CACI International Inc (CACI) Earnings Call Transcript & Summary

All right. We're back with Cantor's Global Technology Conference for our Government Technology and Space Track. I'm Todd Canfield, Cantor's government technology and space analyst. We have the pleasure today of having Jeff MacLauchlan, CACI's CFO; as well as Jason Bales, CACI's CTO. So it should be a good conversation today. Thank you for joining us.

Great. Thank you.

Of course. So I assume all the investors have read the forward-looking statements, we'll get right into the questions. So just first and foremost, as we think about the latest government efficiency impacts in the business, how are those impacts tracking in the quarter? And how has that impact varied by CACI's end market?

Yes. So let me first say that as we have said several times over the last couple of weeks in similar kind of venues, the disruption to our business has really been minimal. We had a couple of contracts that were early on the DOGE Board too. One of them turned out to be over and the other one was nearly over, but was a very low level of activity, $1 million or so a year of revenue. We did have a number of contracts on the GSA list, 8 of them we're in the relevant NACS codes at the risk of geeking out for everybody. Those are the codes, types of contracts that the DOGE activity is focused on. Two of them accounted for about 90% of the volume of the 8. They were both mission-critical activities that were kind of quickly defended by our customers and removed from consideration. So we're really very -- only really minimally disrupted by this and don't see anything at this point that gives us pause relative to our guidance for the year or the 3-year targets that we established last fall.

Brilliant. And if we think about the moving within this year's guidance outlook, if you can maybe talk us through kind of what are the swing factors and sensitivities, the big moving pieces that you're assuming?

Yes. For the current year, again, it's going to be -- we expect everything to be fairly uneventful. About 95% of our fiscal year '25 revenue at this point is in backlog. About 3% of that is recompete or 3% in addition, is recompete, meaning that about 98%, we have a really clear view on to the extent there's any delays or any disruptions that recompete sort of continues, only about 2% to win, which is a relatively small amount at this point in the year. Couple of other wildcards that we've gotten a few questions about continuing resolution. Our guidance for the year accommodates a CR. So a full year CR would all be a nonevent. And again, we don't see anything that really gives us any pause for the year.

Got it. Got it. You mentioned before, just no disruptions of your longer-term targets. If you can maybe just for the investors in the room as well as on the webcast, refresh us around what your long-term targets are?

Sure. So what we said last fall in our Investor Day was that we foresaw over the next 3 years, high single-digit revenue growth, mid-11%, mid-11s EBITDA margin and $1.6 billion of free cash flow. And significantly, none of that free cash flow, the deployment of none of that free cash flow is contemplated in the revenue and margin guidance. So that represents upside to the targets that we laid out.

Right, right. Turning over to company exposure, if you want to maybe talk a little bit about kind of some of the buzzier topics. Maybe update us on the size of your space business today. How large is the relative revenues across geospatial analytics satellite manufacturing and satellite communications? And then maybe talk about some of the other stuff too.

Yes. Jason will want to expand on this, but a few overview items about our space business we're really positioned in our space business to think about it in terms of a contested domain. So if you think about analytics of overhead imagery, think about optical comm terminals. Those are really the activities that we're focused on, and they're related both to security and also processing and analyzing Intel data. We're not probably going to -- we won't be giving any specific sort of size references to this particular part of the business, other than to say that we've kind of previously disclosed we have some ramp-ups in the optical comm terminal production, where we expect to be 6 to 8x units delivered relative to last year. And it's an important and growing part of the business. But I'm going to defer to Jason to talk a little bit more about some of the specifics of the things we do in that area.

Yes. Thanks, Jeff. So I think in terms growth in those areas. The photonics area is still a big place for us, and we're putting -- continue to put investments in moving. We have relationships with SDA, with NASA Space Force, where we're put -- we're developing to put those optical communications up [indiscernible] space. Continued growth inside that area is in the counter space domain too. We do a lot of play in like Jeff said, in the overhead kind of analytics of imagery data. But also in the mission management of the space-based assets and extending that to the counter space domain. We've actually taken a lot of our software from other domains and moved it into create stuff like a remote modular terminal, which was an orbit space for us -- for the counter space area. So a lot of growth in that domain for us.

Sure. And maybe digging into that a little bit. I think the dynamics that have been occurring within the space supply chain have been challenging. And I think that a lot of people have work to gain confidence that things like LYNX can scale. So maybe you just want to talk about kind of digging a little bit into that -- digging a little bit deeper into that, kind of how you think about scaling that business and the level of kind of manufacturing supply chain pull ahead and the like?

