CACI International Inc (CACI) Earnings Call Transcript & Summary

Well, great. Good afternoon, everyone, and thank you for joining us at Stifel's Annual Cross Sector Insight's Conference. I'm Bert Subin with an E. I'm a senior analyst here at Stifel covering government services. Today, we have a pleasure to hear from John Mengucci from CACI. CACI has been on a bit of a tear recently, some really good contract wins, has forged a little bit of a different, I think, path in some of its government services peers.

So maybe I'll turn it over to John now just to give maybe a little bit of an update on sort of where the strategy stands and sort of how you think about CACI versus the rest of the industry?

Yes. Thanks, Bert, and thanks for having us here. CACI government services sector, the approach that we've taken over the last decade has really been moving ourselves from a peer expertise provider think about bodies and moving more towards a mix -- a healthy mix of both expertise and technology. It was our belief when the last large budget cycle shake up happened during sequestration, we had budget cuts, we had government shutdowns. I didn't like the way we came through that type of a dynamic. And if the reason is your growth is down because of these things happened to you, then I don't think you have a sustainable business. So we just finished our 61st year in business. So we are a company that understands that things change and you have to be better positioned for it. So I think part of what we'll be talking about today is how that mix of expertise and technology works and some of the positive things that we've seen happen. Some of the things that we're still learning. And then I guess I'll close with the fact that we're a highly acquisitive company. I'd like to think that, that differentiates us within the sector. We've been doing acquisitions for almost 30 years now. So it's not a new way to grow. It's always been part of our growth. I think that does differentiate us. So with that.

Yes. No, I mean, John, I think you typically talk about how you sort of don't want to fall into the trap of commoditization that is pretty typical in government services, where you end up competing more on sort of your ability to staff and sort of left on what makes you different, and I think that's brought you maybe more into the software and hardware side of things. Can you just sort of just talk about that evolution and maybe what inning you think we're in, in terms of the company moving more toward a technology-based platform?

We're always in the third inning. Every time we think we get to the fourth, things change. But -- yes, so we -- when we embarked on this path, it was more about taking a look at where the needs of our customers going forward in growth budgets and in flat budgets and the negative budgets. And that's really more a function of being a strategically-based company. Strategy is a place where we come from. You don't swim into another pond, you actually create that and you really understand it to what we're going to be known for. What concerned me a number of years back is that I did believe that just providing people was after sequestration came out, turned to a commodity. Some may say it always was, but there was some level of differentiation. But when I looked at the expertise part of our market, it was 80% of our revenue. We're about a $2.5 billion company and realizing that after sequestration, the only differentiator was going to be price. And even the most generic of business classes teach you that when something is only differentiable on price has become a commodity. I didn't think that there was a lot of differentiation that we could provide there. So the real trick of the -- of our transformation was where do we go next? Well, we look at the trend lines, we understand what customers are going to need. And I was always a huge believer that there was a market below the aerospace and defense primes by which a more agile company who understood software and understood to the systems that are being built for national defense. It was a good role for us there. So I embarked upon a transformation that really talked about everything software based in the technology field. I was not going to try to compete against the L3Harris and everybody else who build hundreds of thousands of radios or hundreds of thousands of SIGINT collection devices. It really was more about how I transform the way we build those, how we do it in an agile manner, which differentiates how we develop software, helps our customers react to a much faster threat because the threat was not going to be keep one eye on China, keep one eye on Russia and the world will be fine. Point all your assets, all your missiles, all your overhead things to those 2 countries, the world will be great. But that threat continually changed. And the counterterrorism mission really told us just how fast things can change. With the change of one signal or one frequency, immense damage could be done. We learned that during this counterterrorism mission. So it was really how do we lay that strategy out. How do we build new capabilities for us. How we generate new customer relationships and that became the next step for our M&A program. As the majority of our M&As are not buying revenue. I will never buy something in a space we're already in, I don't need to. I'll just beat you. So I don't need to buy somebody else's book of business on what's core to us. I'll go win that business. So it really is about trying to find acquisitions on the time line that fill capabilities and customer relationships that we can build off of. So M&A for us is a lever for long-term growth, not next quarter's numbers. And with that, getting throughout the entire company, sprinkling that in with learning how to shape awards that are coming out, let's invest ahead of customer need, yes, that is a risk. You invest ahead of customer need. It's not blindly. We happen to know all the market very, very well. We're very strategic. We know where their gaps are. So let's invest some money to show them art of the possible. So when they ask for whatever is next, they don't understand what the art of the possible is. And oddly enough, even in a federal government world that 90-some-percent of our revenue is in, people actually respect relationships. Shocking, right? As you go there and you invest more and you show them what the potential is, you open their eyes up to 2 different things. One is who's the best in class to provide that. And then two, I can actually buy that from somebody who's not one of these 5 large companies. And I love those 5 large companies. So everybody out there, I worked for one for 27 years. They build eye-watering technology for the federal government. I just believe there was a level of mission packages SIGINT, electronic warfare, cyber, optical comms, I believe, needed an influx of more investment and a much more agile way to go create that technology because the threat continually changes. And I think that's done a lot to differentiate us and help me put this technology portfolio in place.

