CACI International Inc (CACI) Earnings Call Transcript & Summary

Yes, I think that it's the people that you -- some of them are [ sistering ] kind of Leidos and Booz Allen and kind of General Dynamics and Accenture to a certain extent. And companies like that are the ones who are -- we're competing against in a good portion of the Enterprise space. In the Mission space, there may be some other competition, kind of BAE in terms of some expertise. When we get into the technology field, some slightly different kind of large defense primes have some of the competing types of mission technology. So it depends on where we are within our framework as to who we compete against. The competition is both somewhat similar. But as companies either kind of divest pieces of their business or combine in a dynamic environment, oftentimes, the names will sometimes change, but those core capabilities or those core competitors kind of remain the same as well.

Right, right. So Booz suggest that margins tend to be better on all new work, more modest on recompetes where folks can figure out what you have to do and sharpen the pencil. Do you basically agree with that statement?

So you mentioned all new work. It's kind of new, new. It's kind of relatively small portion of the work that we see. A good portion of the work is what's new to us is someone else has lost a recompete. So some of the large programs kind of move from one provider to another provider. In those types of work, they're competitive, but they're competitive on kind of best value in pricing technology. And there's no necessarily downward or upward pressure on margin associated with that. The new work, I'm not sure if it's materially different to the extent that is competitive. If it's -- in our case, more the mission technology work where we're creating a new counter-UAS technology or new signals collection device...

But that was one of our -- was a new technology, AI, move to the cloud, more cyber as opposed to just maintaining a system you installed several years ago.

Yes. I think that's probably a fair statement. Newer technology by definition is not commodity-like. And there's a life cycle of technology, new technology comes out, it's unique. It's kind of customers are willing to pay more for it. And over time, the cutting-edge technology today multiple years from now will be commodity-like. And we're seeing that through both, kind of either commercial technologies and the like. And so as the activities become more commodity-like, definitionally, there's more competition and there's less kind of margin. So generally, that is a fair assessment. Do you have any thoughts on that?

No, I agree. I think the only thing I'd add is if in a recompete, we're simply providing expertise, and 50 people with their expertise, and we're recompeting based upon that same set of people and someone else is coming and doing something very similar. You can certainly get yourself to a more price-sensitive competition. I would say, we take a very strategic view and a value-creating view when it comes to a recompete. It's introduced the new technology that Tom is mentioning, create additional value, don't just propose the same. Don't -- potentially, if it's an expertise-type program today, perhaps it can be a technology program tomorrow in a very different model. And again it's incumbent upon us to provide that additional value to the customer as we go through a recompete. And that's not at the time of recompete. That's something that we're working through the life cycle of that program to do, introduce these new technologies, get the customer thinking about new ways of doing things such that it's a -- we're increasingly providing value and adding value such that when that recompete does come around, it is not a price-sensitive -- solely price-sensitive based competition, and it's truly based on value there.

So you guys have separated into Enterprise and Mission systems, which is kind of interesting because most other guys they do defense, intel, they do it by the customer definition that way. What are the different ways you go to market or the business development strategies you have from -- for each sector. And how might they differ from one and other? And how do you think that they're different from your peers?

Yes. So we've thought for many years as to how to best describe to our investors what we do. And after a lot of thought around that for many years, we believe the way we can provide clarity is we provide enterprise solutions. An enterprise solution is virtually every government agency needs an email system, they need connectivity, they need a payroll system, they need a contract system. They need basic functionality to exist as an agency, huge demand. And whether we sell an IT system to an intelligence customer or the Navy or the Department of Agriculture, we're selling an IT system. And the end customer, it's not that relevant. It's the -- that CIO of that agency who wants to meet his or her kind of business objectives. And so that's the enterprise. At the same time, we help customers with their mission. So this is the agency that has that IT system. They need to prosecute a mission. That mission may be finding the bad guy. You should get a good intelligence mission. It may be paying taxes. It may be processing various types of payments. And for that activity, what needs -- kind of domain expertise within in regards to those particular missions. And to us, that's a better clarity of how kind of we manage our business. Then, within those 2 broad streams, we provide expertise, which is more labor-based in the support work. And we also provide technology, and technology could be an end system in IT system or a product. And that provides, again, clarity as to how we could manage our business and how we talk about our business. For the enterprise piece, a lot of commonality repeatable solutions, kind of migration to the cloud, agile development, Army Pay and personnel system, which has capabilities, which those past performances can be used for Navy, how to pay and personnel system. So repeatable solutions kind of missions are getting closer to the edge, understanding what the customers need to prosecute efficient.

