CACI International Inc (CACI) Earnings Call Transcript & Summary

All right. Let's go. Last presentation slot of the day. Thanks for joining us. I'm really excited to have CACI here to take us through their story. It's a company that's extremely well positioned for all of the geopolitical threats that we face and the DoD's need for modernization. We have the company's CEO, John Mengucci, here to take us through the story. We're going to do it in a fireside chat format and go through things. If you have some questions towards the end, maybe give me a little bit of a hand raise, and I'll try to get to you as we work through it. But John, welcome.

Thanks, Brian. Thanks for having us again.

Yes, my pleasure. John, let's level set the story for folks. Maybe help the audience understand your scale, your customer base, your breadth of offering and really how you measure your business success internally?

Great. So CACI, 62-year-old company, as Brian mentioned, serving the national security and government modernization space. If you look at how we're funded, roughly $7.5 billion company, about 30% of our revenues come from the intelligence community, about 50% from Department of Defense, 15% from the rest of the government and 5% by accident, from just other sources. Very much focused on delivering technology and expertise to the federal government. I'm sure we're going to talk about that in more detail. Really looking at areas such as anything in the electromagnetic spectrum, so think about electronic warfare, counter UAS, cyber AI, network modernization and the like. And again, delivering both technology, which is delivering outcomes to our government customer, but what makes us unique is delivering that plus expertise as well. So the old-style government services, a lot of companies do that today, that's about half of our business. So -- and how we measure, we're all about free cash flow per share. In the past decade, we've been focused on getting margins up from the 7.5% to 8% range to the high 10s, getting growth up from flat to low single-digit growth to mid-single-digit growth and now really working on free cash flow per share. And I know we're going to talk a bit about that today as well.

Really that's a great overview. I really do see you as a free cash flow compounder over time. If you look at that, if you pull that up on your screens out there. Let's zoom out real quickly before we talk more specific to CACI. I want to quickly talk about the budget macro. A lot of people have interest in the audience on that. This year, continuing resolution, that's not uncommon. What's a little bit unique is this 2-tiered process plus your customers seem to be still spending a lot in the face of this. So can you maybe just talk us through why they're spending, if they're continuing to spend and really where we go from here?

Yes. So that's the #1 question, right? You probably get 1,000 answers. At the end of the day, world is a dangerous place. I don't think there's ever been a time where we've seen as many different issues going on around this globe. We sort of have a pseudo near-peer fight, us watching Russia and their issues with the Ukraine. You got the Israeli's issue. We like to talk about near-peer but I really can't talk about near-peer without talking about counter terrorism. So you have a customer that -- you're absolutely right, doesn't have a full year budget. They're operating under a CR, but they're continuing to spend. Why is that? Because it's cyclic, because the world is really a dangerous place. You've got parts of the federal government that are spending as if they're not under a CR. So then where does the government go? It is an election year. We get asked what if an R or a D ends up in the White House, what happens? Defense is one of those areas that both parties work out at the end of the day. It's varied by [ Hardison ]. So it doesn't matter that we're in the budget fight and what the Rs and what the Ds want, at the end of the day, the world -- the nation is going to spend what they have to spend. To put that in perspective, the size company we are, a $7.5 billion company, $250 million to $300 million addressable market, $1.-some trillion of government spend. I don't watch how the budget dynamics turn out, whether it's going to be a full year CR, or we'll have a full appropriations bill because they're supplementals and the same body that writes the laws about whether we kick back into this sequestration, it's the same body that when it comes time, usually changes that law because they don't want to face actually having to make cuts. So there's no political opinion in that, just sort of the way our marketplace rolls. So we really focus on how we're going to position customers to fight today's fight and make certain that we are positioning them for tomorrow's fight.

I think you make a really good point about just how big the ocean is for you to fish in. Can you talk about with -- let's talk about CACI's positioning within that. When we think about the geopolitical threats and the near-peer threat more specifically, what are the top 3 markets that you serve that either have accelerated, should accelerate or will definitely accelerate as you kind of think out forward?

