CACI International Inc (CACI) Earnings Call Transcript & Summary

Thank you all for coming. We have Jeff MacLauchlan and George Price. Jeff is the -- excuse me, the Chief Financial Officer and Treasurer of CACI International. And George Price is SVP and Head of Investor Relations. So guys, thanks for being here.

Thank you.

So because -- maybe just a good place to kick off because we've got more than just A&D investors here. Can you maybe give a quick overview of the business and the key markets you work in for the folks that aren't as familiar with your company?

Sure. We have traditionally been a government IT services contractor. I'll explain here in a few minutes how we're sort of moving away from that over the last number of years. But we have been -- we're a little over 60 years old. We've been public for about 50 of those years. 6 or 8 years ago, we found ourselves in a position where we were competing in a marketplace very, very focused on low price technically acceptable sort of acquisition method. And rather than do what many did in that time frame. We actually -- I say we, this predates via involvement with the company. But John Mengucci, our CEO, who had been there for a couple of years at that point, reacted to those circumstances in a different way by saying we're actually going to retool the company here to focus on a fewer number of larger opportunities, look for places where we can technically differentiate ourselves and compete on a different basis. That also went along with building out the technology part of the business so that we were not kind of a traditional expertise supplier and focusing on technical capability and bringing that to bear on similar kind of problems and customer priorities. That had a corollary benefit in that it led us engage in the business development process earlier and have a greater amount of time to sort of shape opportunities to vet and manage the pipeline and bid in accordance with the strategy, fewer and larger opportunities, but also what became higher quality opportunities because of the approach. And so what we're really seeing today is the fruits of that strategy where -- this is a process that takes in terms of opportunity development a couple of years, 2, 3, 4 years to really work, and that's sort of the situation we're enjoying today, where we've had really terrific book-to-bill ratios over the last 8 or 10 quarters, about $28 billion of backlog. It's really reaping benefits for us.

And maybe just as a follow-on, that same path. And you alluded to this a little bit, but -- can you give us more color on the transformation from like boots on the ground expertise to more agile technology focus we're -- and maybe an example of where -- maybe something the company used to do that something the company does today that it didn't do before?

Yes. So I should also have mentioned in that, that shift did not mean that we were moving away from our expertise business but that we were looking for ways to leverage the expertise business to inform the technology part of the business. And so what that means is that we're able to take the domain expertise for some really long-term, deep relationships on the expertise side and use that to identify areas to invest ahead of need and provide technology. So that means that we have been able to get to the second part of your question, to take our support, for instance, of some deployed personnel in some pretty bad neighborhoods. And use that -- those people are deployed around the world and use that insight to generate handheld SIGINT and EW collection instruments, for instance. So it's actually -- we shy away from using the word product. We actually deliver a thing because that's the way the government buys. There's not really a good way to deliver software. But what we're really delivering and the real magic is software. So it would be a little bit like putting a number of applications on your iPhone, then I sell you the iPhone, but the iPhone is not really the point. The point is what you can do with the iPhone. So the ability to characterize signals, geo-locate them decide what you want to do, let's others and as well as you, decide what you want to do with them? Do you want to jam them, do you want to spoof them, do you want to do whatever you choose to do. But -- but the thing about that, if I could extend the iPhone analogy for a second. The thing that's exciting about that is it's entirely a software-enabled situation. So we have the largest SIGINT library, for instance, which is changing constantly. So what that means is you get a new signal in the morning and you can push it out and update in the afternoon, which is something that traditional -- traditionally has not been available in the government acquisition [ road ].

Got it. And then just for folks who might know -- can you describe what SIGINT is?

Signals intelligence. So everything is an emitter. So think about this as everything from a phone to a garage door opener to the remote on your television to anyone in an urban warfare scenario, anyone who is in a building that's collecting data about where someone is, receiving a radio signal any kind of RF energy.

Got you. Got you. And then -- what's the right balance between the expertise and the technology?

