CACI International Inc (CACI) Earnings Call Transcript & Summary

Good morning, everyone. Next up, we have CACI. So very pleased to have John and Jeff here. I don't know, John, if you have any opening remarks you'd like to make or you want a forward-looking statements or you want to get straight into it here.

Jeff, do you want to share anything?

I think, we'll assume everyone understands the safe harbor statement. So I'll leave it that.

I think, that's, yes -- I think, that's understood. So a lot of headlines out of Washington, enough to keep your head spinning. One day defense budget is going up $100 billion. Next day, it's getting cut in half. So what do you -- I guess, cutting -- trying to cut through some of that, what do you see as the -- maybe what are you identifying maybe as the top priorities of the new administration? What kind of beyond what we're reading out there every day, what do you maybe see? And how do you think where you're positioned? How do you think you kind of fit into, ultimately where this administration might be going in terms of the money that we're going to spend on the defense side of things?

Yes. So David, thanks. Thanks for having us. It's -- I haven't looked at this morning's tweets. So I'm behind. Look, I think every administration comes in with their own goals and what they want to accomplish. I think, every administration, since President, Nixon, came in with a view that, can we clean up government? Can we make government smaller? Can we make it work better for us? So I'll keep these comments at a real macro level, because there's a lot of narrow deep holes out there. I think, where you want your employees to work, you want them in the office or out of the office. I think that's the government's prerogative as they get to make that call. I think that this administration wants to do more around protecting our borders, it's tough to fight that one. They want to be more efficient, tough to fight that one. They want to -- they believe that networks across the federal government should be more resilient. They should be better cyber protected and all. You won't find a company or a customer saying that that's a bad idea. And I think peace through strength is a very strong statement as well. All of that takes money. And I think that being a taxpayer, we want the government to be efficient. We don't want fraud waste and abuse. I'm not so certain though that paying a 140-year-old person and actually social security check here and there is the astronomical fine that's going to rouse out fraud waste and abuse. 90% of our company's revenues are international security space. We've got 6% exposure to what we would call the traditional federal civilian work, citizen-facing. Why is that? That was intentional. We wanted to have a very low exposure to the federal and civilian world. It doesn't mean they're bad agencies, it's just sometimes tougher business. So we intentionally about 5 to 8 years ago during that time frame, took our portfolio exposure down to that area. And why is that? Because budgets are very supportive, and they are well supported, whether it's Republicans or the Democrats that comes anything around national security, that's very bipartisan support. And that's where we, as a 60-some year-old company wanted to find ourselves at. So it's an awful lot of moving pieces. There's a lot of noise in the system. At days, it's tough to find what the signal is, but we're navigating our way through it and have an outstanding year and looking for forward growth as we move forward.

So I'll only say DOGE once or twice. I mean, it's really hard to know if this is good, bad or indifferent for you guys and your peers. I guess, how would you frame that? I mean, in terms of -- sometimes I look at this and say this might be an opportunity for you guys. I mean, obviously, the risks are what they are. But how are you -- I mean, the market is obviously telling us one thing, but how are you thinking about potential opportunities and then the downside risk?