Yes. We are in that area, as I mentioned, ramping up production, significant to note that we are the only U.S. manufacturer of space-qualified optical comm terminals to the FDA's spec and we have done both air-to-ground, air-to-air and what's the third one? Air-to-air, air to ground and ...

Underground? Well, space to space.

Space -- interspace, right? Sorry. So we're the only one -- we have demonstrated interoperability in all 3 of those required domains and the only one with U.S. manufacturing.

Got it. Got it. And then maybe if you can provide a similar context around the level of kind of direct energy exposure, CUAS for people in the audience that's counter on crude air systems. That would be just kind of helpful in thinking about where you think the real growth shoots are in that business.

Yes, I'm going to let Jason talk about counter UAS, but it's a very important part of our portfolio.

I mean the key there right is with counter drones. We've been doing counter stuff for over 2 decades with the full group. If you think of the size of the drones from the small stuff you buy at Best Buy to the nation state stuff whose wingspan is the size of this room, right? That's group 1 through 5. And we've been doing the full group 1 through 5 for over 2 decades. We've got thousands of systems deployed all over the world doing national defense in that space. And we see a lot of interest nowadays in bringing that back to the homeland, right, with Iron Dome and Gold -- now Golden Dome in that space. So we're well positioned to pivot towards Homeland Defense whereas historically, we've been kind of world defense on that side with the nation there. So it's an important part of our field. I would like to say, we've also built not just the systems themselves, but also the backbone that disseminates that information to the war fighter for near real-time intelligence. So bringing that, expanding that to the Homeland Defense is something we're well positioned to pivot into.

And really, like all of our technology solutions. The key component of that is the software defined and the flexibility that comes from it being a software-centric kind of solution.

Got it. Okay. Turning over to maybe the margin side of house. As we think about company's cost, cost plus exposure, can you maybe just size what your latest cost-plus exposure is and how the team thinks about its ability to do more fixed -- fixed price work?

Yes. We, this year, are about 60% cost type for about 30% fixed price, about 10% time and material, which is kind of a hybrid. It gives us an opportunity to make some money on rates, but we also have some exposure about the time and material that are expended. The margins this year, our guidance is low 11s. Obviously, with the 3 years in the mid-11s, that's an increasing metric for us. There are a couple of things that are going on in there. One is growth. It's really driven to a large extent by growth in our Spectral and Azure acquisition recently and the mix that, that brings with it with some greater profitability.

Got it. And just tying that theme together, if we maybe think about how investors think about. So I think one of the things that folks have been kind of concerned is cost-plus conversion to fixed price and the ability of management teams to kind of manage that risk. If you can maybe just talk about kind of how you think about the comparison of CACI business to like a commercial IT business and why that comparison doesn't necessarily hold?

Well that might -- there might be 2 things in there. Let's unpack that a little bit. The first, I would say -- the first point I would make is we like fixed price business where things are logically priced and executed under fixed-price contracts. Outcome-based performance is our preference, and we have steadily moved the business in that direction. More of technology side of the business is already in that direction. The business model, though, relative to commercial software companies, the second part of your question is a little different. The commercial companies are more sort of arriving with a finished product sold as a service. Our business model is a little different, and we think a little bit better received or more customer friendly and that we generally are interested in developing fielding systems where we have open architectures, where the government owns the data, the government is able to use the systems and the data as they like. And we're obviously well positioned to manage and improve, enhance and evolve those systems for them, but they're not necessarily locked into a particular approach or structure. It gives them really the maximum flexibility. And the open architecture aspect of that, in particular, we find that they find appealing because it gives them the flexibility to add things and evolve as threats evolve. I don't know if I missed anything.

I think the big theme takeaway there, right, is that we have developed the ability to bring commercial applications and pull them through into the defense and the national space can produce mission outcomes, right? And build, like Jeff was saying, we build our applications on top of those commercials and tailor them towards the defense mission and that's really about the big value add that we bring in. So we can bring that speed and that velocity of the commercial world to produce mission outcome, that's a big focus for us.

Got it. Got it. And maybe kind of digging into that a little bit further. If you can just kind of -- you know what we have, Jason, if you can maybe talk about kind of the evolution of open architecture systems, where we're at now, where we used to be and where we're going?

