CACI International Inc (CACI) Earnings Call Transcript & Summary

Brian Gesuale, senior analyst covering the defense and government services market here for Raymond James. Thanks for lasting through lunch. Really excited to have CACI here to present their story. We have the company's new Chief Financial Officer, Jeff MacLauchlan here to take us through it. We're going to do this in a hybrid fashion, where he's going to go through some slides for 15, 20 minutes, and then there'll be some Q&A. So save your questions, leave on locked and loaded, don't be shy. We think the timing is absolutely perfect. They've got a handful of big contracts, generating a lot of big -- a lot of free cash flow. And I was just telling Jeff, I think that he's timing the organic growth inflection very well. So I'm going to turn it over to you, Jeff.

Thanks, Brian. Thanks. We're really happy to be here today. This isn't on, right? Really happy to be here today. I'm obliged to tell you to pay close attention to our statement on forward-looking statements. There's also, of course, some more materials in our other SEC filings for you look at it as you like. Who are we -- we're a company that addresses the national security and information modernization space. We are very much focused on those areas. We're very proud of the fact we have about 22,000 employees. About 70% of them are cleared, about 36% are veterans. We expect our revenue this year to be about $6.5 billion, and our EBITDA margin to be in the high mid-10s. We're also very proud of the fact that we've gotten some really sustained and welcome external recognition. We were recently named to the Fortune list of the world's most admired companies. I think that was the 12th year that we've made that list. And we've gotten a number of other recognition external recognition around other employees, women, veterans, et cetera. We've also gotten a fair amount, and this is important to the story that I'm going to tell you a little more on a few later slides -- also gotten some external recognition for technology development and accomplishments, specifically around ISR, secure communications and dark web intelligence collection. So how do we approach the market? Some of -- for those of you that are familiar with our story, you've seen this before, but we approach the market through a combination of expertise and technology. They're both important dimensions of our strategy and they're also self-reinforcing. The expertise portion of the business is larger, but is -- tends to be slightly lower margins and a little more traditional in the sense of our market space. The technology part of the business is a little higher margin and gives us some real opportunity for differentiation and is a real competitive discriminator. And we participate mostly in these 5 markets. So for expertise, you see slightly lower margin, slightly lower barriers to entry and for technology, again, a little higher barriers to entry and change, a little higher margins. So how did this strategy evolve? If you think back to a dozen or so years ago, the company was in quite a different spot. We were much more expertise focused. We had a larger portfolio of a great many smaller contracts. A lot of the activity was focused on the Middle East conflicts of the prior decade. And accordingly, as those drawdowns started to happen, and the Budget Control Act came about, we really found ourselves in a spot where the company was probably experienced some outsized issues as a result of those developments. At about the same time, we had a leadership change, which included our current CEO, and they undertook a path to really kind of refocus the company by adding the idea of this technology as a differentiator. And they did really 3 main thrusts as part of the strategy evolution. The first was to focus on technology that could bring some differentiation. The second part, somewhat paradoxically was to focus on bidding less and winning more. So what that means for us is focusing on a smaller number of larger, longer duration opportunities. And the third part of this strategy was to invest ahead of need. So consciously look for places in our markets and important customers where we could position ourselves strategically, thoughtfully and deliberately to be in a position to increase our opportunities. So results matter. You can see over time here some sustained expansion and growth that we're very proud of. You'll notice that income has grown slightly more quickly than revenue. And we've also have a renewed focus or a focus on generating cash flow, which is important to what I'm going to talk about next. So another part of our strategy that will be of particular interest, I think, particularly to those of you with longer investment horizons, is our approach to capital deployment. Strategic M&A has always been an important part of the company's strategy, and we have routinely been regular accomplished disciplined acquirers. All of our acquisitions are deeply rooted in strategy. They're about positioning, about being where we want to be. But we've also mentioned on the earlier slide, focused on internal investments. So we've spent a fair amount of capital investing in some of the things that you read about for us, cyber, laser communications, various electromagnetic spectrum initiatives similar activities. The other thing that has been a recent addition to this is share repurchases. So a couple of years ago, we did a $500 million accelerated share repurchase. We announced at the end of January, a $750 million share repurchase, $250 million of which we've done as an accelerated share repurchase already. And the remaining $500 million we intend to execute at this point as open market repurchases. So this really takes the opportunistic and flexible to a new level and lets us be in a position as we see market conditions develop both in the capital markets, but also in our view of our M&A pipeline to deploy the capital in a way that we think best serves shareholder interest. So I think we're ready for some Q&A.

Perfect. [Indiscernible] How do expect the fiscal '24 [Indiscernible] to kind of shape here as you start to think about how you're going talk about the business over next several [Indiscernible]

Yes. I think there are a couple of factors that are important for us to think about there. One is that for many of us who have been doing this for a little while. Rhetoric is a common feature of political campaigns. You will also note that the action frequently lags the rhetoric. And we think, particularly in those market areas that we've identified, there's really sustained bipartisan support in those areas if you look at the actions. So that said, there's probably a pretty good chance that we will not have a budget at the end of the year. I think we may or may not. But we -- continuing resolutions are a fact of life, and we know how to live in that world. And actually, at the current levels, I'm not sure that's the end of the world at all.