Yes. Look, clearly, markets don't like -- they don't like risk and they don't like uncertainty. I think, every time you say DOGE, you're saying both words in one small phrase, right? It's tough to sort of pin it down on any given day or any hour. So what does it mean to us? So as a public company, publicly traded 60-year-old company, understand this mission space extremely well, understand that different administrations come in with different priorities. Is it a noble cause to find fraud waste and abuse? Yes. I think that's a noble cause. There happens to be agencies in the federal government that are actually chartered with every day finding fraud waste and abuse. You can debate whether those are as effective as they should be. But I can't do anything about that or some of the agencies that have already been DOGED, because we don't support a number of those, meaning we don't generate revenue from those -- from that part of the federal government. Done well, it should drive questions. Done well, we should be talking to the folks who are doing the acquiring of goods and services to find out what makes their job easier. But the backdrop I look at all this against is what our customer is faced with. So each and every year, we've been doing this for 42, 43 years, majority of those years, we haven't had a budget on day 1. So we're under a continuing resolution for anywhere from 4 to 12 months. So I'll pick the midpoint at 8 months. So if you are running whatever agency it is inside the national security world, you've got changing threats, you've got changing priorities, you have enemies who are changing their tactics more on a daily and hourly basis versus a decade basis. How do you attack that with a budget that has 1-year spending? You have caps, appropriations is done by Congress. You maybe have 4 months out of every -- any given year to do a new program start. And we want to go look at changing how government works. That's where my expectation was around something like DOGE. We take it up to that highest level and say, how do we look at the cost accounting standard, how do we look at the federal acquisition regulations, how do we use the regulatory angle and try to pair that back so we can actually move in a more fluid manner, because the threats are going to continue to be more fluid. Beyond that, those types of changes, I think that there's a lot of mini efforts that are going to be going on out there. Having better enterprise IT, having more resilient networks, that's all upside for us. There's a lot of talk about outcome-based contracting. We love that. We've been moving a lot of customers towards that over the last 5 years. It works very, very well. Customers do know how to buy in an outcome-based instead of just buying people. And we've been the loudest in our sector, and we have experienced tremendous growth by driving that new way to actually buy new software applications and the like in a more commercial-like manner. So a lot of things that could be done. The majority of them are all upsides to us. I'll reiterate again, our fiscal year '25 ends in June. At the summation point, one of the threats that we see, we beat and raised guidance twice. We're going to be done with our year at the end of June, feel very strong about the overall year, put 3-year targets out $1.6 billion of free cash flow and then beat and raise twice. So if we felt that there was a threat in all of this, we probably would have made different calls and different moves, but we like to be -- the hand we have. Some things on the edges may be tweaked, but at the end of the day, I like the hand we have in the markets where we're in, and I like what the future growth looks like.

So you touched on a little bit on the budget process, typical CR 4 to 12 months. I mean, this time seems even more screwed up than usual. We don't really know what's going to happen with '25 budget, budget reconciliation bill, when we're going to get at '26. But I mean, any kind of high-level thoughts based on all your experience, how this could actually play out? I mean one day, we're hearing about $100 billion plus extra on the defense side. And next day, we hear the defense budget is going to get cut by 50%.

Yes. Yes. It's an hourly news cycle. Look, what we did is we -- when we gave our latest guide, which was an upward, upward guide across the board, we assume that fiscal '25 would end in a continuing resolution that we wouldn't get any on the full year, okay? Because it was tough to sort of read other leaves there. Second, having said that, there is more volume and more signal through the noise around where the '25 budget comes out. There's some house seats that are open. Those have to be resolved. Maybe that's in the April, May time frame. But there is a lot of [indiscernible] around roughly a [ $3 billion to $3.25 billion ] supplemental, what I would call it, some call it, the reconciliation bill, about $150 billion in National Defense and $175 billion in Customs and Border -- I'm sorry, in DHS. Both organizations that we do an awful lot of work with. So again, any movement on the budget outside of a full year CR drives potential growth -- and that will be at least a couple of year money and it's being spent in the areas that we're very, very strong in. So again, even in noise, you can find a signal. And we're assuming that we end the entire year in a CR, but we do believe that there is some push going forward. There's also White House support for an increased defense spending and increased border spending. So I think that, the one comment is getting a lot of juice, right, is maybe we can cut defense spending in half. I think the precursor, the if part of that statement was, if we can get the Russians and the Chinese and us to all de-nuke in 38 days, the 38 days wasn't said. But if we can make that happen quickly, then maybe we could all spend and spend less. There's a lot of things you could probably do if that happen. But I think that, in the real world, we're actually facing some pretty large threats and things that we need to take very, very seriously, not outside our borders, but also inside the homeland. So -- but I like how that sets up for this company. I like what our growth potential is. During Investor Day, Jeff rolled out our 3-year plan, and we're on track with that.