So you mentioned the counterterrorism position. And I think that was sort of the world we lived in for 15 to 20 years, and I'm not saying it's over, but the focus has shifted towards the Pacific, which is a lot different because we're not necessarily directly in a conflict. How does that shape? How you think about some of the -- maybe the more hardware-focused side of your business?

Yes. So about 3 years ago, I got -- I started to coin this phrase, it's going to be more about bits and bytes than bombs and bullets, okay? And it didn't mean that they won't have to worry about bombs and bullets. Clearly, we always have to worry about those. But to me, one of the effects that we're going to be present on anybody's battlefield is going to be more about bits and bytes. And oddly enough, I wasn't some fortune teller. I was clear that cyber was going to play a role out on the battlefield. In the counterterrorism mission, it was more tactical. Can I find that device that's just going to blow that IED up. And how can I interfere with that signal? How can I find it -- sorry, how can I sense it? How can I georeference it? Where is it coming from? Is it good or bad? And then how do I know that out -- how do I know that effects, whether that explosive does not go off. But at the end of the day, in war, everything is in the RF spectrum, everything. Every single thing that we do is command and control by a signal or a message sent to another system that then takes action. So if you look at that -- the electromagnetic spectrum, everything in the RF world was always going to be relevant. So now, as you mentioned, we're moving from the counterterrorism world to China and Russia. And some people thought now we got to start over. Well, no, because the signal is still a signal. And the sky is still the sky and RF is RF and cyber is cyber. What it is, is you're moving more to -- more of a national strategic kind of RF spectrum than you are from a direct tactical one. So what that means to us is as the fight moves from counterterrorism to near peers, signals or signals. So whether I'm finding a garage door open in Iraq or I'm finding what kind of Chinese ship is talking over what frequency, what all the systems on their ship doing in the INDOPACOM region, it is a one-to-one match. Why is that? Because our solutions are software-based. Software is our superpower. Think of your mobile phone, think of the App Store. We're the App Store, okay? You can buy the phone from wherever you'd like to buy it from. We provide that. It's got a lot of memory and it has a lot of power, and it needs very little power to be able to run because it's out in the field. And then our superpower is software. So as our national security assets find signals out there. They don't know what it is. They send that to us. We quickly decrypt at within a day, an hour, 30 days, a year. They get a new mission package back out there to them without coming to shore, without bringing tanks, without bringing Strykers back in. It's a software download just as you do on your phone. And that is starting to pick up. So more of the technology side, whether it's a large-scale system or it's a small device, that's where we operate in today.

How do you put it sort of into maybe the financial context because I think that everyone, I think, here's the story, and it sounds really good. And it sounds like there's a lot of demand out there. And you would think on the face that should drive organic growth profile that's sort of above the peer group, but you've sort of been in the peer range. Is it something that you're still in the investment phase and so a lot of that growth comes in the future? Or is this sort of you expect to remain in that sort of low to mid-single-digit that's just sort of the range for this type of opportunity?

