CACI International Inc (CACI) Earnings Call Transcript & Summary

Okay. Thanks, everyone. Good afternoon, everyone. My name is Peter Arment. I'm a senior aerospace defense analyst here at Baird. I'm delighted to have CACI International President and CEO, John Mengucci, who's joining us. Very excited. Thanks, John, for coming. I appreciate it. So I want to just basically give a little quick overview, just if anyone is not familiar with CACI. John Mengucci, who's been in the role since February of 2012 and widely regarded as one of the best leaders in the government services space. Last year, CACI celebrated its 60th anniversary as a go-to provider of technology and expertise in the national security and defense market. The company has evolved materially since its inception. When it was really focused on shorter cycle platforms, majority of revenues were driven by billable hours kind of consulting type work. But nearly -- after nearly 90 acquisitions in a 25-year period, the company's portfolio has been reshaped in the longer-cycle software-centric business, aims to address national security threats and monitors -- and modernization needs across various domains. Today, CACI is nearly $7 billion in revenue, is focused on high margin -- higher-margin software-focused contracts, generally larger in value and longer in duration, which plays the company's mantra of bid less, win more. However, their expertise workforce still remains critical to the company today, and it plays a key role in informing their technology products and the services of CACI in the areas of ISR, optical communications, photonics, counter UAS and signals intelligence. So with that, welcome, John. Appreciate it.

Thanks, Peter. Thanks a lot for having us.

Sure. So why don't I jump right into the performance. The stock has been an incredible run since you joined the company, up 500% since February of 2012, nearly over $300 today. Maybe just can you briefly kind of level set us, kind of discuss some of the main objectives when you arrived at the company, first started in the role? And then how that's changed in the current kind of geopolitical environment in government funding levels?

Yes. So thank you. And yes, we've had one incredible run. It's a team of many that makes that happen. I came to the company in 2012. We were about 10,000 employees, around a couple of billion dollar business then. But what's most important, it's a 50-year-old company. And in the national security space, it's not easy to be in that space for 50 years and have a very clean brand and a very clean set of ethics and integrity going forward. So I like that as the actual foundational billing -- building block. I came to the company, saw that brand, they touched an awful lot of customers. Got there just in time for better buying power 1.0 to come out, and then sequestration to hit in 2013. So timing is nothing. And so really just took a step back and said, "The company has two directions. We can call all of our costs. We can drop all of our labor rates and go out there and continue to just deliver expertise or people or we can move this company forward with the knowledge we have of all those customers and sort of get ourselves more into an expertise in the tech mix." And so instead of cutting all investments, we doubled down on investments and really picked the areas that we wanted to go grow. And then from there, the story brings us to where we are. Today, we're nearly a $7 billion company. We've moved from 80% expertise, 20% tech, to a nice 50-50 mix. We used our brand and our investments to make certain that we were doubling down on a number of customers. And then frankly, looking at our distinctive M&A program that was put in place long before I came to the company, it is a sector-wide discriminator for CACI. It is not easy to do 90 acquisitions. It's even harder to acquire companies and not destroy their value. That's really about making certain that you're taking the pieces that really, really matter, buying -- being a very discriminate buyer, but always filling in a capability or a customer gap going forward. I know we're going to talk more about that today. So we find ourselves where we are today, and we'll talk about some of the moves that we made and why we think we're a high-value stock for you all.

So the past 3 years, we have seen that notable shift in kind of the revenue mix. So going from -- I don't know when exactly it, was 80% expertise, but maybe early on in the early days. And as you mentioned, kind of the up to 55% roughly, that's technology making, I think, of the revenue. So maybe can you explain how the consulting type contracts still remain important kind of to the business even though like kind of the technology and the software-type contracts can be of higher margin? And how do you balance all that?

