CACI International Inc (CACI) Earnings Call Transcript & Summary

Okay. Good morning, everybody. Thanks for joining us. My name is Matt Akers. I'm the Aerospace & Defense and Government Services analyst here at Wells Fargo. Next up, we've got CACI. We got Dan Leckburg, heads up IR. Thanks for joining us, Dan.

Thanks, Matt. Appreciate you having us. .

So maybe just to kick things off at a high level. So you've been at CACI for a long time. Can you just talk about sort of the transformation you've seen in the business and some of the, not only the acquisitions but sort of the shift to more kind of technology-focused work and how that sort of trended over time?

Yes. No, absolutely. And just to kind of kick off, Tom Mutryn was supposed to be here. He -- our CFO apologizes, he is not here. He had a personal item come up and but sends his regards to everybody here and out on the webcast. But again, thank you for having us. Yes. So yes, if you look at the business today, quite different than rewind 10 years ago. And we have been on a pretty purposeful kind of strategic shift to sort of redesign the company over the past number of years. 2012, John Mengucci joined the company, our current, joined as COO at the time. And he and our -- then CEO, Ken Asbury, really kind of put the company on a new path. And when you rewind to that period, it was a time of -- you had a number of things going on. You had the Budget Control Act. You had the withdrawal from Iraq, quite a kind of a turbulent time for the industry. And the decision at the time was kind of who do we want to be when we grow up? And the choices they saw at the time were we either get very competitive and compete on price, and this was a period of the advent of Low Price Technically Acceptable, LPTA kind of stemmed from that Budget Control Act. Or we go the other way where we build a base of business that allows us to invest internally, invest organically, build differentiation and really build out that technology side of our business. And so we've been on that path since. We talk about our business in the context of a 2x2 framework, where we have a set of enterprise customers and a set of mission customers and to those customer sets, we deliver expertise and we deliver technology and rewind to that 2012 time and the company was largely expertise, probably around 80% expertise and 20% or so technology. And so the idea, the strategy, the goal was to focus on -- be selective on the expertise side. It's a large market. There's good reason to be there. but really kind of build out that technology piece and grow that technology side. And so we've been doing that ever since. So as we sit here today, we're a bit more than 50% technology. And mid-48 or 48% or so expertise. So it's kind of a nice mix. With that technology side of our business is growing faster than expertise and has been pretty consistently. It brings with it a nice margin profile, 300 to 500 basis points higher EBITDA margins on the technology side on average than expertise. So we like that. There's a long-term commitment to growth ahead of our addressable market and continued margin expansion and that mix towards technology helps us accomplish that. So let me pause there, and you can direct us...

No, that was great. I guess kind of following up on that, I mean, that kind of 50-50-ish mix now? How -- one, sort of how much further do you think that can go in the future? And then is there a way to think about there's sort of a lot of different things going on within government services. But what is maybe like a way to think of like a typical technology program versus like a typical expertise program? Is there like a couple of examples that are easy to think about?