Yes. We spend a lot of time thinking and talking about this. We, most recently, when we started the strategy that I described at the beginning of my remarks, we're about 80% expertise and 20% technology as we were defining -- as we define it now. I think in our most recent quarter, that was kind of 55%, 45% -- 55% technology, 45% expertise. We don't actively manage it this way. We like the balance. They really do help each other. And -- the technology, I think has a natural tendency maybe to want to be a little bit bigger. I think we wouldn't probably want it to be more than kind of 2/3, 60%, 70%, something on that order. And they actually -- I gave you an example about how the expertise business identified in need we could use for technology, but they actually go the other way, too, so we have used some algorithms actually, and I'm not going to lapse into jargons here. But use some artificial intelligence tools to characterize imagery data, which -- then we can use back in our expertise business where we're analyzing data that's being collected and sorted in processed and prioritized for analysis and use for intelligence.

Yes. I think to kind of give everybody a sense, in fact tell me from doing this. Yes. So we met up with you guys. I think it was a USA, and they had a computer display, and they could show us every cell phone in the room.

Right. I think that's right.

Yes. So just to give you a feel for.

Don't creep everybody out.

Yes. So I may [indiscernible] on phones.

But Ron, just to mention an additional thing, right? Expertise is a good business. It tends to have some elements that are a little bit more competitive. So we're very discerning about the kind of expertise that we work and we pursue. But it has advantages in that it tends to be pretty sort of sticky ongoing work, relatively low capital requirements, so good return on capital, you don't really need much capital at all. And it facilitates us learning more about customers so that then we can better understand their needs and down the road take to them different ideas, different opportunities, technology opportunities, basically introduce some of these concepts to them as we better know them and they better know us. And our performance. And so there's a lot of good synergies between it and reasons to have both.

Well, it seems like a really virtuous cycle, right? I mean the expertise and forms of technology and the technology and forms of expertise, right -- kind of..

Very much so. Yes.

Right. Yes. Sure. Can you maybe mention a couple of opportunities or contracts that you're able to win or new markets you will be able to penetrate into because of this change in strategy and the balance between the two?

Sure. I would say probably the most notable recent one would be our spectral program for the Navy where we will be developing and assembling and deploying the sensor suites for all of the Navy's surface combatants and maintaining that signals library so that they're able to collect prioritize process signals intelligence as they pick it up. And this is a case where -- this is a case where we have a couple of the traditional primes that are actually on our team as suppliers. Some of them were also competitors on the program. And one of the things that our approach was able to do, I'm going to go back for a second to the iPhone analogy. One of the things we were able to do in our approach was bring an open architecture to it so that we provide a framework for the things that we provide but it can also be expanded to include particular niches or expertise that others might have. So if you -- you can have this service in the library and more or less continuous updates from us. But if there are things that the Navy wants to incorporate from some other source or whatever, they can easily be absorbed in the system which in the architecture, which in a traditional government defense environment would be something that would be actively sort of not the strategy. And one of the reasons -- one of the things the government liked about our approach was that it avoided something called vendor lock that they've become very frustrated with where you have a large investment in a big deployed system and you buy it from company x and it's very hard to do anything to it that doesn't involve company x. And in our situation, we're relying on our skill and our expertise to develop the system and maintain our position, but it has to be -- you maximize the utility by being open to whatever the best ideas are, not unlike the apps on your iPhone.

All right. So I would argue as a taxpayer. Thank you, right? That's -- how do you offset though? I mean, just kind of broadly -- think about -- I just give you the big model, right? Boeing delivers a bunch of tankers. They lose money on all of them, but they're going to win it back, maintaining them. So kind of the same thing where if you have this vendor lock, you get this stream of income maybe down the road, how do you offset that? Economically, how do you offset not having vendor lock? And return your investment? And I don't know if I'm articulating this very well, but is what I'm saying is...

