CACI International Inc (CACI) Earnings Call Transcript & Summary

We're going to get started on our next session. We have John Mengucci here, President and CEO of CACI. Thanks, John, for coming. I think this is the first time I've gotten to sit down with you and do this.

That's right. Thanks for having us.

Yes. So I want to start high level what's on everyone's mind is, the '24 budget, given that we're now in almost March of '24, we don't have a '24 budget. There is this possibility of sequestration that's sitting out there. How do you think this is going to play out? And let's -- if you actually have sequestration, what would that mean for you guys?

Yes, it's the ten thousand dollar question, right, that we continue to get. We think as we get closer to the next year, we'd be better off that. Look, I think where we sit now, there's a better chance than not that we'll see the appropriation bills come out. I think a full year CR is probably just as equal as an option. I don't see the sequestration route. I think we're better than that. I think there's the indications that we're getting is that we'll either have a full year CR, or we'll have bills there. But in the event, the majority of different options are more than covered by the current guide we have today. But at the end of the day, we're a company that is deep into the national security space and the government modernization spaces. So when I hear if we go under sequestration, if we cut the [ fees ] in budgets more, we're very resilient to where the budget sits today. We're a sustainable business in just about any government funding model. So we're -- you don't have the end item prediction, but very, very confident that whatever does happen, the rest of the year, we will continue to deliver.

So along those lines, your portfolio, you're lumped in with all these other government services companies. But your portfolio leased, to me, appears a bit different than your peers. So can you talk about your exposure today to kind of DoD versus civil? And then specifically, your exposure today now to the modernization budget versus your historical exposure to the O&M side of things?

Yes. So if you look at where we sit today, we're at 80% DoD and intel customer and 20% civil. Do we watch that mix? No, because we really look at national security space, and we look at the government modernization space, and we look at both expertise and delivering technology as well. We differentiate because we're not focused on if fed civil budget goes down by 3% or 4% and DoD goes up by 3%, what does that mean to us? What it will always mean is that we're in very narrow deep funding streams. So it's a strategically based company strategy of the place where we come from. We do market strategies. We review those twice each year. We look for gaps. And then we go out there and we have a long-term bid model that I know we're going to talk through, but it's really how we run the business and how we think about it, that really makes whether the fed civil budget goes up or the DoD goes down. At the end of the day, it's in the trillions of dollars overall budget. When I often get asked, if the DoD budget goes from $800 billion to $780 billion, what happens? Most likely, we continue to have the exact year that we wanted to have, right? We're in very important areas, but we're not in these high production platform programs where if somebody cuts 6 or something that was going to deliver 20, that's a material delta. For us, it's just not.

So along those lines, can you talk about how you've adjusted your strategy around bidding over the last couple of years and the results that have been produced on the back of that?

Yes. So we've a couple of strategies. One is bid less, win more. But more recently, it's really around focused on bids to drive a value creation model, which is based on free cash flow per share, okay? And because with that, we have multiple levers that we're able to watch or able to manage to printable organic revenue growth is one function of how we want to bid. Efficient cost and capital usage is another opportunistic and flexible growth and then margins, right? So when we're putting this bid model in place, it's really looking at what type of jobs do we go after? Are they in our capability space? Are they going to generate a reasonable return today and for the out years? And is it an area that we have a better-than-average chance of winning future bids in? So we bid what's core to us. We look for margins across the entire portfolio. And that combination, to us, drives better free cash flow per share growth, and we've upped our free cash flow per share growth twice during the fiscal year '24. And that really is based on things we did a couple of years ago, which really set our backlog in motion, which is to make sure we have high-end work that were out there bidding on new and then being able to recompete for work. And our recompete rates are above 90%. So we have very little fight, things that are in our backlog today that they're going to come out 3, 4, 5 years from now. On the bid less, win more, it really is what it says. If you're really confident on what you can win and you can shape the customer towards the outcome that we want them to have and we've invested ahead of customer need, then we really set the table up in a "unfair" manner, which is what we enjoy, right? Anybody who's out there marketing, making sure that we're investing ahead of customer need, get the customer to desire us and then bid on those things when we have that type of situation. Bidding on RFPs that come out because we need to get award value and revenue up is not our model. So it's a very strategic bid process.

In terms of the pivot that you made focusing more on tech, where today do you kind of go head-to-head with the prime?

