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Executives

Stuart Davis - Senior Vice President Investor Relations

Kenneth C. Dahlberg - Chief Executive Officer

Mark W. Sopp - Chief Financial Officer

Lawrence B. Prior III – Chief Operating Officer

Analysts

Joseph Vafi - Jefferies & Company

Erik Olbeter - Pacific Crest Securities

Jason Kupferberg - UBS Securities

Cai von Rumohr - Cowen and Company

William Loomis - Stifel, Nicolaus & Company

Edward Caso - Wachovia Securities

Laura Lederman - William Blair & Company

Dhruv Chopra - Morgan Stanley

Joseph Nadol - JP Morgan

SAIC, Inc. (SAI) F3Q08 Earnings Call December 9, 2008 5:00 PM ET

Operator

Welcome to the SAIC third quarter fiscal 2009 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Stuart Davis, Senior Vice President of Investor Relations.

Stuart Davis

Here today are Ken Dahlberg, our Chairman, and CEO and Mark Sopp, our CFO. Our COO, Lawrence Prior will again join in the Q&A portion.

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 made 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’ll turn the call over to Ken.

Kenneth C. Dahlberg

In my judgment our third quarter builds on our foundation of strong performance with solid organic growth, good profitability, and efficient cash collections. We set the stage for further top line and bottom line growth by winning significant new contracts and building our direct work force.

Mark will discuss guidance in more detail, but we expect the momentum that we demonstrated since the IPO to continue through this year and into fiscal year 2010.

Earlier this year the government acted responsibly to ensure a healthy and stable funding environment during this administration change. First, the Department of Defense, military construction, and the Department of Veteran Affairs and the Department of Homeland Security received on time, full-year budgets with good growth.

Second, the rest of the government is operating on a long-term continuing resolution which carries spending at last year’s levels through March.

Third, last year’s supplemental appropriations bill fully funds war-time expenses into the spring of 2009.

We are encouraged by the appointments that President-Elect Obama is making as he forms his cabinet and advisors, especially on national security. So far it is a strong centrist team with knowledgeable and effective people. Moreover, the key players have demonstrated commitment to areas that we strive to excel in.

For example, Defense Secretary Gates generally favors quick response solutions and the Homeland Security nominee, Governor Napolitano, is an outspoken advocate for border security. We still do not know the nominee for Energy Secretary but regardless of the choice we do expect the administration will push for a carbon cap-and-trade program, which could help fuel our energy and environment business.

And it does appear that the selection process is on track to have the key leadership in place by the January 20 inauguration.

Now, our view of the future is essentially unchanged from what we have communicated in the past. That is, we do expect near-term trends to remain fairly stable. We will watch closely progress on the funding for FY2009 for those departments operating under the continuing resolution to follow on supplemental and certainly President Obama FY2010 budget submission.

It appears that there will be a major effort at creating jobs and reprioritizing some spending to restart the economy. We think that will be good for us.

We do expect defense spending to flatten in FY2011 and beyond as Iraq winds down and other priorities take precedence. We believe that services and solution programs will fare relatively better than large platforms.

We do have some exposure on future combat systems but that program now represents only about 3% of the revenue of the corporation and is more likely to get reshaped or pushed to the right than eliminated entirely.

Given our views on the market, we are aggressively addressing our cost structure through project alignment to be prepared for a more competitive environment and we are investing now in market segments that we believe will grow, such as our cyber security, energy and environment, and federal health initiatives.

We will also continue to invest in our core defense and intelligence business. Even if growth flattens, the need is still great. Events in Georgia and Mumbai suggest that the world remains a dangerous place and companies that are agile, innovative, and responsive to the governments’ needs will do well.

Turning to new business, we continue to accelerate our pursuit and capture of new business in this third quarter. New business bookings were a robust $4.0 billion for a book to bill ratio of 1.5, which puts us well ahead of our target pace for the year.

One of the keys to our business development success has been our dedication to pursue larger opportunities. We won six definite delivery contracts in the quarter greater than $100.0 million each, five of which are new or greatly expanded. These include the $410.0 million Army Human Resource IT contract, the $254.0 million Media Exploitation contract, which by the way leverages the capabilities of our newly acquired SM Consulting company, and the $226.0 million CENTCOM IT contract, all great wins.

With these wins, the backlog at the end of the third quarter was $17.2 billion, up 9% from Q3 of last year. Funded backlog was $5.7 billion, up 5% year-over-year.

The bookings and backlog figures do not include any value for the ID/IQ master contracts we won. In the third quarter we won ID/IQ vehicles with an expected value of just over $1.6 billion and including our estimated portion of the $6.9 billion F2AST contract and a recent single-award cyber job estimated to generate $170.0 million.

