CACI International Inc (CACI) Earnings Call Transcript & Summary

Thank you very much. All right. Terrific. Thanks, everyone, for joining us this morning. My name is Gautam Khanna, TD Cowen equity analyst. I cover CACI and a number of aerospace and defense-oriented companies. We're very honored to have with us the leadership team of CACI International, John Mengucci, who's President and CEO; and of course, Jeff, who we all know is CFO. Of course, always on the calls and explaining all the complicated stuff.

But I wanted -- we only have 30 minutes. So I want to be efficient and just -- if you could just talk at the open, we're getting a lot of questions on the volatility we saw in the stock yesterday and in the market broadly. Any concerns that you guys have? And what's sort of your response to what you saw?

Yes. It's the reason why my IR team says, do not check the stock on a daily basis. But look, we're a long-term growth company. So we treat everything that we do with that -- through that lens. Yesterday, I think, was another example of being compared against companies that we share very little alike with, frankly. We can't change our NICs code overnight. So we're a government services company. Everybody expects these certain things from a government services company. So this is who you compete against. Whether that's true or not, this is -- that's the bin that we're in. And sometimes when bad news hits a couple of houses in the neighborhood, the whole neighborhood goes, right? So no, there's no concern about what we're doing. We're very focused on the fact we're a free cash flow per share growth company. We are very, very focused on taking top and bottom line growth to drive that additional free cash flow. We're an over 60-year-old company, understands the mission very, very well. And in the next 27 minutes, we'll be talking about why understanding the mission is so important. There's -- I think there's a lot of factors involved as well. There's AI and there's software company models. And we said that we're a software-first technology company, software equals software machine trade, right? So -- but I'm sure we'll have time today to talk a lot about of these things.

Yes. And just to that point, because that seems to be a theme is AI as a potential threat to the business. And I wanted to just see, what do you think about that? We've heard that as a threat to enterprise IT work, software development. How big of a threat is it to your business, if at all? And how do you use AI?

Yes. So we've said for quite a long time -- we transformed this company a number of years ago, at least 10 years ago, to be an outcome-based company, not a company that sells inputs, okay? And that was a polite way of saying the days of us selling people to drive the majority of our revenue were going to be done. And we said that -- definitely said in 2019, if not earlier than that. So the first premise is I'm a government services President and CEO who talks about delivering less and less people as the company gets older and older and older. So we have been the beneficiary of a lot of technology, AI being one piece of it, large language models is another. We've been able to bring AI in to do exactly what I think one analyst report from yesterday talked about, which is could it be a threat to one segment of our market, which is enterprise IT. In the enterprise IT space, to hit that one directly, you use AI to remove the transactional steps of having to keep someone's network up and running. Okay? So in that regard, AI is a positive to us in that we're able to take individuals out of the equation and drive better reliability from someone's enterprise network from their desktop all the way through the enterprise, through all the information. There's other areas of our business we brought AI in that's looking to allow us to get efficiency up. So if you look at all of the space-based and airborne imagery data that's collected in a average day, about 7% of that gets looked at, the rest of it gets dropped on the floor. We and our customers believe we should be able to process more, but we can't hire thousands and thousands of people. So you bring AI in, you bring large language models in, you bring computer vision solutions that can preprocess that data. We still can't get through all of it, but the message there is we want you to become more efficient. Okay? So when I read things about lowering the level of revenue because we do enterprise IT and AI is going to take over enterprise IT, it's not even factual, okay? If you are dependent in your enterprise IT solutions, which is 5% or 6% of our entire company, if you're dependent on delivering people, the news flash was in 2019, the government wanted to buy less people and buy more tech, okay? So that's what we did. So we made all those changes. So if you look at the deflationary impact that AI has on a fraction of our market, it's de minimis. We moved there in 2019, '20, '21, '22, '23, '24, '25. We're in '26. All of our financial plans are put together, assuming we're going to get more efficient, we're going to deliver less people. That's what I said in 2019. That's what's driven great free cash flow growth. That's what's driven great revenue growth. It's enhanced our margins. So we're delivering a lot more technology than we may have done 10 or 15 years ago, but that was the plan. The other side of that equation is we don't bid on jobs where the customer is asking for just people. It's not a -- selling a commodity in this market is just the recipe for lower margins and having to recompete more often. So we left a lot of the aspects that made me nervous out there. So I think AI is a huge positive to us, helps us support our customers, much more efficient manner. And our win rates and our financial performance really bears that out.

