CACI International Inc (CACI) Earnings Call Transcript & Summary

Good afternoon, and welcome back to day 3 of Morgan Stanley's Virtual Laguna Conference. My name is Matt Sharpe. I'm the firm's government services analyst. And it's my pleasure to host the CEO, CACI, John Mengucci. Now before we get started, I do have a disclaimer to read. For important disclosures, please see the Morgan Stanley research disclosures website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, John, welcome, and thanks once again for joining us at the conference.

Yes. Thanks, Matt. Thanks to you and Morgan Stanley for having us.

Our pleasure. John, I wanted to start off by talking about CACI's market position, which you've worked over the last several years to pivot. Today, you're able to provide or post really solid guidance, 4% revenue on the top line. Nearly all of that is organic. Your margins are just shy of 11% despite what's really been an increasingly difficult backdrop from COVID-19 as well as dynamic as a result of an administration change as well as what's transpired in Afghanistan over the last several months. So maybe you could start off talking about what's different about the company today versus, say, the middle of last decade that's enabled you to post this type of performance expectation?

Yes, Matt. Well, look, thanks. And one word comes to mind, and that's really we've been rather resilient. There's -- I don't think there's ever been anyone in the marketplace today that was trying to drive a company forward in the face of a generational pandemic as well as having wars and moving more towards near-peer threats versus counter-terrorism. So many, many moving parts. But look, we're a very different company than we were 10 years back. Really pleased with the outlook. We are going to continue to grow faster than our addressable market. We are continuing to expand margins and results as really strong bottom line growth, which drives cash flow as well. What we did a number of years back was purposefully increase the amount of technology that was in our portfolio. But when we move down that path in a very heavy, heavy manner, it had to be -- it had to allow us to be very highly differentiated. I wanted to be software-based a software-defined. And I want us to be able to deliver more quickly than others. So many years back, we moved to this new network style setup, where across the entire nation, we've been doing software development, unclassified and classified from a number of different locations. We -- our actual first focus there was to find cleared employees who weren't just in the Northern Virginia area. So that was our absolute focus. I'd rather be lucky than good sometimes, frankly, we built that out. It was showing great growth there, and then COVID comes along, right? And it allows us to move work out of government facilities into our own in a much more nontraditional but very expedited manner. We firmly believe that the near-peer threat added to counter-terrorism meant that the threats were going to be very nimble. Our atmosphere is going to be very, very nimble. And that meant that most of this fight was going to go more nonkinetic versus kinetic. And what I like to say more bits and bytes versus bombs and bullets. So we want to make sure that we were an agilely focused company. We also retooled our entire business development team to make certain we were shaping our work. We were investing ahead of customer need. A very different methodology than a traditional government services provider that when the RFP comes out, we're delivering pretty much mostly just expertise. And you're waiting for the RFP to be released and then it turns into more of a commodity buy. So a retooled business development team where we bid less and we've actually been able to win more. We're shaping our future, really ends up with growth ahead of market. It ends up with predictable margin expansion and very strong cash flow. So yes, very different company than we were less than a decade back.

It's really rather impressive to see the difference in the shift. I mentioned the 4% revenue growth for the year. Let's maybe just drill down into this a little bit. Oftentimes, you talk about the company in the context of 4 quadrants, which you rolled out 1 year or 2 ago. Maybe you can just take the growth and help us or break it down into those 4 quadrants or talk about those 4 quadrants in the context of what you're seeing right now? Is there a hotspot? Is there a cold spot? Maybe what are the building blocks to growth this year for the company?