Yes. I wanted to get to that. So Jeff, I mean, you guys guided high single-digit revenue growth. I think it's higher this year with the acquired revenues and then it kind of still mid-single digit beyond. So high level, what is the budget framework that. [indiscernible] And then, some big program wins that you've had, how much more spectral NSA. I mean how much more do they still have to kind of ramp over the course of the -- how much of a tailwind are those over the next several years?

Much of the growth, the overwhelming majority of the growth is really coming out of backlog. The NSA program that you mentioned has ramped up. And if you think about the profiles we talked about at Investor Day, that was a relatively quick ramp and flat. But EITaaS, NCAPs, Spectral, the Azure acquisition, which is both growing itself and also accelerating the Spectral growth, those are all won in backlog and have over the next 2 to 3 years, have more acceleration getting to rate. So the 3-year targets, we feel really good about and have very good visibility into. One of the things that we don't talk about very much, although we've brought it up a few times, but one of the things that I think isn't fully appreciated in that high single-digit revenue growth and mid-11s EBITDA margin is that the $1.6 billion is basically not considered in any of the upside to those numbers. So any capital deployment decisions we make, acquisition, share repurchases, any activity that we would undertake with that $1.6 billion of free cash flow is also more upside to the 3-year targets.

Yes, because you've talked about -- as part of that, I mean, you've got cash flow growing, I think, double digit. But I think, I remember this specifically last year, you really are focused on free cash flow -- free cash flow per share growth grows, obviously in excess once you start considering that capital deployment.

That is sort of where it all comes under -- the rubber meets the road.

Okay. So on the [indiscernible] you touched on margins. The margins got an uplift from Azure higher -- Azure brought higher margin. So I mean you're pretty much at mid-teen, mid -- sorry, mid-11s now.

Yes.

Yes. I mean, you got -- I think, first half is a little lower or is that [indiscernible]

Lower levels.

Yes. I mean, how -- what is the -- I mean, great margins relative to your peers. I mean, how do you think about the opportunity with some of these big programs kind of maturing the opportunity for margins to even step up a little bit?

So there's kind of a micro and a macro answer to that question. [indiscernible] years, many of you have noticed that we have heavier margins and revenue in the back half of the year, really driven by which we've talked about before, driven by some specific customers' buying patterns and their activity in their own cycle leads them to be more active with us in ways that drive back half of Q3 and Q4 revenue and margin. So that's sort of the micro issue. We saw a little bit of an attenuation of that in our second quarter, where we had some favorable timing into the second quarter. But in general, you should expect to see our back half heavier than our first half. So that's the micro part of the answer. The broader macro part of the answer is really embedded or really premised on a couple of things. One of them is getting to a full year of Azure and its continued growth and growth as a percentage of the portfolio. And the other is somewhat the same, but more than Azure, we have continued growth in the technology part of the portfolio that gives us some additional margin upside. And so that free cash flow and then, of course, the free cash flow per share that results from that is really driven by the top line growth while we're maintaining and modestly expanding the low to mid-11s margins.

Right. And I think all of that drives right, whether it's top line or bottom line growth, that's all going to drive free cash flow. And as Jeff mentioned, the fact that in the last 8 to 10, 10 years, we know that we're looking at more technology-based jobs and expertise jobs. All that rolls into controlling what we can control. We actually bid less to win more. It's a little bit different than other companies. The companies bid everything that moves, because they need to get a certain award level. We know what we're really, really good in. We know what is really too shiny of an object. So it's really the discipline and past performance in this marketplace beats everything. So as you remember that, you don't panic and you bid on larger, larger things and fewer things, you put your best and brightest on winning new work. And the fact that we've driven the duration of the programs in our backlog to greater than 5 years, somewhere around 5.5 years, that's a long time to spend with the customer now. So we recompete in this market a hell of a lot less than my competitors do. And all that does is takes money that I'm throwing away to rewin last year's book of business every year or every 18 months, and I'm allowing myself to invest that in other areas where we can provide better differentiation, which then helps margins, because we're not stuck in a low price kind of a bidding area.