Yes, for sure. So no target in mind for the percentage of expertise versus technology. As we sit here today, we want to keep -- continue to grow technology faster than expertise. I'll make it clear, and we do this regularly. There are very good reasons to be in expertise. So it's not an area of the market we want to necessarily get out of. It's an area where we want to be a bit more selective. We want to compete where we can differentiate even when providing expertise. Again, good reason to be there. So between the enterprise and mission customers, we like to say -- expertise can inform technology and then technology can enable expertise. So there's a nice sort of synergy and feedback loop between the 2, and I'll give a couple of examples to kind of illustrate. So on the mission side, we'll provide intelligence analysts to the intelligence community customer set. That is providing expertise, obviously. Those professionals are utilizing systems and applications and consuming data and they're a great resource to go and form our technology, the mission technology side of our business to go build an application that does that. We'll fix this problem. Here's what's really hard, how can you fix that and make that easier and make that analyst even more productive. So a really nice feedback loop between the two. And then on the flip side, it's that analyst being able to reach back into the technology side of our business and pull mission tech into their day-to-day operations. So good reason to be in both sides -- sorry, long-winded but good reason to sort of be on both sides and why we will never just be purely technology, we do want an element of expertise now. I think you asked about technology specifically. On the enterprise side, a good example is implementing what will be the largest PeopleSoft implementation in the world for the U.S. Army, a current program of ours. Really good example. That is not us providing people to the Army customer, that is the Army customer coming to us and buying a fully implemented PeopleSoft system. And it's up to us to manage that workforce and the tools we use and the process and how we get that done. So a good example on the enterprise side. On the mission side, it ranges from -- and we'll talk about some of the -- some more recent acquisitions, something like an SA Photonics, which is laser communications within that mission technology to software applications, where we're developing, again, intelligence tools, collection tools for an analyst in that mission technology area. So quite a broad range of capabilities kind of in both of those enterprise and mission technology areas.

Got it. Got it. Can you talk, I guess, a little bit about the quarter so you guys sort of cut guidance. Could you talk about some of the delays that you're seeing there? And it sounds like maybe some early indications that things are picking up in April and if that has continued.

No, very good. So obviously, we recently last week, reported our March quarter results. 2% growth overall, healthy margins, really nice cash quarter. So what we're kind of saying is we're delivering on the things that we -- that are under our control. So it's obviously delivered $1.5 billion and quite nice margins. So on the book of business that is there today, we're delivering quite nicely. What we saw during the quarter was a continuation of some of the dynamics we saw in the December quarter, which was COVID certainly played a factor. Supply chain is still a bit of a challenge. The contracting workforce on the government customer side has been challenged in their ability to process just on contract task orders and funding. And then we saw a new dynamic development towards the end of the March quarter, where we saw a significant slowdown in funding orders. So this is existing contracts that we have for the -- with our government customers, and they regularly place funding on those contracts for us to deliver or buy something or do something and then recognize associated revenue. We saw that funding slow and we saw it slow in sort of 2 buckets. One, on behalf of customers, we do some material purchasing. So we could go out and buy radars for the customer set. That's sort of 1 bucket. So very low margin -- a material revenue contributor, but we saw those funding orders slow down in that sort of very short-term buying slow. That was the impact of revenue. On the profitability side, while we delivered a nice kind of healthy profitability quarter, we saw some of the mission technology orders, those kind of device orders slow down a bit. And that was, again, very short term funding dynamic where the customer just had to make some choices, and we saw the slowdown. That was the quarter -- so quarter -- we closed the quarter a bit lower than we expected. And then to your question, we did reduce guidance for the remainder of the year. And the dynamic there is the funding in the quarter was down about 20% compared to the same quarter last year or about $300 million, which is pretty material. It's obviously impacted the quarter and the expectation is given that sort of reduced funding in March that will have an impact on the similar buying actions in the fourth quarter. Since -- so to your point, we -- in the April time frame and even into May, we saw a nice pickup in funding. So April was 8% higher than April last year. And what we've seen in May is even higher than that, which is nice to sort of data points that it truly was short-term and we are seeing some of that funding come back. I guess the other dynamic as it relates to our fiscal year and the timing of our fiscal year, we were under CR through most of the March -- of our March quarter, budget went into place mid-March. Once the fully appropriated budget is in place, it takes time for those budget dollars to get to [ OMV ] to apportion those out to the broad customer set and the broad customer set and then actually get that -- those funds on contract and into requirements and us to sort of execute and then recognize associated revenue. So sort of given the timing of those additional dollars, our expectation is we will not see that materially benefit the remainder of our fiscal year. Our fiscal year ends June 30. And just given that time line, that's sort of -- that's our expectation at the moment.

