CACI International Inc (CACI) Earnings Call Transcript & Summary

Okay. I think we're at time. So thank you all for coming. So our next company is CACI, and we're delighted to have with us Jeff MacLauchlan, CFO, he's to my right; and to his right is George Price, who's Head of IR. So Jeff, thanks for coming. Appreciate it.

My pleasure.

So your CACI strategy has been bid fewer but bid bigger, and it seems like it's pretty successful with the large NSA award, EITaaS, Spectral. And you said on the December quarter, you won another $1 billion job. What's that?

I think the most recent award you're referring to is GENMOD, which is a network modernization job in our business related to digital migration and development. And of course, the jobs from earlier last year are all in the process of ramping up. So we're really on a nice organic trajectory.

What's -- is GENMOD out of protest? And how is that expected to ramp?

GENMOD's out of protest. There have been several network modernization wins. And the one you're referring to, Cai, is one of them. So we've been very successful in network modernization lately as well.

But they're more than GENMOD?

There have been 3, in fact: DIA, which we've announced; and then there's another that just cleared protest that we haven't announced yet.

Okay. So the next issue is, do we -- but you basically booked it, right? If you want it, you book it even if it's in protest?

We do.

Got it. So are there other sizable bids that are coming up that could move -- I mean because you had those EITaaS, the NSA a contract. I mean any of the -- more of that size that could really move the needle?

Well, we have some quite large opportunities in the pipeline. I think we have $11 billion or so to do in the next quarter -- of submits in the next quarter and I think $5 billion or $6 billion where we expect decisions pending in the near term. There's not another EITaaS in there, but there are some very significant opportunities.

Got it. And what about recompetes, what percent of your revenues are up from recompete in the next 18 months?

Yes. We announced in our most recent earnings call that the recompete content of this year's revenue was a little less than 5%. It's actually about 2.5% today. So we continue to do a -- we're very happy with our recompete performance. I think we're approaching around 90%.

Yes. And Cai, thinking about it from a -- the value of contracts coming up for recompete, this year's pretty typical year and the business development function is doing a great job both on the new business awards and recompetes. And next year doesn't look anything -- looks very normal, very typical and nothing unusual from a recompete standpoint.

So I've followed CACI for a long time. It used to be a service provider, mainly tactical Army missions. Now you've got a broader focus into each product. Walk us through your key product or product-related, because I know software is important in there, initiatives like SIGINT, EW, [ CUSA ], UAS.

Yes. The strategy that was undertaken a number of years ago was really focused on differentiation and on leveraging the expertise side of the business. And while we have a portion of the business, the technology portion does have some elements in it that are hardware, we really don't think of them as products in a traditional sense. And that's not just a semantics distinction. They're really software-centric. So it's not something you just take off the shelf and ship and leave it alone. It's got updates coming all the time, access to our signals library, and signal characterization algorithms are being updated all the time. So it's a little different from a typical product business in the sense of sustained involvement with it.

Right, right. So what percent of your business is what I call mission solutions that has a product related to it, rough percent?

Yes. We have moved away a little bit from the mission component. But the technology and expertise is about 55-45 now, slightly more technology. And probably half-ish of that would be in that category.

Got it. So it's roughly 25%?

Right. On that order.

Got it. So photonics really has pretty good potential, it would look like. What's your strategy for winning SDA transport and tracking layer of business? How big could that be for you?

Yes. We -- you'll appreciate we don't give kind of explicit guidance about the size, but the photonics business is a really exciting part of the portfolio. We are kind of nearing the end of the investment phase, the low-rate initial production. Some of the early contracts related to that are starting to deliver. We've opened a new facility that's focused on the production, and we're starting to deliver hardware. We have flying optical comm terminals on orbit and operating today. And really an important part of our story over the next year, the balance of this fiscal year and without getting ahead of our fiscal '25 guidance sort of extending into next year, will be transitioning that area into some rate production levels. We won quite a few SDA jobs, which you're aware of, through where we're generally sub to primes. We have some contracts directly with SDA, and we also are -- some with DARPA. But it's a really exciting part of the portfolio.

