CACI International Inc (CACI) Earnings Call Transcript & Summary

Yes, good afternoon, everybody. We're going to get started here. I'm Brian Gesuale, for those of you who haven't heard me introduced yet this week or who I haven't met. Delighted to have CACI here to present. The company's President and Chief Executive Officer, John Mengucci is here. Their stock, for those of you who haven't noticed has been on absolute tear over the last few years. The company has really ramped up its business development, winning bigger deals with heavier content of IT and really accelerating, ultimately, organic growth and margins. So with that as a backdrop, John, I'm going to turn it over to you.

Great, Brian. Thanks, and welcome, everyone, and thank you for your interest. As -- forward-looking statements. As Brian mentioned, the company founded in 1962, 23,000 employees. The only 2 numbers to us that we focus on constantly is our revenue and adjusted EBITDA margin. We've been on an absolute focus to be growing top and bottom line year-over-year. A nice fact to add to this, 38% of our employees are veterans, which is not only good for us to do, it's actually a great business for us. What do we do? We're a national security company. And we deliver Enterprise and Mission outcomes to our government clients using expertise, innovation and technology. Brian mentioned this move towards more tech, it's really adding on to an already well-qualified company, delivering expertise. Think of that as delivering talent, but greatly augmenting that with the addition of technology deliveries. We talk about our business in 2 different areas: Enterprise customers and Mission customers. The way we differentiate those, our Enterprise customers, these are folks who are buying everything that allows their internal agency to operate. Think about HR systems, supply, supply chain systems, financial systems, all the enterprise IT, communications, networks and the like. So everything an agency needs to be a functional agency each and every day. We talk about Mission customers, and that's really where we deliver capabilities that enable the agency's mission. So SIGINT, cyber, comms, C4ISR and the like. So now we're talking about the mission that our customer is out there prosecuting each and every day. On the Enterprise side, $130 billion addressable market, 5-year CAGR, about 2%. We have an outside firm look at all of the budget growth rates every -- each and every year because that's what we base our revenue top line growth numbers on. On the Mission side, $90 billion total addressable market growing at a CAGR of 6%. So a smaller market because we're newer to it. And we don't have fully built out capabilities as of now. But overall, when I get asked about government budgets, $750 billion budget, $220 billion addressable market, we're a $5.5 billion company. So the way we look at that, we've got plenty of places to go chase, plenty of ways to continue to grow. We talk about our mission. We introduced this during our Investor Day, this past September around looking at both Enterprise and Mission, we deliver expertise and technology. And that really frameworks what our company does. Many times in the government services space is people have that quick assumption, tough to differentiate. It's only based on labor rates. The very top part, the expertise on the Enterprise, on the Mission side, a lot of that work is very price competitive, absolutely true. The difference is we get to the Mission expertise side, you're really talking about not only delivering talent to the federal government customers, but need to have an exquisite understanding of our customers' mission. So something that differentiates us each and every day, we have 700 individuals from CACI that are on the opposite side of the wire, supporting special operations forces on every story that they operate in. That's not just delivering to somebody to watch some blinking lights in an IT operations center, it's actually people who are engaged in the absolute mission. And that differentiates us on the Mission expertise side. You can see what we deliver on the technology side. On the enterprise side -- on the Enterprise technology side, around end-to-end information technology, cloud and many of the as-a-service models, but everything in the areas like business systems and enterprise applications. Some of your traditional enterprise IT don't -- deliveries. On the Mission technology side is what we've been focused on in the last 5 years. It's really been about building out an area that's really focused on electronic warfare, cyber, communications and the convergence of everything in the RF spectrum. As a strategy for this company, we firmly believed 5 years back, that eventually, the government would begin spending billions of dollars on electronic warfare and more nonkinetic means. So there's plenty of jets, ships, planes, outstanding companies provide those today, but we believe that the future of the war fighting effort was going to be more nonkinetic and in the area of signals collection, how do I communicate with my fellow blue forces, how do I find all of the red forces, how we understand what is or out there doing. And that very much differentiates this company going forward. Percentage of revenue to sort of show you where our fighting weight is. About 50-50 between expertise and technology, and we provide much more Mission work than Enterprise work. So why is that important? Margins on the expertise side are sort of low to mid-range, in the technology area, mid- to high range. In that bottom right-hand quadrant, where it's mission tech, that's where we've seen the majority of our growth. And we're going to continue to invest there. We're going to continue to see growth there. And if you look at gross margins from the top left to the bottom right-hand side, you can expect gross margins bottom right to be 2 to 3x what it is we would traditionally get, if we were a pure government services contractor just providing people. Strategy, very, very simple: win new business, drive operational excellence, take those earnings, redeploy that capital and that strong, strong cash flow for growth. Company has done an outstanding job, winning new business, and I'll talk about that in a bit. Driving operational excellence is really a core competency of this company. When we sign up to either deliver expertise or tech, we're going to make absolutely certain that we can deliver. Company, again, founded 1962, a long track record of growth, a long track record of making -- meeting commitments and not many companies are around 48 years after they were founded -- 58 years after they were founded. Driving operational excellence, again, is very, very crucial to us. And then we do deploy our capital for growth. Quite impressive record of growth. We used this chart for all of our Investor Days. We also use it