Yes. I think when we -- when I put this out there a number of years back, I think we had a quad chart. And...

Yes. And I had that pinned up on my wall...

Mission tech side. I sort of just -- I put every aerospace and defense prime out there, right? And that got a lot of attention, which is what I wanted. Look, at the end of the day, we -- they are competitive mates, right? We compete against them in certain areas, and we partner. So the model for CACI we put in place the last 7 years, which gets back to how we have transformed the business to adding a technology component to what was a pure government services play, 80% expertise, 20%, 20% tech. It truly is a model where if a platform needs a software-based mission package, I wanted that work coming to us. And we have driven our business from an 80-20 expertise to tech to about 45%, 55%. So to me, that macro model is working. But the same people that are in those aerospace, defense companies that we have shaped ourselves to win work, competing against them. I can name all 5 that we actually deliver through. So it is that you're a competitor 1 day and you're a partner the next. We enjoy that position because software solutions is what we can do better than everybody else at scale. We understand agile very, very well. And we're not a company that is focused on building platforms today, which is an extremely important job that this nation needs. I just believe that as the threats in the world moved forward, they were going to be quicker to have to react to, which means software versus hardware, and then how quickly can we produce software and how agile can we be to take customer changes on board. And that model today has proven to be extremely efficient, both the primes enjoy that model because if they have our mission package on their platform, we're able to change what that system does much more rapidly than others. And it drives a really nice growth rate for us and creates much better margins than we had previously achieved.

In terms of the growth rate of tech versus expertise, we went through this period where tech massively outgrew, become a big -- much bigger portion of the portfolio. But I think recently, particularly when I strip out the kind of pass-through that I've had recently, the tech growth has slowed. I mean is there anything to be -- is it just -- I guess, what's going on there? And should we expect the tech growth? I mean, your report has a strong second half. Should we expect the tech relative to expertise growth to kind of reaccelerate?

Yes. It's -- we spent a lot of time talking about how do we discuss our business so that people can model it better, and we're sort of close to the same page, right? Whenever I see a quarter that expertise has outperformed tech, I actually congratulate the expertise folks, right? I want both to grow at double digit. It really purely, David, is a mix of bids that have -- bids that have been awarded, the things we may have bid on the last 6 to 9 months where we are in different performance stages. There's so many variables to that. I want to make absolutely certain is that we are always growing above a mid- single-digit level, frankly. And whether that comes for expertise or tech, I'm happy on both fronts, right? It is true there are times, and we had another run last year, 3 large programs that we won, right? Two are in the tech space, 1 is an expertise space. Tech was growing great. So if we looked at the growth on awards, and we look to the growth on revenue, there's some time delta there. So no, look, any day that both are growing, they're both growing above single digit or mid-single digit, then things are fine here. And we will have a strong second half.

So you touched on this, tech margins are higher than kind of the run rate average. So you've had this big expansion in tech revenue. Your margins have improved, but I would have thought maybe they might have even improved more given how much higher you've talked about tech margins are relative to expertise. So talk about the -- I guess, the margin opportunity that might still be there for -- I mean this portfolio, I would think, at this point, would actually lend itself to higher margins than where you are today.

Yes. I mean, one, it gets back to mix, right? Two, it's a long-term margin journey, right? Three, it gets back to mix, again, right? Look, to us, free cash flow per share gets driven by top and bottom, okay? The fact that we were high 7s, low 8 EBITDA margin business, and we're pushing 11 at least and high 10s. Long term, when I've said that over a long number of years is also sort of bookended by -- I still want to make investments in this business, right? So it's got to be natural bottom line gross margin that is sustainable. The fact that we may hit 11 2 and drift to 10 9 and then go up to wherever there is, is an interesting fact that people have to watch quarter-to-quarter. I'm sort of looking at long term. If I look back 5 years, we were at 8s, and now we're near high 10s. It really comes down to no one natural acts. I don't want to short-arm investments, right? So if we look at our space-based business that we just brought on board less than 2 years back, we were very, very clear that, that was going to be an acquisition "I know it's a horrendous word, was dilutive when we bought it, right?" And -- but it's going to take investment dollars. And the fact that, that might take us from going from 10 8 to 10 9, and we sort of stay at 10 8 or dip to 10 7, I'm perfectly fine with that, right? Because long term, it has to be long term. I'm not looking at that quarter point, and now looking at next year's point, it's really building up a very strong survivable, sustainable tech business. And right now, given that we're in some pretty high end, very high tech unique space-based assets, I want to make sure I'm investing in that to the level that we absolutely can make certain we can deliver these terminals because the growth rate of what we have to deliver is going to be extremely large. And I don't want to have recurring issues there. So again, that starts in the second half of our year, right? So we're sort of in the optical communication terminal. We're sort of in inning 7 and 8 on the investment side, and we're in inning 2 of actual growth. So things like that will hold us. We're not looking to be a low 10% margin business if it was 5 years ago. I'd be happy to saying that I'm on stage at this conference talking about we're only in the high 10s.