Yes. Yes. I would -- historically, this gets kind of to a hardware software kind of balance as well. The -- whenever you brought new capability to the defense, a lot of it was kind of a closed box. And so every time you needed to bring a new capability to the mission to handle a new threat, you're bringing a new box. And the soldiers backpack was getting the too full, the humbies were getting too packed, right? It was too hard. As we've migrated over time and focus on -- as CACI's focused on an open architecture, we've been able to kind of reduce those boxes and collapse them down into a nice set of hardware that's flexible that we can continue to just do software updates on top of. But then also make that -- so that's great, right, because software lets you move rapidly for the threat, and that's the focus we have on acceleration. But then also building it with an open architecture, meaning that you can drop in third-party capabilities. So now we come and we bring commercial partnerships to the table. And we're bringing commercial capability, and we're dropping it right in, right? We're bringing other partners in the defense and we're dropping their capabilities in. And then we can help act as an integrator, but also get rapid capability to the field because it's a layered approach for national defense and you got to bring all the players to the table.

Sure. And maybe in the vein of that question, we'll do one more on the subject and move on. But forcing kind of the level of competition within the space. I think the previous iteration of tech coming from Washington was something the mid-2010s and the kind of outcome there being largely beneficiary for the [ GovID ] names, right? We were able to kind of benefit from better productivity, better efficiency and assigning the right head count to it. So within that vein, if you could kind of maybe talk about how much of this time is different versus this time is just good for CACI?

Yes. I think it falls back again to the concept I mentioned earlier about how we've pivoted ourselves towards the portfolio, bringing the 60-plus years of our company's kind of expertise in mission space, bringing that forward. And over the last decade or so, establishing ourselves as a technology company that is informed by that expertise, right? So we're informed by that expertise, and we're pulling in commercial capabilities through in commercial, not just capabilities but tools and processes, our agile methodologies, right? So we're basically presenting ourselves with the best of commercial for defense mission outcomes. That's our focus, and that's what making us different in the past. We're continuing efficient and have improvements to the customer.

And so well, I was just going to point out our partnerships with organizations like GitLab, AWS, the whole DevSecOps framework is a big part of that. So we are very active with several prominent commercial software providers for tools and skills.

Got it. Got it. Maybe switching over to government budgets. If you can just provide the latest on what we're hearing with respect to D.C. and government budgets and then breaking that out by '25 and '26.

Yes. I probably can't do that super specifically, but I can make a couple of general observations. The first one is that our revenue this year will be about $8.5 billion with a $250 billion TAM, total addressable market. So we really are not in a position where top line budget in and of itself drives a lot for us. And a key part of our positioning in our portfolio and the work we've done over the last number of years is being in areas where we see enduring need and solid, stable support bipartisan support for budgets. So if you think about things like signals intelligence, we've talked a little bit about counter UAS work in the electromagnetic spectrum, optical communication terminals and a number of other items. These are areas that generally are not super dependent on top level top line budget decisions, which often have a lot more to do with platform rates and volumes and a number of other factors. So you really have to get a level or 2 into it and say, okay, the total budget is the noise, the signal is areas of the budget where you can see specific moves where we generally have fared pretty well. We've actually grown reliably in growing budget environments, declining budget environments and flat budget environments. So -- it's more about where you are in the pieces of the budget in our view.

Sure. Sure. And again, maybe something that investors probably don't appreciate as much in CACI's resilience. But if you just -- your past experience navigating shutdowns? And what kind of lessons you learned from the past? And if this time is any different, it seems like we're not going to get one this time around, but it's always a tool in the toolbox.

Yes. We feels like we probably won't. But again, as you say, no, it's not done until it's done. We generally have fared pretty well in this regard. The 90-plus percent of our revenue that is security and intelligence has enjoyed a fair number of exemptions from specific shutdowns. And even in the case of actually suspending the operation of the government, we have a number of areas where we're directed to not stop working. So there's a little bit of pressure from that. Again, our guidance would not be affected by a relatively short shutdown. I mean if we were shut down for a few days or a week or so, it would not have an appreciable effect on us. An extended shutdown, obviously, at some point, it does become more impactful. And we'd have to see that where it is. But it doesn't feel to us like we're on trajectory at this point.

Correct. Right. Maybe going back to that TAM number you provided and talking to the underlying budgets, I.f we look at FY '25 request as maybe the proxy, but commanded control budget is up roughly 40%. Intel growing well, IT growing well. So maybe talk about kind of where you expect to be most sensitized to and where you expect to be the fastest growth?

Yes. I think I would -- the numbers that you quote obviously are correct, but I think I would probably also focus on the items in the supplemental budget where Congress is about to add about $300 billion, $100 billion or so for defense, $200 billion or so for Department of Homeland Security. I say or so because there are slight differences between the House and Senate versions, but there are tens of millions of dollars a part there with an easy, relatively straightforward conference resolution range. But on the order of $300 billion about to be added to places that are right in the middle of where we live.