when we acquire companies. Companies who are about to get acquired want to know they're going to a very financially stable business that has an absolute strategy that is very much in line with where they're heading. Commitment to shareholders. First off, organic growth and a drive to continually beat the growth rates of our addressable markets; second, margin expansion, continuous 10 to 30 basis points bottom line EBITDA growth; and third is deploy capital in support of future growth. A little about no revenue with no earnings start, without winning awards, and this company has done -- we've done outstanding job the last 4 years of retooling our business development organization around shaping the kind of work that this company wants to go out and perform next. So if you take a look at enhancing business development, it all started off with bidding less and winning more, and bidding larger jobs versus smaller jobs. And this whole concept of bidding less, winning more means that we need time to shape what our customers' outcome is, how we would solve that for them, make absolutely certain that we're just not spending bid and proposal funds to go win new business, but we actually got a better-than-average shot of actually winning that work. You'll see an unheard of fiscal year '19 win rate of 70%. 7 or 8 out of 10x we show up to bid we're winning. I always remind investors, awards are lumpy. So you'll never hear us use a term record, except my IR guy who's in the front, decided to put it in the third bullet on the chart. But you'll actually hear us talk about making certain that the things we're bidding on, we have a better-than-average shot of understanding where that outcome is going to be. So there's many large jobs, there's other small jobs, you won't see us bidding on. That's probably because we have a very specific focus on the strategy of things that we want to go out there and bid. You can't manage a business by your win rate, but you can grow absolutely, exquisitely well, if you are being absolutely certain that the differentiation and the capabilities we have are most sought after by our customer sets and that's what differentiates us. Year-to-date awards already 2/3 of fiscal year '19. I hate to give forward-looking statements, but you can extrapolate that and see an even better FY '20 award and set of -- book of business coming. Those awards do accelerate organic growth in the future. So if you look at our typical expertise award, when those jobs are awarded after the federal government protest period, those jobs ramp-up quickly. May be in a period of 30 to 6 -- 60 days, and you're generating a total period of performance revenue for the entire life cycle. What's different about our technology wins is those jobs ramped up -- ramp up a little bit slowly. Because we're doing development on behalf of the federal government, or we're delivering products where we've invested ahead of need. We're actually working through what is it the customer actually wants to buy. So we want to make sure requirement set is fixed. And that takes anywhere from 3 to 6 to 9 months. Then we bring on system engineers, software engineers and the like. And that's where you start to see revenues start to grow. Many of the questions, we've got 6 straight quarters of absolutely phenomenal awards and -- but our organic revenue growth is slightly behind some of our peers. We actually are very satisfied by that. Because what we're doing is we're priming a very large pump of technology-type awards that eventually build revenue in 1 year from now, 2 years and 3 years from now. So the larger the jobs that we're winning and the more technology focused they are, the longer term those contracts are. And the last bullet talks about longer contract duration. And the way I ask investors to measure that in the marketplace that we're in, is we've increased the duration of contracts in our backlog over the last 2 years by 18 months. So the average size of a program in our backlog is 5 years, not 3.5. In our market space, that means we're going to recompete over time, far less than my competitors recompete, which means I'm going to keep having to bid on work every 3 to 4 to 5 years to hold on revenue I already have. Our duration in backlog is 5 years, which means a material amount of our work is at 7-year contract cycles. If we -- when we keep that pace up, we're recapturing all of those investment costs that we spend each and every year, rewinning work that's already in our revenue base and moving that towards new work. So additional investments that are outside the customer sets we have now and that's what's primed the pump for this outstanding awards, and it also drives higher organic growth in the out years. You'll see an industry-leading 2.4x book-to-bill, again, awards are lumpy quarter-to-quarter, but year-over-year, it's actually a huge indication to us that we are investing in the absolute right areas. Talking about margin expansion. Driven by higher technology content. Over the last couple of years, we really accelerated our level of independent investments. So IRaD investments outside of the government cost recovery portion of our rates. So with the acquisition of LGS in January of last year, we picked up another tool for our toolbox around investing ahead of need. So we took a look at all of the technologies as well as products that someone who's worried about electronic warfare, signals collection, cyber and communications out on the battlefield have and start to invest ahead of need. Invest ahead of need means that we're moving part of our business to more of a commercial like model. So the iPhone wasn't asked by any of us. Someone else went out and created and drove it as a valuable device, and we find ourselves paying $1,500 each. The way the government traditionally handles device type products that can do those types of things is they're buying one device for every mission they have. So there are SIGINT collection devices, there's communication devices, there's electronic spectrum devices. And our model here is invest ahead of need, come out with a single device that has enough throughput, enough power, that's small, that's lower weight, has a higher power capacity and could do far many more features and deliver that in a commercial-like item. What that does for our customers, it gets our customers' products ahead of or very close to when they need it. Second thing it does for us is it drives margins. We have investing ahead of need. 100% of the intellectual property that we put in all of our technology solutions is owned by us. That's a secondary feature to a very different business model that government contractors use today. They use the government's funds to pay for your IR&D. The government gets general purpose rights. We like the model better that we're going to invest ahead of need in these very specific areas and