Having said that, even with the strong bookings in the quarter, we continue to see good opportunities. Our fourth quarter is off to a good start. So far we unseated a long-term incumbent on a five-year, $450.0 million contract with a key intelligence customer and we recently received an order of inspection systems from the U.S. Army of almost $100.0 million.

Our submitted proposals awaiting adjudication at the end of the third quarter were $13.0 billion including 23 opportunities north of $100.0 million. Our pipeline continues to build, as the investments that we made all year in bid and proposal expense is really paying off.

Overall, our [federal] business continues to drive our robust growth. Our commercial business has steadied. Commercial revenue was flat both year-over-year and sequentially but margins have improved significantly as we took the necessary steps to reduce costs.

One aspect of the company that really turned around over the last several year is contract execution. With thousands of contracts, there is always something on our watch list but we have not had a material write-down in quite a long period of time.

The most obvious example of this change is our Greek Olympics contract. Last month the customer accepted the system in writing, stating that the system substantially complies with the terms of the contract, with some omissions and deviations. While we are not completely out of the woods yet, things are looking up. This has been a tremendous effort by our whole team. I am really proud of them.

Employee recruiting retention continues to improve as well. For the fourth straight quarter involuntary attrition was down and hiring was up from the comparable period last year. Voluntary attrition was about 12% for the quarter and now stands at 12.6% for the year-to-date. The recession is undoubtedly helping with retention but so is our focus on employee engagement.

On the acquisition front, while we did not complete any acquisitions in the period, we remain committed to acquisitions that make strategic and financial sense and we are somewhat optimistic that some of the froth is coming out of the market. Although recently completed deals have been generally high valuations, now many of the books that we are seeing showing that sellers’ expectations are a little more realistic.

During the quarter we also decided to sell the products business from the AMTI business we acquired in December 2006. Having said that, the rest of the AMTI business continues to be core to our strategic intent as we are pursuing large opportunities in ground-based signals intelligence and support to the special warfare community.

The potential sale is immaterial to our results but we will continually review our portfolio to make sure all of our businesses are a fit for our future direction.

With that, I will turn it over to Mark for financial details.

Mark W. Sopp

On the financial front the results are very consistent with what we have been communicating all year, double-digit internal revenue growth, both from new wins and expansion on existing programs, progressively improving operating margins, healthy operating and free cash flow, and earnings per share in line with the range we set out to achieve at the beginning of the year.

As Ken mentioned earlier, with one quarter remaining, the bottom line is that we expect to meet or exceed our established long-term financial goals for this fiscal year.

Given that our core results are pretty much as we expected I am not going to spend much time covering those details in my prepared remarks here. There are a few unusual items in the non-operating part of the P&L that I do want to cover and I will spend the rest of the time on our views of the forward financial performance, both for the rest of this fiscal year 2009 and our initial guidance for next fiscal year, fiscal 2010, which starts on February 1, 2009.

To quickly wrap up our core performance, revenues were up 10% internally on strong performance across our defense, intelligence and homeland security base. We have continued to perform well on winning new contracts across the same set of markets and particularly contracts that are in excess of $100.0 million in expected value. This bodes well for visibility and stability going forward, as we set out to do deliberately.

In terms of revenue composition for the quarter, labor versus materials and subcontractors mix was about 59% to 41%, down from a 60%/40% mix last quarter. This can be attributed to heavier material procurements and logistics activity this quarter which was expected.

Contract type mix, cost plus, T&M, fixed price, etc., was essentially unchanged.

As we set out to do, operating margins improved sequentially from Q2 to 7.8% in Q3. We attribute this to strong program management that Ken mentioned and execution across our very broad contract base, improved profitability performance from our commercial business, and the absence of special charges that have hampered us in previous quarters this fiscal year.

High materials content on pass through activity on systems integration contracts did hold gross margin back somewhat. This year our border, port, and security product deliveries are more concentrated in the fourth quarter, which is one of the reasons why we remain confident that we will drive margins further northward as we finish the year.

Although internal research and development costs continue to rise as planned as we pursue market-making technologies for the future, overall SG&A spending was normal and came in under 6% of revenues.

Now let me address some of the unusual activity below the operating income line in the quarter. First, as we said back at our recent investor day, we moved all of our U.S. cash holdings to U.S. Treasuries for greater security in light of the distressed financial markets. With effective interest rates at well less than 1% being paid in this category currently, our interest income is about one-third of what it was in the same quarter last year if you equalized the cash balances.

Second, we recorded $16.0 million of pre-tax investment impairments in the quarter, all related to investments that we made a number of years ago when the company was actively funding technology start-ups. The impairments are roughly equally split between several venture capital investments and our investment in DINET, a German company involved in the telecomm services space.

