CACI International Inc (CACI) Earnings Call Transcript & Summary

So welcome to our next session with CACI International. We're delighted to have with us John Mengucci, who is President and CEO. And so it's been an eventful time. John, I don't know whether you want to make any initial comments, or certainly I think maybe to make the Reg FD statement so that we're all okay.

We're fine, Cai.

Okay. Good. So it's been an eventful day. Maybe you could tell us sort of with COVID, what impact has that had on your business?

Yes, Cai, thanks. Well, first of all, thanks a lot for having us. Really enjoy being at this conference and very, very happy to be supporting it. Yes, you know, COVID, we're executing through it. Sales are looking reasonably well. We're watching both direct and indirect COVID impacts to us. First quarter, growth of 6.1%; second quarter, 4 and change. We are watching 2 specific areas within COVID impacts. One is that our intelligence customer with these additional COVID spikes have reverted somewhat to the level of density within their skips. So that's basically how many folks can we put into a classified facility. So it has had some continuing impact on us. We'd expect that to find its way into our third quarter as well. And then secondly, really just trying to get our OCONUS folks to deploy. The government is still having issues with getting folks who have to be sent overseas through training, through screening and then get military air flights over there. But less those 2 areas, we are riding it well. Profitability, very strong first half profitability. Bookings looking fine. At the end of the day, COVID is still here, but we've been counting on strong execution and very confident still in our '21 guidance.

Got it. So COVID had an indirect benefit to margins in terms of less travel, lower medical expenses, lower PTO. Are those likely -- at some point, they're going to reverse, but where do you see us in that process?

Yes. Cai, look, we have seen reduced indirect spend. A couple of areas: first, our medical expenses are down, Cai, you would expect that. Many of us, unfortunately, are not going to our doctor visits where people are most likely deferring those. So you're going to see our M&L costs down, and those would most likely make their way back to a more normative level. We're seeing some other indirect costs that are down somewhat. We're -- at the end of the day, those are going to return to pre-COVID levels. But if you look at our earnings and our profitability performance over the first quarter -- I'm sorry, over the first half, some of that is driven by some of these indirect cost savings, but the majority are actually driven by strong program performance that we have been counting on over the last few years.

Got it. So Booz noted some slippage in bookings and sales in this December quarter. They cited administration changeover as a factor. I guess you mentioned a couple of factors, but it certainly didn't look like it had that much of an impact with you. Maybe you could give us some more color on that.

Yes, Cai, we've seen the same activity as we reported during the last 2 quarters. If you look at new bids and RFP releases and selections, we have not seen a material shift, Cai, in that to our first half. In the context of COVID, we did talk about some awards slippages, but that's more about getting task orders let to us on the current contracts that we're on, and I have to assign that to contracting officers are under the same pressures we're under. Some of us are on shift work. They're not in the office 40 days per week, Cai. So we're going to see some limited slips there. But overall, it hasn't been a material impact. The other part of your question, new administration coming in. Yes, it's true that there's a lot of physicians that are open and yet to be filled, but that's the same with every administrative change, Cai. And at those levels, I don't see those physicians impacting day-to-day activities. So there may be others across the sector that are seeing some of that, that may be a function of the kind of business that they are out there pursuing. We're looking at much less expertise work, a much greater percentage of technology work as we go forward. So that may be somewhat of the material impact that others are seeing versus what we hear at CACI or see.

And so what does the fact that we now have President Biden, we have a Democratic-controlled government, what do you think that means for CACI?

Yes. I can tell you everything that I know of, Cai. And as you well know, we continue to learn things each week and every day. Nothing really at this point. My expectations, budgets are over the next 2 years are going to be flat to slightly down. That's nothing of new news. But what I have been very public about saying is that President Biden had a solid 8 years of understanding just how dangerous this world is and how quickly that situation can change and become even worse. He clearly understands the value of the U.S. having the world's strongest military and the need for a strong national security posture. I believe we'll continuously have bipartisan support, although the budget, I believe, will be flat to slightly declining. But you have to look at where CACI stays. We're in counter-UAS. We're in cyber. We're in a lot of high-level systems and engineering work, and we're involved in everything in electromagnetic spectrum. So if you look at cyber, a very strong focus of the Biden administration. We look at AI and machine learning, a very strong focus of the Biden administration. Counter-UAS, how do you handle threats that are more bits and bytes versus bombs and bullets-driven? We're in a completely new era. Is counterterrorism gone? No. I honestly think that what the Biden administration has to grapple with is a world where we're looking at a set of ands versus ors, Cai. We're going to continue to have counterterrorism. We're going to have to worry about and Russia and China and COVID. So there's plenty of areas new administration is going to have to focus on. Last but not least is the entire IT digital infrastructure of the government and companies that support it. We were pretty much have been dispersed, right? The largest impact from COVID in the national security space, as many of our employees begin to disperse. We're no longer in a controlled classified skip. We're no longer completely in one of our own buildings. So as the IT infrastructure has changed, the cyber threat has changed, and the surface area of large-scale cyber threats have been expanded. And we've done a very well-orchestrated way of investing in both enterprise technology as well as mission technology. So whether it's IT modernization in the enterprise set or it's electronic warfare, RF, counter-UAS and the like, we believe we're very well positioned for where this administration's budget takes us.