I think you are, I think the short answer is because I'm not losing money on the [ spectral ] on delivery. So I'm being paid at a fair price and making a reasonable margin on what we're delivering. And beyond that, I've got to rely, I got to compete. I got to rely on our ability to maintain our leading signals library situation and maintain our leadership position to continue to manage it in the long term. But the short answer to your question is I didn't give it away to begin with. So I don't...

It's just my sense.

I don't need to make it up on the back because I didn't lose it on the front.

It's my sense right now that there's an acute sensitivity to vendor lock across multiple vectors, not just the markets you're in. Right. Yes. So -- good for you guys.

And -- that also provides us -- you say, well, okay, others can bring in their solutions and their applications to make a part of the overall solution. But first of all, you have client customer goodwill. And good referenceability. And so the areas -- many of the areas we're focused on the electromagnetic spectrum is a great example, signals intelligence, electronic warfare, basically what signals are out there, whose are they and what do you do about that right? That is very broadly applicable, right? So we make the Navy happy, and it just happen -- it happens to allow a third party to come in and add to that system, okay? The need to address challenges and priorities in the electromagnetic spectrum, that's everywhere. It's every service, it's every domain to the extent that, that helps our competitive our referenceability and our competitive advantage. That's a good thing for us in the long term.

Okay. Yes. That's great. So where do you guys see CACI best positioned in terms of just current national security priorities. And are there areas where you're looking for additional exposure?

I would say that our strengths currently are in a couple of sort of macro conditions that we see as being pretty durable for the foreseeable future. So one of those things would be in the expertise part of our business would be the idea of cloud migration, particularly when it is catalyzed by security and cybersecurity exposure. So legacy systems that are remotely hosted in data centers all over the place with particular agency and to partner specific kind of applications are inherently riskier than things that are in the cloud. And so we have a real expertise in cloud migration that is showing up in a lot of ways. Related to that, because they often accompany the cloud migrations are our skill in agile software development. So we actually -- we operate -- have delivered and are executing 2 of the largest agile software development programs in the government today. Both of those have met with delighted customers and very strong success, good results for us and for customers. Beyond that, I would probably point to some of the things we've been talking about already today, which is the current geopolitical environment and the events in Gaza and Hamas, the Russia and Ukraine and the threats to NATO and of course, the Indo Paycom, the Indian Ocean Pacific Command situation and continued stress there relative to China and some of the other Asian allies like the Philippines. So those sources of friction -- and our EW and SIGINT, signals intelligence capability and our network modernization are places where we're going to see, I think, some pretty durable demand for the foreseeable future. And we had several questions today in our one-on-ones about this, and I think they were interesting questions relative to the election because there are some -- obviously, some policy differences among us as a nation, but they tend to be more about larger platform programs, do we need 1 submarine a year or 2? How many F-35 should we buy? When do we need another aircraft carrier? No one thinks that we can rest on our laurels about defending ourselves against drones, for instance. So the places where we are in the budget in terms of exposure, counter UAS and the other things we've been talking about are places that are really pretty durable and not friction -- not points of friction between some of the competing political interest that you see otherwise.

Got you. And are there any other places that you'd want to have more exposure kind of as a follow-on?

You know there are -- there is a lot of headroom, I think, in the EW and signals intelligence world to do some -- draw a little wider circle around some of the things we do, that would be a place we would certainly be interested in expanding our footprint. We have made 3 acquisitions this year. One of them, a company, quadrant to those digital applications for a couple of intelligence community customers where we did not have a strong footprint, that's enterprise or expertise work that we would certainly be happy to do more of -- so yes, the there certainly are. I don't think they're different as much as they're deeper in terms of what we're already doing. Our total addressable market is about $250 billion. We're going to close with George reminding everyone about our guidance. We've guided to $7.5 billion to $7.6 billion a year for this year, $7.5 billion in a $250 billion market. It's a lot of headroom.

That's good. That's great.

When we think about just kind of capital deployment priorities.

Yes.