In essence, these companies experienced a combination of revenue declines and liquidity problems concurrently and some are in fact are pursuing being sold at lesser values in light of the current economic conditions. The remaining book value of our venture capital investments, including DINET, is approximately $21.0 million.

Third, we concluded the federal tax audits to two fiscal years, 2005 and 2006, in the quarter and we favorably settled positions which we had previously established reserves for. This resulted in a $9.0 million non-recurring pickup in our tax provision this quarter.

Also, Congress recently extended the research tax credit for calendar 2008 and 2009 so we caught up the year-to-date effectiveness in the third quarter provision, reducing it by another $2.0 million.

These two items should drive our full-year effective tax rate to just under 38%.

Fourth and finally, we have decided, as Ken mentioned earlier, to sell the products business that was a small part of the AMTI acquisition back in 2006. This area is now appropriately reflected in discontinued operations. We have recorded about a $9.0 million impairment loss from the assigned acquisition intangibles and other assets that we do not expect to be realized upon its sale.

The combination of low interest income, the investment impairments, and the favorable tax provision had a net adverse effect on earnings per share from continuing operations of about $0.01 versus what we otherwise would have expected this quarter.

We still finished with EPS from continuing operations of $0.29, well on track for our expectations for the year.

Moving away from the P&L results, we finished the quarter with over $800.0 million in cash in the bank. Year-to-date operating cash flow is over $400.0 million year-to-date, well on pace for our target for the year.

Our credit statistics continue to improve as we grow EBITDA and hold debt steady.

We are also pleased with keeping our days of sale outstanding below 70 days. This is particularly notable this quarter as we converted about $1.7 billion of business to our new financial information system in early September, meaning our dedicated employees executed billing and collection activities fairly normally through that difficult process. This give us further confidence in the remaining conversions that we have ahead of us.

Now let me move on to forward expectations. For fiscal 2009 we see continued revenue strength and expect to finish the year at the high end or quite possibly above the top end of our 6% to 9% internal revenue growth goal.

As we said on our last call, if our pass through activity continues at the current pace, and it attributes to higher than expected revenue growth, it will make our margin improvement goal our toughest one to achieve. However, we remain confident in improving the fourth quarter margin to above 8%, which would allow us to achieve at least the 20 basis points of improvement year-over-year with operating margin.

The two main drivers to this are first, I said earlier, we have our heaviest quarter of the year in security product deliveries ahead of us. And second, we expect to see a net pickup as we settle our indirect rate variances in the fourth quarter.

Moving down the income statement, we expect interest income to fall about $3.0 million in the fourth quarter versus the third quarter and interest expense, which is based on fixed debt, to remain flat. The reason for the interest income decline is that we made our shift to U.S. Treasuries back in the middle of September so the third quarter didn’t reflect much of the reduced interest rate but the fourth quarter will fully reflect it.

In terms of other income expense, we wrote down our investment in DINET in the third quarter, primarily based on a new valuation of the enterprise and offers received for a potential sale of the business.

A sales transaction is being pursued and if the sale is completed in the near term, we expect to recognize a foreign currency translation loss in the neighborhood of about 45.0 million.

That said, given the market conditions, completing a sale will probably be difficult and if not done in the near term, any translation adjustment and thus any loss would be difficult to predict given the volatility of exchange rates.

The tax provision should return to normal in the fourth quarter, which with the research tax credit, should be about 39%.

These non-operational items, the possible to net-related currency translation charge, lower interest income, and a higher tax rate, represent some EPS headwind as we enter the fourth quarter, but all in we still expect to be comfortably within our 11% to 18% earnings per share growth goal for the year.

All year we have been tracking well and operating in free cash flow and we expect to finish this year consistent with the cash expectations we discussed at the outset of the year, which is our net income plus depreciation and amortization model, adjusting for special items, including an outflow of $125.0 million for the extra payroll cycle we have now been talking about for a year, and a new flow of $75.0 million for reducing our working capital, primarily keeping our days sales outstanding at 70 days or below.

That wraps up our forward view on fiscal 2009. Let me now address our initial view of fiscal 2010, again, starting on February 1, 2009. We have had a strong year generating new business and increasing the momentum on existing programs, which certainly positions us well for continue growth in 2010.

I said before, the ramp down on our MRAP communications integration contract leaves more than a $100.0 million hole but ramp ups in Pole Cam, AITS, and a number of new intelligence contracts, including two very important recent wins in the cyber arena, should allow us to recover and provide for net growth, all in.

In addition, as Ken mentioned, the new business pipeline is very healthy and that also bodes well for continued growth next year. Our planned internal revenue growth for fiscal 2010 is in the 6% to 9% range, consistent with our long-term goals. Within this, our government business is expected to provide all of the growth, whereas we project our commercial business, which is more directly linked to the economic conditions we are seeing, to essentially be flat year-over-year.

