CACI International Inc (CACI) Earnings Call Transcript & Summary

All right. Thanks. Good morning, everyone. I'm Noah Poponak. I'm the aerospace and defense analyst here at Goldman. Very happy to have with us for our next presentation, CACI International, and we have with us from the company, Jeffrey MacLauchlan, who is the CFO; and Dan Leckburg here as well from the Investor Relations team. Gentlemen, thanks so much for being with us.

Yeah, our pleasure.

So I think those in the room, those listening probably know who you are, but maybe just to kind of set the table and kick things off. Maybe just a quick overview of who is CACI, where do you sit in the industry, who are your customers?

Yes. We have a -- we have what has historically been thought of as the government services market, which is kind of morphing in some interesting ways that I suspect we'll talk about. But we're a midsized government contractor who kind of moves at the intersection of expertise and technology. We -- our principal competitors probably are Leidos, SAIC, Booz that's sort of our universe. Most of our offerings to the defense and intel community are focused on intelligence collection big in cyber and kind of tendent counter UAS capabilities as well as enterprise modernization, enterprise IT projects, both civil and defense and intel agencies. It's kind of who we are.

Yes. Excellent. So let's -- we'll dig a little further into each of those. But maybe just starting at a high level in terms of your end market. National security budgets have grown a lot. The geopolitics of the world are tricky to say the least, which seems to support further growth in those budgets. But on the other hand, debt to GDP is high, and there's a lot of money spent during the pandemic, and there's now a renewed battle around where that should go. The actual House of Representatives has passed the bill to reduce spending. Certainly, the consensus is that will not go forward, but does it open up a negotiation around where spending is going. And so I guess, what is your all's view on where the '24 budgets will land relative to '23? And just what kind of medium-term growth rate are you expecting? Are you managing your business too for your end market budgets?

I think there's a couple of important points to consider in that question. The first one is that, as you say, the world is certainly no less dangerous and in many ways, becoming more so. We have spent a great deal of time and energy positioning ourselves at places that we think even in the most challenging budget environments will fare reasonably well. And that goes, obviously across defense and intelligence, both the analysis and collection of information but also across enterprise modernization where often those projects are driven by reduction cost savings and reduction opportunities. So we think our value proposition combined with our situational positioning in places that are going to be core and important give us sort of the best way to navigate that field. That said, as citizens, we all know that this is an issue, and we have to deal with it. But that is as citizens of the United States, we all know that this is a serious issue that Congress and the executive branch are going to have to solve. So we don't -- I don't say any of those things to be dismissive about it at all. But if you look over the last couple of decades, typically budget pressure has been solved by modifications to large platform programs. So buying a few less aircraft, buying a submarine in 3 years instead of 2. Those kind of things are much more sort of bang for the budget buck as we think about restructuring them. Much of our portfolio would be very challenging to make any kind of meaningful reductions, combined with the fact, obviously, that we think we're in areas that there's really good bipartisan support for these priorities.

If we take just DoD government fiscal year '24, the request is up 3%, 4%, depending on exactly how you're defining it. I think a lot of people are still expecting that to actually be plus up by Congress because the last several years budgets have been plus up. Part of that is [ threat ] environment, part of that is inflation. Do you think '24 will land higher than the request, at the request or below the request?

That's a difficult prediction, right? I won't quote [indiscernible]. But my personal view is it's probably more likely to tick up than down and that's particularly true, again, I think, in the areas that are of most interest to us. I mean that's been the recent pattern. I don't know if you have any...

Spot on.

So your top line organic revenue growth rate has accelerated. The results you just put up is one of the faster growth rates you've seen from the company in quite a while. Talk to us about that, what's behind that? And how sustainable is that going forward?

Well, we talk about our growth rate guidance, hopefully very carefully to say over time. So we did have a particularly strong quarter, and I think our guidance of sort of outgrowing our market and being kind of mid- to high single digits is still a good one. While we were happy to see 10% organic growth in the quarter, we had a couple of things come together, but we obviously won't -- well, we won't be a 10% organic grower every quarter. But we think it's very supportive as well as the margin expansion in the quarter, very supportive of our longer-term guidance and where we see the business moving.

Okay. You had that result despite the federal civilian segment down, and that has lagged a little bit in recent periods in large part because it just has a difficult compare from 2020, '21, pretty strong growth rates. But I guess one question there is, why wouldn't I expect the current growth rates to be sustainable if it's with one of the segments down, which I presume you don't expect to last? And then two, just how does that growth rate get better in that segment?

It's interesting, and Dan will probably want to expand on this. But it's interesting, we obviously report our revenue composition that way. We don't really manage the business that way. And as we were obviously preparing for the call and everything, we did our own analysis on it. But there are programs rolling on and rolling off more or less continuously. And this is really just an artifact of that. I don't know if you want to add anything to that.

There's always variability in any one quarter. So we try to keep bringing everyone back to the full year. But to Jeff's point, as we kind of look at it, see the data when we're preparing for the call, poke at it and then I would say nothing thematic. We're sort of noteworthy there, to Jeff's point, things are rolling on, rolling off any one point.

Is there 1 or 2 programs that are rolling off there that we should be aware of to kind of model forward or not even that and something else?

No, I think you know no single program is more than 5, maybe less than that of the portfolio. So I mean, we have literally thousands of things rolling on and off.