And just on software development, if you could touch on that?

Yes. So we -- a number of years back, I was talking about if we're going to be a software-led technology company in the national security space, we need to make sure that we could develop software using commercial processes. So companies like GitLab that allow you to do test and retest more efficiently, bringing AI in so you get better code understanding to do documentation to do test and retest, all great things. But you can't be a company because you're a national security or defense contractor, you've got to generate -- you got to build software like this, okay? The second way was moving to agile software development because the customer was telling me -- and we witness it every day around the globe -- the threats are changing on a daily basis, not on a whenever a program ends, then changes how they work and we go back at it, right? So there's that time dimension. What we aren't is a license-based software delivery company. We don't deliver a license to the federal government because the mission changes, and you've got like 2 buyers for that software. You only have 200 million buyers. So I got it that the software sector is going through some -- that has no relationship to what it is that we do. Software doesn't equal software, okay? Licensed software is one type, building specialized software for the federal government using commercial practices, which you should hear in that is a very nimble high-tech company, building software as fast as commercial companies do that to address a mission that's constantly changing. In our market, that's a huge differentiator. It's a large barrier to entry for other companies to enter into that because you got to put quick software development skills, combine it with 60-something years worth of mission knowledge. And that's why a lot of commercial products don't work in the national security space because they don't have access to the highly classified information. They don't have the large language models that you all help us create because you text each other and you post photos. The intelligence community just doesn't work that way. Can we use the technology from it? Yes. Can we use an off-the-shelf model for it? Not in all cases. So we're able to differentiate and deliver better.

It is interesting because oftentimes, CACI gets lumped into the public peer group. And I'm curious, like who do you actually run into most often when you compete for a new...

Yes. So yes, a lot of our technology offerings, we are going up against companies -- depending on what everybody is called today, right? It's tough to tell aerospace and defense companies from defense tech companies from commercial companies. We've sort of put even more piles out there, right? But those are the companies we've competed against since we got deeper on to the technology side. And why is that? Because we're going after the same missions that traditional aerospace and defense companies were at. We're already in missions that some defense tech companies are taking a look at. But we got into that in a very different manner, a much more agile manner with a software-first model without wanting to be the long-term OEM of whatever it is that we're delivering. We will default be the long-term supplier because we're putting new software baselines on a hardware device handheld, backpack, rack-mounted mobile. It really doesn't matter. But the threats have got to be things we can handle with quick software enhancements. So that's who we compete against. I can tell you that we don't compete in other areas because we don't deliver people.

That's very helpful. Actually, I wanted to touch on that or give you an opportunity to give some examples because you've talked about how high military OPTEMPO has kind of played to CACI's quick development time lines. What are you guys doing in EW right now? Just -- if you could give the audience some examples of what you're actually doing in the battlefield?

Yes. So electronic warfare is a term that should encapsulate -- when you hear cyber, that's electronic warfare. When you hear signals collection, that's electronic warfare. It is literally doing nonkinetic cat and mouse games in the electromagnetic spectrum, moving zeros and ones around, not dropping munitions, not targeting munitions. But how do you rid of threats in a low, no collateral manner using nonkinetic means. In a really simple state, if you want your cell phone to call me and I'm tired of getting your calls or I don't want you to call, I'll very quietly stop your phone from calling mine. Done, right? And to take the phone away, didn't have to confiscate it at all, just make my life easier, just don't accept signals from that individual. I'm making this really simple because every other example we have is highly mission specific.

Not simple.