Is it true for the way you're talking about it that basically this kind of Investor Day where you defined it that way is more a definition for the outside world to understand better and not a significant sea change in terms of how you run the business?

Yes, it's a combination of both. It provides more clarity. But in terms of running the business, we've always kind of -- we're focused on certain mission capabilities versus enterprise capabilities. And we were never organized by an end-user customer. And, again, there's multiple ways for different customers can organize -- different companies can organize themselves. We've never -- we've kind of recently organized around customers, but it's more around markets or capabilities. And this is a further kind of reinforcement of those capabilities. If you recall Investor Day, kind of DeEtte Gray has a business sector, which is largely enterprise. We have kind of John DeFreitas, largely, and Kevin Kelly and David Nack, largely mission type of focus.

Right. So one thing folks haven't talked that much about is your new shared services facility that went in last year. Has that -- I mean I assume that's been successful. Has that been a big differentiator over the last year? I mean is that pretty much steady state now? Or you're still getting benefits from it?

So approximately 2, 2.5 years ago, we took a look at some of our Enterprise capabilities to use that terminology; how do we process invoices, how do we manage payroll, how do we manage contracts, how do we handle job requisitions, and there was a variety of work that we did to support the Enterprise, which were more administrative kind of in nature. And a lot of that activity was being done in the Washington, D.C. metropolitan area, kind of relatively expensive, both in terms of labor cost and in terms of kind of real estate. And we took a good number of those capabilities, 200, 250 positions worth and relocated them or stood them up in a lower cost location, Oklahoma City. And we have a shared service center in Oklahoma City. And it's performing quite well. And what it did is it allowed us to reduce some costs, cut labor costs and cut real estate costs. But it also allowed us to create a center of excellence, where this particular kind of location can focus on driving efficiencies in those particular areas; how can we kind of use technology, how can we provide repeatable processes for some of those activities. One example I will give you is we've been embarking upon some kind of robotic process automation capabilities. Every day, we get anywhere between 300 and 400 notifications from various government payment offices, typically by e-mail on the state of invoices, so as we collect money. And it takes a person anywhere between approximately 10 minutes to kind of read the e-mail, digest it, update our kind of internal tracking systems and to provide the information for the organization to track statement processes. We created and stood up a RPA application of BOT, which will read those e-mails and use that information e-mails to populate our kind of internal systems, saving significant time and providing more timely actionable information. And so that created a -- one of the benefits of having that concentrated center of capabilities. As a result of spinning of the shared service center, there were cost savings associated with it. What we did was repurpose some of those cost savings and to resist the CACI. We looked at our -- several of our benefits are paid time-off program, our 401(k) program, what are we doing to attract people in high-level security clearances, and we took those savings and invested in our workforce to help train, attract people and retain people.

One of the things you mentioned, sort of with the robotic system. I mean you've gotten your DSOs down to 60 days, excluding MARPA. With the robotics system, are we going to go lower?

I hope so. One of our continued focus is improvement in kind of DSO given the collection activities. A combination of contract terms; how frequently we can invoice, what does the government customer require in terms of supporting documentation associated with invoices, can we create that invoice and get us out the door quicker? And then once the invoice is off the door, can we collect faster as well. But in order to get the invoice out the door, having some automated capabilities or through kind of lengthy reporting requirements for an invoice to the extent we can automate that, have more accurate and timely invoices, that will help the overall cash collection processes. And so we continue to focus on kind of driving DSO downward.

So if we go back over a longer period of time, fiscal '05 to '18, your cash flow conversion was around $1.5 million. This year, it looks more like $1.05 million, $1.10 million. Why has it come down? And where do you think it can go in the future?