Yes. So one is network modernization, right? So whether you're talking about cyber attacks or you're trying to push everything from 1 classified to top secret data over the same network, the government has literally thousands of networks and they are looking to do 2 things. One is to consolidate them and the second is to therefore let's push common different information over those same networks. So they have less networks that they have to protect. So if you look at CACI, we're a highly acquisitive company. We've done [ 89 ] acquisitions, it's a 62-year-old company, just about half of those in the last 15 to 20 years. So what that means network modernization is we did an acquisition about 4 years ago called LGS, have a great high-end network company. Bought another company 2 years back called ID Tech, which gave us our own intellectual property in commercial solutions for classified. That's sort of how the last mile, the edge device connects to that network. So we put all of those together, been winning a large amount of network modernization work. The second one based on just where the overall global is what we've been focused on in the last 10 to 15 years. That's everything in the electromagnetic spectrum, right? What we're all learning today is that everything emits RF, everything emits a signal. It's really important to not only know that there are things emitting signals, but where are they? How do I deal or take them and how do I take care of them. That is -- that marketplace is large. It's always been large. We are one of the nation's leaders in providing counter UAS solutions. You wouldn't think about that given all the issues but that marketplace is in its infancy stage. What we are seeing drones do today is nothing to what they'll do 48 hours from now. We're involved in the drone-based issues around the globe, whether it's in Ukraine or whether it's over the Red Sea. Everything is impacted. Commercial shipping is impacted. Naval ships are being flown over. And at the end of the day, you got to be able to find them. And our enemies, they are changing their tactics every 48 hours. So the days of building big, large systems to find those, understand how to counter those are now sort of catching up to where our model was, which is best ahead of customer need to really make certain that you can non-kinetically find them and non-kinetically defeat them because the economics of taking a $20,000 drone out with a $2 million missile just don't make it. And it's never going to make it. It's going to continue to get worse. The last area I would say that is really an impact as well is space. Wasn't that many years ago, I've been in the marketplace for 41 years. We used to own space. It was the U.S.'s domain. And now I think we all know that it is no longer that way. So we are in the optical communications terminals market, that is how satellites talk to each other and our satellite push information to and from the ground. It's going to move over the next 20 years from RF to optics. It is pretty hard to jam an optic signal on a device going 22,000 miles an hour, at least 20,000 miles above the earth. So we like our odds there. We're the only U.S. developer, provider in manufacturing of those optical communications terminals. We've got a couple of competitors worldwide. But at the end of the day, where this fight is going is protecting all your data coming down from space. And it's not our bet, it's actually our assertion that our U.S. government customers are going to want to use U.S. suppliers in the entire building material and the complete chain. Those are 3 areas that are -- set us up very, very well given that the world is a dangerous place.

Makes a lot of sense. I think we teased on a couple of the themes that you're going to answer this next question with. But by far, the biggest question I still get even after you've been public for multiple decades, is really, how do you differentiate CACI from the rest of the government services space for this investor audience? You certainly differentiate with your customers every day on your go-to-market and in the RFP process and you're winning an awful lot more than your fair share, your positioning is different, different than others. But if you could condense that and synthesize it for this group, I think that would be very helpful.

Yes. So we'll go back to the GICS, NAICS, [ KICS ] codes and buy all of those codes by another name or a government services company. So what differentiates us. We do provide what we call expertise. We deliver talent to perform the government's mission, whether it's at an organizational level or whether it's getting some part of their mission done. But our strategy is completely different. That's about 45% of our business. It used to be 80% a mere 10 years back. So we are now 55% tech and 45% expertise. So our strategy, and we have one, and it's been working very, very well is to make sure that we're going to customers we've known for 50 years, we understand their mission extremely well. So how do we get involved in the technology delivery? How do we move up that stack from just providing people to actually providing outcomes. And we've done that, and we have invested in that over the last 8 to 10 years. We are -- we differentiate ourselves because we have a world-class business development team. When you say you're going to move from delivering expertise to tech, you've got to reset your entire company. You've got to teach first of all, how to sell tech. You got to build an enduring organization. You have to have some limited production capabilities. And then you have to look at your customer and say, past performance expertise, very different than on the tech side. So how do we prove that? We have a philosophy or we are the company that invest ahead of customer need. So it's a good counter UAS is in the entire drone market, right? We've known that drones have been out there, flying around for 15 years. So 10 years ago, we started to focus on how do you counter those. Understanding that the threat level to those was going to build over time until now it's at a horrific level where literally 48 hours Houthis can change their tactical procedures and fly a very different drone, built with very different parts, operating at completely different frequencies within 48 hours and it cost them about $20,000 to do that. So we differentiate in the government services area because we actually deliver technology. I have peers that talk about they do expertise, they do tech. But the way I measure that is every technology bid we have submitted since 2012 has not seen anybody in the government services space bid against us. The big aerospace and defense companies are those folks who were competing against us. So we differentiate by wanting to build mission packages to ride on those large platforms on the F-35, on everybody's satellites, on everybody's ships to make sure that we're that software-driven technology provider. The last part of that is we are software-driven. Software is our superpower. So all of our solutions have to be software-based. I'm not looking at building large production facilities. I'm looking at building small racks of equipment to have memory, to have processing power, let the entire mission be done with software because the threats today change too quickly. So those large programs that are out there today cannot move fast enough because they're hardware based. How do we differentiate? We have a phenomenal business development team. I think every CEO would say that. We actually have win rates and compete rates that show that and we invest ahead of customer need. What does that mean? We sit with our customers 2 to 3 years before a request for proposal comes out. And we're that company, the only company that sits with them and walk through art of the possible. In our marketplace, when you show the customer the art of the possible and they get to see what they can do, they actually shape the request for proposal to be more like what we showed them versus something they're not sure is available or not. And that is why win rates in CACI are so high. That is why I hate to say we dominate, but we win a hell of a lot more than we lose. And we win our recompete work because we're always bringing additional work to bring in into that fight. So that's us in a nutshell. It's why we can differentiate because we deliver both expertise and tech.