Got it. Makes sense. Can you touch on margins. And so if you go back to the start of the fiscal year, you guys sort of high 10% adjusted EBITDA margin. I think there was a expectation that they would maybe go higher? I know there's been some strange moving pieces around some of the costs reduced during COVID and stuff like that. But is there opportunity for the margins to continue to kind of get back to that area?

Yes, there certainly is. And again, so we kind of frame this year and this most recent quarter as a very short-term dynamic as we look long-term -- medium-term and long-term, the prospects look pretty favorable. The budget situation looks materially more constructive than it did even just a few months ago, frankly. So -- and then near peer threats, there's a lot of sort of dynamics in defense and national security that's driving continued bipartisan support for robust defense spending. So that's sort of -- we always kind of lay that out -- that is the big picture, look, -- and obviously, there are shorter-term dynamics that we can talk through. So this fiscal -- our fiscal year '22, which ends in June, we initially guided to EBITDA margins of 10.9%. And that came off of '21, '21, we closed at 11.1%. So quite nice margins in fiscal '21. We normalized '21 down to 10.7% if we were to pull out some of those COVID cost savings and some other dynamics, a more comparable margin to the 10.9% this year was 10.7% last year. So seeing -- adjusting for that, seeing nice continued margin expansion. So 10.9% expectation this year we got into the December quarter and 2 dynamics there. Again, we saw some of those mission technology, sale delays push out of the year. So that impacted margins to some degree. We also closed on -- 2 acquisitions in particular, high value from a long-term strategic perspective, but dilutive to margins in the short-term. ID Technologies and SA Photonics. 2 companies -- and we can -- we can touch on those in more detail, but the 2 companies in sort of the early stage of investing, it's a pretty compelling technologies that, again, just given the stage that they're in and sort of investment profile were dilutive to margins in that December quarter. And then March quarter, the dynamics we already spoke about, push out of some of those additional mission technology sales, which come at quite nice margins. We're expecting 10.5% EBITDA margins to close out fiscal '22.

Yes. So maybe we can touch on some of the acquisitions you just mentioned in SA Photonics, and can you talk about sort of how you see that market developing over time? How big is it? What are sort of the big programs or milestones to watch for there as we see that business kind of grow?

Yes. So just this fiscal year, SA Photonics was one of four acquisitions we've done. We did one small one, which we have not named in a very, very sensitive customer, another one called Bluestone Analytics, which is open source Intel. So this is subscription-based kind of Software-as-a-Service technology that allows law enforcement and intelligence community to -- in essence, surf the dark web and gather intelligence from the deep and dark webs, quite interesting technology and seeing some nice demand signals for that. ID Technologies is a -- bought it for its CSFC technology. CSFC is Commercial Solutions For Classified. And what that does, CSFC is an NSA-certified capability, and it allows their software -- ID Technologies software allows commercial devices to connect to classified networks. And today, that's done with a type 1 NSA approved device, which is a hardware solution. It is a big clunky piece of hardware, ID Technologies, software-bases solution. And again, this fits our theme of sort of software-enabled everything. It's all about software, less so the hardware, enables a user to bring your Dell laptop to a classified environment and operate in a secure mode on the classified network utilizing again, a software-based capability. So 3 pretty compelling acquisitions and then number four, being SA Photonics. So SA Photonics is a laser communications technology and pretty exciting. We had some existing photonics capabilities prior to buying SA that came to us through our LGS acquisition. And that was really a very high-end kind of bespoke GEO or further based laser comp. So that technology is going to be a part of the mission -- the upcoming mission to the moon. That's going to beam back high-definition video from the moon. So no longer the grainy Buzz Aldrin pictures from the moon, this is going to be literally high-def video beam from Photonics -- CACI photonics device. SA Photonics is a -- so that -- so our existing capability with LGS addresses really GEO and that high-end kind of bespoke photonics. SA, higher volume, lower size, weight and power, addressing the LEO demand. So our -- the rationale, the strategic value of SA was we've sort of addressed the -- when it comes to laser coms, address that, bespoke high-end need, and we saw sort of a burgeoning LEO proliferation in essence. And -- and it's across -- that's both government customer set, and they're obviously a potential for commercial customer set as well. So a nice manufacturing capacity, and they've really gotten down that size, weight and power for a LEO satellite, which is going to be smaller, less available power and going to be requires a price point a bit lower than the more -- the higher end bespoke just given the proliferation, the volume and the refresh rate of LEO satellites -- or is this something that sits up in GEO orbit for 10, 20 years. Yes. So really exciting capability there and nice and synergistic between the existing photonics technology that we had. And a couple of recent successes. We -- the SA Photonics in partnership with DARPA and SDA, recently successfully as part of the Mandrake 2 program. Demonstrated a photonics cross-link between multiple satellites. And obviously, that laser comms link transmits a heck of a lot more data than a traditional RF-based link. And that's between satellites and orbit that can be to ground-based stations or airborne assets. So quite a nice potential there for SA. They'll launch in January of '23 another alternative AP&T, precision navigation timing, kind of an alternative to GPS. We'll launch a technology in that -- in the new calendar year that ride on a satellite as well as additional photonics capabilities coming out of SA. So a pretty exciting nice acquisition.