Yes. So managing the business over the long-term is repeatable growth. And it's been our focus that how we pursue jobs, the jobs that we take and the methodology of how we want to build this company forward. If you roll the clock back 8 years, the technology part of our portfolio was 20% of a $3 billion company. It's about 50% of a $7 billion company. I like that trend line, okay? It wasn't something you watched quarter-to-quarter. It wasn't wins that we had, so we could tick somebody's quarterly call off. It really was the long-term growth strategy. So we believe we're a mid-single-digit top line growth company at ever-increasing margins. And yes, at times, oddly enough that when you adjust your gap EBITDA margins, you find just wild fluctuations on what's in and what's out. So I would ask all of you if your potential investors who are investors in ours across the sector, it's worth reading a couple of really nice studies that have been done to show what true EBITDA margin is and what it means. We move from about a 7.5% margin business to 10.5%, 10.7% over a 8-year period. That's remarkable for a company our size. We've doubled the size of the company. And the average length of a contract in our backlog has gone from 33 months to 66 months. So if you follow government services, the whole game is always about how many recompetes do you have, right? And never seen such a crazier thing. You have work in every 3 years or 4 years or 5 years, you get to recompete on the book of business you already have. From an investor standpoint, 100% of your business was in recompete. It's not one I would be investing in. So our goal was to get modern recompete down, the contract duration longer. So because I can spend $1 million on winning a job I already have, and I can spend $1 million in new program investment. And we chose 8 years ago to go to the $1 million in new business a week and we can go out there and win. So financially, it's putting our investment dollars towards new work and far less towards holding down the book of business that we have. I don't watch where our peers are most times, frankly, because their strategy is not mine, and I'm not going to augment mine because of what they're doing. We've sort of set this tone for doing both expertise and tech. There's a lot of folks who are starting to get into the tech space. But I always invite investors to come to our facility and actually touch tech versus get a white paper on what tech could be. I invite folks to talk to us about how much AI we do across our business, not because it's a hot topic. 61-year-old company, you don't get there by changing your audio track, you get there by actually delivering. And so I'm quite happy with mid-single-digit top line growth and ever-increasing margins.

So I guess, got to go with AI from here. I was going to wait, but now I sort of got you. What is the opportunity? Maybe not -- maybe starting like what do you think the industry opportunity is? Because I think everyone's thinking about AI in the context of commercial application. What do you think the government application is? And then maybe below that, where do you think CACI plays into that?

I've sort of lived through the cyber bubble. We all talked about maybe 15 years back cyber was going to be large. It took the federal government almost 10 years to actually provide the first dollar cyber funding, okay? AI, machine, machine learning -- we were doing AI before we put the letters A and I together, right, really is using a machine to look for things that are repetitive in nature. We're more on the computer vision side. So how can I take -- how can take video feeds from hundreds of assets. They started having an intel analyst look at that and tell us that's a train and that's a missile, let the machine tell us 99% sure that is a missile. So instead of leaving a lot of this video on the ground, we're actually processing far more information than we ever could because there are a number of platforms out there generating all this information is 10, 20-fold that which we had people to actually use it. So that's where we specialize in. We've been doing AI and machine learning for at least the last 25 years, and win the first award that we had in it. We used to keep track how many contracts had artificial intelligence had in it. After we got to 100, we just stopped counting and that was 3 years back because now everything -- a lot of our programs have AI embedded in them. On our mission technology and our enterprise technology side, it's highly AI relevant. We're looking to how you take a human out of the loop to the extent that we can process more and more data. So it's not going to somebody's term paper, but it is going to make absolutely certain that we're able to process more information. Where does the industry go? It's -- if you put machine learning as a subset of AI and you put RPA as a subset of AI, the world is your oyster, I mean there's lot of things we could automate and do faster. There's certain systems and certain things that the government does that you've got to have a human in the loop. You're not going to launch a missile or any kind of fire control system or something that hasn't been humanly validated. That's the right thing. If you want a RPA tool to check the value of my invoice and make sure that the pennies are correct, I'm not sure I got to have to have a human check that. So I do think there's a lot of growth coming. I think as customers become more comfortable with AI, this is the federal government space and in the national security realm, I think you will see more and more growth. And I think that the sector and specifically us, are very well positioned to be able to take on that mission. So right now, national security, it's the comfort factor. It's not that they haven't pushed the I believe, but they do believe that machines can do a lot of work. There's a lot of analysis work that happens. But as they become more comfortable, again, I think you're going to see budgets grow and grow, and we're very well positioned in the intelligence community, across the entire DoD, DHS, private material and a few other customers on the Fed subside.