Well, speaking of winning, your contracts awards over the last year have been kind of borderline gaudy, if I can say that. Some of these have been the biggest awards in the company's history, right? I think certainly 1 and 2 or very close to it. It also seems like they're ramping rather quickly. Can you take investors through some of those big wins, talk about how they progress and really then just give people a flavor for how you've gone out and captured this work?

Yes. So if you look at both expertise and tech, the ramp-up period, how quickly can we generate revenue once we've won something. In the government services world, expertise ramps up quickly. So I just won -- we won a 5-year multibillion-dollar job with a highly classified customer to do cyber and network protection. That's an expertise job. That job ramped up in about 90 days. It's got some more ramp left but then that will deliver at that level for the next n number of years, however long that contract, that one happens to be 5 years. Then we won 2 technology jobs, 1 large one with the United States Air Force to modernize and consolidate all information technology across the United States Air Force. The 10-year $5.7 billion job, that's a technology delivery job. That job is going to ramp up what we're doing design, development, going to all 400 air force bases and installations, understanding what they have today, modernizing that. And then when we get that design done, delivering that to 400 air force bases. So that ramp is a little bit different. It's going to ramp up slowly. It's going to add some level of organic revenue for us. And then when we get out another couple of years, that will start to really deliver because we're doing full-scale employment. Spectral, is a large navy job. That is the navy's most modern electronic warfare kit that's going to fit on all surface ships below the deck. And that's a large technology job, a lot of design and development there. And again, that job is going to ramp up with preliminary design review, critical design review, getting the first article tested and then deliver that to n number of ships over a 7-year period. So 3 large programs, all multibillion-dollar awards, a new business rate this past couple of years in the 40% to 60% range. I used to talk about $200 million jobs that we were finally successful at winning, and we've got another dozen of those below that, the 3 jobs we just mentioned. So -- and how do we win? Again, it's just about -- it's staying core, it's staying true to what we know how to do. You're talking to the CEO of a company, when we submit a bid, we understand what that bid costs. We're not taking undue risks. If it needs an undue risk, we just won't bid it. Again, $7.5 billion company, $250 billion to $300 billion addressable market, we can be selective as to where we want to go to go bid.

Makes a lot of sense. I think it's interesting the way those last 2 are ramping, right? The enterprise IT contract is enterprise IT as a service, a little bit of a different delivery model in the way the government is buying. And then certainly, the way you described the navy work at the end as well. Well, how do you top that, right? That was a prolific year last year on the award front. What's the pipeline look like and really what's next? Because I'm sure you got a couple of tricks up here.