At this point, we have about 55% of next year’s planned revenue in backlog, another 41% in identified opportunities from existing contracts, recompletes, and near-term decisions in the pipeline, and the final remaining 4% from unidentified new business.

These statistics line up very well with the position we had a year ago coming into this current fiscal year.

While our book of business is healthy and we have a strong base defense and homeland security budgets in place for government fiscal 2009, the funds committed toward economic recovery do create, in our view, some uncertainty on the continuity of spending in national defense.

For this reason, our current operating plan prudently assumes lower revenue growth in fiscal 2010 than we expect to achieve in fiscal 2009. We will, of course, update that as our view changes over time.

For operating profitability, we expect to continue our operating improvement progress at a pace of 20 basis points to 30 basis points next fiscal year, consistent, again, with our long-term goals. The main drivers for expected improvement are continued growth in our higher margin security products business, improved mix in higher margin services and systems integration areas, largely fueled by some of these large winds, and continuous cost reduction and containment efforts that we have had underway for a couple of years now.

Thus, our expected core operating performance, that is our internal revenue growth and our operating margin improvement, supports obtaining our long-term earnings per share growth goal of 11% to 18%. However, achieving this EPS growth goal in fiscal 2010 will be more challenging because we shifted our domestic funds to U.S. Treasuries currently less than 0.5% of return. This may dilute our earnings per share growth by as much 2% if that condition holds true all year.

We will consider shifting back to higher return instruments only when we are satisfied with acceptable risks that will preserve our capital, our number one criteria. And it is quite honestly hard to tell if and when that will be at this time.

Our normative effective rate on taxes will also go up about 1.5% from fiscal 2009, which was unusually low, to about 39%, as I said earlier. But we also don’t expect to see impairment charges that we had in fiscal 2009 recurring so we are effectively planning on a net push in that category.

As we said in today’s earnings release, we expect to generate strong free cash flow and we intend to deploy our cash wisely to drive earnings per share growth and shareholder value through continued acquisitions and repurchases, assuming prices are attractive to us.

With all of this, we are comfortable we can still achieve our financial goal of 11% to 18% earnings per share growth from continuing operations in fiscal 2010.

Finishing up the fiscal 2010 outlook, our operating cash flows should line up very well with our model of net income plus depreciation and amortization. We expect capital expenditures to run on a consistent percentage to sales, as we have historically seen, yielding what should be a meaningfully stronger free cash flow result than what we expect to see in fiscal 2009.

Again, this gives us attractive fire power to invest in growth and shareholder value creation throughout the year ahead.

Standing back from all those details, the big picture is that our core government business is expected to continue to grow at a healthy pace and do so more profitably. Despite softness in our commercial business, we have taken steps to return its profitability to acceptable levels, and with this the enterprise as a whole has consistently met the long-term expectations that we set out to achieve in our IPO.

Despite the challenging economic environment that may represent or present some adverse financial consequences to us, our strong balance sheet, our strong business momentum, our excellent visibility, and our healthy cash flows allow us to pursue offsets so that we can deliver and continue to deliver strong earnings growth consistent with our long-term model.

I will turn it back to Ken for some closing remarks.

Kenneth C. Dahlberg

Well, as I have articulated and Mark has further clarified, in summary our business is strong. In the two years since the IPO our contract execution has been excellent and that is leading to good financial results and our ability to win new business and capture market share.

At our recent investor conference, we highlighted three of the primary drivers, our technology discriminators, our focus on strategic campaigns, and our strong management team. I believe that these factors will be even more important discriminators going forward.

With that, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joseph Vafi - Jefferies & Company.

Joseph Vafi - Jefferies & Company

I was wondering if we could talk a little bit about the VACIS business, if the kind of current economic environment might be affecting the pipeline there internationally. And then secondly on VACIS is you are still looking at about the same number of units shipped for fiscal 2009 as you had talked about last quarter.

Kenneth C. Dahlberg

I think to the contrary, I don’t see the economic conditions being that closely correlated to VACIS because this is all about fighting the war on terror and we are actually seeing a lot of interest internationally, especially with our higher power capability. So I feel going forward, especially with the recent winds that we got, our opportunities next fiscal year are going to be strong.

Joseph Vafi - Jefferies & Company

And the other question, just basically your planned shipments and sales for fiscal 2009, are they tracking to what you had previously stated they would be?

Kenneth C. Dahlberg

They are close. We may be off one or two units, but the profit in it will be strong.

Joseph Vafi - Jefferies & Company

On the margins, I know over the last couple of years you have kind of ramped up your bid and proposal engine a fair bit. Is it fair to think that there is operating leverage coming off of that run rate into next year, or do you think we are still going to invest more in that as revenue grows?

