By Joey Cresta, Research Analyst
Investing in new areas generates additional business development opportunities for SAIC
Expanded market access gained from strategic investments in 2015 supports SAIC’s optimism for a return to revenue growth in 2016 in an improving federal environment. SAIC’s emphasis on deepening relationships with clients and entering adjacent addressable markets aligns with successful strategies other federally focused firms have employed to augment revenues. We believe that with two-thirds of its outstanding bids related to new opportunities rather than protecting existing business, SAIC is aggressively ramping up sales and marketing spend to shift its business mix toward more specialized systems integration from commoditized service areas.
Revenue was up 12.5% year-to-year in 4Q15 due to the continued inorganic impact of Scitor; organic revenue was down 1.5% over the same period. However, the intelligence-focused business faces headwinds from small business set-asides, which increasingly relegates Scitor to lower-revenue opportunities as a subcontractor. Despite this, we believe the twofold benefit of intelligence market access and a higher-margin portfolio demonstrate Scitor’s longer-term value to SAIC.
SAIC seeks to become a viable alternative to larger aerospace and defense peers in specialized platform markets
The U.S. Marine Corps’ selection of SAIC to develop next-generation amphibious combat vehicle (ACV) prototypes — unsuccessfully protested by General Dynamics — indicates SAIC’s potential to disrupt the market position of leading aerospace and defense vendors. Although SAIC lacks a platform development legacy, efforts to expand its platform integration business are evidence SAIC is following these vendors as they withdraw into proprietary platforms to escape intense competition and profitability pressures in other areas of the government services market. SAIC’s history of engineering and integrating systems into tactical platforms such as mine-resistant ambush-protected vehicles and amphibious assault vehicles on behalf of the Marines supports the notion it can serve as a credible alternative to larger competitors.
SAIC’s role on the ACV is a natural evolution of its ability to provide maintenance and modernization services on defense platforms. As SAIC lacks its own platform, the company partnered with ST Kinetics of Singapore, which provides the vehicle that is the basis of SAIC’s ACV proposal. While making a stronger play in the platform integration market provides SAIC with a route to market that circumvents some of the most price-sensitive and competitive areas of the government services market, it also requires the company to aggressively seek out partnership opportunities to ensure its success on the ACV program is repeatable rather than an anomaly brought about from a fortuitous relationship with ST Kinetics.
Platform integration initiatives dovetail with SAIC’s efforts to expand its training portfolio and Air Force business
SAIC includes platforms in its broad push to expand in the military training and simulation market, projected to grow globally at a CAGR above 4% over the next decade. In 4Q15 SAIC suggested the U.S. Air Force could replace its Beechcraft T-1A Jayhawk twinjet trainers and T-38A companion trainers with Eclipse 550 very light jets (VLJs) provided by SAIC on a turnkey basis. While VLJs offer benefits such as greater fuel efficiency, we believe this proposal is unlikely to generate significant interest, as the Air Force’s lukewarm response to VLJs in the past indicates the platform does not meet the service’s needs.
We believe that SAIC’s efforts to gain traction with its VLJ proposal to the Air Force would benefit from striking a partnership with Eclipse manufacturer One Aviation. This would replicate the success SAIC saw in leveraging a platform partner on the ACV program. Partnering with SAIC would also benefit One Aviation by providing customer access, as although SAIC’s exposure to the Air Force is limited, it does have deep familiarity working with defense clients. Absent a strong partner or a larger, riskier acquisition play, SAIC is more likely to benefit from focusing on other training developments of 2015, such as its Federal Aviation Administration training contract win and the opening of its serious games studio.
Please feel free to use this content with TBR and analyst attributions. Contact Joey Cresta at +1 603.929.1166 or via email at joey.cresta@tbri.com for additional analysis.
