CACI International Inc (CACI) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to our conversation with CACI. I'm here with Tom Mutryn. Tom is Executive Vice President and Chief Financial Officer and Treasurer of CACI International. Thank you, Tom, for joining us today.

Thank you. Thank you.

So today, Tom is going to do a brief introduction about the company. And after that, we'll go to Q&A.

Okay. Yes, thank you, Mariana. And thanks, everyone, for joining us this morning. CACI is a $6 billion company, 22,000 employees providing a variety of expertise and technology to the U.S. federal government. So our primary customer, almost our exclusive customer is the U.S. federal government. And we look at our business within those 2 lenses, expertise is where we provide inputs. We have a series of qualified people with different skill sets, and they work to provide support for various government enterprise remission activities. We also provide technology and technology can be viewed more as an outcome. It could be a software product, it could be managing of an IT system. It could be an IP-based product as a delivery model, a variety of technology components, more focused on outcome. So that's how we look at our business from those particular lenses. We were founded in 1962 as a software company. That is our heritage software is ubiquitous the types of activities that we do. In the last 10 years, CACI has made a strategic shift as we continue to do to evolve to meet the changing environment. At that point in time, we were more enterprise expertise focused and now we've shifted to more technology. But right now, we're approximately 50% of revenue is technology, 50% is expertise. Our technology is more differentiated, comes with greater kind of margin characteristics and that part of the market is growing faster than the expertise. Both parts of the business are important, but they have kind of different characteristics. Areas of technology for us are C4ISR, cyber, data analytics, Counter-UAS, IT modernization, important areas where we have some capabilities. The result of this shift over the last several years has been technology growing at a faster rate. This past year technology is growing double digits. Our margins have expanded considerably up around 200, 250 basis points from where they were 2 or 3 years ago, generating strong cash flow and strong contract awards within large business. Our commitment to our shareholders is to grow faster than the addressable market and ever-increasing margins. And we've been successful doing that over the past several years, and we'll continue to focus on that going forward. And so with that as an introduction, I'll turn it back over to you for some questions.

Perfect. So to the audience, I'll start, but please feel free to e-mail me or Bloomberg me, and I'll pass-through the questions you have. So first one is the recent President budget request kind of like affirmed that defense budget is flattening out after several years of strong growth. How is CACI positioned to continue growing on this more pressured budget environment?

Yes. So the budget has not growing at the robust levels we saw in the last few years. The last few years, there was a lot of reset necessary to bring the fighting force up to speed. Different capabilities have been depleted for the past several years, and there was an important -- for the U.S. government to -- had to bring the military up to the appropriate ambient level of kind of readiness. Now we're growing at approximately 2%, which is a reasonable kind of growth level for the budget in total. But what's important is to look beneath that, and some areas are growing greater than others. Platform is actually a bill payer. The government is planning to spend less on platform, ships and tanks and aircraft, but significant growth in O&M, cyber and space up kind of 9% C4ISR, cyber, electronic warfare investments up about 9%. And also continued investment in the classified space. So there are areas which are growing, and our technology focus is based on those particular areas. So I think we're pretty pleased with the focus of where the budget is and how that aligns with our capabilities.

And how is CACI positioned to this growing arenas?

Yes. So as I mentioned, we have been focusing on technology in both through organic investments and through acquisitions. We develop technology capabilities. In the areas of IT modernization, we developed Agile software development at scale, which has allowed us to win several large programs for a variety of government agencies. We have expertise in managing large complicated IT networks, moving things to the cloud and maintaining cloud capabilities, partnerships with companies like Amazon Web Services. On the mission technology side, we have been investing several years in electronic warfare, signals intelligence, RF signals, counter-UAS. Some of that has come through acquisitions. Some of it has been developed organically. And at this point in time, we have some exclusive capabilities in those areas, which have strong demand signals.

Perfect. And you discussed this already in your prepared remarks that how has this trend ongoing -- like increasing your exposure to technologies change the company profile? What's different from like 5, 10 years ago? Because some investors might remember that the services companies were really impacted during the last defense downturn.