So the recent Russian hack has been cited as a big deal. What impact is it having on your business?

Yes. That's quite a sensitive topic, right, but it's widely known, and I've been commenting on it. It's the tip of the iceberg that the entire public knows and the larger story and the more disturbing story is what is below the line of sight. As I mentioned, we're going to see the need of modernized IT systems. We're going to be -- have to be much more vigilant to those threats. It's a different time and space where you're defending our borders against platform-type kinetic threats, Cai, versus those non-kinetic digital type ones. It's a very different threat, and that threat is extremely real. And the reason why we don't hear a lot of it is because you can't see a lot of it, right? You can watch the nightly news and see kinetic attacks. You can watch nightly news and see those that are non-kinetic and digital in nature. So cyber has always been a very strong focus of ours. It's been a very deep core competency. Some of the acquisitions, such as older GS that get us into 5G and the protection of that infrastructure, is very, very germane to this topic. And I believe that Todd Probert, who runs the majority of our mission technology business, will be on your cyber panel as well. I'm sure he'll be able to talk more on that.

No, no, that should be great. So Biden is proposing $9 billion federal IT network upgrading. And presumably, there's other money somewhere for the intel agencies because they obviously are impacted by all of this. What do you see out of that, that you guys -- that you could comment that you guys directly could benefit from? Or what are you -- because we don't know exactly where the money is going, but just if you look at it, where would your guess be, the opportunities will be for CACI?

Yes. So a couple of areas, Cai, I'm going to revert back to what we do in the enterprise technology area as well as in the mission tech area. When cyber first came out, it was all about defensive cyber and putting virus handlers on your laptop and making sure that your e-mail still came in. I don't know about you, I'd be happy if I have a few days without having e-mail come in. But the folks, right, who are focused on mission, that's extremely important because the same networks carry both types of data. Where I see the Biden administration going is, frankly, investing in well overdue infrastructure, cost of federal government in the IT space. On the mission side, it's not just defensive cyber, it's offensive cyber. And it's a lot of what we call electronic warfare, a lot of what we call SIGINT. It's every bit and bite out there which is traveling in the ER spectrum some way somehow. And those companies that are very well adapt at finding it, finding signals, classifying those, putting defensive measures up and then understand how can you offensively attack those positions that are trying to interfere with those bits and bytes. That is a vulnerability that many study panels have made a lot of comments on. They've been pushing the federal government to get a better understanding of what the threat is. I would expect tens of billions of dollars to go towards a network infrastructure, systems resiliency, you can take that all the way up to the platform level in these mission packages. Right? If you have multimillion-dollar platforms that can't fully operate because of potential cyber vulnerabilities, whatever those may be, those are extremely important dollars being spent. You may not see those independently spent because they may be part of larger system-wide budgets. But make no mistake, in this administration, cyber threats and how we defend against those are going to be very important, and we're looking both to our enterprise tech and our EW Mission tech roles to benefit greatly.

So your December quarter book-to-bill was a healthy 1.45. 17-year average was only 1. So clearly, better than you had been doing, had a good first quarter. Trailing 12 is now an above-average 1.5. So clearly, the numbers would suggest you're winning more than your fair share. How come?

Yes. I was just trying to do the math on those numbers, making sure they were trending in a positive manner.

Yes, they are.

Good news. Well, look, Cai, this has been a part of a multi-year quarter-over-quarter focus on not only business development talent, but really repositioning the company 5, 6 years back, frankly, for us to really take a look at the kind of work we're out there bidding on, making absolutely certain that we're bidding on quality revenue. Right? We always get those questions about top line growth rate. My guide and my focus is to always grow top line better than the market's growing, but to always be driving bottom line margins. And to do that, it starts at the business development capture phase. It starts at the technology investment phase. What is it that the customer needs in the future? Where are those areas that don't have thousands of companies playing in it, where I can differentiate on price. I want to differentiate on the value that I bring and the type of outcomes that I can bring that customer. So part of this is bidding more wisely. Part of it, though, is not managing a win rate. It's doing all those right things that drive a higher win rate. And the last piece is, as nice as the numbers look today, awards are lumpy. At some point, they stopped becoming overly lumpy. But our performance is driven by all those factors that I mentioned. And nothing helps us more than on the recompete wins, Cai. And we had a very strong second quarter, strong recompete performance. That comes with operational excellence, right? That is 16 months in a row of delivering to customers what they absolutely need, what they expect and what sometimes they don't expect, which is stellar performance. Nothing begets recompete progress and recompete win rates than doing the work you have with that customer, doing it extremely well. And we've been more than blessed. It's actually one of our 3 tenants. We focus on it daily to make actually certain that the work that our mission and our enterprise customers allow us to perform to them today that we are able to continue to perform that year-over-year. So really nice numbers, really proud of the entire team. But it is an all-out focus from the day we decide we're going to go after something to our investments through the actual win.