Lawrence B. Prior III

The trend we have seen is that it is increasing. We looked for the traditional wall between Thanksgiving and Christmas and haven’t experienced it, so we expect to continue to run hot as we go into Q1.

Operator

Your next question comes from Erik Olbeter - Pacific Crest Securities.

Erik Olbeter - Pacific Crest Securities

As you look into the SG&A, there was a significant reduction. Can you just go over that? Whether or not you expect additional level at 5.7% to repeat again?

Mark W. Sopp

As you recall, in the second quarter we had some non-recurring expenses in the SG&A, G&A in particular. The litigation place we had plus some severance dominated that, so we had higher SG&A last quarter, so if you are looking at the sequential decline that is certainly a big part of the reason. We also had a record revenue quarter in the third quarter which absorbed the fixed G&A more efficiently.

So, looking forward, we generally expect, although there can be variation from quarter to quarter, the SG&A line to be roughly 6% of revenues, give or take one here or there as things are volatile in the IRAD and B&P arena, which they tend to do, and any non-recurring things that happen in the G&A side.

Erik Olbeter - Pacific Crest Securities

And on gross margin, down [80] basis points of year-over-year, how much of that is really the VACIS and the other things you listed? Do you have a breakdown or a general sense you can give us?

Mark W. Sopp

I don’t have a precise breakdown but clearly I would say it’s probably not far from equal parts in lesser security product shipments coupled with larger M&S pass through this quarter.

Operator

Your next question comes from Jason Kupferberg - UBS Securities.

Jason Kupferberg - UBS Securities

I have a question on cash flow. I’m wondering have you built any additional expectations for pension funding requirements there? I know you have just that one pension plan with a single customer and I know there was some dispute there around obligations and obviously the market has worked against everyone’s pension plan. So I was just wondering if you have assumed higher cash contributions in the plan for fiscal 2010?

Mark W. Sopp

The one pension plan you are referring to is our single defined benefit pension plan that we have obligations on and that is in the UK and we are in process of evaluating the updated obligation, as well as the assets, given what is going on economically.

We started the fiscal year with an unfunded amount of about $20.0 million US dollars. I expect that to grow substantially northward when all this shakes out, maybe as much as double, but it’s preliminary. But the way it works is it would be incrementally funded over the effective remaining lives of the participants and so I don’t see it having a material effect on next year or any one year, given the length of spread that you deal with that.

A separate issue is the conversion of the contract, or the ending of the contract, and what happens then. That is a fiscal 2011 item and there are some legal issues there and we disclosed those accordingly in the public filings and I will leave it at that.

We don’t really have particularly high headwind on cash flow nor P&L effects from that pension given the spread and duration.

Jason Kupferberg - UBS Securities

And a two-part question related to the new administration. On the first part is are you and your competitors bracing for a more challenging procurement environment and if so how will that manifest itself?

And then given that the election has now passed, do you have a clearer sense of where your M&A priorities may lie over the next year or so and any more detail you can share there.

Kenneth C. Dahlberg

Well, we certainly can’t share a lot on M&A expect what I provided in our opening, is that we are starting to see some books with valuations being down a bit from historic highs. And I think that is good. Long term we continue to have an M&A pipeline of opportunities that we are looking at tied to our strategic intent, where we are trying to take the business. So that’s good.

Your first question, I actually think kudos to the Bush administration and to President-Elect Obama for really stepping up and working the defense team in particular as well as the economic team. We are at war. I think both the outgoing administration and the incoming recognize that this needs to be a seamless transition and so far things are hopping along quite well.

As I reflected, I really don’t think the Obama administration really can do much until they submit their FY2010 budget. So we are looking for things to continue. There may be a little bit of fitful starts and stops, but my goodness, we have had that for the last couple of years anyway.

Operator

Your next question comes from Cai von Rumohr - Cowen and Company.

Cai von Rumohr - Cowen and Company

So I don’t want to beat a dead horse, but VACIS shipments were somewhat light in the third quarter. Can you give us any sense as to how much higher you expect them to be in the fourth?

Mark W. Sopp

The pace in the fourth quarter of deliveries is about double that of the third quarter.

Cai von Rumohr - Cowen and Company

And then you didn’t repurchase any stock in the quarter, after having been a little more consistent in the earlier quarters. How come and how do you think about your deployment of cash going forward?

Kenneth C. Dahlberg

The general thesis of cash flow and the $500.0 million floor that we have talked about before holds true and the pecking order of cash deployment still hold true, so we have talked about that abundantly.

I would say that we made heavy repurchases in the first half of the year. As you will recall, we well more than offset our annual share creep, which is our model or our assumptions at our earnings per share growth goal.