Yes. Around 10 years ago, a couple of things happened. One, there was a focus in Washington about budget deficits. It appears today, people do not care about kind of deficit spending. But at that point in time, they did, and there was a sequestration, the Budget Control Act, which forced significant cuts across the board. And we had a variety of expertise programs. Let's say, 100 people supporting a particular government program, and the government needed to reduce some spending, well, instead of 100 people, why not 90 people, why not 85 people kind of a death by 1,000 cuts, and that impacted a good portion of our expertise business, and that was coupled with significant drawdowns in Southwest Asia. We were reliant on a variety of pass-through activity supporting the U.S. Army in Southwest Asia. And with the reduction in activities there, we had reductions in revenue associated with that. Today, we're a different company. Our portfolio is more balanced. The technology work is longer term in nature. Lot of the work we win is in multiyear contracts, 5-year contracts, 6-year contracts, 7-year contracts, very much embedded in kind of mission activities to the government, more resilient to those short-term budget fluctuations. And our exposure in Southwest Asia is materially less than it is. Now we will see some headwinds going into our next fiscal year with troop drawdowns in Afghanistan. We estimate it will be approximately 2% revenue headwinds moving into FY '22. But bottom line, significantly more resilient due to our kind of differentiated kind of technologies embedded in some key government programs.

And then do you have a way to measure how large is your exposure to this like winding down programs or services more related to the legacy systems that the budget is trying to cut?

Yes. So those legacy systems are opportunities for us. As the government moves from some existing legacy systems and some of these legacy systems are 10-, 15-, 30-years old. These are kind of older IT platforms, not particularly secure, relatively inefficient. Some of the user interfaces are kind of less than desirable. And we have an opportunity to solve the government programs by providing some of our capabilities. A very good example is a program that we won a year or so ago called BEAGLE supporting custom and border protection, which is part of Homeland Security. $1 billion program over 5 years, where we are tasked with going in and modernizing a whole host of systems supporting that particular agency. We're driving it through Agile software development at scale, very quick, efficient way to deliver, kind of a real-time progress to that particular agency. So here is the case where there is a legacy system in our IT modernization capabilities provides an opportunity for us to support our customer.

Interesting. And what other opportunities is the company pursuing related to national defense?

Yes. So Mariana, a whole host. In our mission technology sector, one of the threats, which we see and virtually everyone sees, is the -- broadly speaking, the electromagnetic spectrum. How do we ensure that our systems are resilient in the face of hostility or potential adversaries? And at the same time, how do we look for vulnerabilities and other parties in your systems and capabilities? That is signals intelligence, secured communication, cyber, both offensive and defensive. And then in order to create situational awareness, ISR intelligence surveillance reconnaissance, a whole host of tools kind of machine learning, data analytics. There's massive amounts of data and how can we use artificial intelligence to shift through full-motion video are self-learning to provide information to the people who need that information. So the technology is very relevant to those government needs right now.

Yes. Interesting. And then I think CACI has differentiated itself from the other defense services guys with a higher appetite for products exposure. What is your strategy of like products versus services in the long term?

Yes. Yes. Thank you. So you're using product and services. I'm going to change the vernacular a little bit. I'm going to talk about expertise in technology. And so we deliver either inputs, expertise or outcomes, which is technology. And as part of that technology, we have some, I'll call them products. Most of them are heavily software enabled to take capabilities, to provide solutions for government customers. One good example is our Counter-UAS, unmanned aerial systems defeating drones. And we package it as a product buying commercially available kind of radars and antennas and processing power kind of interfaces. But what differentiated it is robust software behind it where -- while -- those antennas can operate, they scan the RF spectrum, and we're able to detect various signals, i.e., drones flying in a particular space. And we actually are able to kind of manipulate those and interfere with the user in the drone to provide defensive capabilities. So while it is a product, there are some physical elements to it, get a very much software-based activities. Another analogy would be some signal collection devices. Troops in the battlefield are interested in a variety of electronic signals. There is a person talking on the cell phone over there. There's another person sending e-mails or some kind of routers in a different location. It's important for the fighting force to be aware of the situation and the capabilities that we have and provide that through, again, high-low software embedded in some physical devices.