Yes. Thanks. So look, FY 2022, clearly, another strong year, at least that's what we haven't planned, 4% organic growth. If I -- it would be closer to 6%, if I exclude the Afghanistan work. We were very transparent on that. We always had about 2% of revenue within the area. Our folks have done a phenomenal job. When we talk about the war on terror, it's not about revenue. It's not about margins. It's really about life sacrifice and lives lost. And we were very much part of most of the action on the other side of the wire. So could not be more proud of the work that those folks have done. But as we get back to FY '22, we're going to continue margin expansion and drive really robust cash flow. You mentioned our framework and around expertise and technology, technology grows faster with higher margins. We've been very, very vocal and very public on that. Our technology work comes at about 300 to 500 basis points, better margin. And why is that? Because there's less competitors. It takes an awful lot of investment. It takes a different engineering skill set. But when you're doing that and a company knows how to move very, very quickly, you end up with a very profitable message and a very profitable portfolio moving forward. On the technology side, everything from IT modernization to large-scale back-office systems, digital applications and the like, all using Agile to some of our mission tech work, whether it's something in the SIGINT space, electronic warfare, cyber, photonics, laser space. But as I look at the portfolio, last year, I believe, Matt, we finished the year at about 6% growth, relatively flat in the expertise area and I think 11% to 12% growth in the technology area. This year though, those 2, as we start the year off were a little bit closer, they're a little bit tighter. That's sort of the way we have the year plan. Part of that is awards are choppy. RFPs are lumpy, too. So I don't worry about it quarter-to-quarter. And how we end the year could be very different than sort of that layout that we have today. But at the end of the day, our focus is going to be on software and really delivering as much software and as many technology jobs that need a software solution as well as continuing to move our expertise customers more towards a solutions-based RFP, where instead of procuring 200 people to do a task, you would think in the eyes of tough to get people cleared, talent in Northern Virginia as well as COVID. The days of wanting 200 people in a secure operation center may or may not be the right answer going forward. So we're very focused on how we move our expertise to customers more towards technology, and then that drives even better growth at much better profit and as -- and by the way, for our customers, a much lower price.

Got it. Got it. That's good insight there. I want to key in on a couple of things here said and sort of bridge it to your guidance range. RFPs, we all know, move around. Awards can be choppy. You've got a labor market that's tight right now. Help us think through what needs to happen in order for you guys to move towards the upper end of your top line guidance range this year, 6.2% to 6.4%? How should we think about sort of the risks, opportunities to push you there?

Yes. As I've always said, timing awards -- timing of the awards is the main factor. I've been in this business for a few decades, and it always comes down to that, right? As well as win rates, I'm very confident in the way we go about shaping business and what we're out there bidding on. So less on the win rates, but more on timing. And the other thing is, as I've been asking in the past is every customer has their own award plan personality. Some deliver right on time. Some award 3 months late, 6 months late, 2 months early. But FY '21, 1.5x book-to-bill, 12% backlog growth, driving out awards and revenue that deliver us 20 bps of margin growth to be and just a shy under 11. We're going to continue to drive free cash flow. The other thing we watch is -- have historically watched is staffing, right? I mean, are we able to find the right talent in a technology business, it is very different than coming from the expertise business. There's less connection between number of people and the revenue. Talent is much more fungible on the technology side. So we just have so many more options, Matt, both from how do we redeploy folks and then the number of folks we need to get some of our software-based solutions done. So it's really going to come down to timing. We don't have anything about COVID in our FY '22 guide. I really believe that we can sort of claim that once, but boy, we've all gotten pretty good. We're not experts yet, and I hope we never become experts, frankly. But we're out there doing the right things that allow us to keep this business moving forward and finish the year within the range of our guide.

John, you mentioned the backlog and the book-to-bill figures there, 12% year-over-year growth on the backlog side, trailing 12-month book-to-bill, 1.5x or greater for the last 11 straight quarters, by the way. How should we think about these leading indicators as signals for the medium term? I don't expect you to be able to provide us guidance for a year out, 2 years out, et cetera. I won't push you that hard, but in all seriousness, how should we think about that? Because at times, these figures can dislocate from growth. And other times, these are really strong indicators of what's to come.

