CACI International Inc (CACI) Earnings Call Transcript & Summary

Good morning, everybody, to those here in the room as well as those that are listening in on the webcast. My name is Jason Gursky,, the aerospace and defense analyst here at Citi Group. And I have the pleasure today of hosting CACI. On the stage with me this morning, we have Jeff MacLauchlan, the CFO and Treasurer of the company; and George Price, who's the SVP of Investor Relations. And yes. George, I think, congrats on the recent promotion. Is that right?

Thank you.

Didn't mess that up. Sometimes I can confuse people, but I think I got that right. Let's see here. I've got a laundry list of questions that I wanted to go through this morning, but I will open it up to the floor a couple of times during this session, just to see if there aren't those in the room that I want to double click on anything that comes up. Is that good with you?

Yeah. Good. Happy to do that.

Yes. So I'd like to start bigger picture with these sessions, just in case we're catching some people that are relatively new to the story. I see, for example, a sales guy here at Citi that's in the room. He certainly would benefit from getting a little bit more about the bigger picture of the company. So I think maybe we'll start with maybe a brief description of the company, the problems that you're trying to solve for your customers, that includes kind of a statement on who your customers are. And a little bit about how you go about solving those problems and then kind of what differentiates the company in the market?

So let me sort of put all those things together, if I may. We are focused on solving largely defense and Intel customers' hardest problems. And we focus on doing that in a number of ways. One of the things that we think differentiates our approach and that is showing good results is a combination of enterprise and technology in our solutions. And so what we mean by that is that the company's roots are a little bit more enterprise focused. And a lot of our recent activity over the last 6 or 8 years, has been focused on leveraging that expertise to add technology. So we do that in a couple of ways. We've done it through a very disciplined long-standing acquisition program, and we've also done it by investing ahead of need, which for those of you that follow us or have a little bit of familiarity with us, you'll know we talk about a great deal which is being able to create capabilities, develop capabilities to solve customer problems before we get into an active sale and business development cycle. And what's important about that to bring it back to the expertise part is that the two sides of the business really are important to each other. The expertise to a large extent, informs where we invest in the technology solutions. And we've now actually turned around a little bit where -- and we've added to that the fact that the technology now increasingly sort of enables the expertise work. So we think both sides of the business are more important to customers and accordingly, more valuable then neither of them would be by themselves. And we think that gives us a real point of differentiation in the way we approach problems and the way we approach the marketplace. George, did I miss something?

No, I would add to that, too. A key differentiator for us is software and taking a software and a software-defined approach, right? We look at everything through the perspective of software solves the problem because technology is changing very rapidly. Our adversaries capabilities are changing very rapidly. And as you know, the sort of historical procurement cycle in defense, it's one of -- it takes years and then you get a box and then by the time you get the box, it's obsolete to some extent. And then when you need new capabilities, you go get a new box. Well, when you're -- when it's software or it's a software-defined device, right? You just change the software, you update the software, it's just like your phone. And that increasingly is a differentiator for us. We won a large award with the Navy called Spectral, and which more typically would be something that a prime might do. And we won it by, among other things, convincing the Navy that their signals intelligence and electronic warfare issue is a software problem, not a hardware problem.

And that to further expand on that point, that lets us bring in something that the government calls we call as a community, CSfC which is commercial solutions for classified. So it lets us take things that are readily available, modify them, use them in slightly different ways. So that we can take advantage of the pace of development in the commercial world to also solve some of these problems, which is both sort of technologically keeping pace with what's happening in the world, but it also lets us do them in a more efficient, cost-effective way.

So leading them with software begs the question about availability of labor to do all of that work. I can imagine it's a pretty competitive marketplace. So I guess two questions. One would be what draws people to CACI, how are you successful in recruiting people? And then the second question would be, I would imagine in the last several years that market, in particular, has probably seen quite a bit of wage inflation. So maybe talk a little bit about some of the contract mix that you have and how that either isn't a factor in your margins or how that potentially impacts margins.