And Cai, remember, too, there's the -- what you're talking about with SDA with respect to the higher-volume, low-swap LEO photonics technology, we also have the more bespoke photonics capabilities that we acquired with the LGS acquisition. And that's -- that brings us some of the capability. I mean that's -- you have that with NASA on the Psyche probe, deep space optical communications. We have terminal communicating -- technology that's communicating from about 19 million miles away at this point, I mean, doing some things that haven't been done before. And the point of that is simply that there's a significant amount of technology capability, and that also -- that research, that capability factors into what we're doing across all of photonics...

[ If we think ] we're relevant.

If we think about the SDA but tracking the transport layers, who is your guy? I mean, what do you sell to SDA? What do you sell to LHX or to Lockheed? Or how should I think -- we think about who's buying it, who's contracting right now?

Well, to the satellite primes, we're selling the optical communication terminals. So it's their components and subsystems that are on the primes platforms that they're integrating.

I mean one of those LEO satellites, Cai, for example, would have 3 or 4 optical communications terminals on each one.

So is it -- I mean the great thing about LEO satellites is they don't last that long. They last 3 to 4 years, and then you got to put them up again. Is this a kind of business like if you're on Tranche 2 for transport, you're going to be on Tranche 3, if it's the same, they pick the same guys? Or is -- are they likely to just -- you're always going to have to fight to get your position?

Well, one of the requirements is for interoperability. So that would suggest that there is some ongoing opportunity to compete. But that's actually not necessarily off-putting to us. I mean we think we have a really good technology and a really good position and find ourselves happily, probably ahead in the market currently. So we think we have a good position.

Cai, it's interesting that we've -- one of our primes actually, these are their words, said ours is the most mature technology that they've seen. And they've obviously seen all the providers that are there. So we really look at ourselves as the lowest-risk, most mature capability. We have actually terminals up in space that have connected, right? So that's an important element of how we're going to market and how we're differentiating ourselves.

And are the terminals -- because, I guess, Northrop had said on the latest tracking layer, they basically decided not to bid the one that TR AEROSPACE kind of got on. I mean, is the pricing okay here? I mean given your expertise and there's enough commonality one to the other that this is a good profitable business? Or is there risk still in the profitability?

Well, I mean there is no reward, obviously, without risk. I mean -- and we do have to transition into the rate production mode. But again, we are producing flying hardware, and we know it works, and we know what we have to do next.

And we should be ramping over the next year?

Yes.

Got it, got it. So talk about Agile software development. And I think you say you lead in the market. Why is it so important? Who are the biggest competitors?

Yes. George will want to amplify my answer here a little bit. But we have several, including the IPPS-Army job, the human capital management system for the Army, that are the largest Agile contracts. And you're certainly familiar with the concept of Agile and the efficiencies and the speed with which you sort of iterate requirements and develop and field it in portions and the advantages of that. So it is an important skill. It's a place where we've invested ahead of need, which we talk about a fair amount as part of our strategy. And we have an Agile software factory which operates like a factory. And so we're very proud of our Agile capability, and I think it gives us a real discriminator.

Yes. I mean, Cai, Agile is really becoming more and more common, in fact, table stakes. And when you can go out there and say -- we've talked about Customs and Border Protection, CBP BEAGLE, right? BEAGLE, there's a large program with the Army. There's lots of other programs that we execute using Agile software development. But 2 of the largest and very successful -- I mean, we're very successful execution with our CBP customer on BEAGLE. That performance, that referenceability, right, that track record as this is becoming more and more common in RFPs, that puts us in a great spot, and we're very happy about it.

Right. So the next one is artificial intelligence becoming a priority, increasingly important. And when we talk to some other guys, you think that they invented it. But how would you rate your capability versus folks like Booz, Leidos and SAIC? Are you all comparable? Are you catching up? Are you ahead? What's the difference?

Yes. Certainly not catching up, I mean, if anything, ahead. I mean, artificial intelligence is something that we've been doing for a very long time. Some of the large language models are starting to get sort of some public attention. But the idea of artificial intelligence in intelligence data processing in particular, you'll know is not a new thing. We've been doing it for quite a long time. There's some exciting developments going on, and we're -- I think we're in the middle of those. But it's also an area with some real potential.