So you talk about quality revenue. I think everybody would talk about quality revenues. If we go back to fiscal '12 and '13, you had a fair amount of revenues coming from OCO. Yes. I mean, you never did have a lot of in-theater work, but you had a lot of business under the S3 contract that was sort of subject to kind of going away when the wind came from a different direction. How would you assess today, I mean, do you have any of that business? Or is it more things that you're mentioning, like IT upgrades for cyber, et cetera?

Look, I mean, this question is really fundamental to our recent performance, Cai, and our expectations going forward. The bottom line is this business is drastically different than it was. And we would sit on calls in 2012 and '13 and '14, and you're absolutely right. We had one large contract that was driving a material amount of top line growth. And that's another proof positive that large-scale top line growth without bottom line growth does not beget a long-term strategy, frankly. We are a very different business going forward. Part of that was the drawdown. Part of that was the Budget Control Act, part of that was LPTA and better buying power. Fundamentally, what we created now in this company is, expertise is valued for us if it informs -- if and when it informs technology. But technology is driving growth and technology will continue to drive growth in this business. It's the right strategy we undertook 7 or 8 years back for a number of reasons. A couple of those is you get paid bills with bottom line earnings. And you'll also drive a longer term, a more predictable growth path when the number of months in your backlog, when the duration of program in our backlog grows. So if I went back, Cai, to 2013, 2014, the average duration of our contract in our backlog was somewhere around 30 months. It's over 5 years now. That's a material shift. It didn't happen overnight. It did take us time. But when the government gets back to flat to declining budgets, which is something we can always predict, we'll come along at some cycle. We want to make certain we were that company that for a multiple number of years into the future, we were involved in long-term sustainable work. $6 billion company, $240 billion addressable market, $1.5 trillion spend within the federal government. We are positioned much differently than we were back in '10, '11, '12, '13 and the like. We're much thicker across all of our quadrants, and you're very happy to say that there isn't one contract that's responsible for more than 3% or 4% of our annual revenue, which is extremely important. You have been covering us for a very long time, know that, that was not always the case. It takes a long time to dig yourself out of that. We were not going to become the low rate provider, we did the opposite. We have been focusing on IRAD spend, building differentiated capabilities, then allow us to go after different work than traditional government services providers go after, which may be part and parcel to some of the work that's slowing down is that work that is long-term professional services work that is just not that sustainable during periods of flat to declining budgets.

So along with all of this, your profitability has increased. Part of that, I assume, is moving into product-related acquisitions, LSG (sic) [ LGS ], Mastodon and AVT. Do you see further room for margin enhancement if we exclude M&A, if we just use the core businesses you have? Is there room for further margin enhancement? And if so, how do you get there?

Yes. So look, our past commitment and our going-forward commitment is to grow faster our addressable market and to drive -- expand margins every year. Even in years that we performed acquisitions over the last 4 years, our core business grew margins, and our margins were growing by acquisitions, right? Those acquisitions are not by accident. They're very well thought out. They looked at capability in customer gaps and past performance gaps, and they also tend to position us into areas that we're not completely strong in that we believe are going to be long-term government spends: electronic warfare, cyber, 5G, AI, machine learning, software definable devices and the like, and that sort of sums LGS, Mastodon and AVT. In any 1 year, you're going to get more from core than what we may acquire. But over the long term, at least the last 4 years, we have continuously driven bottom line margins year-over-year. And of course, that drives cash, cash flow that we can turn right around and deploy in either government-funded or self-funded IR&D, where we build our own intellectual property and it sort of builds that continuous cycle, right? That going after good work begets better margins and better margins allows us more investment dollars and more optionality as we go forward. So I don't think there's an end in sight for margins. But it all starts with what are we shaping for, what's our business development stature, what are we going to go after, are we going to go after areas that we could differentiate ourselves in other than the lowest rate or something that we can generate quarterly revenue on because we are not a quarterly revenue company. We're going to be a year-over-year consistent growth.