Yes. George will want to expand on this. I think you have some statistics that will sort of help wrap around the story a little bit here. But it has always been challenging to hire talent and so we have all of the normal recruiting and talent acquisition processes and practices that you would expect. Beyond that, we have a couple of things that we think are specific and differentiated for us. We have a very active internal movement program which lets people move around within the company. You've been doing something for a few years, you're feeling a little stale. You want to do something different. You don't have to leave the company, you don't have to leave CACI to have a new role. And I think recently, 1 in 4 of our open job racks are filled by somebody within the company that wants to do something a little different. So that's an important thing. We also have quite an active internship program. In any given year, we've got 300-ish or so. But what's most important about that is not the interns we hire, but the fact that about 2/3 of them convert to full-time employees. So these things in combination have let us actually enjoy an attrition rate now that is well below the industry average and also below the levels that we saw pre-COVID. So people like it. They come, they stay. It's important work. We also have a significant number of veterans. I think it's in the high 30s percent of our employees, 38% or so that are veterans and bring to their work strong identification with mission and with what we're doing and what we're focused on. And while they obviously need a competitive and deserve competitive salaries, they're not entirely making the decision based on that. I mean, they're working for more than a paycheck, which also is a great help. So we're really pleased to routinely show up as some of the best work -- externally recognized as a great place for veterans, a great place for employees generally to work.

Yeah. No. Spot on.

Okay. Great. Maybe we could talk a little bit about -- and you mentioned it in the answer to the first question, you mentioned the word investment. So maybe we can talk a little bit about some of the investments that the company is making, kind of what technologies you're focused on, what missions you're trying to solve? And kind of where you're emphasizing some of your IRAD these days?

Yes. I'm going to expand the question a little bit because investment is more than IRAD at least as we think about it. So a great deal, a fair amount of it this year is related to wrapping up the development and early production of our optical communication terminal programs. We have a very strong position with a number of SDA programs where we also do this work for NASA, for DARPA and as we move into sort of rate production and realize the potential of this product, we're exiting sort of an early investment phase. We also -- George mentioned Spectral, which is an early stage of a large win a year or so ago where we've developed an open architecture that will eventually be the SIGINT suite on all naval surface combatants, which is in the early phases of design and in development. So we have a number of items.

Yes. Signals intelligence and electronic war -- Jeff mentioned Photonics to begin with and then Signals Intelligence and Electronic Warfare, Spectral is an example, but there's many. There's another program that's out in the press with the Army that you can read about where we have some equipment that's been very favorably evaluated and looking forward to getting an order there. And then AI has been an area of an investment as well. And I think important to distinguish that the things we're doing with AI are real and revenue-generating, right? There's a program with the NGA SAFFIRE. It's basically, well, it's their -- a new entire platform for processing intelligence, but specifically using AI for computer vision, object recognition, right? We've used earlier versions of ChatGPT with some of our cyber work. We use robotic process automation, both internally for our own efficiency and externally through partners like ServiceNow for efficiency for customers. So -- and there's other areas, obviously, of investment, but I think those are probably the three biggest.

You mentioned AI and particularly in the context of the NGA, which stands with the National Geospatial Intelligence Agency for those that aren't as familiar with that 3-letter agency. Can you describe a little bit about how the -- I suspect that the AI is going to certainly enhance a lot of your products. It will further enhance your ability to analyze large data sets. Maybe you could describe particularly on the latter, the analysis of large data sets, kind of compare and contrast what were we doing before? And what AI is enabling maybe in the context of NGA, just kind of use that as an example, the SAFFIRE thing that you talked about. And what the business model looks like? Is the business model changing at all for you all?

Well, George will want to further expand on this, I'm certain. But it's very hard to compare it with what we were doing before because the tremendous proliferation of data that swept and collected is really -- I hate the word unprecedented, it gets way overused. But in this case, I mean, the amount of data that we collect today was not fathomable almost a decade or two ago. So without the tools and algorithms that let you sort and characterize and prioritize where attention gets paid, you really can't productively process the amount of data that today exists. It's a case where we really are able to do a lot more and deal much more productively with intelligence collection and analysis that hasn't heretofore really been possible.

Yes. No. I -- spot on. There's probably -- there was a lot of stuff that probably ended up on the cutting room floor that didn't get the appropriate attention, right? And AI helps you -- can help you tip and queue the human being to say, here's the 5% or 10% or whatever the percentage is and stuff that you really need to look at. So that's absolutely true. I think the other thing is, I mean, it just -- it helps people be more efficient, right? Doesn't take people out of the loop, it just helps them be more efficient in the loop. You'll hear us use a term for the analysts, by the analysts, right? So we have people that are very familiar with what exactly an analyst or a domain expert needs to do with this information, and we use AI to help them to be more efficient in doing their job and enhance their productivity.

So even in the context of AI -- so it's supplementing and making people more productive in the context of a lot more data. It's not necessarily going to reduce the number of people that you'll need to perform certain tasks? And this gets to the business model question because I think there's been -- ever since ChatGPT came out and say, "Wow, a lot of the defense services companies won't need as many people in their own kind of billable hour." Many of them have billable hours kinds of contracts. So just kind of curious in the context of that.