Yes. I mean, Cai, the -- I'm not -- I don't think we want to try and get into comparing ourselves to somebody else about a technology tool that's becoming more pervasive. We had a similar thing happen with cyber, right? Everybody was touting cyber and how big of your -- what part of your business is cyber. And the answer is it's hard to put a number to something like this, a tool that is becoming more and more ubiquitous. But I think the thing that we would emphasize is that our capabilities are real and deployed and revenue-generating, whether it's optic object recognition, computer vision on NGA's Sapphire program or it's robotic process automation that we're executing in conjunction with a partner, ServiceNow, both internally and externally or, in fact, I became aware that years ago -- I think the current version of ChatGPT has a 4 handle. It's 4, 4.1 or 4.2, maybe. Sorry, if I got that wrong. But I'm aware that in our cyber work, we -- years back, we were working with ChatGPT version 2 for some of the work that we did. Obviously, I can't go into detail about what it was, but this is a capability that we use like many other capabilities in executing. But I think the point being is that it's not something that's aspirational or, hey, we're trying it out. We're actually using it to deliver real outcomes for our customers.

Can you define it in terms of like what percent of your workforce are folks that are mainly focused on AI? Or what percent of revenues, this is sort of like the prime component? Anything you can do there?

I'm not sure it really lends itself to that kind of analysis. I mean it's sort of in everything.

If we have on the order of about 200 large programs, it's in use probably in more than half.

Okay, okay. And...

I mean think about something like maybe Spectral. That's absolutely going to be using that technology. You get a signal, you have a technology and a tool that helps you assess what that signal could be and what you should do about it.

Got it. So turning to the environment. What about -- does it -- I mean election outcome, does it matter Trump/Biden?

Well, it's hard to say it doesn't matter, probably. But we've taken some care, we think, to position ourselves in places that sort of transcend the current partisan debates. The places where we are in the budget and the intersections in markets and customers to whom we devote our time and attention are -- generally enjoy pretty clear pretty clear support across the spectrum. We have also -- those of us who have been doing this for a little while know that the action sometimes lags rhetoric, too. So even though a lot of things get said and talked about in the course of political campaigns, the facts on the ground kind of remain what they are. And it's difficult to imagine in the current environment that many of the things we do don't remain pretty important no matter who's in the White House.

Right. Of course. So I guess all you guys are pretty experienced in handling CRs, but what about a government shutdown? What sort of -- is there -- I don't know, some of the other folks have kind of put numbers about whenever you have a shutdown, it's like this is what the number is. How do you think about that as a risk?

Yes. I mean it's a little -- as I'm sure you know, it's a little bit of a difficult hypothetical because you have to sort of parse through the portfolio. There are a great many activities that are identified as priorities. And in the run-up to the last several budget deadlines, we've had customers make provisions for a lot of our activities to continue through various methods. We have a little bit of a challenge occasionally for things that we do at customer locations that may be not available. But much of our work is still able to be performed, and customers have routinely sort of indicated to us that they would continue, too. So I'm being a little bit ambiguous about this because, obviously, the specifics of whatever could happen in the future will be what they will be. But it's a condition and a circumstance that we have some experience navigating.

Yes. And I think, Cai, too, the -- just the way things are -- appear to be trending on the Hill certainly is the outlook for appropriation seems to be -- seems to have improved a little bit recently. CR, we have a little bit more time. Possibly maybe you get another small CR to GAAP as to appropriations. But it seems like the potential for a shutdown is kind of receding. And ahead of an election, I guess that would probably make a lot of sense. I don't think there's a lot of interest in a shutdown ahead of an election. But that being said, to Jeff's point, we do a lot of -- this isn't the first time this kind of thing comes around. And so we do a lot of preparation in advance to make sure that the business is impacted as little as possible.

So you hiked your FY '24 revenue guide, and you attributed a bigger-than-expected ramp on EITaaS and Spectral. Are you setting up a tougher compare for yourself in '25? Or is this still just -- qualitatively, just it's good news because you built sooner, but you've got farther to go and you got other programs or...

Well, by definition, higher '24 is a harder compare for '25 But that's -- I'm obviously being a little tongue-in-cheek here. But obviously, we have big parts of the portfolio that are accelerating where we see real sustained growth. And again, I don't want to front-run our '25 guidance, which we're still obviously planning '25 at this point. But if we have real bigger in the portfolio and some real acceleration of some important parts of the portfolio in the business.