But if you have 1 that's 3 or 4, 4 or 5…

Yes, nothing like that.

And its rolling off...

No, we had a large name you'd recognize when we'd share it. There's reason to not.

You'd be talking about that?

Yes, right.

Okay. So if you don't manage the business to those, why keep reporting it that way, how do you manage the business? I assume that's expertise and technology. You've had the shift to similar product. So talk about that shift and how you do manage the business?

Yes. It is really what you just said. It's enterprise and technology. And the thing that we keep coming back to and we think the thing that makes us different from many of our competitors is there really is a strong symbiotic relationship between those 2. And either part of the business improves the quality and inside of the other. And so particularly in the technology area, many of those contracts come with higher margins. They're a little more differentiated. You may know that we have made several -- we've made some recent investments in things like optical communication terminal, laser communications, handheld SIGINT devices to counter UAS technologies. And those things all kind of wheel off of our insight that we gain from the expertise side of the business. So our principal management focus is really, really around that.

Can you elaborate on that, how they wheel off the expertise side of the business?

Well, the expertise kind of the business, for instance, will identify need -- a need for tactical fielded systems to collect SIGINT signals, which we then with several of our products, Beast and Kraken and -- we were able to build SIGINT collection hardware that a squad of soldiers can use in the field to capitalize on the insight that we gained from the expertise side.

Right.

On that expertise side, I think intel analysts think special operators, we have folks working alongside special forces around the world. And seeing real-world threats and issues and encountering those problems using the other technology in the field, what works, what doesn't, what new requirements, what new threats have arisen, bringing that back to the technology side of our business and being able to address those is a really healthy feedback and then pulling technology to go enable those intel analysts and special ops supporters is very powerful.

And some of our counter UAS products benefit from that same loop being able to see what's happening and what the need is to take out unmanned aerial vehicles, drones and things. We can translate that directly into here's something that will solve this problem.

Okay. That's interesting. So what's the mix at the moment? And what's your long-term strategic vision of where that mix goes over time?

I think we are 55-45 as of today.

Yes, in that ball park, yes.

And more technology is probably helpful to margins. We often get comments that, gee, you'd like to see technology sort of dwarf expertise. And that's really not true. The beauty, we think of the -- of our portfolio and our thesis is that there's some value to the balance and the relationship.

Well, as you just described the expertise of…

Yes. So if technology were 60% or 70%, that's probably kind of starting to look a little bit too much technology and too little expertise. But 2/3, 1/3 or so is probably not a bad place to be.

And we've kind of purposely, over the years, in 10, 12 years, it was -- we were probably 20% tech, 80% expertise and there has been a very purposeful set of investments, M&A investments, organic investments to sort of build that technology portfolio side of our business over those years. And you look past -- look at the past number of quarters, tech continues to outpace broad expertise, but we're getting to that kind of nice mix at the moment between the 2 sides.

There's an existing defense hardware industry, technology companies in that mid-cap arena or of a lot of sizes, actually. How does that work when you are moving into a new piece of technology, a new product where there's existing competition presumably?

Well, there is occasionally, but we're not -- I mean, our goal here is not to compete with major hardware providers. I mean these are sophisticated systems, but they're generally quick design, quick assembly, they're not large systems engineering projects that you'd ever see like the sort of activities that you would see in a prime or even a larger mid-cap. The other aspect of the strategy, though, that I think is also kind of interesting is that many of these components set us up nicely to be suppliers to the primes. So things like our optical communication terminals, in particular, we're starting to see situations where we're on several different teams that are competing in larger competitions and things like that. So some of them were selling directly and some of them were selling through primes as part of larger systems.

Yes. Okay. That makes sense. So I guess if we put all of that together, I sort of want to ask a question of just where do you see the bookings trending in the near term just because I know there's a lot of focus on that. But I also want to ask the kind of broader question of just where are your biggest opportunities? I know counter UAS has a lot of focus. I don't have a good understanding of how large you are there relative to how large you could be. You mentioned these broader buckets of intel, SIGINT, cyber. I know those are all growing faster than the budget. So I guess where is the most opportunity, the most growth potential? And are there any handful of large concentrated programs that we should be watching as well?

Yes. I think there's 2 ways to think about that question. The first one is we've had an extremely productive last 4 to 6 quarters where we have won several very large programs that will be ramping up and increasing in a relatively low-risk way because they're one. Large intelligence community job, ITAS, the Air Force enterprise IT as a service. We also recently won DCSA background investigation work, even though that was a recompete we -- and we were an incumbent, we won -- it had been 1 of 3, and we re-won it as 1 of 2. So it has some growth in it as well. And so those things are -- and then -- so those are things we've won that we see increasing. And then on -- more on the technology side, we have some things I don't mean to keep coming back to the optical com terminals. But we're really on really poised, I think, for some pretty strong growth there, probably a little farther out, that may be '25 even before we really start to see that part of the business take off. So we have some very interesting positions already secured that we have to prosecute successfully that should drive some growth. In addition to that, we have $9 billion of bids outstanding. And over the next 2 quarters, we expect to submit another $19 billion. So -- and they're very much in the spirit of this intelligence community win and the ITAS win where there are extensions of this strategy we undertook several years ago to bid fewer larger things, and which is working, and we're very happy with the way the strategy is sort of manifesting itself in our results. And we look forward to that continuing through this next round of upcoming bids and pending awards.

And when is your next major sizable recompete?