And Jeff, on the micro side and on the margin side. So if I recall correctly, Q2 was a little bit better than you would have thought, Q3 is supposed to step down a little and then Q4 is supposed to recover.

I think, sequentially Q2 and Q3 probably are about flat. I mean, plus or minus 10 bps or something.

Yes. What's most important is, we're going to end the year in the low-11s, which is what we mentioned. We're sort of looking through '25, looking at 2026 plan going forward now when we're into the next year's.

So how -- the recent deals that you've done, Azure and Applied Insight, how are they performing relative -- I mean, what is the technology they brought? What was additive? And how are they performing relative to your -- I mean, it's early, I get, but how are they performing relative to your plan?

They're both ahead of their business plan. John will want to add to this, but they're both ahead of the decision cases that we use to make the acquisitions. Applied Insight focused on within the classified community cloud version. Azure is really exciting position [indiscernible] enabled us to accelerate their work on [ CINCF, ] which is the predecessor contract to Spectral and has enabled us to position Spectral for a quicker transition. We recently achieved a really important milestone, MVP, minimum viable product, which means we've sort of established a baseline that meets the basic requirements and has let us go forward. It will continue to evolve, but it's an important milestone and our ability to sort of work that back into [CINCF] sets us up nicely for transition.

Yes. And a little bit on Applied Insight. There's only 20% of the federal government is into the cloud today after 15 years of moving things to the cloud. So we can debate and we can snicker whether that makes sense or not. Maybe that's something DOGE finds out. And that's not because people aren't pushing them there. There's a multitude, I would imagine, of different reasons for that. But Applied Insight provides a great framework in a classified space to be able to more easily move things to the cloud. So they've had great impact there. That's still a burgeoning market and 80% of it has still gone unserved. On the Azure side, we did Azure and Applied Insight in the same week. I don't remember the date.

Maybe a couple of weeks apart, but they were very close -- they were coming together.

Yes. And we -- [indiscernible] they clearly weren't damaged assets or they would not be exceeding the business plan that we put in place and the Navy would not be so elegant that the fact that we're able to push signals in and signals protection to the entire fleet of Navy ships years earlier than the last incumbent was not able to be successful with. So I like what their growth rate has been. It's been very synergistic with the rest of our business. And you get something in a really good multiple when what we do and what they do are very much in common. So I would like the pace that the integration has done. And as Jeff mentioned, they're on a nice trajectory as we move into low rate production and full rate production in '26 on Spectral.

Can you talk about your need to hire? And given all the uncertainty that's out there, maybe you -- we've seen one of your peers who hires pretty aggressively kind of pull at least hourly pull back on hiring. How are you thinking about your hiring needs and kind of the pool of candidates that are out there, how that -- your ability to hire and you want to hire.

Yes. So we differentiate ourselves in the sector and that 55% of our revenue are technology delivery. So those folks work directly for us. They're very fungible. We can move them around programs and the [indiscernible] expertise on longer duration contracts. So the level of hiring is lesser for us, because we don't have to worry about that. Having said that, one out of every two employees that we bring in comes from a referral. So our attrition rates across the sector are at an all-time low. Why is that? That is because if you refer somebody who's an A talent, the odds of you leaving the company in the next 3 years come down statistically draconianly. And the ability for us to retain that individual who is just referred comes up, because someone who knows you who's been in the company for a while, you're not going to -- you're going to have a few bad days before you sort of say maybe this isn't the right fit. So that model works extremely well for us. It means, that our talent acquisition group gets to go out there and look at the best and the brightest. When half of our needs are serviced by our own employees, it helps the attrition. So that sort of -- that works out very, very well for us. We have not had an issue with attracting candidates. We have all-time high resumes coming in, because below all the noise is actually the work that we do. 90% of our revenue is in national security space. We're in seven key markets that are very well funded. Our new employees know that, our long-time employees know that. [indiscernible] So that you all who are investors have to wade through to get to the signal the employees already understand what the signal is, right? We've gotten no stop work orders. We've gotten no program disruption letters. We did handle the executive order on DEI rather swiftly. So everything that could potentially happen has not happened, and that's not by accident, because strategy is a place where this company comes from, and we control what we can control. And we stick with absolute business fundamentals. Our employees also see that in all this noise, you've had the first 2 quarters, we've exceeded all of our goals. We've beat and raised twice. We're on our way to a really solid year. We continue to win business. And will we win that at a choppier manner in the next couple of quarters? Perhaps. But we're not a quarter-to-quarter point. I don't have to win a job by March 30 to start generating revenue in the April, May and June quarter. We're just a totally different company within the sector. I don't need to win a large expertise job to meet next quarter's revenue. In fact, 95% of our revenue is already in-house, 2% is tied to new business and 3% is tied to recompetes. If the recompetes don't happen, we continue to hold that work. So we're sitting here in early February, 98% of our revenue for '25 in a being raised model is already in-house. So it's tough for us to find a threat model that completely disrupts that.