Got it. So you mentioned the length of your backlog as a competitive plus. But given that you have more kind of product-related type of things, is there a risk that there's any fixed-price development in there? Or would you say that's just all goodness because this stuff is going to be nicely profitable?

Well, I mean, as you point out, it has the potential to cut both ways. But most of the backlog and the longer visibility, in fact, much of that activity is in the enterprise side of the business, much of it is cost type, whether it's enterprise or technology. I would say the places where we have the potential for some cost pressures are generally the quicker-turn, shorter-cycle parts of the business that aren't drivers of the backlog number.

Got it. So you -- 10-Q indicates you got a $67 million acquisition under LOI. So is the M&A environment improving?

It is. And as we talked a little bit in the call, we are seeing some signs of life. In fact, the acquisition to which you refer, we closed on February 1. So that's operating now as part of the business. It is, like all of our acquisitions, sort of a strategy-driven gap filler. In this particular case, in the enterprise portion of the portfolio where we're focused on some human capital management capabilities with a customer set where we have not had a big presence. And so this gives us an opportunity to take work that we know and well understand and give us access to a new partner or customer set.

Got it. Got it. So you -- historically, you guys have been active in M&A and done a good job. You also suggest an interest in share repurchase with cash flow improving. Like how would you rank those 2 priorities?

Yes. We have a pretty, you won't be surprised to know, a pretty rigorous return-based process where we evaluate the pipeline and actionable opportunities that we see in the near future, and of course, the market and share buybacks as an alternative. We do see some interesting possibilities in the acquisition pipeline. But you will also remember, I think, that we have about $337 million of our existing share repurchase authorization available to us. So we're very well situated to react quickly and opportunistically as opportunities develop and as the share price unfolds. So we're quickly ready to operate in either of those opportunities. We're about 2.2x trailing 12 months EBITDA levered, which I probably don't want to get too much below that. So we're -- we look at the same things every morning that you do.

So where would you want to go on the high end? I mean, I think you -- I can't remember who is it that you tried to buy and you didn't, but I mean would it put you out there like I think -- or something but...

In today's environment, I think that's hard to see. That's a hard hypothetical, obviously, because it depends on the target. But in today's world, a short time in the mid-3s or something could make sense. But it's very...

It depends on...

Very situational dependent.

Cai, going -- just to build on something Jeff said, go back a few years, we made a -- we deployed a little over $1 billion, made several acquisitions and also bought -- did a $500 million ASR. So we did about half and half. So at the point where if the opportunity presents itself with the right characteristics, we can do both.

Got it. So Jeff, I don't know whether this matters, but you come from a business development background at product-oriented companies at Lockheed and Rockwell, not that -- I mean product plus software. So is this whole product or sort of mission solution, whatever you want to call it, where it's some hardware plus software, is that a key focus for you, I mean, given your background? Or was that...

Well, I think it's useful experience. My career, I've been not working quite as long as you have, but -- well, it's true, 42 years or so, has been split pretty evenly between operating finance roles and corporate development acquisition roles. So I think it's a useful skill to have in the quiver here. But I did at different times at Lockheed Martin. You may recall, I was the CFO at different times of 3 of the 5 operating segments, including a large part of what is today, Leidos. So this is not new for me. But I think given the company's strategic priorities and the things we're looking at and thinking about, I think my experience is useful.

Because it certainly sounds like, I mean, looking at what you've done, that CACI used to be, like I said, mainly Army-related services. And now it's basically moving into whatever you're going to call them, solutions, product. And it seems like that is -- so is that sort of the direction we should expect going forward, that more of the focus is on that sort of a product or that sort of an area?

I think John has been quite clear about that. I mean, I think the answer is yes. We are interested in being wider, broader, focusing on differentiation, focusing on things that are stickier and longer-term, durable customer and franchise relationships as well as this whole idea of longer-term backlog, longer-term positions, more visibility.

So the second quarter, basically, The Street was disappointed. They felt the margins were a little bit light. And you said, "Well, we would have expected the second half to be stronger." And second half looks like it's a whole lot stronger. How come, I mean, versus second half...