How similar to cyber do you think it is? Because I think I asked you last year about cyber and you said there's no way to break it out because it's sort of been everything you do. I mean you're just bringing this to current events, you just won a pretty massive intel contract that's slated to start later this year, which is related to cyber and a large component of that, I believe, is labor based. Do you think the AI opportunity is going to be sort of a staffing opportunity for the government? Or will it be a combination of that and then just overlaying it into existing contracts?

Yes. So part of how we win business and part of how we grow is -- and every expertise job where the customer says, I need a N number of people to do this job. 2 years before that comes out, we're sitting with them saying, why 200 and not 100? Now that's an easier discussion to have post COVID, and I'll never say anything good came from COVID. But it does sort of have everybody's eyes and ears because now they live through it is, would you rather have 100 and have the same job done, if not better, do you want 200. And this new cyber contract with a very large intel customer is all about how do I take cyber, cyber effects bring analysts but how do we bring technology in as well, because cyber continues to change, it continues to morph. And what this customer is looking for was a state-of-the-art new way to look at how to process the information they had, networks that they had to protect. And part of that was done to be differentiated by bringing technology in to help provide better expertise. So slightly less people, higher solutions base and how do we continually bring that in. The far superior solution that we put on the table that was documented in the GAO protest was all around moving to higher end cyber and getting folks who are doing that work more highly credentialed faster and also how do you introduce tech to be able to take a larger step forward in where they were going. That's the kind of creative juices they were looking for as they could do the next 5 years.

So maybe just to put a bow on sort of the -- maybe the remission tech side of things, I think the thing that myself historically and investors have struggled with a little bit is maybe thinking through the opportunity in terms of the actual technology. So I know things you've highlighted like EW, electronic warfare, signals intelligence, you have photonics, spectrum analysis, dark web CSfC and lots in there. How do you think about like what's maybe more near-term where you could see growth? And maybe what's a little further down the road? Is it EW, SIGINT, sort of now CSfC and Photonics as later?

Yes. So I'd tell you that electronic warfare is in everything. And if you look over a long enough period of time, you're going to see growth. Again, I'm looking at long-term growth. Again, in the technology piece of our business, if you went back 8 years, you probably grew the technology side from $500 million to about $2.5 billion, so actually $3.5 billion because our tech is about 50% of our revenue. If I look at all the different tech, whether it's a system, so a customer comes to us with requirements, build me the satellite ground station that is mission tech. If it's [indiscernible] this device that can find a signal, it could deliver a cyber payload. I want to find your phone, I want to let it keep talking. I found your phone, I don't want you to keep talking, all of those devices that you can use either from the air from space or from ground, EW, ISR and electromagnetic spectrum are now, cyber is now. As you look forward, we did 2 smaller acquisitions the last couple of years. One was in the Commercial Solutions for Classified. Think about that devices I'll let you talk on any network at any time. You can go to an unclassified network or a classified top secret, you can move those devices around sort of having separate ones. And then in the optical comms area, what we're doing, not only in space optical comms, but in LIDAR as well. Think about a laser, it's light, how I put away for a minute. So therefore, I can transmit data. That's what our optical comms is. And as the cyber positioning gets worse, not only on ground and air but in space, optics are extremely hard to toy with. They're very hard to disrupt, especially in space. So we took the lead in looking at how we move optical comms forward. The CSfC market is more of a 25 -- FY '25 becomes much larger in '26. Up to a comms market, it's already started. We've been investing heavily in those 2 acquisitions, both LGS and SA Photonics and I would look at that to pick up in '24 and then really come to full field in '25. So there's a nice waterfall model when these things start to pick up, when they start to contribute both top and bottom line growth.

