, maybe you can talk about the growth lanes a little bit more.

You touched on this in the monologue, but even here, we're seeing pressure.

Is there any growth anywhere?

Well, we are seeing growth, as we commented, in our Health IT segment and in our Energy segment.

We think notwithstanding a one-time situation from last year in the second quarter, a material element, an M&S element, our ISR business would have been growing.

So we still think that the areas that we have identified as higher growth areas will continue to be higher growth.

What I think we didn't fully account for is that the -- I think the uncertainty in the business environment, it really impacted our civil -- our Fed/Civ sector.

It was down significantly.

And as we've experienced declines in our SETA business over the last 18 months, that we saw a decline there that was probably more significant than we would have anticipated.

So the areas that we identified, frankly, two years ago is areas that we believe would be enduring and have higher growth potential, continue to be the ones that we pointed out, Health IT, Energy, National Security in the form of C4ISR, and our Logistics Readiness and System, and of course, we continue to see progress in our Cyber Security area.

Okay.

So, just a couple of follow-up questions on all of that.

Thank you.

Should we think about the minus 1% to minus 4% that Mark talked about before?

How do we put that into context then on a longer-term basis, given that you've got these big headwinds in some of the larger core legacy businesses against the growth in the areas you just spoke of?

How do you think about the long-term growth compared to those numbers for this year?

Mark here.

We do believe, although it's hard to quantify, some element of what we're experiencing is temporary due to the uncertain unstable funding situation.

And hopefully, with Congressional actions here in the fall and beyond, we'll have, albeit flat line or nominally decreasing, a more stable environment.

And in that scenario, we do expect that this area that we called core in the past in our dialogue with the investor community will contract, and it will contract in a single digit arena.

Where within that space, hard to tell.

But to Walt's remarks, we think that ISR and even C4ISR as well as the energy, health and cyber areas can see positive but probably single digit growth, probably mid -- low to mid single digit growth, although we think that health and energy could exceed that.

And so collectively, we view outside of the temporary conditions to still have reasonable expectations for single digit positive growth for the enterprise once we're in a more stable condition.

Okay.

And then how should we think about, based on all of that, what can you say with expectations on book-to-bill for the rest of this year, and to what extent might that be influenced by another CR?

Well, I think we think the CR's inevitable.

We think even with the agreed debt deal, even if you had an appropriations bill, it would be essentially at the same level in the defense side as we're seeing in FY '11.

And with regard to book-to-bill, we still believe, even under a continued resolution, which by the way we described back in the last quarter and at thebeginning of the fiscal year, we thought was probably going to be upon us.

We still see our book-to-bill to be 1.0 to 1.1 for the year.

Okay.

Okay.

And then last as I just finish here, what's your forward M&A and share repurchase strategy?

Any update there?

Thank you.

Yes.

No update there.

We will continue to look for economically attractive and strategically consistent bolt-on acquisitions in those higher growth areas and it will -- and we will use capital to deploy there in a mix with share repurchases, based upon the opportunistic nature of M&A.

Thank you.

Thank you.

And your final question comes from the line of Mr.

Jason Kupferberg from Jefferies.

Please proceed, sir.

Thank you, guys.

So I just wanted to talk a little bit more about the guidance for fiscal '12 on the revenue side.

If my math is right, at the midpoint of the new guidance range, I think you need to average about 4% sequential revenue growth in each of the last two quarters of fiscal '12.

Usually, historically at least, your Q4, the January quarter is a down quarter from a sequential basis.

So is there a reason to believe that trend will reverse this year based on perhaps product shipments or some other trends you see in the business?

I just want to test some of the conservatism, if you will, around the midpoint of the new guidance in the context of sequential growth rates that we're used to seeing historically.

Yes.

It's product related?

As we started the beginning of the year, we explained that our products oriented business was going to be more back-end weighted.

And even though we aren't quite where we wanted to be in the first half, we still expect to see that -- those product shipments come in at the end of the year.