Yes, a lot of new stuff going on. Is there -- in terms of like investment for some of these big things, I mean, I know you've talked about some of the mission technology being like a generally higher investment business. Are there any things we should think about in terms of like CapEx or bigger R&D to support some of these things that you just discussed?

So I think we do have a pretty robust R&D spend. It's something we manage very carefully and we certainly want to be invest -- continue to invest in these areas of our business to continue to build capability and differentiation and that technology suite. . CapEx -- we're pretty -- we're still a pretty capital-light business. We're -- this fiscal year, we expect around $80 million of capital spend. And that's not just investment in this technology area that includes facilities and some other programs. But a nice chunk of that $80 million in that mission tech space. So until that becomes a much more significant piece of our business, I think you can expect fairly consistent levels of CapEx. It's going to -- we're going to remain pretty capital-light.

Yes. makes sense. Let me just pause there. I guess if anyone in the audience has a question, feel free to raise your hand. We'll fit you in. Just moving on to sort of capital deployment. So you guys historically have been all M&A. I think about a year ago, you did the ASR and -- so it sounds like buybacks have been more part of the picture, how do you think about kind of balancing those 2, given the market and given where your stock price is?

No, good. Yes, to your point, we have -- Yes, traditionally, through our actions, favored M&A a bit more than other options. I think rewind about a year around the time of this most recent ASR, you heard definitely a change in tone on capital deployment. And the terms we use our flexible -- a commitment to be flexible and opportunistic. And the commitment to flexibility is M&A. All options are on the table, M&A buybacks, debt reduction, internal investment in those technology capabilities. So everything is on the table. Opportunistic is commitment to take advantage of whatever the dynamics are at the time. Is there a super -- really compelling SA Photonics acquisition out there that we want to add that capability, and it makes sense from a long-term value perspective. Or is the M&A pipeline a bit dry, and there's perhaps a good value opportunity in the stock, and that's sort of the dynamics that rewind to March of 2021 last year. That was the dynamics we saw that. And so it was a good opportunity for us to go drive some shareholder value through an ASR. We did not have really compelling set of acquisitions in front of us, and it just made sense at the time to do that. So as we evaluate those options, the commitment, it's all about long-term free cash flow per share growth. And that could be driven through internal investments in various areas of our business or M&A or share buybacks. And it's not a 1 or the other. John likes to say it's an and -- flexible and opportunistic. And so that may mean 1 thing at 1 time, 2 things at another time or something else that you know...

Is that the M&A pipeline in terms of the deals -- is it full? Or are deals reasonably priced?