And then how much this mission technologies arena represents today? And how should we think it could be in 10 years from now?

Yes. The technology part of our business is approximately 50%. And out of that, probably 25% -- 20%, 25% is mission technology. The other part is enterprise technology. And this is an area where there is significant growth potential. I quoted some statistics on the FY '22 government budget where there was higher growth in those particular areas. We've been growing both organically and through acquisitions. Several of the larger acquisitions we've done in the past 5 years are in the mission technology area. It's an area where we have some gaps in our capabilities. We can grow through acquisitions. At the same time, we're investing our own dollars -- our R&D dollars to do -- improve our capabilities in those critical areas. So I would imagine it's going to grow kind of disproportionate over the last -- the next 5 or 10 years. And we can capitalize on some of the customer intimacy we have and the capabilities that we have. Now like any part of the business is competitive, there's other parties in place. But in some cases, we have more agility and less ties to existing legacy systems. And so we're able to operate without other companies self-imposed constraints being wedded to certain technologies or platforms.

Perfect. Yes, my follow-up question was around that, like I think the competitive base is different than the one you have on the other areas. So how that is a challenge for you? And how can CACI differentiates with these different competitors or a competitive base?

Yes. So we do a pretty -- a job there for year looking at our competitor strategies in different kind of market segments, kind of where is the customer going? What does the market look like? What our strength and weaknesses? Who our competitors are? And there are different competitors. First and foremost, it's important for us to have capabilities, and we fill those capability gaps through some acquisitions. Six3 Systems, probably 6 or 7 years ago, brought us some unique capabilities in signals intelligence, kind of high-level people who are able to decompose signals. We recently bought LGS Technologies, which had its heritage in Bell Laboratories, a series of scientists and engineers, who have in-depth knowledge of wireless capabilities, photonics, kind of laser-based communication protocols. And more recently, a company called AVT, Ascent Vision Technology, which has exquisite EO/IR devices, Electro-Optical/Infra-Red sensing devices with material -- large amounts of embedded computer processing to kind of deconstruct signals. And so those provide some technology differentiations, and we're able to package those together to create kind of solutions which are relevant for various aspects of both the military and the intelligence community.

Interesting. I'll switch gears now a little bit to organic growth. Organic growth has slow down to mid-single digits from the -- like high single digits we saw early 2020. What are the main drivers of that trend change? And what are the main trends that will define mid-term growth?

Yes. So what we saw in the last year was some impact of COVID. Our business was not impacted as much as several other sectors of the U.S. economy, hotel, industry, car rentals, airlines, but there were some impacts associated with it. Some government facilities were closed or restricted as to how many people could work at secured government facilities. In some cases, we saw some delays in tasking due to disruption of workflows kind of with the government. And we had some employees, who work outside the Continental United States, along with kind of military government employees. Travel was materially restricted, and those people were not able to provide those particular services. And so that caused some delays or slowdowns in the growth. Most of those issues are largely abated at this point in time. I did mention that there will probably be a permanent kind of reduction in Afghanistan's battle, provide some headwinds as we move into FY '22. But we do feel positive about our growth trajectory, growing faster than the addressable market. We think, overall, the addressable market for us in FY '22 will grow approximately 2%. So we should be able to do better than that. We'll provide our guidance for FY '22 in August when we release our FY '21 results. So stay tuned on that. What is Q2 growth, though, is the kind of award activity. The trailing 12 months, our book-to-bill ratio, the amount of awards we've won divided by trailing 12-month revenue, it's around 1.5x. A positive demand signal, we're winning more work than our current base of work is. Now some of those awards are multiyear awards, and it's going to take some time for us to turn those awards into revenue. But the fact that we're winning those awards, some of them are in the technology area differentiating with our capabilities, it's a positive indicator.

That's good. And you just comment about delays in tasking. We have heard that a lot in the industry, not only related to COVID, but also related to the change in the administration. Can you provide some color around that? When should we expect that to normalize? And how that could define your award pipeline on -- like throughout the remaining of the year?