And also, we were looking at quite uncertain financial and economic situation when we set course for the repurchase program during the third quarter and given those things, it just led to the decision of very little activity.

Cai von Rumohr - Cowen and Company

And how do you feel now? Do you think that the credit markets are starting to settle down and that therefore if things kind of go this way you may not have all of your money in Treasuries and you may buy back some more shares, or what would you need to see to make you feel a little more comfortable on that score?

Kenneth C. Dahlberg

That is really difficult to answer. And it is something that we are continually interacting with lots of advisors, as well as our Board, and I think the time right now is to be a bit conservative until we see some turning. It makes a lot of sense.

Also, to add to Mark, we weren’t kidding, we do think perhaps there may be some more books becoming available of some acquisitions that we would like to have some fire power but still stay well above that $500.0 million of cash required to keep our debt rating.

So I think we are taking a prudent approach in this period of uncertainty.

Cai von Rumohr - Cowen and Company

And if you look at your outstanding bids were down $1.0 billion from the second quarter versus last year, second to third they were down $2.0 billion, and you really had pretty good bookings in the quarter. Are you feeling a little bit better about the momentum you carry into next year?

Lawrence B. Prior III

We are feeling very good about the momentum going in, especially as we look at H1 of next year. Ken and Mark are appropriately prudent and conservative when we look at the second half, given that we will have to see a new FY2010 budget from the administration.

There were some timing issues and lots of decisions are concurrent with our in-process bids but when you look at the buildup of those $100.0 million bids, we like the momentum and everyone of our group presidents and business unit general managers are cranking lots of those small proposals, the $10.0 million to $15.0 million proposals, just across the enterprise right now. And we see that as very healthy.

Cai von Rumohr - Cowen and Company

You mentioned the acceptance by Greece. When do you expect to be in a position to close that contract out and what would you gauge that your odds are of maybe having some favorable adjustments when you do that?

Kenneth C. Dahlberg

I wish I could tell you. What we are very delighted in that we executed a contract mod and promised that we could deliver a system, and we did. And we got the Greeks to accept it. As you well know, but things go a little bit slower over there and our expectation is to build them for what is owed us after we have negotiated the omissions and deviations arena and then it gets on Greek time as to when this kind of issue will get resolved.

I think it is positive that they have accepted the system and I don’t see, at least right now, any reason not to assume we will come to closure. The only question is the timing, I don’t know when. Whether it will be favorable to the company or not, it could be slightly favorable. I don’t know yet until we have finished the negotiations.

Operator

Your next question comes from William Loomis - Stifel, Nicolaus & Company.

William Loomis - Stifel, Nicolaus & Company

You have $21.0 million in book left on all your joint venture investments. So we can view that as the absolute maximum if things continue to fall, potential write-offs. Are there any other issue out there that are hanging out on the balance sheet?

Mark W. Sopp

There are when you read the 10-Q which will come out tomorrow. I assume the total carrying value of such investments is $30.0 million. There are $9.0 million more above that $21.0 million for investments we have, largely in joint ventures and LLCs that are mostly program or project-related, some of which came over from Benham. I view that risk as less than the venture capital and the DINET category, but nonetheless, the risk.

And then that, in addition to the $30.0 million, is the $5.0 million of translation potential loss related to DINET, so that is not necessarily carrying value but it’s hanging out there as a risk as well, a currency risk.

William Loomis - Stifel, Nicolaus & Company

And the $9.0 million that you mentioned of programs, is that within your core markets?

Mark W. Sopp

They are.

William Loomis - Stifel, Nicolaus & Company

On the $450.0 million intelligence win, what is the status of that in terms of staffing and protests or anything like that?

Lawrence B. Prior III

We are in the midst of working the transition with both our government customer and in discussions with the outgoing prime and their subs. It’s early so stay tuned. Not seeing any protest filed and we are in discussions with the customer. It’s a significant strategic win for Larry Cox and his team and we are excited for them.

Kenneth C. Dahlberg

Very significant.

William Loomis - Stifel, Nicolaus & Company

Based on what you would understand right now, is this something that would be fully ramped up in the fiscal first quarter 2010 or later? Or sooner?

Lawrence B. Prior III

It’s kind of the standard 60 to 90 days. As you make the transition you will keep a governor on it with the customer, to make sure as you are transitioning subs that you manage that well. But you should see us entering the first quarter with a substantial amount of this work.

William Loomis - Stifel, Nicolaus & Company

And on the border security, particularly the high-end VACIS sales like you sold to Abu Dhabi, you said it will see a lot of impact with the economy. You would say even with the high end systems? Is there increased interest as those systems get delivered, that other countries are coming to look at them or is it kind of stagnant? How would you characterize that?