Yes. So when you hear about expertise in technology, we decided to go to that framework because when I came to the company since a lot of the revenue you're generating was from delivering people, you sort of get put in this to this consulting bin, which then all I got to talk about in my first 2 years was billable hours, utilization rates, direct labor, ODCs, all things that are highly boring, and I really don't want to run a company just delivering people. So frankly, get it amped up a little bit, talk about the expertise that we deliver and then let's start to frame what our technology business is. We have moved from 80% expertise, 20% tech, to 50%-50%. And how we went about doing that was really looking at where are those areas in the federal government that are going to be deep funding streams as we go forward. It doesn't matter what we delivered in the past, but what do the budgets look like to us going forward. And there's actually a chart in the deck, and I've always been told a picture is worth a thousand words, and obviously up here while I'm talking about it. But on the expertise side, I learned in business school, right, the minute you're going to differentiate on price, you are now a commodity. And that's no way to drive a long-term growing business for the next 60 years. And on the technology side, there were fewer players in there. So what we did is, coming from an aerospace and defense company, understanding there's the platform and then there's all the mission technology that sits on all of those platforms and then there's the services that actually support it, I firmly believe that there was a wedge of work done in the federal government, $260 billion addressable market, that would be out there doing addressable mission technology work across the federal government. And companies like ours can hire just smart people, we can hire from the best schools, we can build the same labs. But we wanted to make software as our super power, is how do I enter into that technology realm without unionized high-touch labor building devices and having somebody buy the device from anybody they want, but let the software really drive value? You can see over about an 8-year period, got ourselves to the 50-50 crossover point. So how does expertise and technology play together? Expertise informs the technology that we deliver. Half of our business, about $3.3 billion is in the expertise side. Think about that as people with just about every government agency out there, especially across DoD and the Intel community. We know every single issue they have. We know how they budget. We're in their offices. We're in their work cycles. We're not [ OCIed ] out. We just have a front row seat as to the kind of technology that those folks need. So expertise, like to say, informs technology. So we have what we think -- in some police departments, they actually called us like clue, right? We have a clue. We have an understanding where the customer wants to go. And that directs where we're going to invest. And then we work hard to get budget dollars, put in place for that work. On the flip side, technology allows us to deliver more cost-effective expertise. And a great example of that is Customs and Border have 160 digital applications. They used to buy that in a government services mindset, 400-, 500-people 5-year program, give us your time and material rates and go staff that building. I actually thought it was a better opportunity for us to take technology, show the customer the art of the possible upfront. And when they do their 5-year annual recompete, which was a number of years back, is how about you pay less and don't worry about how much I make. Tell me the periodicity you want all those applications updated. I'm going to bring Agile software solutions in. We're going to be able to spiral development, going to be able to get some apps in 2 weeks and some in 2 months, but you get to drive that train. You have to manage 500 people. And that starts to drive being able to deliver less people, but a better outcome to our customer. And that's this model. So that's how expertise connects to technology. We don't want them in two separate businesses. They're actually very, very connectable, and I think the mix today works for us.

Awesome. That's a great overview. Really helpful. So 90 acquisitions. You've been busy. Two of the last -- last two deals kind of larger ones, ID Technologies and SA Photonics, they came back at the end of calendar 2021. You still -- your leverage is reasonable today, just over two turns, a little -- maybe close to 2.5. Strong record, always of incredible free cash flow generation. So how are you thinking about the M&A landscape today when you think about your most recent deals?

Yes. I mean it really ties back to our capital deployment strategy, which is flexible and opportunistic. For a lot of reasons, the majority of our capital over the past n number of years was focused on M&A. And I have then to tell you, we are a strategically based company. Strategy is a place where we come from. We don't buy revenue. Frankly, I would rather take the revenue away if you're in my market versus buying you. So I don't want to buy bulk because bulk and scale to me in this marketplace are not a massively large discriminator. So we actually use our M&A program to fill capability and customer relationship gaps. And it's always an element of time. If I have the time to invest internally, I want to own intellectual property, I want to invest 100% of the time. But all of us have great ideas. They all happen at the same time. Some companies invest in different areas. And my hats off to them because they make outstanding acquisitions for us because it is filling capability gaps. To me, it's what's our company's addressable market, that is really the landscape and how much work can we actually go after. $260 billion addressable market out of a $1.5 trillion budget, it's not bad. We're a $6.5 billion company. So I like our odds, but always adding capabilities help. If I look at both ID Tech and SA Photonics, on the ID Tech side, as networks become more collapsed and more combined, where you've got unclassified -- classified secret and top secret information going across those, the devices the government needs to plug into those, you need to be able to handle all of that. And when you unplug a device, you can't take any of the information with you. So what's the software definable solution to that versus opening up every laptop and every server and putting hardware components in there? What is a nice slick software way that, that device gets different licenses? And how do I make that in every government network that gets IT modernized? Incidentally, U.S. government spends $80 billion a year in IT modernization. So how do I get the end device piece of that market? So they're doing an outstanding job just about at the end of the investment cycle. What was unique for those two acquisitions, they were both slightly dilutive when we closed on them, very transparent, very, very open on that. We bought them very early in the cycle. I know people don't like the word dilution.