Yes. I think recently, I think we have seen valuations a bit high. We've talked about that in the past. There are certainly deals out there. There's a pipeline of deals. We've also talked recently about terms favoring the seller a bit more than the buyer, which we don't like. So I say all that to sort of illustrate, CACI is a very disciplined acquirer. There's not a need to do M&A. But if there's something really compelling that fills a capability or a customer gap that we can get at a nice price that has a nice cultural fit, we like that. And I apologize, I forget the second part of your question there.

No, I think you had -- I mean, just kind of like availability of deals and pricing. Yes. You hit on it.

Yes. I guess I look -- so to illustrate the even in this dynamic of sort of -- perhaps valuations are a little elevated, perhaps terms favor the seller a bit, we have been able to still find a couple of really compelling opportunities, obviously, illustrated by the acquisitions we talked.

Yes. Could you talk to -- I know you don't want to give '23 guidance yet, but just free cash flow, there's some big moving pieces. Could you just highlight just so there's no kind of surprises?

No, good. And we make a point to do this on a very regular basis as we communicate with investors because there are some chunky pieces of cash flow movements. The biggest 1 being this year, we have a $230 million benefit to free cash flow. And that is driven by a tax election method change that we adopted in -- at the end of 2021 -- fiscal 2021. Now the net-net of that was an additional $60 million of cash. And so very compelling reason to go adopt that tax change. Would it resulted in -- so $60 million goodness, but then some lumpiness as it relates to cash. So we had a headwind in that June quarter of 2021. This year, there's a nice tailwind, a material one, $230 million there. 2023, the $230 million will not repeat. So that will be a headwind in essence, on a year-over-year basis. And then we have an outflow of around, I want to say, around $45 million as it relates to that tax method change in '23 -- fiscal '23. So in '22, we had a Cares Act payroll deferral payback of around $50 million. We'll have the same repayment of about $50 million in 2023. So not -- that will be our last payment in fiscal 2023. Not a year-over-year comp issue between the 2 years, but two chunky repayments that are in both years. The big 1 is that $230 million this year that won't reoccur next year.

Sure. Can you touch on recompetes? And just any big programs coming up that we should watch for that could be at risk?

Yes. We're -- and it's kind of a nice spot where no 1 program in our portfolio is greater than 5% of revenue. So quite diversified. So we have not -- there has not been a need to sort of point to 1 singular or 2 extremely large programs that are a risk kind of looking forward. So on an annual basis, we don't win all of our recompetes. We're typically in the 90% range, which is quite nice. But given the sort of the diversity of the portfolio that sort of managed on an annual basis pretty well.

Yes. Okay. Got it. And then kind of a similar point. So you guys called out on the quarter, I think there was $10 billion of bids that you have out of which 90% is new work and like $20 billion that you're planning again, 90% is new work. I think those are both up. The dollar values and the percent work are both up from what you said a quarter ago. Is there like a way to think about where that new work is that you're looking for? Is it like a specific customer? Is it more on the technology side?

Yes. No, good question. So Yes, up nicely. Now any time we talk about awards or we talk about pipeline metrics, we'd like to remind everyone that awards are lumpy as is pipeline metrics. It's heavily dependent upon size of specific deals and the timing of those deals. So nice to see it up. But anyway, you just sort of caveat it with that comment as always. So I would not flag 1 particular customer. We're pursuing business across the entirety of the federal government. So yes, there's not a singular customer there. There's not a singular 1 program that I would sort of point to that it's reflective of sort of a broad opportunity set across the government customer set that we like quite a bit, heavy on the new business side, as you noted, which is always nice. We knocked off a nice set of recompete wins last year. Last year was pretty heavy on recompete wins, and we fared quite well. So you're kind of seeing a heavier focus on new business in those pipeline metrics.

Got it. Got it. That makes sense. Yes, maybe if we pause for a second just if there's anything from the audience feel free to raise your hand. I'll just continue. Can you talk about interest rate risk. So you guys have some amount of variable rate debt just how you're thinking of that in terms of interest expense in the next year and just with interest rates moving quite a bit there?

