CACI International Inc (CACI) Earnings Call Transcript & Summary

Great. Let's shift gears a little bit to the talent of topic management. It's been a complicated year. Would you give us kind of the latest lay of the land on this front? I mean it's obviously been a bit disjointed with voluntary turnover being generally very low, vacation times kind of off trend, if you will, and really just inherent challenges of finding talent as the economies were closed. It's also been a couple of years since Amazon announced their landing in the area. And maybe just give us an update there on your overall thoughts on finding talent.

Yes. First off, the hiring environment for us. It's always been very competitive. It's always been very, very challenging. We could be sitting here in 2012, I would have said the same exact thing, right? STEM enrollment is down. Trying to get folks into the national security space, having to go through a clearance, this generation, "What do you mean I can't have my cell phone with me for all the hours that I'm at work?" There's been a lot of challenges out there. COVID throws that in there. We're at an unnatural low attrition rate today, clearly, because not many people would change their job in the middle of generational pandemic. So I would expect that to maybe more normalize. But what I told my team is this, Brian, when COVID struck, I sat down with our senior leadership team and mentioned that our people will judge us when COVID is behind them, not during it, okay? I'm pretty happy to say we've been judged pretty damn well. I think we did far more things right than wrong. We pulsed our workforce continuously because none of us were experts. And people have a lot of connections all over this globe. And we got some great ideas from crowdsourcing. Where do we go next? How do we keep a skiff clean, right? Those are going to come from people who are sitting in the skiff. So when you took care of those employees, so far, attrition levels have held. They've not surprised us. When I look at the hiring environment out there, I'm hearing many people talk about how challenging it is. It's always been that way. And frankly, as a CEO, if I'm not there winning business that I need to hire people at, I ought to already know that, okay? I ought to not be bringing that forward after I won that business, saying, "If I could only find that people, I'd be able to grow." That's the foundational element of a people-based business. So what are we doing differently? One of -- 1 out of every 4 of our open reqs are filled internally. That means people are getting a chance to move around the company. 1 out of every 3 are from a referral. So I got it that it's tough to hire people out there. Newsflash, it always has been. Wages are going to increase because some people have fallen out of the marketplace because of COVID. We understand that. 60% of our business is cost-plus. Those costs are going to get passed on to the government. The government expects that. That's why they contracted with us in a cost-plus manner. In our firm fixed price work, we've got to be more -- I lost my train of thought. We have -- more efficient, thanks, and we have done that. So hiring is tough. Hiring is always going to be tough. But I don't think that's the reason why we can't grow top and bottom line. It's our job to make certain that we're getting people to come to us and not go to other places. And part of that's because we run a great operation here. And we moved into technology, and that brings a whole another class of folks. You mentioned Amazon coming into town. I wish more high-tech companies would come into town, okay? That would help hiring. I always say about that being such a negative and a threat. Again, you got to look for the opportunities here. People run to the West Coast so they can do high-tech work, really smart folks from great universities on the East Coast. I'm all about them staying on the East Coast and actually doing great technology for defense of this nation. That's a much better way from where I sit. So it is a challenge, but we're up to it.

That sounds great. Let's maybe talk about the award environment. We're mid-August here. Government's fiscal year is obviously coming to an end. It's been a bit of a kind of a lumpy year, not that the years aren't typically lumpy on the award -- from an award timing standpoint. But maybe can you talk about how you're feeling going into the fiscal year-end? Talk about some recent successes and really anything you can share with current pursuits and quantify maybe what you're looking at between tech and expertise opportunities and just give us a lay of the land, John.

Yes. So on awards, I was talking during this latest earnings call and got a similar question. And as you've always heard me say, awards are lumpy. Every time I get some congratulatory notes, congratulations on the best awards quarter CACI ever had, I usually look forward a couple more because I probably have the worst, right? And it's just timing.

Yes.