Get me nervous up here.

I know. But we want to buy them at the right turn in their cycle, and we knew that they had more investments that they need to be made. SA Photonics' optical comms, just a burgeoning market. When we closed on that acquisition, we said we had about 2 to 2.5 years' worth of substantial investments in it. Optical comps and spaces is like what you would imagine is there's a transmitter and there's a receiver and they are multi-thousand miles apart, and they're going 22,000 miles an hour. But you can't drop that link. They got to stay. They always got to be able to find each other. So algorithmically, by software-wise, really, really hard. Hardware-wise, not so much. You put those two things together, we get a unique solution. We're the only U.S. government provider of that technology. And it's our market laydown that all the classified information going over classified satellites in the future are going to be done with optics. And I can't believe the U.S. government would want that to be in any other hands and in a fully U.S. company. That's why those investments were made. So they're both going well. And we look to see some beginning of the uptake on the revenue side at the end of '24, in SA Photonics and it really had a full stride in '25.

So if we stay on the M&A theme, are you so -- any -- like so the areas of signal intelligence or Photonics, those niche areas, are those still a focus? And then when you think bigger picture, do you think any of there is transformational opportunities for a company like yours?

Yes, we always get asked about the one transformational opportunity. We had a couple of them get away. Oddly enough, bigger deals scare investors, right? So against model, we built a shared service center in Oklahoma City 5 years back. So whether I'm bringing in 1,000 people or 30,000 people, it takes the same number of hours. Everything is fully automated now. So we bring a company in, we understand how to transition all their work to our systems, which is 90% of the issue, and they're getting all those employees actuated. We're always looking for one. But again, we're capability and customer-focused, okay? If there's a larger-sized company that fills more gaps in one buy, that's what we will do. Because it's a one buy, it's a single integration. I think in this space, too, there's people talking about potential consolidation in this marketplace. And we've always been the consolidator rather than the consolidated. So we're constantly looking at it. But today, valuations on the one-off acquisitions are still a little bit high. They're still a little bit rich. Some of those numbers that people are looking for is of an interest to us, and you can retreat back to the flexible and opportunistic, looking at more share repurchases and the like.

That's helpful. Let's talk about maybe some of the recent wins, really recent, one being FocusedFox, the other being [ EiTaaS ]. Since January, those are one -- three multibillion-dollar programs, and that's going to provide obviously a lot of visibility in the second half of this decade. Maybe you could just walk us through some of the strategic importance of these two awards or the individual awards? And then maybe compare what you're doing differently versus your peers when they approach consistently to win these large awards?

First thing we're doing is we're winning. When we move the company to its next phase, we retooled our business development organization. It's a pretty simple 3-step approach. One is bid less and win more. And that whole philosophy is companies that start to lose and they know they need to generate revenue, the issue they have is they continually bid more. They put more bids out there. And the problem with that is there are lesser and lesser quality bids as you keep bidding because you're in a panic, okay? You only have so much fixed cost. You have pricers. You have to capture leads. You have people who can write really good technical proposals. They understand how to get proposal scored well. You only do n number of those per year. You can't shove more and more through that funnel. What happens is you keep dividing people's time. And like anything else, people get multi-tasked and you end up with garbage coming out. So it is won less, bid more -- bid less, win more. The second part to that is investing ahead of customer need. So if I get a clue that a customer needs something, then I'm going to go put some dollars out there on my own before the ideas or before the requester proposal is there and sit with the customer to talk about they are the possible, not how can you work the current RFP to my favor? Let me actually bring you something of value. Let me show you instead of buying 400 people to fill an operation center, if you thought about bringing three elements of technology and using that, get yourself in a different personnel-based model and actually get outcomes up versus down. And then third is just shaping those procurements, sitting down and building that relationship. At the end of the day, government likes to talk about the far and large RFPs and huge walls. At the end of the day, newsflash, people buy from people, okay? You got to have that trusted relationship because we're not talking about find the cheapest blouse at the mall with the sharpest Google AI-driven search engine. We're actually talking about the difference between life and death. So you have to have that trust, and I wanted to put that 60-year record of performance as well as shaping jobs. And that's really all worked out well. So as I look at EITaaS, great Air Force job. It really gets us a nice breakthrough program within the part of the Air Force that we can talk on. It's a large enterprise management solution first to take all of their base-wide networks and consolidate all the enterprise resources, then eventually through wave 2 and wave 3, commonize all of their networks, which then becomes a conduit for our ID Tech solution that goes on to all those modernized networks that let you talk on classified, unclassified and top secret. So it's a really nice win. It's a $5.7 billion job as announced by the Air Force, we're taking about $2 billion worth of it as credit because there are some other add-ons will be involved in, but we'll not go through our books. So really excited about that. That job is going to ramp up a little bit slowly because they're more of a design, and then build, and then push it out. But I like what it delivers to us. On a long term, it's a massive credential for us to do service-wide implementations. The one large intel customer program that I can't talk about the name or at the agent -- the agencies, it's just a phenomenal win for us. And so how do you win that work? You shape the customer. You bring them solutions that they're looking for from their incumbents that they're not getting. I often tell our folks, you're on a 5- or 7-year job. You're the only person talking to that customer. And it's a unique position. Our job to get into that was to go with the customer and say, "Here's what we don't think is happening. Here's where the pace of network analysis is. Here's what the level where cybersecurity is today. We don't believe you're there today, but the next time you look at this bid, you should be asking for A, B, C and D. You should be looking for us to train our employees versus you using your dollars for that." Just a lot of really different things. How did it turn out? We survived two protests and a purchase in operatory and at the end of day, I'll use my customers' words, a far superior proposal, much more in line with what they were looking for, lowest risk and best value. So that to me is a home run win. There wasn't by a skosh win in that. We're looking to transition that program quickly. You'll see the majority of that consistent pace revenue show up in our '24 numbers, and then you'll see a little bit more coming up in '25. But both really good wins, focused on customers first. When focused on customers, our financials follow. To put my company's financials first, you don't usually get your customer to follow you. So really nice sell.