Kenneth C. Dahlberg

I would characterize it as kind of embryonic. We have broken through with a couple of key-country sales and once we get the systems up and operational and the value proposition is recognized, we expect to see more customer interaction.

Mark W. Sopp

There is also a forcing function out of the new Obama administration that as they increase the emphasis on inspection, any percentage requirement for inspection through ports will just have a ripple effect across that global market. We don’t expect 100% inspection numbers but what we are hoping for is just the first increment to begin that process.

William Loomis - Stifel, Nicolaus & Company

And on those five, when do they become 100% install and fully operational? All of them?

Kenneth C. Dahlberg

I think it’s next year.

Operator

Your next question comes from Edward Caso - Wachovia Securities.

Edward Caso - Wachovia Securities

Any of the uptick in past year revenues this quarter represent a pull forward from either the January quarter or FY2010?

Kenneth C. Dahlberg

Some of that could be occurring. It’s just episodic, you know, when the customers have the money and they need to acquire the M&S. it’s tough to time it. But it does happen annually, so the same kind of scenario you could expect next year as well, pulling forward.

Edward Caso - Wachovia Securities

Any update you can offer us on your real estate endeavors, to right size that?

Lawrence B. Prior III

We are proceeding ahead with facilities consolidation. Arnold [Perinaro] and his team have done a great job with what we’re doing in San Diego and we have got several plans underway in Northern Virginia. Remember, there is not a robust market for the sales of those properties, but prudent consolidation as part of project alignment continues on.

Edward Caso - Wachovia Securities

I am starting to hear some more chatter about BRAC. Can you talk about your positioning for BRAC and where maybe you could benefit?

Lawrence B. Prior III

What you have seen is that we are strategically positioned in many of the areas where movement of government personnel and work will flow. So if you think of the large position that we have got in Maryland, both in Aberdeen as well as in the Columbia area, we do very well. So we have got large organizations near Ft. Meade, large near Aberdeen.

We already have a significant presence in Northern Virginia and are well positioned for the movement to Ft. Balfour. But also we see a lot of opportunity both in Huntsville, as well as in Dayton, where we have got great leadership a part of our SAIC team. And working closely with governments as they think about those transition plans.

But we haven’t heard the drums beating any louder recently, just part of the steady planning that we expected.

Operator

Your next question comes from Laura Lederman - William Blair & Company.

Laura Lederman - William Blair & Company

You mentioned earlier that the acquisition deals you are seeing, the books that are coming across your desk, the valuations have come down a little bit. Could you give us a sense of what the valuations are looking like just generally? And also can you talk a little bit about the long-term commitment to the commercial business?

Kenneth C. Dahlberg

No, I am not going to talk about the valuations. In general they are coming down. I am not going to share much more than that because it gets into competitive kinds of issues.

The commercial business. I have not changed my mind on the strategic value of our commercial business. We have spent the last quarter or so daubing back the infrastructure to support what we think the near-term revenue outlook is and we are continually striving to do more what I call noble work as opposed to pure IT outsourcing. And that continues and the energy and the utility, the pharma space. While they are slowing down, we are well positioned as that turns.

Lawrence B. Prior III

I just returned from visits to Houston and then to New Orleans where I met with our team and customers where we support both upstream oil exploration and then the utilities industry. Both have tremendous potential as you put it in contrast to a couple of large declining contracts. So they have been able to develop new customers, new capabilities, and as we see it, it is still core to SAIC when you think of taking on global problems with science and engineering and technology.

The Obama administration is going to come out of the gates with initiatives around the cap-and-trade and we are well positioned in both energy and the environment to help the administration do that.

You will see initiatives around health care and our position from both the military and initial work with the Veterans Administration are going to benefit, we think, soldiers, sailors, airmen, marines, as well as it shifts to the total population. So we are optimistic that the company is doing the right thing, chewing up their margins and we are prepared for the future.

Laura Lederman - William Blair & Company

You mentioned on the call that the new administration’s focus on job growth would potentially help SAIC. Can you give us a sense of how you see that happening?

Kenneth C. Dahlberg

With our acquisition of Benham, which is in the design build arena, and as Larry mentioned, if there are really efforts going on with regard to carbon cap-and-trade, we are well positioned to take on, hopefully, some of those RFPs to bid and win.

Lawrence B. Prior III

And I would expect even in the core national security business, Congress will be prudent about when and what they do as it affects jobs over the next 18 months. Clearly, with Secretary Gates national security and effectiveness is job number one, but we contribute considerably to the exports of the nation and that will be part of their calculation.

Operator

Your next question comes from Dhruv Chopra - Morgan Stanley.

Dhruv Chopra - Morgan Stanley

You have obviously done a very job on the bookings and the pipeline continues to build. Can you talk about what you are seeing on the competitive landscape and if you are seeing any change in pricing behavior in the event that other providers are also seeing flattening growth environment?