Thank you. Yes. So I did mention that our book-to-bill in the last 12 months was 1.5. And so the government is awarding. It's just kind of work, kind of close to $10 billion of awards based on those statistics over the last 12 months. So we're seeing kind of good award activity and have not seen material or inevitable impact due to the change of administration. Many of the award decisions are made 2 or 3 levels down from political appointees. And the wheels of government continue to turn, no matter who's in the White House. We've seen that through kind of administration changes for the last 20, 30 years. So again, robust award activity, not seeing much due to the change in administration. We did reference some delays in task orders, which are -- we win a large award. There's individual task orders beneath that, which were impacted by COVID, not across the board. But in some instances, with some particular agencies, enough that it was helpful for us to tell our investors about that. One example was we were waiting for some task orders which we submitted last June and expected them to be awarded in July, probably $100 million, $120 million worth of task orders. And they were delayed and the government told us because of COVID, people are not coming to work, we can't kind of get together. Now at this point in time, in April, I believe it was, we received those awards. And so that is water kind of under the bridge, we were able to solve that. But that lack of work for that 9-month period had an impact and slowed down what our revenue would have been. But I think we're very close to getting back to a normalized level. Most government facilities are more or less opened up, relatively few restrictions right now. And the good news, at least for good portions of the United States, I know the world situation is different and you're in Brazil, some of the COVID activities are behind us.

Yes, I hope so. So I'll ask you now about defense for a while and ask you about federal civilian exposure. Right now, it represents about like 25% of your revenues. How should we think about that in the mid- to long term? What technologists, customers, growth rates and margins should we expect in the mid- to long term?

Yes. Yes. So we look at our business through the lens of expertise and technology, less about civilian versus DoD. And I'll give you an example. We spoke earlier about Agile software development at scale, whereby we have good capabilities to provide that. Two large Agile software development programs that we've won recently was BEAGLE which I mentioned, which was to Homeland Security, which is a civilian agency. Another large Agile software development program, along with other activities, is a TCS program, the name of it, to the National and Geospatial Agency, which is a DoD agency. So we're providing similar capabilities. And in a way, we don't care whether it's a DoD or civilian agency. This is a need among the government customer, and we will fill that particular need. So from that perspective, we're agnostic kind of where the money goes. We've seen some greater growth in some civilian agency budget request. But I would point out that some of those increases are kind of grants to other parties, which are not addressable by government contractors. For example, the Department of Energy has a plus up in their budget, but a good portion of that goes to fund research into green energy initiatives for research universities or private companies or not for profits. So in terms of the addressable market, civilian agency is robust, but it's more about the capabilities that we can provide rather than where does that particular organization sit on the U.S. government or charge.

Perfect. And then you mentioned capabilities after the SolarWinds breach, there has been an increased emphasis on cybersecurity. How can CACI benefit from that?

Yes. So I think the SolarWinds just underscored what a lot of people have been focusing on for many years. We have vulnerabilities in our cyber infrastructure. It could be commercial colonial pipeline, kind of ransomware. It could be in IT systems. It could be in other types of systems, communication protocols, how secure is the cockpit of the F-35. And so the threat is pretty ubiquitous across both platforms and IT systems. And we have developed capabilities for many years focusing on the cyber capabilities. I mentioned BEAGLE and TCS, large Agile software development, your cyber is embedded in those software development protocols. And as we focus on some of the ISR capabilities, how do we ensure that our systems are resilient in that signal collection activities that I spoke about, how do we look for kind of vulnerabilities elsewhere. So it has been a cornerstone of the work we do, both from an enterprise and a platform in cyber. And the recent headlines just underscore how kind of real and pressing this particular need is. And so I think that we're positioned well in a variety of those areas.

Interesting. And next one is going to be related to competitive environment. There has been some U.S. government incentivized to -- like for the nontraditional players to compete like more commercial technology companies to compete and serve the U.S. government. How has that changed the competitive environment? How is CACI position? Where do you guys choose to compete? Where do you guys choose to operate? And if you can give us some color around that would be helpful.