And was that customer, the one that we can't mention? Is that -- was that a lot of new business for you? Or you had -- you've always had relationships there for a long time?

We have relationships there. We have outstanding cyber credentials. You don't hear a lot about it because a lot of cyber work that we do, we can't talk on. There's defensive cyber and there's offensive cyber. We do a fair amount of defensive cyber. Offensive cyber is, I want to take control of that asset, not I want to protect it. And clearly, for obvious reasons, we don't get to talk about an awful lot of that. But the customers who recognize the value of having that within our own shop, we're able to easily evaluate what we were going to do for them. And they wanted even more of that. So it's 1,200 people over the next 5 years.

Terrific. Speaking of people, so labor environment, always a challenge in your world. Are you seeing any opportunities? Just if the macro environment softens up a little bit, where you're able to bring more people in? Or maybe just what are you seeing regarding in terms of software offerings and trying to attract that talent?

Yes. Talent is always tough to find. I mean if you look at -- I look at two simple curves. I'm a big trends guy. If you get two different curves occurs, one is number of software engineers we all need, and the other side of that curve is the stem-in enrollments, right? They're always going in the opposite direction. So the first game is to retain those that we have, and we've done an outstanding job there. Our retention rates are below, which is good, even than what they were even pre-COVID. So I'm really happy with what we've done from retention. I actually credit that to a couple of things. One is that the National Security Mission actually means a lot to an awful lot of folks, and there's a lot of high-tech being done there. From the retention side also, and the attraction side, it's still a secret. A lot of us lost people when the West Coast tech was going on a wild hiring binge after COVID, add some pretty phenomenal salaries and people didn't realize that, that salary was only for 12 months. So with those layoffs and the like, we've been able to pick up folks. What it does for us is it lowers that high-end salary noise that got into the system for the last 2 years. We respect that, though, because software and system engineers are very, very hard to find. We put a 300-person internship program in place. It's our fourth year. We've got over 300 people; in our market, that's really important. 300 may not sound a lot, but we like interns who come to us their sophomore year in college. And when they leave for their senior year in college, they leave with an offer from us and they leave with a security clearance. So when they come in, there is no 12- to 18-month delay. They come right in, they are high productive. They know who we are. They know most of the leadership within the company. We spend a lot of time getting to know them, and they feel like they make a difference immediately. And so it may not sound like a lot, but 80- to 90-people every year that come in without an 18-month delay, for us is just great for us to continue to find growth.

Terrific. Let's talk a little bit big picture on budgets. So we saw in the recent debt ceiling deal, kind of budgets kind of capped 3%, 4% roughly for -- when we think about '24. How do you see that impacting you? And maybe if just, in generally, the government services space?