Yes, for sure. So we recently created our credit facility in the December time frame. So have a nice facility in place there with quite a lot of capacity. And since we've hedged about 50% of our debt through swaps. And so as we sit here today, we're about 50% fixed, 50% variable, as we think about '23 and what may come, obviously, the interest rate dynamic is something that we factor into our expectations for next year and would provide that as part of our detailed guidance come August.

Yes. Got it. Could you touch on just the situation in Ukraine and any kind of uptick in demand you guys have seen around just further activity going on in Eastern Europe?

Yes. So pretty awful set of circumstances there. I think as we take a step back and look at it, I think it's a -- it's an indication that the world is truly a dangerous place, that there are bad actors. And it's a proof point, unfortunately, for defense and national security spending. I think there has been very consistent Bipartisan support for defense and national security spending over the last number of years. Even with the withdrawal from Afghanistan, there is a near peer concern and threat and potential adversary that we as a nation need to be prepared for. And I think as we've seen this investment in broad national security, I think there is partly driven by a realization that we've -- from a near peer potential adversary perspective have underinvested for the last like 20 years as we've been focused on that almost solely on that counter-terror mission. There are real threats as we're sort of -- we're seeing today. Obviously, Russia, China, Iran, North Korea, it's -- these are real capabilities that we need to be in a position to deal with. So anyway, as I kind of -- you kind of step back, I think the unfortunate events in Ukraine, again, sort of another proof point that -- this is real. Peace has not unfortunately broken out across the world, and there are bad actors, and we need to maintain our cluster. As it relates to Ukraine, I think the focus -- we've seen some supplementals to support efforts there. The President recently proposed a quite a large $33 billion supplemental. A lot of that -- big piece of that focused on resupplying arms here in the States versus something that we might play in. There's elements of some cyber and some intel in there that we would definitely plan. We support the European Command today. And so they're obviously integral to what's going on in Ukraine there. So again, our view, less so short-term tactically, it's more of a -- another proof point that the world is a dangerous place. And we, as a nation, are going to likely continue to invest in broad national security.

Sure. Yes, maybe -- so just to close, I guess, can you just touch on the hiring and still probably the biggest question I get on you and your peers and not only ability to hire people, but what's kind of the timing of when you're able to pass through maybe any additional cost if there's some labor cost inflation?

Okay. Again, the labor cost just real quick. We've said, and which is true, it has not been a material concern for us. We're managing it quite well. 60% of our business is cost-plus. And so by nature, that higher cost gets passed on to our customer set, and the customer recognizes the reality of labor costs if they're, in fact, increasing. . Our ability to hire. I think we've been doing quite well. We like where we are. Over the past number of years, we've been investing quite heavily in our people, and that's been through benefits through flexibility through training programs. A lot of things to be in the right spot to attract that sort of top talent. John says, I love paying top dollar for tough talent. It's worth it. So has not been an issue for us. The other aspect is the technology element of our business allows people to be sort of fungible across that broad technology portfolio. So it's not about the customer set on the expertise side who needs 100 people and they're helped us 1 types and they can only do [indiscernible] This is broad engineers, software developers, digital signal processors that we can utilize across a wide range of mission technology, which is quite nice. I think the other -- the flip side to hiring is attrition, which, again, we're quite proud of. Coming out of -- out of COVID, as we see things sort of normalize a bit, our attrition today is lower than it was pre-COVID. And I think that's, again, a result of those investments that we've been kind of consistently making in people. And I think how we've handled, it's an element of the technology business, and I think it's how we handled and treated and took care of our folks during COVID. It was obviously a significant priority for us.

Yes. Sounds good -- all right. Well, with that, I think we're out of time. Dan, thanks. [indiscernible]

Thanks for having us. Thanks, Matt.