make sure that we own the intellectual property. So that allows us to maintain it and allows us to drive higher margins. At the end of the day, a customer gets that device sooner. Will they pay more for it? Absolutely so because it's much more complex and does many more features. But at the end of the day, there's no upfront government investments. Bidding appropriately, absolutely so improved profitability at the program level. We look at 200 of our top programs across this company, and they're reviewed every month, not only by the chain of command that owns them, but by a separate chain of command throughout the company. So I make absolutely certain that from an operational excellence side, there's 2 sets of eyes on our 200 largest programs. That's what drives top line growth because we continue to deliver with excellence. And that drives bottom line growth as well. Talk a little bit about overhead leverage. Our ability to manage indirect costs clearly drives every ounce of efficiencies, and we opened up a shared service center 2 years ago this coming July, where we functionalized all of our transactional business across the company, $38 million savings, allowed us to get ourselves into a footprint in Oklahoma City and not in Arlington, Virginia, where rents are about 1/8 of the cost, employee costs and salary costs are about 1/3 of the cost. And we're able to maximize all those transactions we do across our company. What we did with the $38 million? We reinvested it in our employees. Better health care plans, better work-life balances, different pay time out schemes and the like, everything that our customers -- that are employees asked -- ask for. Be great if we had that story, but then we follow that up with but we're no longer investing, and we're no longer increasing margins. What we've been able to do is because we're a strategy-based company, strategy of the place, where we come from. And so how do we get ourselves to a model where we maintain rates, we win more business, that book of business is higher profit levels, without disrupting our current workforce. So how do I improve retention, lower attrition, also attract folks to it. This has been the equation that has worked the best. So we are investing, and we are increasing margins. We have not been the company over the last 4 years that says we're working on top, top line growth. We're going to take bottom, bottom line down. Since a lot of our costs are cost recoverable, it takes an exclusive way to balance costs we're not a cost -- cost of goods sold business. So we want to invest in talent. We want to invest in growth, want to invest in our capabilities and our efficiency. So the shared service center is a large one on the efficiency side. Capabilities, we spend about $25 million of our own monies, generating intellectual property that we can then put into our products. The one thing that differentiates those capabilities is the fact that we are generating software-defined solutions in a high-powered device. So think about as much memory, and as much throughput I can put in the device, let the software that we download to it define what mission it's going to take place on. Should remember that I talked about having 700 employees, who are out on the wrong side of the wire, helping the special operations forces prosecute every mission that they have. That means every week, we're getting feedback reports from all 700 people. Here's the devices that worked well, here's vendors' devices that didn't work well. It'd be nice if we had a device that did these 3 things versus 3 separate devices. So that informs us. We spend our own money, generate intellectual property then deliver those solutions to our customers. Deploy capital. Very important part to this company's history has been a serial acquirer of talent and of capability and of customer sets. We've completed 79 acquisitions over the last 22 years. We've done about 18 acquisitions over the last 7 years. It's really around a strategy based on finding gaps. And then if we have time, invest, so we own the intellectual property. That's the cheapest way. Partner, if it's a commodity like item, like Amazon Web Services or Splunk or someone else who have got a very narrow, deep cylinder worth of business and capabilities that it's more of a commodity type add on to our solutions and then we'll partner and on the acquisition front. And we're always looking for acquisitions that give us a capability or a customer set. And those are the 2 most important things. The third is around culture, is to have the right culture to work within our corporate framework. We got a long track history -- a of long history and a long track record of driving growth within those companies. But most importantly, they've allowed us to go ahead and grow. Because the more capability sets we have when we absolute need them allows us to almost 2 and 3x what those individual companies would have done on their own. Strong cash generation and ample debt capacity, day sales outstanding, 51 days. We've been working on that very, very stringently. It's part of everybody's bonus metric. It's not only good to deliver capabilities to the customers, we enjoy it when our customers pay us in a very timely manner. And that takes an awful lot of focus, and we're extremely focused on it. Pro forma leverage 3x. We're comfortable with up is -- with as great as 4.5x. We've been at that level in the past, but we've now delevered the majority of the acquisitions we've done in the last couple of years with about $1.5 billion worth of dry powder to continue to look for companies to provide us long-term capabilities, long-term customer relationships. FY 2020 guidance. Organic revenue growth of at least 7%. We started the year with a guide at the midpoint to 5.5%. We're up at 7% and expect to finish this fiscal year that ends in June, June 30, somewhere in that area, about 15.5% revenue growth over the last year and EBITDA margin growth of 90 bps. So we're very transparent, 20 bps of that came from core CACI, 70 bps of that came from the 2 acquisitions that we did last January. It's more a function of the kind of work that they bring to our customer set. It fills a great capability for us. So we've been driving 10 to 30 bps each year. We decided to break that out just to prove that it wasn't the acquisition that got us this year's EBITDA margin growth, it really is better, better wins and making certain that we have an absolute handle on the kind of business that we're bringing in. One of our favorite charts. We're doing our right thing over the last 20-year period, it's hard to argue what a dollar investment in CACI looks like versus the S&P 500 and the aerospace and defense companies there. Continually focused on shareholder value, as we have the last 58 years, and we will continue to do that going forward. With that, that's our entire presentation.