Okay.

And is Vanguard meeting your expectations so far in terms of ramp and any update on when it will be at a full run rate there?

Yes.

When do you expect it to be at a full run rate?

Let me think about that for a second.

Probably by the second quarter of next year.

So, fiscal '13?

For fiscal '13, right.

Okay.

Okay, got it.

And then just the last one here, to build on your previous comments around M&A, which sound like they're basically the same thing you guys have been saying for a while, opportunistic, more bolt-on type stuff.

I mean, what's the biggest inhibitor to you guys doing a larger acquisition?

Is it more because of OCI concerns, valuation, other factors?

I'm just wondering, because it feels like with the fundamentals getting a bit tougher here, there might be a little bit more pressure, if you will, from some elements of the investment community to get a bit more aggressive with the balance sheet in some way, shape or form.

Obviously, while remaining prudent, but just wanted to get a sense of what would hold you guys back from doing a larger acquisition that could help revive your top line.

Valuation for the most part, in that we still see some extraordinary prices being paid for properties.

We're looking for things in the same area that other people are looking for things.

And, frankly, you have to convince yourself that even in the high growth areas, there's sufficient synergy to pay the premiums that are necessary in an acquisition, in a take-over kind of -- a controlled take-over kind of situation.

That's predominantly the thing that frankly limits our taking on bigger things.

And having said that, those things that -- large or small, that we think have strategic long-term implications for growth for the Company, I can assure you they are getting considered, and we will be appropriately aggressive to bring those properties to SAIC.

Okay.

Understood.

Thank you guys for the comments.

Thank you.

You have a question from the line of Mr.

George Price with BB&T Capital Markets.

Please proceed, sir.

Hi, guys.

Thank you very much for letting me sneak in here at the end.

Many of my questions have been answered, but I did still have a few.

First of all, just I wanted to ask a little bit more on the DSOs.

You mentioned some hold-backs related to the DCA audit activity.

Can you give any more color on that?

Is that anything that has any future implications or is that something more standard?

I can't comment if it's a long-term condition.

We don't expect it to be, but we and the others in the industry are undergoing, as you know, rigorous and lengthy audit programs.

And every audit we are under is taking much longer, and is, for the most part, unresolved at this time, just because it takes longer.

And in some cases, we have agreed to withholds to allow for the overall billing processes to continue with a minor hit to us on the cash flow side, which gives the government a little bit of protection in light of not having reached conclusions in some of the audit areas.

So a deal was struck.

We think it is in, to the best we can, it's in the best interest of both parties to do that so business can continue.

And hopefully they will wrap up their audits in a more expedient manner so we can get back to normal, but that is not to mean in any way that our relationship is negative.

In fact, these were open discussions that I think reach a good conclusion to allow us to proceed with the bigger dollars.

Okay.

Fair enough.

And I apologize if I missed it, but can you comment at all maybe on for the third fiscal quarter, given the environment, what kind of typical seasonal trends you expect in terms of quarter-over-quarter revenue?

Quarter-over-quarter.

Well, we still expect the third quarter to be, as history has shown, our highest quarter of the year in revenues, although as Walt remarked earlier, we think that that will largely be sustained in the fourth quarter sequentially.

I think the year-over-year numbers are consistent with the guidance we've discussed earlier.

So still -- well, the range implies we'll probably be in the negative territory in terms of organic growth, but nonetheless better than Q2.

Okay.

Then, just lastly, maybe exploring a little bit more of the environment that you're seeing in the short term this quarter and next.

I guess, could you talk a little bit about your award and funding activity assumptions, how you think things are going to flow through the remainder of GFY '11, and into the early part of GFY '12?

You did mention that you assumed we'll start off with a CR.

I don't know if you have any thoughts on how long that situation will progress, but if you could talk about that, talk about maybe, again, the end of GFY '11, seems like the spigot has opened, but not all the way, did everything get obligated?

That sort of thing, thank you.