If you'll indulge me for a second, I'd like to first talk about the second quarter, which was the quarter where we did exactly what we said we were going to do in the first quarter. So I appreciate that there were people that looked at that, and it wasn't what they expected. But it was pretty much exactly what we said we were going to do. The second half -- nevertheless, the second half will be stronger than the first half really for 3 sort of driving reasons. The first one is that the optical communication terminal business is nearing the end of its investment cycle. And we talked a little earlier in our remarks here 10 or 15 minutes ago about the fact that we're ending -- approaching the end of the development cycle and the investment in facilitization and ramping up to -- for production, which we expect to sort of really start to show results in the second half of the year and into next year. The second thing is that the several large programs that we won last year, EITaaS and the Intelligence job and Spectral are ramping up on or ahead of our expectations. And that is driving a mix change in a favorable way, driving a mix change as those programs accelerate, some of them with above-average margins relative to our average. And then the third thing that happens -- and those first 2 things are sort of specific to FY '24. The third thing is probably a more repeatable pattern, which is that some of the technology solutions work that we talked about earlier in this discussion, where we're doing sort of quicker-turn, higher-margin, software-centric products and technology solutions, has fallen into a -- or has a pattern of being bought more in the third and fourth quarters of our fiscal year. And those are a result of -- in fact, if you look last year, you'll see a similar pattern, although it was a little bit less pronounced because of the 2 things I mentioned a few minutes ago. But the third and fourth quarter do have a higher-margin mix in several of these businesses, which is really driven by customer buying patterns.

So -- but if we take what you're saying, certainly, the optical communications investment, presumably, that's down. So that will be down next year, too, and it wasn't down in the first half. And EITaaS, Spectral and FocusedFox will be there in the first half. And so that mix benefits you next year. And I guess -- assume the seasonal factor is the same. It happens in the second half. But doesn't that -- I mean that seems to point to better margins next year.

We'll see when we get to talk about fiscal '25.

Yes, we'll see when we do '25 guidance. But I think even as we're finalizing and going through that planning process, there are some structural things that -- without talking in absolute terms, there are some structural things that make the second half of the year higher margin than the first half. And I suspect that those -- I would expect those patterns to continue.

Right, right, right. So as you look here, what are the key things that could make the business this year and maybe into early next year better than you think? Or what are the bigger risks that could kind of derail you?

Opportunities would probably come around further acceleration of some of the program ramps that we talked about. Spectral in particular has some geopolitical relevance to naval activity. I would say some of the things that we're seeing in terms of our Counter-UAS business probably have some potential upside. Our SIGINT and electronic warfare businesses probably have some upside. In terms of things that could slow the business down, I don't know that there's anything that I see that will be a huge driver there. I mean there's always budget perturbations, things of that sort, but I mean what we see is generally more positive than not.

Great, great. So CACI has changed really quite a bit, if you go back over 10 years, what it used to do and -- so where is the company, do you think, going to be in 3 to 4 years? Is it different -- going to be different than today? Or in what respect would you say it's more likely to be different? I guess, is there potential as you get to sort of these mission solutions or margins that the profitability should be higher or the mix is going to -- how would you say you should think about it in 3 or 4 years?

I mean, I think, generally, you'll probably see an extension of what we're seeing today. I mean, I think you see some potential, first of all, greater acceleration. I think you'll probably see maybe a slightly higher technology mix perhaps, although that balance is an important part of the business. And we continue to believe that each part of the business is better because of the other than it would be by itself. So they really do inform each other and kind of move back and forth. But I think there's some potential for further growth there. And we're really focused. You mentioned margin. And of course, we continue to pay a lot of attention to and work on margin. But we've also sort of evolved that into paying really close attention and -- we've always paid attention to it, but really focusing to an even greater extent on the whole free cash flow per share. So that to the extent we have accelerating organic growth at same or slightly increasing margins and we're deploying capital as we've talked about in a program that includes some amount of share repurchases, you have the potential for obviously accelerating free cash flow per share.

Got it. That sounds pretty good. Thank you. That was a terrific interview. Appreciate it.

Thank you.

Thanks, Cai.

Nice job.

Thank you.