We're going to continue to win and learn -- all of our sales team understands that bonuses get paid out at the end of the year and then that big top board goes back to 0, right? You start all over again. We measure it 2 different ways. Bids that are submitted that were awaiting the decision to come out and bids that we're going to submit in the next 6 months. Total is $25 billion of business. $11 billion has been submitted, still waiting to award. We've been averaging a trailing 12 months book-to-bill of 1.2x for as long as I can remember. Another $14 billion of bids to be submitted in the next 6 months. And contrary to what I hear in other circles, getting back to your budget question, customers on the whole have made their decisions pretty much on time. So you would think that our budgets were tight. The customers would start to slow down on releasing the RFPs and be slower to make their decision. It's just the opposite. So either we're lucky or we're good, or we're both. But that's how we're positioning. We are going to continue to win. We have some great bids out there. And the second part to the equation is your recompete business. So we've got an above 90% recompete win rate. That is work that comes up for a bid after a number of years, 3 years, 4 years, 5 years, where the government rebids that work. So the quickest way to not grow, of course, is to lose the book of business you already have. My model is to make certain of what we're bidding has the lowest duration we can possibly get from our customers. Because every time we bid a job at 3 years, recompete. I'm going to spend a material amount of investment dollars just rewinning the business that we have. So the measure that we track, 8 years ago, the average -- the weighted average duration of a program we put in our backlog was 3 years. The last 6 months it's 72 months. It's been between 5 and 6 years since. So we're very focused on big ones live there forever and then delay in your recompetes who are -- all those millions of dollars can get plowed into winning new business, which allows us to continue to grow this business.

Maybe just following up on that thread, on the longer duration. How is your on-contract growth been? Have you seen kind of a bump up there as well over the last few quarters?

Yes. What you find when the customer gets to know you for both expertise and tech, you cover the entire landscape. Okay, in a very agile manner. We're software-driven. So our solutions are software-driven, whether they're in a software-defined device or whether it's an overall tech delivery, it's very software-driven. And so what we look for is once we get in, we land and expand. We land, the customer knows we're going to perform, we staff our jobs responsibly. We make certain that if we're going to bid on work, we can actually deliver that. And that usually comes on FFP side with staffing but the teams have done an outstanding job at driving on-contract growth. So while you're there with that customer, odds are, that somebody somewhere near you within 1 degree, it's not delivering. So talk to that customer by bringing that work into our pool. If not during our current contract, during our recompete, bring somebody else's work along and recompete both. We're that confident that we can hold on to the work that we have. In the last few years, with a recompete rate of greater than 90%, that's what's now starting to be the final priming of this growth of growth engines so we can drive even better topline growth.

Excellent. I think you've been transforming the CACI portfolio since you joined the company back in 2012. It's been a minute now. One of the more visible shifts has been this externally anyway, has been this technology, addition to the portfolio, really overwhelming the size of even expertise. Would you talk about the interplay of these 2 businesses, how they feed off of each other. You've done it a little bit, but maybe expand on that and then really just help people understand on that technology side, general sizes of some of these really big markets that you've talked about in space and other areas to the extent that you're getting?

Yes. So we do the interplay of technology and expertise in the following manner. If I've been with a customer delivering expertise for 40 years, 50 years, I know how that customer budgets. And in some instances, a lot of instances, we're deployed with them. That's the part of our mission and expertise business, where these high-powered joint explorationary teams that are in war and wartime in all 24 time -- 22 time zones are led by somebody from our company. So you learn a lot about what capabilities are needed. You also learn a lot about capabilities that you're giving that don't work or don't work the way you need them to work. So we call that expertise in forming tech. So it's true. We get a leg up and understand where we're going to invest in our technology, so we know exactly what the customer wants, most times, with all due respect, before a customer does because we're in the field. So we don't like to wait for the Yuan or the Juan to be written. There's already phone calls coming back. If you can make that handheld device, deliver a cyber payload and find drones, that would be everything that special operations forces need. So another couple of months after that, we'll hear that from our special operations customer. We're already running down that path. That's how expertise and forms tech. The flip side of that is how do we win so much expertise work against the people who are in the government services space. Because technology should enable better and higher quality expertise as well. So the days of a customer asking us to provide 400 people to manage the network operations center, if I'm in that customer meeting at a very senior level, my first comments are, what do you need done? What's the objective? I knew the network operations center run at 99 and 99.999% availability. Great. How about you just put that in the statement of work? Don't harm me by asking for how many people. And we have time and time again delivered solutions that we've won. We've delivered not that number of people at a lower price but I'm making more. So if I cannot have the risk of finding people but deliver tech to do some of the mission, then as the customer, as long as you're paying less, stop worrying what I'm making or stop worrying as much because you're going to get budget back that you can spend on other things. And that model, the combination of these 2 businesses, while they're not standalone inside the CACI, they're very complementary in 1 informs the other and then 1 allows me to deliver much more cost-effective expertise. That drives top and bottom line growth.

