CACI International Inc (CACI) Earnings Call Transcript & Summary

My name is Sheila Kahyaoglu, with the Jefferies Aerospace Defense and Airlines Equity Research team. We have the CACI International team with us today. I think this is the first time at our conference because we moved it so you guys could actually participate just for you, just -- so you know, George. This is George Price, Senior VP of Investor Relations; and DeEtte Gray, who's President of Business and Information Technology Solutions. So yes, it's great to have you here because we don't often hear from you on the investor call. So this is going to be a real treat to us.

So maybe just to start off, give us a brief overview of your business within CACI to familiarize investors, what do you provide key customers, et cetera?

Thank you. Thanks for having us today. So my business is focused on really -- so my business is around $3 billion a year. It's -- around half of the business, and so it's pretty significant in one of the sectors and 1 of 3 sectors within the business. And I'm really focused on application modernization, application sustainment, moving things -- migrating applications to the cloud. We do a lot of ERP work. So we do a lot of business systems, human capital systems, financial systems, logistic systems for the federal government. And again, we're really focused on modernizing those systems and sustain them. We also do a lot of data analytics, data management in our portfolio with some AI in there that's helping us really weed through the data, if you will. The second area really -- that's in my area -- in my sector is Enterprise IT and so we are providing IT to the federal government, and we start really from network modernization to helping them upgrade their networks to sustaining their networks. We run their applications in between, but all the way through service desk, running their service desk or help desk or Tier 2 support and things like that. Both of these 2 areas really focus on modernization and helping to grow those. You probably recognize some of the programs -- some of the publicly announced programs that are in my portfolio. So the TCS program, which is doing network modernization for NGA, National Geospatial Agency, the BEAGLE program where we do agile software development at scale for customs and border protection, the Sapphire program, which we won a few years ago, which is building the next data analytics platform for NGA and then the recently awarded Air Force Enterprise IT as-a-Service...

We're going to get to that so don't skip ahead. So your customers are pretty broad-based across the services you would say. And just on the broader government services, there's been some recent volatility. How would you characterize your addressable market and what the biggest opportunities are anything you'd call out in the pipeline?

Yes. Thanks, Sheila. So during the pandemic the flow of RFPs were slower. It was a little [ volatile ]. I would say today, it's really back to normal. We are very happy with the flow of RFPs that are coming out. It's been a busy season, if you will, with those in the awards. So the funding really is there. Our markets are growing and the markets that we're in across the company are very strong markets with really high priorities for the federal government.

So we -- Jefferies recently upgraded your stock on some of these recent big wins you've had in your business. I task with the Air Force, Spectral with the Navy and a large cyber award with NSA. One could say those contracts alone are above your revenue guidance, but we won't get there because George will talk me down. So can you discuss sort of the revenue ramp on these programs in fiscal '24 and beyond.

Sure. So I'll start with Air Force IT as-a-Service where we're -- it's a high priority for the Air Force to modernize their IT. This is a new program. So we're ramping up the program. We will -- we have to build out a service desk. We have to build out EITaaS system, and then we'll go to each of the bases and start consolidating some of those efforts. That will take us several years to do that. The contract has a very large ceiling. It's $5.7 billion. We booked $2 billion of that based on what we could see currently from the Air Force, their demand in this -- from the beginning. But also we have a contractor team in arrangement for small businesses, so they get small business credit, which we'll get some of that ceiling also. So it's a slower ramp in FY '24, you'll see, we'll have some revenue from it. There'll be more in '25 and it will continue to grow in '26. For the Spectral program, an exciting win for us is something we pursued for many years. And this is building the next-generation shipboard system for EW and -- second, Sorry, just won't blink for a second. This is also a new program, new technology. So we will go through the first years. So in FY '24, we'll be going through the design part of that. We'll do some of the development of it. And ultimately, it will ramp up over the next few years into deployment. So it's also a slower ramp-up in the first year. The last one, which is our large NSA program that we won that we're providing analysts for the -- for NSA's cyber mission and the intelligent -- national intelligent -- international foreign mission. This is existing work. This had an entrenched incumbent that had been there for many, many years. And through our great talent and expertise we were able to take over this program. So we are working through a transition now. We're staffing those programs up, so you'll see more contribution in FY '24 from that program. And then you'll see some more growth in '25, but that will [ not ] have more contribution than '24 than the other 2 programs.

Just back on Spectral for a second. Is it fair to say it's like your marquee AI program and how -- like if you could expand upon like maybe the AI element of that one?

Yes, I would say it will definitely have -- AI will be a part of it. I would say AI is a technology that's really becoming entrenched in everything we do. So it's -- Spectral is one place that will be -- the program is really a software-based program, and what we're building out is a software capability that takes second data, processes of that data and gives the analysts at the same time, the ability to do some analytics on it. We will use AI in that as we do on our other programs. Another program that we do that is, for example, Sapphire, which is an NGA. So we are building the next generation, the next -- the new platform for analysts to process the national geospatial data, so geospatial data and it's all types of data from full-motion video to objects. We use AI there embedded into the program to detect objects. It's an algorithm that we built, that can go through the -- through the imaging -- can detect whether it's truck, whether it's a person and then follow those -- follow that capability throughout. So AI is -- in all of our programs, we're doing some sort of AI or RPA is another area that we see across many of our programs to automate some of those manual processes. And so it's a tool that we use. It's not really a market by itself, but it's a tool we use...