It makes a lot of sense. I would agree with that. Maybe let's move on to kind of 2 larger kind of geopolitical thrust and how it impacts CACI. First, maybe talk about the geopolitical instability and how that's creating opportunities in the Pacific and in Europe? And then secondly, maybe talk about this new threat profile of a near peer threat or a great rival conflict and what that does to the technology element of your business.

Yes, that's a great question. There are several features that probably are notable in all that. You may -- you will recall from my earlier strategy slide, much of the company's focus -- a decade or so ago, was much more focused on global war on terror and urban ops, things that were different -- the places where we're investing today are much more related to that. Space is not the secure domain that it once was, lots of companies -- countries rather, lots of countries live in space. And specifically, our laser communications is a much more effective technology for communicating in that environment than RF. So laser communication being a point-to-point focused targeted transmission is much less susceptible to jamming and interference.

Yes. No, that makes a lot of sense. We're seeing a lot of activity in space. Maybe if we talk about some of these forays and strategic things that you've created and done over the last decade or so, how they've matriculated into new business. You've been quite successful at hunting elephants over the last several months. Obviously, these weren't overnight successes. But could you maybe talk about maybe the EITaaS contract, the big Intel win that you had and also the DCSA work collectively, $10 billion, give or take, a few bucks. Talk about the timing for how we ramp those and what that means for the business.

Yes. We spend so much time talking about orders being lumpy when it's bad news. It's nice to finally have a chance to talk about orders being lumpy in a good way. We have had a very gratifying couple of quarters of new business activity. They have run through sort of the increasingly normal protest process. In the 2 large cases, the intelligence community contract -- well, actually, all 3 of them have been affirmed and reawarded, 2 of them have been sort of reprotested, which in a narrow or more limited way is a permissible response. The -- we feel very good about our position on all 3. One, of course, has the defense contract support agreement arrangement is underway. But the other 2, we expect to be resolved over the next quarter or so. And they will have some impact in FY '24, probably more into FY '25. But I think over the next 6 to 8 quarters, you'll see some real tailwind developed for us in those 2 contracts.

Anyone from the audience have anything they'd like to ask?

[Indiscernible] anybody try to stop this protest in process [Indiscernible]

It's a great -- also a great question. I'm not sure we can do it. I think it may be -- well, I know we can't do it. But I think as citizens, it probably would have to be dealt with in some sort of broader acquisition reform overhaul. I mean the government has to give some sort of recourse to people. I think what's happened, what I've noticed over the last decade or so is it used to be relatively rare and it really was only done in cases where you identified a real serious problem. And it almost now has gotten to the point where it's sort of automatic. I think what would probably help it would be if the government were to have some soft -- what's the best, like least conversational way to say this. There doesn't seem to be any real penalty for it. I mean, I think everybody just sort of thinks of it as a free pass. And if we were in a normal commercial exchange and you were a noisy and uncooperative supplier. At some point, I would stop asking you to bid, right? But the government is really not in a position to do that. So there's no real -- there's not any real disincentive. Particularly when an incumbent is the loser and the protester because obviously, they generally benefit from it by the contract that they're about to lose being extended. So there's some structural things that I would think the government maybe could do, but I'm not sure I see it happening.

Yes, I would -- I'm not holding my breath for a meaningful change there. One thing, I really like the transition that you showed in the chart between the technology and expertise work. One thing, could you talk maybe a little bit about what that's meant for margins? Your EBITDA margins over that period have grown substantially. I imagine the business mix continues to shift towards technology over expertise. How far can margins go? And what do you see this business looking like several years down the road as that evolution continues?

We will see, over time, continued margin expansion, but it will be 10s of bps per year or something. It won't be 100 or 200. And one of the reasons for that is that an important part of our strategy is that balance. So it's very important to us and to our thinking and our market presence to have both of those features of our portfolio. They really do reinforce -- each reinforces the other. And so that provides sort of a natural drag on earnings in a simple way, but it also has similar positive effects on things like capital investment and whatnot. So in terms of returns, we like the posture.

When you talk about balance, and I think about these 2 businesses, just as a follow-up to that, the technology business has grown faster organically and presumably you're going to commit more capital to grow it inorganically. Is this something that balances 80/20 at some point, 90/10?Or can we really keep them 60/40 close to parity?

Well, there's probably some point in which we revisit it. But I think in the foreseeable future, I hesitate to say an exact number, but 2/3 or 1/3-ish is something like that is probably kind of a natural limit. There is some point in which we could find ourselves in the future looking at the portfolio and saying, maybe we should change our view of this, but I don't see that happening. And certainly in the near term, they're both really important parts of our plan.

Okay. That's great. Anything else from the audience? All right. Well, I'm going to keep going then.

I should mention actually our Head of IR, Dan Leckburg is here, too. So feel free to give him any questions you'd like to.