Yes. I think I would think about it actually the other way. I think it enables tremendously increased output and constructive analysis and review of things that five years ago, you wouldn't even have gotten to. So I don't think it's less input. I think it's more output.

Yes. So much more productive?

Yes.

Yes. Big productivity gain. Okay, great. And then going back to the terminal that you were talking about a minute ago in the context of the SDA. Can you talk a little bit more about that?

Yes. The optical communications business, which came from a couple of acquisitions, most recently, 1.5 years or 2 ago, our SA Photonics acquisition really enables point-to-point very secure communication through light, through lasers. So if you think about traditional RF signals, they're just sort of transmitted out into the world and anybody can pick them up anywhere. Whereas if I have a communication signal that I want to direct to that man sitting in the last row, and I point directly to him, it goes right to him. It's much more difficult for anyone else in the room to intercept it and either eavesdrop or listen to it or spoof it or do any one of the other number of things that you can do. So it makes for a much more secure communication. And we've also proven it at great distance. In fact, we were talking this morning, we have an optical transmission on deep space probe, and we were debating and trying to figure out the distance that it's been, and I'll let George fill this in. But we're moving information at distances in this method that literally hasn't been done before. I mean these are first time scientific achievements.

And the -- is it -- so we have all of these SDA contracts that have been awarded. We've gone through Tranche 0, 1 -- I can't remember if Tranche 2 has been awarded. Yes, 0, 1, 2. Is this capability set that you're talking about going on all of these satellites, which your win rate been thus far? And do we look out at this proliferation of expansion of the number of units that are going to be launched here through the end of the decade is the way we think about revenue in that business?

Yes. We have today the only flying functioning optical communication terminal. We are in each of the 3 tranches so far. Generally, in this case, we're selling through a prime. So we're selling a key subsystem that gets integrated with someone else's satellite. We are, in many cases, on several of the competing teams. So the ultimate customer appreciates and accepts our technology. It's a really, really exciting area, and we're right at the cusp of some really exciting breakthroughs here in a couple of important ways.

Yes. Our -- Jeff mentioned ours is we're the only one with defense and Intel related technology actually in orbit, right? That's achieved a connection. And ours has been described by one of our prime partners as the most mature, right? So our distinguishing characteristic, we believe, is lowest risk, most mature, right? We were the first to pass interoperability testing. We're the only one that has the connected technology up in space right now. And we're very happy with that. But that's -- there's the technology that's in LEO. There's -- we have technology that's tested and qualified and starting to be deployed at other orbits as well or interplanetary. And Photonics technology also has additional potential uses things like remote sensing that are perhaps to follow the optical communications side. And that's one element of the portfolio, right? There's other -- we talked about SIGINT and signals intelligence and electronic warfare. There's cyber and then obviously, we have a significant presence in a wide range of modernization capabilities. So -- but we're very pleased with what's...

Counter-UAS also an area of particular relevance and interest today in our customer sets.

Yes.

Utilizing photonics?

No. Just Counter-UAS technology. I was asked -- we were talking about the broader technology investment.

Right, okay, great. And what does that look like? What are you -- how do you solve for that?

Well, the systems are able to identify and characterize signals, locate positions of targets and then deliver generally non-kinetic solutions, but we also have products that others modify, we don't do this, but they modify them to deliver a kinetic weapon as well. So it can be used either way.

And the -- and this is one of the interesting elements about the capabilities, the knowledge we have around signals and then the software-based technology around signals, right, identifying them, geolocating them and then potentially affecting them. We can take that software-based capability and put it in different form factors, right? So you have fixed site defense, right? You put it around the base in place, a forward operating base. We have on the move, right, on trucks, I see like radar and different things mounted on trucks and you can track things going 50, 60 miles an hour. And then you also have man packable, things that are very, say, low swap, right, low size, weight and power that do multiple things so that a soldier doesn't have to carry a bunch of different things into the field, they can carry one thing that can do multiple missions and you can have the software in that updated over time.

And just one last question on the optical. Is it space to ground? Or are we going satellite to satellite at this point?

Both.

Both and air to ground.

Right and air to ground, okay.

I mean for example, the ILLUMA program on the ISS, it bounces off a geosatellite down to the ground, right? We've had that connectivity.