I got ahead of myself a little bit but I just want to like close the loop on AI. How is CACI leveraging AI, whether it's internally or externally? And do you see that more frequently in the contracts that -- proposals you're bidding on?

As I said, I wouldn't think of AI as a -- is a business by itself. If we think of like a tool like cyber. Cyber is embedded across everything we do. AI is becoming the same thing. It is a tool to enable automation, to enable, frankly, for us to get through more data faster than a human really can. So it's really become more of an enabler and tool in that. But I can tell you it's real. We are doing it across multiple programs. We're investing in AI. I mean to look at advanced what's the next thing with AI? How can you advance that call? We do work for DARPA, too. So in the -- I think really advanced AI and thinking further out, we're doing some of that kind of work for DARPA with [ ARPA ]

Just going back to those key wins. What do you think were the drivers of those wins as you were kind of explaining it, I thought the characteristics were so disparate. So what differentiated CACI the bidding process versus peers? And do those wins open new doors to those customers or other customers over time?

Yes. So we approach everything starting with our strategy. I mean it really started in all 3 of these programs we started several years ago, and it really started with our strategy. We took our differentiator capabilities. We invested ahead of -- we've looked at what the customers were going to need, where the customers are going, and we invested in those areas. So they were all pursuits that we have been working for several, several years. So it's not by accident that we were fortunate to win all 3 of these programs. On the Enterprise IT as-a-Service that started a few years ago with a strategy to expand into, frankly, Enterprise IT and DoD. We really didn't have a large presence there. Air Force, we knew Air Force was on a mission to modernize. And so we said that was a good target with a customer that wants to do something different. And so we started pursuing that part of that was investing in strategic hires, people understand the mission of the Air Force. And then as we advance that, investing in capabilities that can help them do that. And really, frankly, for that win was really leveraging our past performance and experience at some of our other agencies like DHS and looks like that. For the NSA program, it really came down to our talent. I mean we have the talents that really understand the NSA mission. We've been at NSA for quite a long time and really -- our ability to really deliver excellent program management, and that really is a program management to be able to staff those programs. And Spectral actually started probably 10 years ago as a target. We knew this was a need for the Navy. They need to move more from a hardware-based systems to more of a software-base system. We saw that need. When we bought the Six3 acquisition, we've got some capabilities that helped us -- we advanced our [ SIGINT ] capabilities in that at that point. And then LGS, we added some of those capabilities. But over the last few years, we've been investing in building out a software-based capability in SIGINT and EW, and that's really what we used for the Spectral win.

Great. And then you've recently announced a strategic collaboration with AWS to accelerate cloud adoption. How does CACI benefit from this? And what's the market opportunity for cloud?

So the agreement we have with AWS is a truly investment on both sides. This really stem from a relationship we've had with AWS for quite a long time, investing in training, building out our capabilities. In this case, it's really talent. But I can tell you the demand for cloud migration, which is rarely where our play is, is really increasing the government. The government spend on cloud is about 15% of their spend today. They have a long way -- lots of opportunities in cloud migration. I can say that in my portfolio, where we're running government -- multiple applications for the government, we are migrating them to the cloud. Every single one of the programs, if they're not migrating or on that journey, they're definitely planning those out, including the very complex ERP systems that we're that we're running for the government. They're looking at how do I migrate into the cloud. We moved the Air Force financial system, which is an Oracle-based system. We migrated them to the cloud. And we're just beginning even that journey. So there's a lot of opportunity of helping customers migrate to the cloud.

Yes, you would say it's fairly mature in the commercial market, but not so much in government. Any like percentage you would ascribe to commercial cloud adoption in the government? Or like what services may be more ahead than others?

I don't know percent, but I would say that it's definitely priorities of all the CIOs. I mean if you go look across the federal government and the CIO priorities, cloud is always one of the top. And it's, of course, Cloud because of the efficiencies. But a part of it, too, is the security too because you lower the threat platform of vulnerabilities for these customers. I mean, even simple things they want on their data centers. So there's tons of drivers for it. I couldn't really size that. I just know there's a lot of opportunity for us...

I put you on the spot with a percentage. George new I would. So when it comes to CACI, you guys are in a slightly different position than your peers and that your 70% federal exposure versus peers at about 50% given they have a little bit more of civil mix. I don't know what percent of -- sorry, DoD, sorry. How do you think about that advantage of that mix? And within your business, is it all DoD? Can you talk about a little bit more?