We're seeing some areas where we're starting to see a slight pickup, other areas continue to be flat.

I think for the budgeting purposes, I think the budget that the government will have is going to be pretty well understood, especially under CR.

It's going to be essentially what we have in FY'11.

I think the -- and we expect that decisions will start to increase.

When we look at the amount of decisions that were made in the first half of the year on big programs, and there were about 30 programs in the first half of the year that got decided, which we did very, very well on, even though they may not have ramped up as quickly as we would like, we see a significant higher number of pending decisions, almost two to one in the second half of the year.

Now, again, we expect those decisions to get made but if the ramping up doesn't -- if that condition doesn't change, and what we've assumed here, that there is no change in that condition, that is what's kind of predicating how we think about revenue in the second half.

So we think it's not just a case of the budget and the funding.

It is a case of both the willingness and ability of converting those wins into revenue, and having active contracting and the government's willingness to let that funding go.

And so we've got a lot of good indicators, but we've tried to say, hey, if nothing changes on the funding of existing programs and new programs, from what we saw in the second quarter, then that has shaped our thinking around guidance.

Does that help?

Okay.

Yes, it does.

I appreciate you providing the additional color and taking my questions.

Thank you.

Thank you, George.

And you have a question from the line of Mr.

William Loomis with Stifel Nicolaus.

Please proceed, sir.

Hi, thank you.

Just to follow up on George's line of questioning, so just -- I guess I'm still not quite clear what gives you confidence in fiscal '12 in terms of the back half of your year, because we'll start fiscal '12 with a continuing resolution, we're kind of in this fiscal '11 continuing resolution.

But you're still going to have the same uncertainties in fiscal '12 in terms of probably being a series of short-term continuing resolutions.

We're going into the elections next year, so that's going to carry some uncertainty, and then we have -- of course have the November 23rd date, what's going to come of that.

If the government's not willing to fund on fiscal '11 money that was already passed in mid-April, why do you believe they will on fiscal '12 money?

Bill, big question.

The fact of the matter is, we've not assumed that they're going to be more effective or less uncertainty in that regard for the balance of this -- of our fiscal year.

We have said that if the conditions that we saw in our Q2 don't change, all right, we expected that and that's what we use as the basis for our guidance.

Having said that, we kind of said last quarter that we expect that even under a CR, things will start to stabilize.

But that will take to the balance of this year.

And our expectation is that by the end of the first quarter of this fiscal year, those issues related to November 23rd and the subsequent establishment of priorities around those decisions will kind of be behind us.

And even if we end up for all of FY 2012 under a CR, all right, that CR will be at essentially the levels we are now, and we think that in and of itself will start to stabilize things, come the end of the first quarter of FY '12, the government FY '12.

Okay.

And then just looking at fiscal '11, that budget -- I mean from a numbers standpoint, fiscal '11, under a CR still had good numbers attached to it.

Where is the money going if it's not getting -- if you're not seeing programs funded?

Is the customer giving those funds back?

Or where are you seeing the money actually go?

Is it just extensions on existing work?

There is some extensions on existing work, but from what we can tell, there's some dollars that aren't getting obligated.

And, frankly, we would hope -- I hate to use that word here in this town -- we would hope that funding would flow here in the back half of the government fiscal year.

We just didn't see that over the last three months and that's -- and to assume that it will I think is imprudent.

And so that's kind of shaped how we think about our guidance for the balance of this year.

Okay.

Thank you for the clarification.

And thank you, ladies and gentlemen, this concludes our question-and-answer session.

I would now like to turn the call back over to Mr.

Paul Levi, Senior Vice President of Investor Relations.

Thank you, Tam.

On behalf of the SAIC team, we want to thank you for your participation today on the call, and your interest in the Company.

That concludes our call for today.

Thank you.

Thank you, Mr.

Levi.

Ladies and gentlemen, that concludes today's conference call.

Thank you for your participation.

You may now disconnect, and have a great day.