Maybe we could talk a little bit about the pipeline at this point. And I know you have had some pretty good success here over the last 12, 18 months of converting some of your pipeline pursuits into awards. So maybe you can talk a little bit about maybe win rates relative to what you've seen in the past, whether those have picked up anything interesting going on there? And then maybe talk about -- highlight a few of the key awards that you think investors should focus on.

Yes. again, I'm sorry to keep saying this, George will want to expand on this. But I think there are a couple of things that are important to sort of start to get to your question. The first one is that we clearly see the benefits of the strategy that we implemented a number of years ago about focusing on fewer larger opportunities, focusing on longer duration opportunities, which give us greater visibility into our backlog and the things that we're doing and also give us more time to shape them and be positioned to be eventually the successful offer. There are a couple of notable large items, large recent wins, both in enterprise as well as technology, EITaaS, Enterprise IT as a Service for the Air Force is a single award task order to consolidate and maintain the Air Force's IT infrastructure. So it gives us a great position to consolidate a couple of different legacy contracts and operate in a more efficient coordinated way for the Air Force. That's happening very well. Demand -- Air Force is eager to go faster, which we're doing. We're ramping up a little bit ahead of schedule, very gratifying work both for us as well as for our customer. We had a recent large, about the same time frame, had a large intelligence agency award which is also ramping up ahead of schedule and meeting with strong customer positive feedback, working -- things working very well there in the intelligence community. And then we've talked a little bit about Spectral, which was sort of the third one in that hat trick of a year ago, where we're also meeting strong customer demand and sort of renewed focus. And actually, I won't have to explain to anyone in the room how the current geopolitical environment has made the Navy very aware, particularly in INDOPACOM area of responsibility about evolving requirements, changing demand signal and an area of great focus and attention. So not only in Southwest Asia and Middle East, but the broader Pacific theater, I think, promises to be a very active, very active area for our skills and capabilities for some time.

Yes. It's spot on. The only thing I'd add to that, network modernization. We've had several network modernization wins recently. There was one with DIA in the first quarter that we talked about, but we've had a couple of others. And that falls into that more on the modernization side of what we do, but it's important because all of these things, like you hear JADC2, which is not a program per se, it's a concept, right? But if you want sensor or the shooter -- all this instantaneous sharing of information, you need a modern secure network to connect everybody. Otherwise, it doesn't work. And so network modernization, not only for efficiency but also for improved cyber hygiene is an area where we're seeing a lot of demand, and we're seeing a lot of success.

Maybe just moving on to some of the numbers since we've got the finance team here, it seems appropriate to do, I think. Can you just talk a little bit about some of the assumptions that you have embedded in your financial guidance and your targets and talk a little bit about the budget environment, what you kind of expect out of '24 going into '25 and kind of how that informs the guidance that you've given out to Street.

So you're tired of hearing us talk about science? Well, No, no, I'm kidding. I think -- nothing I'm about to say is new. I think we've said all these things in the past, but in the context of your specific immediate question, our guidance for the year really kind of ranges what we see as the probable range of budget outcomes. So we don't have some protracted government shutdown covered or anything of that sort. But most sort of logical and of course, as we get deeper into the year, we feel better with this -- about this assumption. But most of the reasonable sort of range of probable outcomes we have covered in our range. I would also point out that as a matter of strategy, we're a little bit insulated from this because we have focused on areas of the budget that are really important intersections of threats and budget priorities. And really, most of the areas that are most important to us are not areas where we have broad disagreement in -- among our customer community and Congress about what budget priorities are. So if you think about the current world and some of the things we've been talking about for the last 15 or 20 minutes, those things really sort of transcend budget debates about most of the things that we read about. So we feel like we've got ourselves in a position, again, as a matter of strategy, where they're sort of broad bipartisan support for most of the things that are important to us. Beyond that, I would note that we have increased our guidance for the last several quarters, each quarter. The business is running very well. Our organic growth is sort of proving the benefits of our strategy, and we are well positioned, I think, for the rest of the year and to deliver what we've been talking about for our fiscal '24.

Can you talk a little bit about some of the margin dynamics going on this year? I think they may be a little bit different than what we've seen in the past?