So you touched on it here, there a little bit the space business. Maybe sum it down for us? And what do you guys, I mean -- I think I understand optical terminals, but what do you do? How do you play in the space? How do you play in the whole proliferation of small satellites and...

Yes. So satellites have to talk to other satellites, satellites have to talk to the ground, okay? Lasers, we all know what lasers are, it's light, okay? How do I embed data in light? And if I can wind fiber optics tighter than everybody else can wrap it with a great software defined baseline on those terminals, I can connect light to light, which means I can send data between satellites in a highly protected, much higher protective way than just simple RF, okay? You can disrupt RF, you can jam RF. It's really tough in space. 22,000 miles in the year, going 20,000 miles an hour, take a piece of glass and get it right the perfect spot, okay? So we build the terminals, we build optical terminals that allow these satellites to talk. So fundamental to an optically-driven satellite constellation is you've got to have things that are beaming light out that gets data from one point to the other. Ours are deployed, they're operational, and they're tested. So then you say, how many other vendors are out there, count them on, that's the number of fingers I have on the one hand okay? We are the only optical communication terminal that is connected, completed a complete link in space. We're the first one to meet every interoperability standard of SDA. And the other type of terminals we build are sending information from the distance of Mars to Miami Beach, 19 million miles. So to be able to connect light, it's so much about the algorithms and the software that you go into. How do we take a satellite is doing this and other one doing that? And how do I sync these beams of light that never lose connection to send data? One, extremely technically challenging. Check, okay? Two, we're working on producibility now, and that's why this large burst of investment is how do we get the producibility issues out of that, okay? And then three, the fact that we are the only one in space and that we're only one out there that is connected, our primes tell us we are light years ahead of where our competition is. And we're the only U.S. built design and manufacturer supplier as well. So if you can imagine all the information that go satellite to satellite, satellite to ground, we want that on something that we own. We own the software baseline, too. We own the entire building materials, too. So that's it in a nutshell. But the level of investment, of course, we've had through the first half is why we're setting ourselves up for a nice second half. The second half that I enjoy talking about because when you have it down and that's what your full year plan was, it's not as frightening.

So I wanted to touch on, you mentioned the 3 big awards. So EITaaS, Spectral and then the Intel award, all, yes, very large. Where are each of these? Maybe if you can take them one by one, where are they relative to kind of your expectation for the ramp? When will they each kind of hit the run rate? And what kind of margins do each -- obviously, I'll be specific, but what kind of margins do these programs carry?

Extremely great margins, first...

All 3...