And just maybe for the clarification of folks on the webcast, the supplemental you're considering is in addition to the base budget. And so the way you want to think about that is if we have an $800 billion or $900 billion defense budget that $100 billion goes on top of that, right?

Yes.

So maybe triangulating on that. What have you kind of heard in terms of the duration of spend. I think we go back to the Infrastructure Act is kind of the big other supplements, obviously your other supplemental is related to war fighting. But what is the sort of duration that we've heard on that $300 million?

Yes. I think that's still an open matter between the 2. We've heard in a number of cases, that it's expected to be sort of 2-year money. So I think this year and next.

Got it. Got it. So a pretty substantial growth rate off of the base, I would say.

Substantial.

Got it. Versus market expectations of cuts. So we'll see how that shakes out. As you consider kind of capital deployment, how do you think about kind of visibility around government budgets and efficiency efforts and how that interacts with shareholder returns?

So our capital deployment strategy, which many of you that follow us have heard us talk about this before is -- remains to be one of flexible and opportunistic. We are serial acquirers. We make regular acquisitions. The opportunistic part of that means in some years, we've done 3 or 4 in some years, we've done none. We have also, prior to this quarter, we've repurchased over the last several years, about 12% of our outstanding shares, I'd say, prior to this quarter because in this quarter, we have also been in the market with an open market repurchase program related to $337 million or so of an earlier authorization and so we have bought back some shares this quarter, which obviously will disclose at the end of the quarter. So we're very much focused on flexible and opportunistic. I don't think we probably have acquisition targets in the near term. That can always change, but the valuation volatility, in particular, makes for difficult sellers these days. Sellers process multiple contraction more slowly than new buyers. So I'm not sure that we see opportunities in the near term but we certainly remain interested in being acquisitive. Our acquisition program very much gap focused, very much grounded in strategy. We don't buy bulk. We buy to fill gaps in technology, gaps in customer footprint, gaps in experience rather than just sort of -- we're not in the business of just adding volume.

Appreciating there's maybe less of a full pipe in terms of near-term capital deployment. But maybe if we turn it over to Jason and get him involved. What are some of the capabilities that you want the most? And how often is Jeff saying no, because of price?

Jeff is a good guy. I think it's still what investors want to hear. So Jeff made -- I want to first emphasize the point that Jeff made, right, is like when we do look for opportunities and things. We're looking to fill gaps, right? With the acquisition of Azure Summit Applied Insight that we pulled, we filled some of our major caps recently. So we feel we're actually in a good strong position where we're pulling our portfolio together to go out in the really strengthen our competitive position in the market because that's important to us. In terms of areas that we always want to grow inside of, right? Obviously, like I said, and I'm going to hit it again, right, bringing kind of the fast commercial capabilities and the defense outcomes. A lot of that today is AI, right, the generative AI space. So we're always looking to bring new capability in there. We build our applications on top of the commercial AI so we're not in the business of making AI, we're in the business of applying it to the customer outcome. So that's an area that we're always paying attention to. But for us, it's more about developing the partnerships, with the commercial entities, like we talked about AWS, right, GitLab. We have partners, a slew of partnerships, and we're always looking to increase those partnerships to be able to bring kind of their investments into the government space.

Got it. Got it. And then turning back over to Jeff. As we think about return hurdles, what are some of the metrics that you contemplate with M&A? And how do you think of kind of the cash dynamics of technology versus expertise, acquisitions?

Yes. Look, we should spend a second on that. We talk a little bit about the leverage levels in which we'd like to run the company. And we generally like to have a sustained kind of 2.5 to 3x trailing EBITDA leverage. We find that, that gives us based on the opportunities in our pipeline, in particular, that gives us sort of the right combination of enough leverage to be a positive influence to our weighted average cost of capital but also gives us enough flexibility to be able to hop up and make acquisitions generally in the size range that we're looking for. So once you do that, obviously, at any given time, we obviously have a WACC, weighted average cost of capital. And so then our process is really more premised on evaluating the relative returns of acquisitions share repurchases based on market conditions and available targets. And so that return decision rather than being a specific point is more often kind of a relative one. We're obviously not doing anything that doesn't generate returns pretty comfortably in excess of our WACC on a risk-adjusted basis, but we're able to balance those 2 together and weigh the relative returns and then execute accordingly.

Got it. Got it. And then digging into that statement a little bit, as we think about kind of your risk adjustment process, maybe high-level conceptualize kind of what are the 3 to 5 points that you look for or run the ground as you risk adjust an acquisition? I know we focus more on kind of the conceptual financial but actual operational risk.