Yes. So what I -- the way I like to look at it is it gives me a good measure how predictable my future growth is going to be, right? As we change the mix between expertise and tech, just those revenue growth rates change, right? On the expertise side, if there's no protest a month after you should have the majority of your staffing on board. So staffing rises quickly and then stays rather flat for the next 3, 4, 5 years. On more of our technology programs, there's systems engineering being done at the beginning. So there's a lower burn and then there's a higher burn towards the middle, and then we're actually delivering whether it's a device or a solution or a system, then there's a rather large top line hit, and there's also, I mean, pop and there's a really nice bottom line with that. So the other thing is the element of backlog growth is increasing duration. I mentioned it earlier, the average award duration for my FY '21 awards was greater than 5 years. That's going to up a year compared to 3 to 4 years back. So if you just do that, if you sort of spreadsheet that out, we've got much more predictable growth out for the next 2 to 3 years. You made a very important point also, Matt, in that 12% growth on our backlog does not immediately mean 12% revenue growth, right? Some of those are ceiling values. Customer priorities move all the time. It's why I wanted to peg. Our expected growth rate is always north of where our addressable market growth is. So if our addressable market, where we're placing a lot of these bets and where we do work is a 4% growth market, you should expect us to not lose market share, and we should be growing greater than that. The other element is how much of our work gets to end of life in any 1 year. And then how much is if our work ends up being recompeted. When we recompete work, that refills backlog, but it doesn't get the kind of growth you and I are used to talking on, right? With all those recompete wins are sort of allowed to take that same revenue forward for n number of years. So it's really that new business growth. But overall, that backlog measure, if it was negative 12, you and I will be having a very different chat today. In fact, you may be chatting to someone else maybe. But overall, it does give us really good confidence we can continue to outgrow where the markets go.

Yes. Okay. Got it. That's good color there. Why don't we pivot a little bit to the outlook here down in D.C., I should say. Over the last 12 to 18 months, as I noted, there's been a lot of change, whether it's Afghanistan, whether it's COVID-19, whether it's the administration, et cetera, how have your end markets held up throughout all that change? Where are you maybe seeing some of the stronger demand signals versus, say, some demand signals that might be fading? Provide us just a little bit of a sense of the evolution, if you will.

Yes. First off, COVID, we've been as transparent as we believe that we could ever be something that was new to all of us. And as I mentioned earlier, we're very -- we're as confident as we can be the -- putting no COVID impact in our upcoming year plan was the right thing for us to be doing. The Afghan was small. We signaled that early on in the third quarter of our last fiscal year, really made certain that we supported the United States government. And we were involved at the forward operating basis. So we exited all of those facilities as planned, and frankly, without an incident. So we have all of our folks out. But at the core, our markets are healthy and really not a lot has changed. Great, great power competition is going to be a key driver. But I also caution folks, it's an and versus an or. When the last administration on their way out, the new administration coming in, we're going to move to great power competition. We're not leaving counter-terrorism behind. And anything has just shown that and has either gotten capitalized or at least bolded because it's not going to go away. So how do we come up with solutions to actually support both? There's also new markets opening up. We are no longer deployed 2 very volatile hotspots around this globe. And the world is a rather dangerous place. And so how do we keep our eyes on what's happening there to make sure that we're well equipped and that remotely deployed commanders had the right courses of actions ready to go forward. We're seeing Cooker procurements. We're looking pace of the threat changing. So there's this need for speed. So how do acquisitions commands get solutions that are 80%, 90% good enough. We get them out there within 6 months because we invested ahead of need. At the end of the day, the customer is going to pay more for that. We're going to make more margin. But at the end of the day, the customer is going to get it a hell a lot early and much less work. Cyber, look, I don't think we can talk about that enough. I'm impressed with this administration talking about that a lot. So that's a very strong end market where we're starting to put dollars where dollars need to be spent not only on defensive, but on the offensive stuff. And we can go on and talk about IT modernization and space com and counter-UAS have all fared well in the current budget. We're watching the budget move through its paces, and we're seeing additional funding being spent, and those are in areas where we've got a really nice set of capabilities. I'd also tell you, Matt, that element dispense -- element expands defense, intel and federal civilian. And my only caution to the federal civilian side is, and when these budgets come in, we're pretty good at strategically looking at where we're going to go next, and we shred budgets. And I heard a lot about all the growth in the federal civilian area, about 15% by our estimates are actually addressable for anybody within this space. There was a lot of loans, there are things that the nation needs. But when it comes down to I think the large slug of money that went to Federal Civilian agencies, we're going to help 15% of it sure, but the other 85% not, but I like our balance.

Got it. John, you mentioned sort of following the progression of the budget through Congress and thinking about the budget in the context of some of the demand signals that you just highlighted. Obviously, demand signals need to be resourced. How are you thinking about the budget set up here, pending or the possibility of a CR? Is there any risk to this market as a result of where the budget is right now or are we going to be in just business as usual?