Yes. I mean for the first time in a long time, this is my 40th year, I'm getting old, but we've spent a lot of time under a CR. What's -- I hate to say good things come from a debt ceiling debate. One of the positive things is we have an agreed to upon top line number. It's a 3% growth and then 25 -- it's a 1% growth. The 12 authorization bills still have to be passed, but the long pull, 10 each in every year has already been solved. So I would expect CR maybe October through December, but the fact is funding is flowing. What really hurt us the last couple of years was a good budget, but tough to get funding now, now we've got both. So I like where we are going forward.

And you don't think in some of these most recent new wins, does a CR impact your ability to kind of ramp up at all there?

Yes. So on the one large intelligence program, that job is an already underway program. So they're not under any worry about new, new. Air Force EITaaS is a new start. It's all new work, and our customers have that fully funded and fast. in our kickoff meeting, their issue is go fast. So no, I don't see any funding issues there either.

We get this lot of regarding just particularly more in the hardware space, but you do have some hardware. And are you being impacted at all in the supply chain side? Or how should we think about that?

Yes. I mean we were in the depths of COVID. We're not GM, so we don't buy millions of chips. We buy a much smaller amount. So I didn't find myself on the top 1,000 people buying chips. So we went out there, we just put more capital upfront apart for what we believe we would be selling. We maybe 6 to 8 months off. So we carried a little excess inventory, while we were getting those orders in, which is fine. Chip delay times have come down greatly. For a business our size, it's pretty much normalized. And I don't see that as being any reason why we get in front of either of our financials going forward.

Terrific. Well -- so I don't know if you noticed on any recent conference calls, but the term AI has come up a few times. So maybe I'll just ask the proverbial generative AI question. Some of your peers have been a little more vocal. You guys seem to just focus on delivering the fundamentals. But -- we can talk about that another time. But maybe your thoughts on AI? How maybe it may help your business? How it may impact the landscape that's out there?

Yes. So I'm not usually a big hype person. So I don't believe in the hype. But from a national security side and from where our investors should be looking at CACI playing in, we've been doing AI for a couple of decades. Underneath AI, there's machine learning and there's generative now and there's RPA and there's a bunch of other versions of it, right? At the end of the day, computers were created to make our life easier and actually process more data faster. So that's nothing new because we put the letters A and I next to each other. I think what you will see in the national security space is customers have -- are overwhelmed with information -- with data, okay? There are some studies that say 11% to 15% of all the overhead imagery data that is collected is on the cutting room floor because you only hire so many intel analysts that can look at so many videos and say, that's a treetop and that's a missile top, okay and you've got to be pretty experienced to go find that. So we've been spending a lot of money and a lot of time and effort around ComputerVision AI. How can I have a machine go through all that information, at least on the first pass, and make use of all the relevant information and leave nothing on the cutting floor? That's all good, right? We can all understand that, that is good. Our shared service center, we use our RPA, we have been for the last 5 years. How do you automate invoice creation? How you take accounts receivable? How you take checks coming in and put them in the right dropbox? All that is great stuff. From national security side, the customer side is, "How can I trust it, right?" Because we're not looking for the cheapest blouse in the mall, we're actually looking to find out a good person versus bad person. Are they on our list or are they not?" And I think to the extent you don't take an AI-driven system connected to weapons fire control system, then we're most likely safe. But I do think what their discussion on AI is going to lead to is more knowledge transfer, okay? And the more people understand about a technology, the more they're going to trust it. And I firmly believe, as digital natives, within our entire customer set, who've been to those procurement roles, they have a better understanding of it. They also understand some of the real life pitfalls of it. So I like what the discussion will do. I think the more people who are discussing it, our customers will learn more about it and understand the pros are greater than the cons. That will probably create more market for us and more opportunities. But we are at $3.5 billion technology portfolio. The majority of that has got some element of those four building blocks of AIs.

And as it develops more, do you think maybe the more productivity, ultimately, is probably the end-result for you guys?

Yes. I mean if you look at this -- how technology changes the face of expertise, if I'm an expertise company, delivering people, you have to believe that our company is going to be looking for ways we can bring technology in to deliver less people and/or reset people who are intel analysts who are out there today, sell them as expertise, training them up and having them generate even more output and more outcomes for our customers. So it's not about creating layoffs, it's about delivering less people and more and more output. And I think that is a positive side of where I would see AI going forward.

Terrific. Well, we're out of time. So thank you, everyone, for coming. John, as always, thank you so much for coming. Appreciate the support.

Thanks.