Okay. Very good. Thank you. Yes. So some of the large kind of commercial players are companies that we partner with. In order to sell to the government, there's a complicated protocol, the federal acquisition regulation, cost accounting standards, a different sales process than it is to sell commercially. And we've been doing this for a long time. And some of the large commercial companies view a company like CACI as a conduit to partner with. Strong relationships with Salesforce and ServiceNow, Amazon Web Services, Microsoft Azure, where we can take some of your capabilities and use it as a conduit to sell to the government. And so we've been seeing that quite a bit. There are some other smaller players who have some capabilities and kind of data analytics or kind of various analysis tools, which are capabilities that we have ourselves. Some of those players as a private company then kind of in the market trying to sell to the government, and they'll do so as a public company. But I would say, generally, the playing field has not materially changed. And our job as a company is to ensure that we have the same level of technology solutions that rival commercial players.

Interesting. And then not only you, but a lot of the different services companies depend on the talent. How -- what differentiate CACI on talent acquisition and retention? And how has COVID-19 kind of like changed the hiring and retention environment?

So first of all, we want to be an employer of choice. And I know a lot of companies say that. We do a regular process of serving our employees, measuring your engagement. The last engagement survey results were quite strong compared to industry peers, compared to the technology sector, compared to kind of leading organizations, a strong stickiness kind of among employees, so how do we generate that competitive pay and benefits are an anti to get into the business. We provide a variety of training, career advancement kind of mentoring, communities of practice in a sense of mission and purpose, a company founded on integrity, innovation, doing the right thing in helping solve some very tough problems, so people like kind of working on kind of in important things. And so that has certainly helped both our ability to attract people and retain people. A few years ago, we made a significant investment in our college internship program, bringing people in early on in their college career, a couple of summer rotational assignments so they can be comfortable with CACI. We're kind of getting your government clearances. And the success rate has been quite high, where 70%, 80% of the folks will get job offers from CACI, and a large number of people, accept the job offers. And so competing for talent is not easy. We're looking for people with kind of unique skills, and we're looking for people who have clearances. And so it's a smaller subsection, we're trying to create that employee engagement kind of very important.

That's good. That's interesting. And then probably, we have room for 1 or 2 questions. So next question, I'll switch gears a little bit to the financials. What is CACI's capital deployment strategy?

Yes. So the good news is CACI generates significant operating and free cash flow. How would we want to measure it as a percentage of revenue or net income, cash flow conversion and the like. And we have access to the capital markets, able to borrow money at a relatively low rate. So a lot of capital available to us. And we use that capital to drive long-term shareholder value. We've done a lot of acquisitions in the past. We have gaps in our capabilities, and let's use the ability to acquire companies to fill those gaps. And that's been a core competency for us. We've completed over 80 acquisitions in the past 30-plus years, and we're proud of our capabilities there. At the same time, we have a balanced and opportunistic capital strategy, which we spoke about kind of last March, April when we embarked upon a $500 million share repurchase program. We saw a situation where we had relatively low leverage at the time, less than 2x, a low interest rate environment. And we've looked at that compared to our acquisition pipeline and felt that we could buy some shares that will be considered an attractive valuation and still leave capacity to focus on acquisitions. And so going forward, we will continue to, on a real-time basis, look at those alternatives with the lens of how do we generate that long-term value to our owners.

Perfect. And then you mentioned these gaps you have and that you are willing to just fill with acquisitions. How should we think about them in terms of technologies, customers, contracts?

Yes. So I would say -- yes, yes. So most of the gap, we do a very good job in Agile software development, enterprise IT, we have kind of robust capabilities. The world of electronic warfare, kind of laser communications, photonics is complicated and other companies oftentimes have invested ahead of ourselves in developed capabilities, which would be very good additions to our portfolio, cutting gaps that we have. And so I would think that a good portion of our future gaps in acquisitions would be in that mission technology space, higher-end kind of technology companies think Mastodon or LGS, Six3 Systems, companies like that. And at the same time, sometimes these gaps that are either in the customer set or geography, and so we're looking to kind of create that balance with the focus on generating those long-term organic growth and higher margins.

Right. So we're getting now to 35 minutes. This has been really, really interesting, and thank you very much, Tom and CACI team, for joining us today. It's been a pleasure.

Well, thank you so much. I appreciate everyone's time and interest, and we're always available for follow-up calls and questions. So have a good day, everyone. Thank you.