Yes. The way we see it, the President's budget had about a 2% growth in for government fiscal year '22 defense spend. And as I mentioned earlier, it's going to move its way through Congress defense. Looks like it had some upside, as I've always mentioned. Bipartisan support for national security is always going to be there. You sort of got to as a CEO of a publicly traded company, you cut through the rhetoric and really get down to, okay, let's look at the accounts and some of these customer threats and where those are going to go. And frankly, I'm very pleased with where the government is spending those dollars. We're going to be focused again on kind of -- and cyber and electronic warfare and space, those are going to be around for a while. Those aren't knee-jerk spends. Those are all long-term spends. And I think as we go forward as a nation, and all of our workforces are in different areas today. We shouldn't expect that COVID is the last thing that's going to disperse us when we would least like to be dispersed. So that sort of cyber attack surface is going to be greater than ever, and we're going to have to make sure from a national security standpoint, we have that covered. So confidence in the budget. I'm going to assume that, and this is a coin flip. We'll probably start up by '22 with a CR. In my 38 years, it's probably I can count on one hand, the number of years that haven't. So we know how this one works, and we've seen this many, many times, it's not an excuse for us not to grow. And if some of those new, new starts, we always find ways to get those started. So seriously just a nice feeling about the FY '22 budget.

Fantastic. Why don't we take this opportunity to just jump over to profitability for a moment and talk margins. The levels have been pretty impressive over the last, call it, 1 year or 2. There are dynamics, whether it's COVID-19 or otherwise that also sort of complicate the picture and make it difficult to some extent to sort of peel back the layers and understand what's driving expansion, what's weighing on it, et cetera. So my question for you is as you look at the business today, is 11% where it should be from a structural standpoint or is there opportunity here to continue driving it upward? I mean you guys have year in, year out, done a nice job of that. And so I think that people get acclimated to the trend line and make assumptions, but what are your thoughts there?

Yes. I like the fact that we're up a couple of hundred basis points over the last 4 to 5 years. It was very intentional. It has many, many levers as I'm sure you would know. The main driver has been tech growth, clearly. That has been a #1. And that includes the M&As and bringing those in, in a manner that they're driving this company forward with new capabilities, not just buying revenue at lower margins. We're actually buying capability and customer relationships in higher gross margin areas. I've always been focused on cost efficiencies. I'm not a big fan of cutting costs. And if I was, it wouldn't be where we are today, frankly, because back in 2012 and '13, going through sequestration I watched a lot of companies. You had to make that choice. You're going to cut everything down to the bone to get your rates lower so you can win in a nonpast performance LPTA world or you're going to eventually assume that as the pendulums do in this place, it kicks all in one direction eventually comes back to some new norm. And we made that very intentional decision to invest more versus less and go after low-hanging fruit costs and let's get ourselves efficient. COVID impacted our '21 margins in both ways, plus and minus, and we sort of net those out. But if I were to normalize it, Matt, because we always talk about that as we come out of 1 year, there's a lot of onetime events. If I looked at FY '20 to '21 and compare to '22, adjusted EBITDA margin in '20 would have been around 10.3%. FY '21 adjusted margin would have been around 10.7% when we're gunning pretty hard towards 9%. So what I like about it, it's steady. It's consistent. It's also healthy. Just like I always -- I'm always talking about unhealthy revenue growth that gets you through the next quarter, but it doesn't do a lot for you in the future. Same about healthy annual margins, if we're doing it from just cutting costs, that's not helpful. And frankly, we've been one of the few companies that other than a recent change to our EBITDA numbers and coming off of GAAP, just to take intangible amortization out, the rest of our report is clean. It's very, very crisp. There's no -- this year, I'm going to adjust out this and that. So I'm really proud of our -- of Tom Mutryn and his entire team. And so I'm going to focus on healthy annual margin expansion.