Yes. Second, we can debate what extremely great is. But all right, so EITaaS first, technology program, taking all of the information technology support across the entire Air Force, all bases, every single place there is an Airmen. How do we build updated networks, help desk and the like across the entire Air Force? Job is ramping up faster than we had originally assumed. It's based on 2 things: one, a great ramp-up of people and the investment ahead of customer need to make sure that we have things we could deploy sooner than what we originally planned on. And a driver of the United States Air Force to get networks and get everything that is IT across the Air Force in a much more cohesive bundle, okay? $5.7 billion job, over 10 years. Our backlog has $2 billion in it today. So plenty of room to go grow and burn the backlog down and also grow another $3 billion to $4 billion worth of effort there. So tremendous win, great competitors, we won. Second, a large Intel network and cyber analyst job, wanted with a technically superior proposal and the customer is getting technically superior results. That job was staffed very, very quickly. That is an expertise job. So finally, 1,200 to 1,400 people to have this kind of skill set and go deploy globally, make certain that the intelligence agency that we are supporting doesn't lose a beat. That has ramped up sooner than we originally planned, respectful margins. So we're good. It's a secure job. And then last is Spectral. And Spectral really ties into this move from expertise to tech, and it also greatly describes [indiscernible] customer need. So the fact that we've been in the electromagnetic spectrum, the electronic warfare and the signal collection business for a rather long time, how do we take the acquisitions and the know-how and the software prowess and how do we show the customer almost 3 years before the bid came out. Here's [indiscernible] possible on Navy based ships, below the deck plate, you've got thousands of hundreds of antennas on each ship. How you take that information down, how do you process it, and how do you bring things like machine learning and AI in to sort of say that signal is this item, it belongs to this country, here's its abilities, here's how you can electronically defeat that. Today, that is a number of people on a ship, doing sneaker, taking information from one, you found this, where is it, that's another source. Take all of that and put that together. The job has ramped up faster than we expected when the job was awarded. But I'll also tell you, well, world, it's a dangerous place. So whether it's the Red Sea and the Carney, whether it's drone over, over flies, whether it's what's unfortunately happened recently in Syria. It is a world where signals and the enemy change their tactics daily, if not hourly. So Spectral is taking everything that can possibly happen to a naval ship. And how do you better protect it and how do you ensure that things don't fly over and how do you ensure that it can continue to do its mission? So you would imagine, given we are now, we're in the design phase today. We are looking at a number of changes to that baseline, think additions, not subtractions, and looking at what does the new Spectral look like as we go forward. So I like what the team has done. I like the speed to fleet, how quickly we'll be able to deliver. And without sharing too much we're looking at how do we take the schedule and compress it, frankly, how do we get some capability out there sooner rather than more later. The fact that it's software set up and is software-enabled, means we're able to take those changes on so. So all 3 programs ramping up ahead of plan, which is what's driven continuous top line enhancements due to...

Do they all get to kind of full kind of run rate levels next year?

Yes. So the expertise jobs in our market get to run rates quickly because it's staffing. And then they'll creep up over time as we can enhance scope. The 2 technology jobs start up in a little slower level. And then once you've built that kit, got the design done, tested that, now you're deploying that mod to 1,000 ships or 200 ground stations, then those sort of ramp up. And margin sort of follows with that as well, right? So the way these programs are set up, we're going to reserve margin in the event that we find unknown unknowns, right, that we have to work through. So the margin profile on expertise jobs follows exactly as your revenue does. But on the technology jobs, based on whether they're cost plus or fixed price and the like, margin is going to more than likely trail what the revenue growth rate. So looking at our backlog, great visibility in long term predictable growth, better than where we were 5, 6, 7 years back at ever-increasing margins over the long term. But at the end of the day, free cash flow per share, they both drive that.

I'll get to that. I mean -- but I wanted to ask you about -- you sounded more positive tone on M&A, the environment on this most recent call. So what has changed there? How does your M&A pipeline look, maybe compared to last year or 2?

Yes. So we're a highly acquisitive company. We've done around 90 acquisitions, discriminating. But the last couple of years, there were assets that were out there for sale, but valuations were not anywhere near what we were willing to pay for them. So almost as if there are some companies that realize interest rates are higher, right? And valuations across the business are slightly coming down, and they're looking for something at an extremely high premium. So it just didn't meet our whole investment model. But it also didn't tickle enough of -- if we had this capability as part of us, could we take 1 plus 1 and generate 3, right? Could we -- because that's what we do on acquisitions for. We look for gaps in capabilities or customer relationships, and we go fill those gaps. It's really based on time. If it's a capability, and we have time to create that, where I own all the intellectual property, we're going to invest internally, we're going to generate that. I don't need to find an acquisition for that. If we need a technology and the market is coming up upon us and somebody has 100% of that technology done or in the case of SA Photonics Optical Communications terminal, they had 60% or 70% of it done. But I believe if we took that with an earlier acquisition, put that together, we could hit the market exactly as it started to grow. So the valuations is one measure that have gotten better. But again, opportunistic and capital deployment strategy, right, is one that is really based around the times we're going to do share buybacks and times where we're going to do an M&A. So what I wanted to keep putting out there is because M&A -- because we're talking about M&A again. Again, your previous speaker, right? We get a lot of opinions as to whether we should buy back shares or -- M&A is the ultimate long-term growth model, right? And along the way, as we see valuations of our stock lower than what we would like, we will buy it, okay? It doesn't matter if it's $200 a share or in the [ $360 ] range, right? If our belief is the stock is going to continue to climb, fundamentally, there's no bad time to buy it back. Okay. But it's just really short term versus long term.