So obviously, like most serial acquirers, we maintain a view of our acquisitions for some number of some period of time. Often, it's significant to note that if we've done our job well, within a year or 2, you sort of can't find them as they're assimilated. But we generally have a pretty good idea, and that gives us some solid rules of thumb around things like integration synergy savings and our track record relative to business cases, particular opportunities that we may be better positioned for after an acquisition and we keep sort of a track record of that. So we're -- there's a feedback loop built into our process that we use as we evaluate acquisitions in particular.

And maybe just staying on it while we have it up here. Any sort of dynamics around kind of deal structuring that you want to call out, earnouts and the like that you like to use? How do you think about kind of keeping folks on and keeping them motivated or keeping them incentivized?

Yes. We have done transactions both ways with and without earnouts. It's usually a sort of transaction-specific item. It may be related to founders. It may be related to being able to bridge a valuation gap relative to uncertainty in a business case. We use it in a number of ways. We have a pretty decent track record of doing it. I personally am always a little bit slow to come to earn-outs because as an acquirer, there's an element of control that you see when you do that for obvious reasons because you're holding an acquired entity, responsible for an outcome. And so you can't always integrate them as aggressively as you might like. But we have a pretty -- we have a good track record and use them selectively in certain cases and certain times, it's the best way to bridge a gap or keep someone interested for some period of time.

Sure, sure. Going back to your repurchase matrix. If you can just kind of talk about how we think about that rubric in greater detail and then kind of the level of how you think about debt versus equity financing within the business. I think multiples come up. So obviously, less relevant, but interest rates are high and that can be expensive and there's always kind of ways to structure it.

Yes. So once again, you've asked a question that has 2 or 3 questions. There are a couple of things. First of all, in evaluating share repurchases, we obviously keep a close eye on market conditions and have a view of what near-term volatility might look like and whether or not there's an opportunity to be opportunistic around that. We also obviously pay a lot of attention to our own internal intrinsic value analysis, which frankly is not much of an element in the decision these days. So it's quite a bit higher than anything -- anywhere we've traded in recent history. But that's obviously an element in that. Leverage is -- leverage is something that we're kind of more inclined to use than equity. I think situations where we would use equity are probably for particularly strategic items where it was important to the counterparty. We're not necessarily focused on -- I've learned to never say never. But we're not particularly focused on large transformative sort of things, which would be cases where you would be more inclined to use equity. We're not particularly focused on that or don't see any particularly compelling options there. So I think we'd be more likely to be debt financed in terms of transactions.

Sure. Sure. Circling back on that a little bit. As we think about kind of the -- like the dynamics within your -- I guess, we'll say like your visibility versus scale and like your ability to need scale. I know you -- CACI has never been that's needed scale before. And if you go back to kind of the genesis of the scale conversation, you can make that argument that it's had positive and negative outcomes. So maybe talk about kind of how much are you hearing the need for scale nowadays and how does that kind of reflect on your M&A strategy?

Yes. The areas that are of the most interest to us, where we see the most opportunity for growth and returns and opportunities to add to our free cash flow per share, which is our ultimate figure of merit. We -- we're not scale challenged. Jason alluded to our counter UAS position, which is a particularly important one to us, a couple of thousand deployed locations. We're the largest player we have a really strong track record execution-wise. I mean they are not -- we have the 3 largest agile programs in the government, our enterprise modernization is an important part of the portfolio. We have, I think, 7 large network modernization programs underway. So I think if you decompose your question while $8.5 billion sounds like a relatively small defense company, if you look at the areas of interest to us and the areas where we play, we have a significant footprint. I mean I don't feel -- I don't feel disadvantaged by size in any of those areas where we participate. I don't know, did I miss anything.

I think that's good. Well, in the last 60 seconds, is there anything -- 70, 70 seconds. Is there anything that you feel that we've missed or that we should follow up on?

I would only -- I would add that I think if there is a silver lining in our current situation here, environmentally, macro sense, I think we're going to have an opportunity to see how divergent the businesses in our sector have become. And I think the companies that we often are compared to as peers, not in a judgmental way, that's a fine business but we've become very different businesses. And we often find ourselves sort of being painted with a broad brush and sort of compared to companies that aren't actually much like us these days. And so I think there's an opportunity here for us to be able to sort of see that because you're going to see, I think, that many of us will be affected differently obviously, by some of the administration's current activities. And so I think that may actually help with the broader investor understanding of our portfolio and our position.

Great. Well, thank you for joining. Thank you. Jeff and Jason.

Thank you. Sorry, I used all the wrap-up time.

Thank you.