Great. That's good context. And then helpful to sort of unpack that margin story and appreciate sort of the underlying dynamic. When you kick that off, you touched on M&A there for a second. So I want to jump over to that component of the CACI story. M&A really capital deployment, maybe we'll start off with the latter. It was a few months ago that you started executing on a $500 million ASR, which is unusual for your company in the context of the last decade. So maybe you could just tell us what the motivation behind it was? Does this signal any shift in your capital deployment scheme? And anything else to just put that ASR into the context of how you're thinking about the business?

Yes. Look, we've been talking for a few quarters, if not the entire fiscal '21, Matt, around a capital deployment strategy that's frankly more opportunistic and more flexible. It doesn't mean balanced. Okay. I really chose all those words carefully. I still believe today that to generate the longest term organic growth, top and bottom line, is to add capabilities and customer sets to our portfolio. That will always be my absolute #1 belief. It doesn't mean that, that needs to be a single-threaded capital deployment strategy though, right, because available M&As, ebb and flow, our gaps are far less than what they were 7 to 10 years back. So whether it's additional repurchases, it's M&A, it's internal investments, it's debt reduction, capital returns doesn't mean we can't also do an M&A. We're 2.5x. Today, we're comfortable up to 4.5x. The ASR is just about running its course. So what I would tell people, it is a full throated and strategy. We should be able to do more than just one at a time. And I think that our shareholders should see us move out more with that and strategy just versus a one that was single threaded.

Got it. That point, you're 2.5x today, you're comfortable going up to 4, obviously implies a decent amount of firepower there. Well, can you maybe share about the M&A pipeline today and what gaps or areas you're looking to either fill or bolster?

Yes. It's a healthy market today, Matt. A couple of things have changed. You've got a lot of -- for some of the smaller companies, founders looking at where do capital gains go. Is this the right time to get out, then it gets clouded by higher than -- higher multiples than maybe we'd like to look at and some terms and conditions that are actually -- that's actually morphed and changed. But we've always been a disciplined acquirer whether there's been a lot of properties out there or down in the single-digit numbers. We're going to always look at things that have SIGINT and EW cyber, AI and analytics, probably 3 out of those 5 are actual factual. I don't want everybody coming after the same companies that I'm after. But that's what we're really looking to. But just those, Matt, really tell a different picture than back to your first question. The kind of company we are now, we have less gaps. I don't want to double down and start purchasing revenue. That's not what we'll go out there and do it. So we're going to look at IT modernization. We're going to look at different customers as well, frankly. We're very well positioned at customers in border patrol, in ICE and DHS, we see a lot more funding headed there. Are there some gaps there? Perhaps over the short term. Most likely in capabilities there that would help us. So we're seeing an awful lot of opportunities are all different shapes and sizes. We're going to keep more than a toe in the water because to me, doing acquisitions not only find them and getting them closed, but making certain that they're growing once they're part of us. We don't destroy value. That's a key differentiator for us and haven't done any one of them. A lot of companies out there looking to be purchased know that fact. And so it helps us attract the right kind of companies coming to us and helping us go into those well-funded areas. So more to come on that. And of course, it will always be an important use of our capital.

Got it. Well, John, we're up against our time, stops here. I've got one more quick question for you. If you have one more dollar of IRAD or you had one more dollar for your M&A program, what tech is it going against?

Matt, it's going to go against anything in the in the EW, IR spectrum cyber world. Because to me, you can't talk about cyber or SIGINT and EW had those be separate discussions. They're all on the same medium, and I'll sort of get back and end on bytes and bullet are -- bits and bytes is where the nonkinetic fight is. And bits and bytes were attacked every single day. We just don't hear about it, right? So that's where the future is. And that's going to be very relevant, whether it's near-peer or whether it's counter-terrorism. So I would spend my last dollar in those areas. And as you've heard me say in the past, dollar-for-dollar, pound-for-pound, if I can bid, work in a part of the market that's not highly entrenched, and you can differentiate based on tech. And it takes a reasonable amount of investment. I'm going to go to that versus one that there's 1,000 competitors out there because I don't want to be in a long-term commoditized market.

Great answer, John. Thank you so much for joining us here today. As always, it's been a pleasure. Hopefully, we can do it same time next year in person with a little luck.

That'd be awesome. Matt, thanks. Thank you to you and Morgan Stanley. We appreciate being here.

Thank you. Take care.