Sure. Yes. One, we don't approach the market from a customer. Customers said we don't say, "Hey, I want to go grow in fed civilian agencies." We focus it more on our capabilities. So what are our core capabilities? What are our differentiated capabilities? And then what customers need -- have a need for those capabilities. And that's really how we approach the market. And so my business is actually made up of DoD, Intel and fed civilian. Our fed civilian is -- a lot of that is DHS, which is great because DHS still has lots of opportunity for -- that we -- have opportunity we can help them with. But we do have some of the other federal agencies, the work we have. But a good example is our human capital systems capability. So we deployed the Army's HR system, the IPPS-A program, you've heard about. We deployed that, it went live in December, and that's the largest PeopleSoft implementation in the world. It has 1 million users on it. If you think all the soldiers, National Guard, reservists are on this one new state of the work -- state-of-the-art HR system. So that gives us a great past performance to go to other agencies. And so we have a long pipeline of opportunities to go to agencies, both Intel, fed civilian and DoD to help modernize their HR systems. So that's just a great example of how we approach the market versus taking it on from a customer set.

And maybe talk about just reliance on labor, you might not be as reliant as your peers are. We've seen attrition as a major challenge across the group as well as wage inflation. How does this sort of play into CACI's financial profile and retention from a top line perspective?

So I would say hiring retention and -- recruiting and retention is a watch item for us. It's not a challenge for us at this point. I'll talk first about attrition. Our attrition actually from FY '22 to FY '23 actually dropped about 1%. So we're very, very happy with the way our attrition is. I can say that's because the programs that we've been implementing around our -- around the company, talent is so important to us. And so we've invested in a program called #MakingMoves, and that's really to promote employees moving around the company to get more experience. I wanted to move in the company versus moving out the company for new opportunities. Another program is our referral program. About 40% of our programs -- 40% of our new hires come from referrals, which is great because they stay longer. And then we just recently rolled out a program, a flexible time-off program, which gives employees more flexibility in how they utilize our time. From a salary perspective, I think that was the second part of your question. From the increase in salary, we've always paid the right salary for high-tech skills, and we will continue to pay that for high-tech skills. 60% of our business is cost plus. So the increased salaries will be pass on to the government. The 40% that we -- that could be susceptible that we manage. We manage very well. And some of that is through using technology versus people. So we don't have to hire the people or we can hire the higher salary folks and then I don't have to have as many people. So we balance all that and -- I think very well actually.

That's great. And then CACI has been known to do a lot of M&A over the past few years. How do you think about M&A and acquisitions upgrading or enhancing your addressable market?

So again, like we started, we -- everything starts with our strategy. So when we think about M&A, we think about filling gaps. And so we -- as we build our strategies when we evolve our strategies as we think about what are those gaps and a gap could be a technology gap. You've seen us buy some technology companies that were additive as I use example of Spectral. We added those -- some companies that brought some new technologies that were already advanced. But we also think about M&A sometimes to get from a customer presence. So when we're talking about the fed civilian market, there are some agencies that we're not in, and we will bid and go into those markets organically. We're going to do that anyway. But if we wanted to advance that, that's a potential area of M&A. So we think about it in those ways. In my business, 2 of the acquisitions that we've benefited from in 2016, we bought L-3 NSS, we actually picked up several Intel IT programs, which gave us some past performance -- larger past performance that we didn't have in the past. So that -- we benefit from that, it led into what the TCS program is today. And then not talked about a lot, but when we bought LGS, they actually had a smaller piece of that business -- was network modernization that was moved into my sector, and that joined up with the network O&M work we did on TCS and some of the other programs gave us a 1 plus 1 equals 3 scenarios, we've been able to grow that, too.

Great. And how does your business help CACI outgrow the broader market? The broader market.

Say that again.

Is there like a growth rate associated with your business and how -- we could skip it if you want.

I mean we're -- we have a very nice opportunity this year for growth, both on the current programs that we have with the Air Force IT as-a-Service, but also in some of the pursuits we have a very nice pipeline of opportunities that we're bidding this year.

And how do we think about profitability, whether it's for CACI overall or your business in particular, the long-term margin story for your business, between mix shift and operating leverage, what can we think about profitability and reaching in the longer term is like 11% the maximum margin levels you guys see? Or how do you guys think about it internally?

I think there is opportunity for continued market expansion. I mean, it's a balance. We're not going to -- we're not going to starve our investments that we make for growth to increase our margins. So it's all balanced between that. We also look at cash flow and it's another metric from a value proposition, but I think there is opportunity for margin expansion as we continue.

That's great because you don't always hear that from government IT services companies continued focus on operating margin expansion after, I think, up 300 bps in the last 5 years or so. So -- and maybe just to close the loop overall, how do we think about your business with your 1.5x book-to-bill over the past year? How should investors think about it as it relates to forward growth potential and the conversion of the backlog and revenue of that time plus the margin expansion?

So we're very happy with our -- we finished the year last year with 1.5x book-to-bill. We have $26 billion in backlog. So that gives us good visibility into the future from a revenue perspective. And so we're very, very pleased with where we are, and we think that's going to continue in the future.

Yes, I would just add on to that. If you look at the weighted average duration of the awards that went into backlog this past year, that reached 6 years. And if you go back about 5 years, it was probably just under 4 years. So we've added a significant amount of duration that we're -- those awards going into backlog, right, are longer and provide good visibility to the business. So that's -- it's an important element.

Great. Thank you both for being here and participating in our conference, and thank you all for joining.

Thank you.

Thanks Sheila.