What about '26, how much is kind of in the book already for '26?

Yes. Nominally, it's usually an 85% is in book and 5% is based on new business revenue. Jobs we win in, in the current year that has to generate revenue for us and about 10% is recompete. It's a slightly lighter recompete year for us, David, in '26.

2026.

We can look at the budget and say, so where's the '26 budget going to go. I'm not looking at the $2 trillion or $3 trillion level. I look at our seven markets and where those narrow deep funding streams are. And I'm very confident that we're not going to stop desktops from being at everybody's desk in the federal government. I'm pretty certain we're not going to stop collecting more...

You need more desktops.

Yes. And doing signal collection. I'm quite certain we'll do more versus less network modernization program. So at the level of budget that matters to us, we're very well funded and while we're already working on our FY '26 plan.

Okay. A couple of other things I want to ask, but I want to make sure I get to capital deployment and where your stock price is. So you've historically been a very acquisitive company. You've done share repo, but you've certainly tilted more towards M&A. You've done a bunch of M&A, balance sheet is, I think, a little bit more levered than where you typically want to sit. You talked about restarting open market repurchases. So, how are you kind of thinking, given where the stock price is, your leverage is, how to kind of -- how are you thinking about that?

You answered your question?

No. I'm just throwing it all out there, to see what you buy.

So, we say historically, we're comfortable. We like running the business 2.5x to 3x. We're recently a little under 3x. We have also said at different times that we would be comfortable stepping up for short periods to 3.5x, for things that were compelling value.

Around stock price?

Well, typically, we've said that about acquisition.

Yes. That's why...

Today, though, for a variety of reasons, it's really our shares. So we keep a close eye on our pipeline. We don't have anything of interest that is likely to mature in the next couple of quarters. So when we looked at that and we looked obviously at the share price, the best application of capital at this point is really is us. So you will all know or many of you will know, we have about $337 million of authorization left from an earlier authority. And our trailing 12 months EBITDA is a little over $900 million. So if you take this half a turn or so is $450 million. So we're sort of -- that -- we're not giving obviously explicit direction, but that will kind of book it for you. You should be thinking of $300 million or $400 million kind of activity here. And we are in the market today buying shares.

Let's get to the audience participation questions, if we could. There's one more I want to ask if we have time, but let's get this for sure. Okay. Great. Is everyone here? Can I look for the signal through the noise?

So what we're trying to work on here?

Does it tell you how many have responded?

No.

100% was three people.

Next question, please. There might be three people or four people.

Yes, I'm feeling four.

Wait for this question every year.

You like this one? Here we go. Okay. 4x levered maybe. No, that's cool. We'll consider that a bad info. Next one, maybe on EBITDA, not on earnings. Right. Hourly tweets.

There should be a category on here.

Try to ignore it. John, Jeff, I appreciate the time. Always good having you. Thank you. Appreciate it.

Thanks, everybody.