So maybe pulling it into current events, hard not to mention the debt ceiling and the fact that that's all over it. And now we have maybe a little more clarity on what the budget is going to look like. How do you think that process played out for CACI? Is there -- you think a pretty good growth opportunity with the DoD and Intel and maybe a little less of a growth opportunity in non-defense?

Yes. I always like to say that some good things came out of COVID, even though COVID was poor, right? Actually, a couple of nice things came out of the debt ceiling world, right? One is we have a top line number. And when you're sitting in my seat, you struggle to get the top line number and then the government struggles to get the 12 authorization bills passed. And positive news, we have a 3% growth budget in the '24 and 1% into 2025. I don't much worry so much about the top line growth. We're a $7 billion company, $220 billion addressable market, we're in a $1.6 trillion budget. So when people ask me a lot of times, defense budget goes from [ $850 million to $825 million ], what happens? I might not even hear about it, okay? I'm really focused on 5 market areas and what it is we are out there doing. In the areas of IT modernization and electronic warfare, our signals collection optical comms are all very well-funded. So that's -- those are some of the core things. My mantra when we started this was I am going to always be somewhere close to the flag pole. Very, very sticky and make sure I don't have to read the paper every time that the budget gets cut. So I like our hand there. So out of the budget deal came fixed numbers, so we know what that growth is. Should we expect a CR going into this coming year? Yes, but most likely very, very short. Because most of the length of getting the budget in place is arguing over the top line number. And the fact that we've got that locked down but, I mean, I've been in the industry for 40 years. This is one of the first times I can say that since maybe mid-80s that we're in this position.

So I mean, I think that maybe most notably for -- now you have a little bit more of clarity on the macro picture. But most notably for you, we already talked about the large intel you've had EITaaS which was the largest contract in the company's history, $5.7 billion. And then you had a pretty big recompete with the screening contract that you do with DCSA. So it sounds like even if the macro environment were a little weaker, you have a pretty good set up for growth. Can you maybe just walk us through how to think about some of the ramps of those contracts and maybe what the pipeline looks like if there's a lot more opportunities that look like there's in there?

Yes. I guess, first off, we would expect in the next couple of weeks to have some announcements out there in the mission tech area as well. So additional work we believe we're successful on just timing did not work out for us to be talking about that today. We have a large Intel contract that is going to -- we're going to start to see task orders from that. That was the large takeaway that had a couple of protests in it from the 2 incumbents. We'll start to see that ramp up very heavily in FY '24. And then again, a smaller bump in '25 because as task orders -- as funding rolls off to the old contract, that's going to roll into ours. And our customer wants to "Go fast." So we're going to see a large ramp-up in FY '24. On the Air Force EITaaS job, that's rearchitecting of Air Force network globally, all their Air Force bases and putting a large annual price desk in place. Those are the jobs that sort of start off a little bit slow because you're doing a lot of the design work and a lot of the infrastructure and knowledge work and then you're going to go to full rate production where you're going to go base to base to base. So I would see a reasonable amount of revenue coming from our Air Force EITaaS job in '24, and I would see that ramping up in '25. So those two jobs going to different speeds, given us some nice underlying growth. You mentioned a large recompete for us and our background instigation work, that was a 5-year recompete. That's in the rearview mirror. We don't have any single job that's more than 2% or 3% of our revenue going forward because we took on a lot of those recompetes last year.

On the EITaaS side, I think that's one that may be more open for interpretation from our perspective, to a $5.7 billion contract in theory, could be north of $0.5 billion a year. Like are there any sort of expectations for where that actually goes?

Yes. If you looked at our announcement, I think we booked a little over $2 billion as what we believe is the value today for everything that we know. A heavy unique structure where the Air Force wanted to have small businesses involved as well. So they're going to get a portion of that work. I don't think it was fair for us to count the $5.7 billion against us when I already have knowledge that, that was going to go to small businesses out there. So overall, to the Air Force, it's a $5.7 billion job. Would have loved to share that headline value with you all but the more transparent, respectable way to talk about that award is a couple of billion dollars over the next 7 years. And again, I would model that out as something smaller in '24 and then getting to a nice run rate as you go '25 out to 2030 and the like.