Great. Thanks, John. So we do have time for a couple of questions from the audience before we go to the breakout room, if anyone has any. I'll just -- go ahead, please.

Any coronavirus impact you guys noticed.

No. I mean, we're -- we are in some areas, embedded with our customer set. So we have people all over the globe and some in very dangerous areas, but we're sort of wedded and connected to our government customer. So nothing else there. We're being very cautious in making sure that our employees who are going to travel to the 7 or 8 designated countries, let a senior leader in the company now. We make certain that no more than a number of people are traveling to the same conference or whatever it is because just from a continuity of operations, making sure that we don't end up with people who are quarantined for 14 days and it impacts our performance.

And then I just have one for you, John. Can you -- your M&A has been such a lifeblood of your overall strategy. Can you talk as the types of businesses you're looking at buying have changed over time, more tech heavy? Can you talk about that pipeline because these companies just don't erect overnight?

Yes. So a couple of comments to that. In the recent past, we've been looking for very tech-heavy companies. But again, we're a company -- we look at strategy across all the 5 markets that we serve. We are consistently finding gaps as our customer moves. But the last few years, we've been very much focused on the tech side. . What's more interesting is about how we like to go about doing it. We will look for companies that we can partner with initially. So majority of the acquisitions we've done in the last 7 to 8 years have been exclusive in nature. Because we like to understand how their technology works, does it truly work the way it's advertised. And more times than not, we find ourselves an exclusive relationship, usually with founder-based companies. That works well for us. It works best for the founders because we recognize over a period of 20 years, founders love that value piece. But secondarily, very close second is what are you going to do to my company, and how are you going to treat my people. And we have a great track record. We tell every new potential acquisition, the leadership team. We give out phone numbers and e-mail addresses to last 7 companies that we bought and had them talk to the previous CEOs of companies that we've purchased. Because those are the people that should be -- that can provide the best for APAC. So overall, very much tech-focused mostly in the EW, SIGINT and cyber areas. Doesn't mean we won't go outside of that, but our focus today is going to be in those areas.

Great. Thanks so much, John. We're going to end it there. Cordova 4 for the breakout session. John and Dan will be there to address any other questions. John, thanks so much.

Thanks so much.