So you've talked a lot about free cash flow per share being your focus, which I appreciate. Your free cash flow has bounced around a fair amount the last couple of years. I mean a lot of it's been on tax, but some of it gets lost on -- we forgot 1 year you had a tax hit, 1 year you had a tax gain. So what is the normalizing, I guess, for tax and whatever happens with Section 174, what's the outlook for -- I mean do you have a target in mind for free cash flow per share growth? Where do you think -- how you think you can grow free cash flow per share?

Yes, I think you started off with some of those things. One great lesson in business is timing, right? We started talking about free cash flow per share, then we did a tax rate adjustment. We had 174 come in. And as soon as we wanted you all to point to something that was extremely positive, we started to move it all over the place, right? So I think we've got enough information out there now. Look, from a goal, it really starts with bids, right? Sitting down with our business development team, talking about here's our free cash flow per share means. Here's what top-of-the-line growth mean, which then really gets us focused again, it refocuses us on the front end of the business, which is 2 years in advance, what are the discussions we're having with customers around budget, around capabilities we're able to deliver. What does it mean for us around pricing? It's that we look to make sure that 2 years in advance because that's when we start to shape the customer's mind when they eventually give RFP's, and then we can go out there and bid. It's the only way in our marketplace to not get caught in buying on price, okay? CACI stopped buying on price, selling on price 7 to 8 years back. It's not the ultimate differentiator. It's the last one you have left. Adjusted net income to free cash flow conversion of 100% is sort of what we're looking forward to. And it's not trying to get people's eyes off of either measures. Just as a business leader, I want both, right? I want predictable organic growth rate, and I want respectable margins, I don't have to differentiate from. And with those 2, if I can grow this business reliably to our investors, greater than mid-single digit at a high 10s or even greater than margin, we can all do the same exact model, okay? And we'll use share buybacks and we'll do M&As. And that's sort of -- on the financial side of this business, that's something we want to go grow it. So -- and that's our focus.

It sounds like there's more of a focus to throughout the organization on free cash -- generating free cash flow.

Yes. If Jeff MacLauchlan was here, he would tell you day sales outstanding, ARs, we were at 64 days, a few years back, we're at 47 days. I'll be happy when I'm getting money ahead of when I do the work, right? So now your people say, "Hey, boss, we got to 50." Are we going to do better? We're never going to do better. Now we're at 47. So where's the end. There's a lot of different models, right? We can get ourselves to a position. We're on the technology business. We're actually taking in money ahead of [indiscernible] so we can forward front-end cash flow. So there's many more directions we have left.

Yes. Okay. Can we pull up the -- I don't know if you've seen this slide, well, you might have seen the last one, audience response system, please? Right down here, okay. We had this problem with one earlier. That's not coming up yet.

This is [indiscernible] stock...

Here you go...

Here we go.

Do you own the stock? And then if you keep coming back, there will be -- you'll have a history and then we look...

Whether I should stay here or whether the...

When we have some companies coming to us for many, many years. We have a long -- it was interrupted obviously with the pandemic [indiscernible] do in person. But we actually missed 1 year in person.

That's great. So a lot of potential investors here, which is great. We got some open slots for the rest of the day. So please come up. Great.

Next question, please.

Free cash flow per share. Got to love that.

There are a lot of things that you can focus on, but that seems pretty...

See ultimately that's a great generator, right?

It's -- I mean you haven't been talking about that outwardly that long, but that's kind of your target. And next question, please.

That was a good day when number 2 is 20. Yes. We actually haven't, right? We've been talking about the different elements. We had to get margins in line, and we had to put a business development focus. We are not bidding on everything. And when you start to teach the entire organization that you can really drive growth.

Because there are some of your peers who I won't name, that trade at a much higher valuation than you, but don't...

Yes, what is that.

Their free cash flow margin is the same. Next question, please.

The ultimate question. This flexible and opportunistic capital deployment strategy is perfect for us. We're just looking at what gives shareholders the best value. Bolt-on is great, large, interesting. I think we're right down on items 1, 2 and 3, and we see the world the same exact way.

All right. John, we're -- that's it for time. I appreciate you coming.

Thanks so much, David. I appreciate it.

Thank you.