Lawrence B. Prior III

The areas where we have won have been significant in terms of technical offerings and have been part of our plan to improve our margins. There have been several losses, especially around our recompletes, where we were beat on price. And Ken Dahlberg and the group presidents have purposely looked at our win rates and have tried to press to be very competitive on our technical offering, as what Ken would say, the noble work, and at times we won’t play that price shoot-out game.

In FY2011 it may get a little bit tougher and that’s all the reason why we want to tune up our cost structure and be ready for that environment.

Kenneth C. Dahlberg

I think it is safe to say it will get more competitive and that’s why we are addressing aggressively our cost effectiveness and efficiencies now so we can come out of this malaise stronger.

Lawrence B. Prior III

For example, the one win we talked about, the intelligence win where we unseated the long-term incumbent, it was our technical offering that won it for us. I would point out that was a five-year, $450.0 million contract, so as we begin to perform in the first quarter the context is a five-year contract. But it was won by our team giving a really strong technical offering and performance that they have earned over the years.

Dhruv Chopra - Morgan Stanley

And on MRAP, is that still running the $55.0 million to $65.0 million range per quarter?

Mark W. Sopp

It will slow down by about 25% or so in the fourth quarter and continue downward toward the communication and integration piece. There are two MRAP contracts. The logistics piece, that is OCONUS, is expected to continue at its existing pace.

Kenneth C. Dahlberg

Although it will be re-competed and if we win it will continue at its expected pace.

Dhruv Chopra - Morgan Stanley

And wasn’t there the potential for some follow on additional work, I think there was a lighter MRAP vehicle?

Kenneth C. Dahlberg

Yes, there is some notional MRAP-like vehicles. It’s not clear that that will go through the [spyware] contract. We are working that.

Operator

Your last question comes from Joseph Nadol - JP Morgan.

Joseph Nadol - JP Morgan

My first question is just kicking the dead horse a little bit more, just one more on the VACIS. You have been out there looking for an Army contract I believe that is a pretty significant size. Just wondering how that is going? Has it been awarded yet? When do you expect it?

Kenneth C. Dahlberg

We won that.

Joseph Nadol - JP Morgan

How many units was that?

Kenneth C. Dahlberg

It’s about $100.0 million.

Joseph Nadol - JP Morgan

On the cap-and-trade, I’m just trying to get my arms around it a little bit more what your role might be in cap-and-trade. You talked about it at your investor day. The transition group has put out a little bit more of an agenda, a five-point agenda, in the last week or so on the stimulus. Can you give a little more color on anything specific in there that you think that you can target? Or what your role might be in cap-and-trade? As an advisor to companies, how to comply with it? As an advisor to the government, etc?

Kenneth C. Dahlberg

The value proposition extends from front-end consulting to actually designing energy-efficient operations, energy management.

Lawrence B. Prior III

On our company website our recent edition of Science Disolution is really dedicated to our green business focused on carbon. There is a lot of detail on the company’s history, our current performance for the Department of Energy and many of the labs. We do everything from environmental analysis, we did a lot of the original research that looked at the effect of carbons on the environment.

But Benham will go in and actually improve the energy efficiency of plants, they will design plants for bio fuels and we have folks advising and supporting the trading markets that are out there today.

It is a very good edition and will give you a broad background in the company’s capabilities and all of our capabilities are there.

Joseph Nadol - JP Morgan

It sounds like some of the upside might be in the commercial side as opposed to the government side.

Kenneth C. Dahlberg

It’s in both.

Lawrence B. Prior III

It’s definitely in both and as you come out of the gate with the change in regulations, as you are trying to impact the market, it will begin in the government regulated side. You will see it flow fairly swiftly as the market takes place. When you do an energy-efficient plant today, you are penciling them out one plant at a time. If a carbon cap-and-trade comes in to create the currency for it, that’s a different value prop for many of our customers.

And that is a lot of the commercial side out of our Benham group.

Joseph Nadol - JP Morgan

Is there a number you have put on this opportunity? Whether it is a market size of which you can capture a share, or just a financial opportunity for SAIC specifically?

Kenneth C. Dahlberg

It is a long-haul opportunity. It is going to take a while for the Obama administration to get their act together, but we clearly see energy and the environment as potentially a strong business pillar for us, over the next there to five year horizon.

Stuart Davis

We have come up against the six-o’clock hour. If there are any other questions you can contact me or the rest of the management team and we will see if we can get to them. But I want to thank you for your participation.

Operator

This concludes today’s conference call.

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Source: SAIC, Inc. F3Q08 (Qtr End 10/31/08) Earnings Call Transcript
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