And Dan will be joining us in the breakout room where we'll the conversation a little bit as well. Let's maybe just throw some darts at some of the faster-growing areas. Can you -- you talked a little bit about space and comms. Talk about signals, cyber, artificial intelligence, give us maybe a sense for how big of a part of the portfolio these business is or collectively today, how much investment you're putting towards them and how big they are in the future?

Yes. I don't think we talked specifically about their size, but I think one of the things that's really exciting about them to my viewpoint as a relative newcomer here is that they are all, I would say, sort of in the early innings of their maturity. So the photonics and the laser comm we talked about a little bit in the space applications. It's worth noting, by the way, that we have the only flying laser communication inter-satellite systems happening right now as we're speaking. So that's kind of a cool thing from my perspective. Some of the other things, the RF characterization tools will become increasingly important. The cyber market, you all know probably at least as well as I do, the cyber market is tremendously dynamic, changing all the time. And we have a very strong position there. It's just -- it's an exciting time for most of these things, early phases.

Agreed. Maybe one of the things I get a lot of questions on as well as capital deployment. And I think you covered the share repurchase, which I commend you on for broadening the posture there over the last few years. I want to maybe double tap on M&A. CACI has been a premier acquirer of service companies over the history, certainly going back to the '90s and even prior to that. You've got a pedigree with doing M&A in your own right. Maybe talk about what that M&A footprint or strategy looks like as you move forward at CACI?

Yes. Some of you will have noticed that we have not made an acquisition in a year, which is very unusual. I would also add that in addition to the services acquisitions that you mentioned, there have been a fair amount of technology and product kind of positions we've acquired as well. We're in a little bit of an unusual time, I think, in the current environment with interest rates and some other market factors. And we feel a little bit of a reset in the pipeline in terms of valuations and there are a number of assets that we see coming out of sponsor-owned assets we see coming to market over the next few quarters, several of which are very interesting. And we continue to look very vigorously. We have been not necessarily as a matter of design, but we have found ourselves in a position where sensing those market changes and some other market factors, principally interest rate-driven, has sort of made the market a little unsettled, and we're going to remain disciplined in our evaluation and our approach. And so for that reason, we have found ourselves not necessarily in a designed pause, but we find ourselves as we process those factors in a little bit of a dry spot here. But the pipeline looks very interesting.

Okay. Great. Maybe the last one. Anything from the audience before we do the [indiscernible] here.

[Indiscernible]

No, they both actually are important expansions of our existing capability, EITaaS, E-I-T-A-A-S, for those of you that have read it more often than you've heard it is enterprise IT as a Service, which is an Air Force infrastructure modernization program will be a very large and kind of premier franchise, we think, for a number of years. And the intelligence community activity, which we obviously can't talk very much more about it than that, is also a very interesting work that we've, I guess, it's okay to say, work where we're displacing some other contractors and represents a very important strategic position that we're establishing. So I think they both portend being in a good spot and a good posture for future activities.

You've historically used acquisitions to [Indiscernible] capabilities that are going to be important in the future [Indiscernible]. Going forward though, do you anticipate that we'll see without [Indiscernible] M&A activity might be? Do you think we'll see M&A adding a new sets of capabilities? Or do you think those will be more organically grown? Or do you feel comfortable with as you have the right set of capabilities now to kind of lead the future growth?

Yes. It's going to be a little bit of both. But I would say a number of the things that are most interesting in the pipeline that I alluded to a little bit ago, are reinforcing in some of those areas where we already are. So they're either adding new dimensions to the capability or they're sort of reinforcing and bolstering positions where we have established beachheads, and we're now ready to build out more fulsome capabilities and positions with no new strategic directions. It's more about building out, bolstering things that we're already doing and where our position is giving us a good indication that we're having some success and the demand signal is what we expected it to be and so it's reinforcing a lot of existing things -- several existing things.

Great. We're going to wrap it up with this last one. Jeff, this is your drop the mic moment, 30 seconds. What message do you want to take to investors here. No follow-up from me. The stage is yours.

Okay. Thanks. No mic to drop. But I would say there are 4 things about our position that I think particularly important. The first one is that this combination of technology and expertise is a really important strategy element for us and I can't foot stomp enough how important that is and what we're doing. The other thing I would mention is that the world, we are reminded every day, is a very dangerous place. And despite the fact that we occasionally hear talking heads on television and whatnot, talking about things that are important, like the budget, I don't mean to minimize the budget or the debt ceiling at all. But there are several things developing around the world that I think we are recognizing in a bipartisan way are really important to us. And those things are going to need to be addressed. I also think the capital deployment is a particularly strong suit for us. And I think particularly for those of you that are thinking longer term, you have a management team here that's really committed to being flexible and opportunistic I said, and really being in a position to quickly and even now with the open market repurchase program even more quickly react to changes in the marketplace, either the M&A pipeline or capital market activities for us. And we're excited about the next few years, and I hope everyone else is as well. Thanks.

Great. Thanks so much, everyone. I'll be at the breakout room for followup questions. If you need discussion [Indiscernible].