But on the awards front, customers have different personalities as to how they award. You would want a company like us to really understand those personalities. Been in business for almost 60 years. If Jack London were on this call today, Jack would say it's about trend lines, my friend, right? You got to understand how customers deliver. It wasn't that long ago, 5, 6 years back, we were talking about sequestration and delays in awards. And we put a 90-day buffer in there because some customers award late all the time. We have not seen anything different other than task orders in the intelligence community being awarded in a timely manner, which you can make a logical sense out of that, right? There are acquisition folks who make decisions on the main award. And then there's day-to-day contracting officers who issue task orders. Those day-to-day folks are in the same COVID-filled buildings that we're all in, right? So they're 1 week on, 1 week off. You wouldn't expect them to be that productive as they were in the past. It doesn't make them bad they're trying to stay safe. And that has sort of ceased, and we've seen task orders come out. So how do we see awards? Look, FY '21, $9.2 billion, 1.5x book-to-bill, 11 consecutive quarters of strong awards, some really nice recompete wins. DTRA, all of our desktop work and all of our IT and cyber work at DHS, USDA, on our web SCM job, all that is technology work and mission expertise work. We had a great NGA award, a little under $400 million, around AI-based computer vision. How do I take full-motion video and take 70% or 80% of the analysts' work away from them and sort of prescreen some of that video work? That's all real-life AI work. And I talked about photonics. Pipeline, it's a healthy mix of expertise and tech. I continually say that, that mix varies with timing. But both are important to us at long-term success. And I have to tell you that we're winning more and more work around Agilent scale. We talked about a little over $1 billion job last year with the customers in border. We are -- we actually run the 2 largest Agile-at-scale programs in the federal government. That's a key credential. And you can't get great at Agile if you didn't invest 4 years back because you got to have the infrastructure, you've got to have the right software engineers and the right IT talent. So it's all about investing ahead of need. So $240 billion addressable market. You've heard me say this so many times, $6 billion company. Every time one of my leaders says, "I'm not sure where we're going to grow." I sort of share $240 billion addressable market and a $6 billion company.

John, that's great. That dovetails into maybe a follow-up here on the addressable market size. You talked about the $240 billion. Maybe talk about the growth rate and if you've set targets for how you want people internally and externally to think about your growth over market. And depending on how you're growing, I think it's been -- probably since you joined the company, we've seen EBITDA margins almost double. So how do we think about the margin profile 3, 4, 5 years out?

Yes. So on the top line, yes, you're absolutely right, Brian, $240 billion addressable market. When -- I also often get those questions at least last year. If the defense budget goes from $750 billion to $710 billion, what's CACI going to do? So I'll probably look at a $240 billion addressable market and continue to grow. The measures I wanted to put in place, working with Ken initially and then becoming CEO in 2019, is the internal, external message have to be the same, okay? And so we can all keep that simple, keep people focused. We want to grow above the growth rate of our market. I won't always be taking market share. That doesn't necessarily mean we have to have increasing budgets. It needs to be we need to be in the right places, right? I got to be grazing in the right fields. And there's got to be plenty of nice green grass there. If it's dirt, there's 1,000 companies there. That's not going to help us grow. So I always want to grow above our market growth rate. Market growth rate the next 5 years is about 3%. Will that vary? Absolutely. If different things happen around the world and budgets change, yes. But -- so we're going into FY 2022, 4% organic growth rate. Should have been 6% had we not left Afghanistan but we did and so it's 4%. Last year was a little bit better than that. What you're seeing us focus on, though, is I don't need to be the fastest-growing company. I need to be generating the best quality of earnings that I absolutely can. There's plenty of companies that do it. There are plenty of companies that deliver phenomenal shareholder value, not growing 0.5%. It's all about how we run this business and making certain that when we put our valuable bid and proposal monies down, our marketing dollars down, we want to make certain we're going to place them on those areas that we've done the best shaping with our customers. We got the highest probability to win. We've got to do that more often than not. So market growing to 8%. Bottom line margins, look, we were at somewhere around 7, 7.5 about 5 or 6 years back. The fact that we're coming up on 11 and not a single time if I talked on an earnings call about if I just hadn't won that low-margin job, I could improve margins again, okay? We are very much focused on -- we focus on margins today, we bid the job. We focused on margins 2 years prior to when our peak comes out. So a lot of things are going to vary year-to-year. What's not going to vary is this company is going to continue to grow top line at better than our growth rate and ever-increasing margins. And that's what we've put on the board. We've done what we said we were going to do year-over-year, and that's the ethos within this company.