And then maybe like the last piece, I guess, within this would just be on contract growth, which I think something you guys have been pretty successful with particularly last quarter. How much of that has just been an easing in hiring situation versus maybe getting smarter on how to actually yield more contract value?

Yes. So some of the jobs that we win have a ceiling value. Customer has an idea to spend $200 million, but they have a ceiling value of $1 billion. I want to be investing in a company that focuses on the $800 million gap, not on the $200 million delivery piece. To deliver on the $200 million in this example, we only bid things and we know how to do well. We don't subcontract our core. It's why when I see numbers that what is your sales per employee? It's laughable almost. If you want it from me to measure on that factor, I'll subcontract more of my work, it doesn't really help me. But that $800 million, we've got a great set of people across the company to know how to land and grow. And land and grow is really about if you're a software company, they can look for solutions very, very quickly and address to very changing needs. That's why a customer puts a ceiling in place because they can only see maybe in the next year or 1.5 years ahead, but they know they're going to need more of that. So we have a large FISINT business, which is another version of signals. It is phone intelligent signals. Something happens, this is a signal. They come to us and say, this is the signal that we captured. What is it? Who is it? What was it? How would we defend against it? Those signals change continuously. So we're best-in-class at generating on-contract growth, which is another governor for us to watch mid-single-digit growth. The reason why we don't plow through and look for double-digit top line growth is because we're a top and a bottom line growth company. They both generate free cash flow each in their own way. It keeps us honest to the kind of work that they're out there winning. Winning work that's $100 million of top line is 3% bottom line does nothing for us other than have a great earnings call, okay? But then beyond that, the reward I got was to spend $1 million 18 months later to win the same work I have at lower and lower margins. And that's just not a conducive -- that's what governs our top line growth not because we don't believe we can grow higher. It just becomes a distraction. So that's the way I see our model. Several -- over 8 and it's working out well.

So maybe just to wrap up, we're almost of time here. I guess, you got to ask about capital allocation. You guys have done 89 deals in the 61 years you mentioned, but no deal really in the last, I guess, going on 18 months, and now you're a little more aggressive buying back your shares. Can you just maybe sort of talk about how you're thinking about the balance sheet?

Yes. As we were building capability, if you're a company that did 80% expertise and 20% tech, you're not going to grow that overnight, right? It could be grown overnight, but it takes you a much longer time. So the fact that I came into a company that is really, really good and masterful at doing acquisitions, not only buying them or buying them for a fair value and making certain that they are strategic and you're not just buying our revenue. From the earliest acquisition, I was involved in, it was in 2013, we did [ 6.3 ]. That really got us a good technology foundation. And upon that, now you can hire system engineers and software engineers because there's work that they would enjoy doing. You start to build your company in that manner. Frankly, opportunistic and flexible capital deployment strategy. We were traditionally almost 100% buying down debt and doing M&A and borrowing and sort of stepping in [ APD ]. And the fact is if you buy for capability customer relationships and you get to a point where you got your capability gaps filled, then maybe, maybe not you're going to be as active in the M&A front. So it only makes sense that we would move from almost M&A always to more flexible and opportunistic. So we buy down debt. We invested internally, the last 2 acquisitions I mentioned, SA Photonics and ID Tech. They're high in the investment phase right now, the optical comms area. So we are putting a lot of investment there because that's our 2 areas that we bought. We believe there are going to be large funding streams. Those funding is now coming up. We're going to invest on that. And then if you look at where we go forward, it's going to be very opportunistic. Flexible and opportunistic does not mean balanced. So don't assume if I do $500 million acquisitions, I'm going to do $500 million share buyback. But we still believe that our stock has room to run. That's the reason why we're out there buying it back. We did $250 million ASR that we did in January. We had another $500 million of open market purchases that we started off, and we'll see where that one goes. But we are very, very happy that we're able to show our investors that whether a share, which are buybacks or M&A or buying down debt or investing internally, we think we've got the right capital deployment model.

Great. Well, John Mengucci, CEO, CACI. Thank you so much for your time.

Thanks so much, Bert.

Thanks, everybody.