Fantastic. John, since you became CEO, you've really broadened out the capital deployment. You've incorporated many more share buybacks into the mix as opposed to what it had historically been. What's maybe the ideal mix between the 2 -- or capital deployment in general, what do you think about when you have capital at your disposal?

Yes. So we like to call that flexible and opportunistic, but don't look for balanced, right, because the world changes. And what we see on any given week or any given month is different than what we may have seen the month prior. So we're really looking at flexible and opportunistic. It's true the last couple of years, the M&A market has not been what we'd like it to be, what is a highly acquisitive company like. I love it when there's properties out there who have thought of an idea before we could think of it and they progressed it further than we can in the amount of time. If that's not the case, then we'll invest internally. If it's something that is commodity based, we will partner. The last option is to acquire. But those acquisitions, those companies, even though they have great capability or customer relationships that give us long-term growth, it's got to come at a valuation that makes sense. And frankly, the last couple of years and where we're looking for assets, the valuations haven't come down in line. So flexible and opportunistic means, let's go look at what it means. Let's look at how our stock is valued. So since last January, we bought back 6% of our shares. We have another $370 million on a current authorization that we haven't put into action yet. We used to be at a maximum leverage rate of around 4.5, but then unfortunately, interest rates upped in. So we're about 3.5 company. We're just north of 2x leverage. So I like how it's setting up. I like the fact that the M&A market is coming back. There are some things that we'd like to fill some gaps on but again, flexible and opportunistic is I'll always believe that our company is undervalued. So share repurchases are always there. And the fact that we're looking at free cash flow per share, we're going to be looking at that even more.

Maybe if I just follow up on the pipeline of deals out there. It's an election year. So how is that changing things? Secondly, are the types of companies you're looking at smaller size as you evaluate a portfolio. I know one size doesn't fit all. So I know that's going to be your answer, but I feel like I'll ask it anyway. And then I guess, are these coming from private equity, carve-outs of bigger companies? How do you really think about what that portfolio consists of?

Yes. One size doesn't fit all. Look, we've come to really enjoy a small to moderate size acquisition. We think we do those really, really well. Of course, as a CEO, we've done large ones, too, and I'll tell you, we do those excruciatingly well. But the small to moderate based on what we purchased and the gaps that we filled works for us. We will take book deals any day of the week to go look through those. It keeps our folks modernized with what's out there today. But we also have a number of them that we've done direct dealings with. And we sort of look for a reserve price. We really like an asset, we like to have those discussions one-on-one. So small to moderate ones fit us very, very well. We will -- we're looking in the areas of still in cyber and electronic warfare, digital signal processing, things that have a long shelf life. These are things that are never going to go away. RF will always be out there. There will always be singles who want to know what it is and where it is and how do we defend it against it. But doing something that's like our size, that's not where we want to head. We don't buy revenue, frankly. We buy capabilities and customer relationships. I don't need to buy on top of what I already know how to do when I win 40% to 60% of the time, wasting money on buying revenue just has never worked for us. And I don't really think that our marketplace scale matters as much as people make it out to be. There's people who have scale are the largest ones out there. I don't have a problem winning against scale. So it's a well strategic plan. We look at gaps in our market, and that's how we look at it.

Last question for me, it's not really a question. This is your drop the last moment, if you will. Take 45 seconds, talk to the investors directly, let them hear from the boss on why they should consider CACI for investment?

So we differentiate within our market space. We are software-based. So all the technology that we deliver has a very long shelf life. And by the way, better than the hardware refresh cycle, software refreshes in some of our systems every week because the world is a dangerous place in a very different manner. And that's that everybody is changing how they operate every 48 hours. So the software upgrade market is large for us. We are very, very focused on a strategy, a strategy in place where we come from. We're a very free cash flow per share centric. We're going to make absolutely certain that we can deliver a predictable or organic revenue growth, margins that also allow us to continue to invest. We're not a 0.25-point company that's got a short arm investment to meet 1 single quarter point. We're going to make sure that we are CapEx light and very cost conscious and make absolutely certain that we deliver what the best workforce there is. We have high retention rates, able to staff all of our programs. And we -- at the end of the day, we deliver extremely well. That's why we have so much S&P business coming back to us. So thanks. Appreciate it, Brian.

Great. Thanks, John, for joining us. We will be doing a breakout downstairs, last of the day. So please join us if you have some follow-up. Thank you.

Thanks, everybody.