You certainly generate your fair share of cash to say the least as well. So I definitely like to see that. I think that kind of feathers into maybe my final question here. Capital deployment has been front of mind for investors. Historically, CACI has really tilted heavily towards M&A, and it served the company very well. And you're probably the premier acquirer in the space. This past year, though, you leaned into a very accretive ASR. Many believe you're very open to another ASR. Has there been a change of mindset with the company? Or are the caliber of companies you're looking at, have they shrunk now that the quality of CACI has moved up so much? And so how much should investors read into this change and what your appetite looks like going forward?

Yes, Brian. So look, I wouldn't look -- when I look at our capital deployment strategy, it's not a mindset change, but it is a change in tone, okay? More opportunistic and more flexible. So there's a couple of things. And since becoming CEO, I spent a lot of time looking at this, listening to a lot of investors and sort of trying to reset the fact that we have a large range of options. With the size of the company we've become, with the kind of work we've gone after, with our focus on improving day sales outstanding, with our focus on cash management both collections and outflows, we're a larger, financially stronger company. I always tell folks, I don't want scale for scale's sake. The fact we're larger is the fact that we have much better quality of revenue than we had in the past. And we have a mindset in this company that cash is just as important as top and bottom line growth. So I think what you're seeing us do on top of that is that we've built quite a nice business. You mentioned we're an acquisitive company. We know how to do it. That doesn't mean that's the only thing we should be doing, okay, because I'm going to harken back to a strategically based company understands where their gaps are, okay? We understand how to go fill those. We have spent a lot of money internally, internal investments, making sure we can own intellectual property because guess what? We bought companies who are really sharp on understanding where customers are going. We're embedded. So we understand the technologies that need to come. So we've got all those pieces that says, "We're the best-positioned company to go out there and build what the customers need next." And if I'm doing that well, I'm investing more money internally and less than M&A. And I probably don't have as large gaps as I would have had when I got here in 2012, frankly. So all of that sort of goes into that mixer. And you sort of look at there's healthy M&A pipeline out there, but I've got to be a disciplined acquirer. There's a lot of nice companies out there. And frankly, terms and conditions are not as favorable as I like them. And I'm not going to change terms and conditions. I'm going to accept because it's more competitive. I'm going to do the right thing. But we have built a company now that has just as much chance of investing and building things internally than we do purchasing them externally. That sort of doesn't put M&A as the only, it puts it as one of. So share buybacks, getting down debt, we're comfortable at 4.5x. We're at 2.5x. If we sit quiet by the end of this year, we'll be down to 1.5 turns, and we can resolve about a turn of debt every year. So look, we're very much focused on being more opportunistic and more flexible. And we're going to place cash where we absolutely believe is the best way to both get long-term growth and short- and long-term shareholder value. And that's where we want to get to. And we're -- finally, then, we can have these deeper discussions around we've got a great cash war chest. We got great free cash flow. We're balancing cash collections with our CapEx investments to make sure those stay in line. So we are now at that point where we always wanted to be, growing bottom line and frankly making certain we're making the right investment. So everyone out there has our commitment. We're going to utilize cash flow, deliver the greatest long-term shareholder value. At the end of the day, that's what we're looking to do.

It sounds like a great message to end on, John. Always a pleasure. Thanks so much for joining us. And investors out there in the virtual world, thanks for joining us and look forward to seeing you all in person at some point again. Thanks, everybody.

Brian, thanks so much. Be well.