Yes. So when we look at cash flow, we start with -- if I look at the incomes or the cash flow statement, we start with net income. We add that noncash items, then changes to working capital. I'm going to assume that changes to working capital are going to be somewhat static. We may grow working capital a little bit as we grow the company, but we'll slowly add to working capital as we grow. The big piece there is going from debt income to the noncash items. And some of those items, depreciation, amortization, cash compensation, we had some noncash interest expense that we are recognizing associated with the convertible debt instrument we had. We're greater as a percentage of net income several years ago than they are today. So that has influenced that cash conversion kind of level looking at net income to cash flow. Suffice it to say that we want to continue to drive in operating cash flow, and it starts with net income. So kind of grow organically, increase margin. Once net income increases, that should slow down the cash flow statement. These noncash items will be what they want will be and then kind of managing kind of working capital.

So I mean should they -- the ratio likely to stay where it is, you just did some bigger acquisitions?

Yes, I would think that it was going to stay generally where it will be.

Got it. Okay. So cash conversion has always been one of your strong suits, giving you ammunition to do deals, which you've done quite frequently. And so now that you've done Mastodon and LGS and actually taken a bigger step into the product area or sort of related product area. How shall I think about your acquisitions going forward? What are you looking at now, big, little capabilities?

Yes. Yes, so we're looking at big and little if you're looking at variety of opportunities. From an acquisition perspective, we start with strategy, so kind of what is our overall strategy, where do we want to go as a company, where do we have gaps in our solution set. It could be gaps in technology. It could be gaps in getting geographic footprint, contracts, customer sets. The area that -- we probably have kind of more opportunities in a slash caps would be in some of the areas related to electronic warfare, kind of broadly speaking. Several years ago, we did an acquisition, Six3 Systems, which kind of introduced us into analyzing the RF spectrum signals intelligence. LGS, Mastodon kind of dovetail into those particular areas. CACI product company has capabilities there and more white space for us because the technology is ever-evolving and very specialized capabilities. We do not want to be a platform provider, but we do want to be able to provide collection devices, processing devices, kind of payload, kind of related to various platforms.

Right. So a number of your competitors complain about the prices are so high. I guess my observation is the interest rates are so low. The money is so cheap, so I mean it seems like it's a favorable environment in which to be buying things. So are you -- you did some big deals, you did some little ones right after it. Are you guys still pretty aggressive in terms of looking and to see what's available. And do you agree that this is like a particularly good environment in which to be looking at deals?

Yes, yes. So we continue to look. There's a number of opportunities, still lot of activity in the marketplace, and we are kind of very active in looking at a variety of opportunities, all within that strategic framework. So I do think it is a good environment. There's a number of sellers out there, which makes it attractive as a buyer. The question of price is always interesting. There is efficient markets. And generally, the market for M&A in our space has been fairly efficient. We are a present-value decision-maker. To the best we can, we forecast future cash flows and discount them and that informs us as to what the purchase price is. Once I take the purchase price and divide it by either trailing 12 months or next 12 months, EBITDA will come up with a multiple, which is a statistic which has some interest, but kind of broadly speaking, a higher multiple implies that the company is growing more, and a lower multiple implies that the company is growing less, just kind of mathematically. And we'll continue to look for companies that drive that strategic value and also make sure the economics work and we drive long-term value to our shareholders.

Terrific. If you think about your business, like, what are maybe the 1 or 2 things that could make fiscal '20, the next year better than it looks today or maybe are bigger risks not as fully appreciated by investors as they should be?

Yes. So FY '20, we have 4.5 months left, I believe, so we...

That's all counting.

Okay, it's counting. So it's our ability to continue to win. Once we win work, how quickly can we kind of ramp up that work. Sometimes the win comes with an incumbent workforce, transition that incumbent workforce can execute on the work that we do. It's a competitive hiring environment, making sure that we can retain our employees. We attract new employees. Those are the -- I would say, the major kind of variables the operating tempo of kind of running the business. And then there's always more singular kind of M&A activities, which are harder to predict, which will overlay on those types of activities.

Terrific. That's super. Thank you very much. I appreciate you guys coming.

Okay, thank you, everyone, for your time.

That's great.