Yes. I might say it a little differently. I'd say they're a little bit more pronounced maybe than they've been in the past. If you look at us for the last year or two, the last several years, we have a pattern of having slightly lower margins in the first two quarters, slightly stronger margins in the back two quarters, the back half of the year. That's really driven by a couple of things. We talked a little bit about the optical communication terminal investment. We're coming to the end of that phase. What we have not talked about is that we have on the three large programs that we talked about. In the aggregate, we have a couple of elements of that portfolio that have above-average margins and are ramping. So that's contributing -- the mix is contributing to some of it. And then in some of our technology solution, those two things, by the way, are sort of specific to this year. And then the third situation is that we have in some of our technology solutions, some customer buying patterns that seem to focus activity in the first half of the calendar year, which is the second half of our fiscal year. So our fiscal third and fourth quarters are heavier activity in some of those technology solutions which have slightly better margins. So while we expect and we've guided to stronger back half margins, I should be quick to add that you shouldn't necessarily take those and extend them because we have some investments ending. We'll obviously have -- maybe not obviously, but we will have new investments that we'll want to backfill some of those with. And of course, the ramping at some point sort of levels off. I think we'll see a little bit more. But I don't want to talk too much about '25 because obviously, we're planning it now, and we're not ready to give our '25 guidance. But we do have stronger back half margins as we've indicated before than one half of the year.

Right. Okay. That's helpful. Yes, we should take it literally in the second half of the year into '25 per se.

Don't extend it into '25.

Yes, right, exactly. I think my might mic cut out, but I did get that word don't, yes. Can you talk a little bit about M&A. This has obviously been an acquisitive company over the years. Kind of what the current environment pipeline looks like, regulatory environment, et cetera.

We have talked a little bit about the fact that we are starting to see a little bit of loosening up in the M&A pipeline, and we will continue to do the sort of strategically GAAP-based tuck-in acquisitions that we have done historically. We completed one on February 1, which was a human capital management business that took a skill that we had and took it to a lot of intelligence community customers where we did not have a lot of presence and it sort of filled in a nice capability for us there. We'll continue to do those. There are -- some of it will be enterprise, some will be technology. But you can't talk necessarily about acquisitions without talking about cash flow in general. And we're very focused on free cash flow and specifically free cash flow per share. And I'm sure most of the people that follow us are tired of hearing the words flexible and opportunistic, but we really are committed to doing that. We have a very disciplined return based analysis that we go through continually looking at the acquisition pipeline and share repurchases. And I'd point out in the last several years, we've repurchased nearly $1 billion of our capital -- our equity capital base shares. So we have about $337 million, I think, of remaining outstanding authorization that does not have an expiration date. But we're well poised, again, to be flexible and opportunistic as we see the acquisition pipeline develop and as we see the market develop and as we obviously continue to generate cash. I think actually, I mentioned increasing our guidance for the last several quarters. I think since our initial guidance for the year. We've increased our free cash flow per share guidance about 7% at this point in the -- early in the back half of the year.

Yes. I promised that I was going to open it to the floor to see if there were any questions. I just realized I hadn't done that yet. So is there anything from the floor? Okay. That's fine. They are usually pretty shy.

This is where I usually say, who is going to be the second person to ask a question?

I guess maybe we'll -- we probably have time for one more here. Let's see here. You've recently discussed, I guess, your value creation model. You started to talk about the free cash flow per share. But if you could just kind of dive into kind of the components of the value creation model, how you all are incentive based on it as a management team as well.

Well, I won't go through the detail. I mean everyone can read in our proxy, the details of comp and incentive plans. But the way we think about the free cash flow per share, in particular, is really tightly managing our working capital. At the last quarter, I think we had 46 days sales outstanding in receivables, which in our industry is, I think, the leader by a reasonable margin. So we are very efficient managers of capital and also the cash deployment, capital allocation and share repurchases and M&A obviously contribute to that as well to the growth of free cash flow. And that -- I mean, our value creation model is really about strong organic growth at sort of durable, solid industry-leading type margins and that growth being sort of further refined and manifesting itself in managing the capital base and the shares and ongoing share repurchases and all those things come home to roost with sort of free cash flow per share, where we expect to continue to make solid progress.

What do you attribute the DSOs being industry leading? What do you attribute that to?

Well, it's got a couple of dimensions. It starts with contracts and pricing, and it starts with structuring deals, structuring business arrangements, commercial operations in a way that doesn't require inordinate amount of investment, has solid payment terms, et cetera. And then beyond that, it's basic blocking and tackling, getting invoices out of half a day faster than you did last month of detailed following up with payment offices. We go through receivables on my team once a week, pages and pages. It's not magic.

There's a lot of attention to detail?

It's just managing the business.

Yes. Okay. I've just noticed that we're counting up and not down on the clock, which I think is not a good thing.

That's a bad thing.

Yes, that's not good. So with that, I want to thank you for joining us today. Really appreciate you.

Thank you very much. Thanks, Jason.

Thanks, everybody.