Right. And whether that's in space or whether that's on the ground or whether that's in the air, it doesn't much matter. And it's why we talk about things that we do are in the electronic -- in electromagnetic spectrum. So it's electronic warfare. So when you hear about people doing offensive cyber, that is taking care of a network or a device in an offensive manner without using munitions. It's a non-kinetic way of handling that. That's what we specialize in. So when we say we're a company that's $2 billion of electronic warfare today, and we did just about 0 starting in 2019. And we have great growth rates there. It's generating fantastic margins, as it should, because we deliver a lot of this as a commercial item, which is in line with the administration is at. Those 3 parts of our solution make us highly sought after.

I was going to say, who do you actually compete against for that type of work? Is it the OEMs that manufacture?

A lot of it is the OEMs. A lot of it is also folks that have a partial -- a piece of that solution. I can tell you on the technology front, who I'm not competing against are the government services companies that are out there. I'm not. Jeff, anything you want to?

Yes. No, almost very, very rarely in the marketplace do we meet the people to whom we're traditionally compared.

Right. No, it's -- and I was going to ask you also just because you've talked about what makes you guys different from the peer set from what you're comped. Talk a little bit about the business development process and how you've sharpened that over the last x number of years and how this new budget may actually play to some of your strengths.

So -- middle of the last decade, when we looked at where does this company go next, right? We're a 60-something year-old company. And every 10, 15 years -- we actually look at it twice each year. Where is the market going? What's our strategic direction going? Where do we aim this company next? When we said we wanted to deliver less people and become more of a technology provider, that's a material curve. That's a material turn. So you just can't say that. There's a lot of companies out there that say that it's great to buy billboards and put really great quips out there. We do that very little. We do the hard stuff, which is do we have the capabilities to be successful in this market so our investors get rewarded. One of the areas we had to completely revamp is our business development team. We have a team -- our entire financial management team had to be revamped. How you sell and how you manage programs you're delivering people is draconianly different than how you manage a high-end technology delivery schedule and how you sell that into your long-term set. Our strategy was to take a 52-year-old company that we were then when we started and believe we have some pretty good credentials. We had a track record of delivering, even though more of that was delivering people. We always met our people delivery commitments. You didn't hear the CEO then saying it's bid at a price that I can't find people to go deliver, that's sort of a new one now. But we had to retool business development. Business development in the entire process is, our mantra is we bid less to win more. And you bid less to win more because you only submit so many high-quality bids. You have some of our pricing models in our indirect cost. I only have so many pricers. I only have so many capture folks. So if I try to push 40 bids through them versus 10, the odds of me winning, they're going to actually decrease, not increase. The second part of that is how we go about bidding. We will work a program 2 to 3 years before the customer has thought about it. Okay? A lot of that is just shaping the future. It's shaping the customers' knowledge, right? We always want to deliver to the smartest customers out there. So you make them smart by -- you share with them the art of the possible, you share with them what the possibilities are. We spend a lot of our own money. This is where this administration has caught up to where we are. You should expect companies to want to invest in what they strongly believe in. If you understand the market and you have the right technology, you should be willing to invest. So invest ahead of customer need, put that with a model that we're going to bid less to win, win more and a model where we're going to shape what that looks like when it comes out. And we're spending money working with that customer. Customer intimacy matters. So it's changed that entire market. That's what drives win rates. That's what also drives long-term recompete win rates because customers know we're willing to invest ahead of time. And when you deliver in your own private lives, you do it every day. We just don't talk about it with the stock price around it, right? We all go to people who deliver, and we all go get competitive bids, and we all try to be as competitive as we absolutely can. But the business development model is very different. We're not looking to place a lot of bids. We're looking to place well-placed bids in areas that are highly regarded by the federal government and very well funded. And that model has worked.

Yes, the shaping is important. The targeted investment is important. And one of the things John doesn't talk about quite so much, but is also a critical part of it is the discipline to say no. And when things come up, you say no, it doesn't fit. That's not in the book.

Yes. It's interesting because your margins -- CACI's margins have also kind of graduated up, and now we're at the high end of the "peer set." When you look at what you have outstanding with respect to bids or what's in your near-term pipeline, is it -- would it be kind of consistent with that level of margin that you guys are doing? Or like I'm just curious, how you're seeing?

We see, which we've communicated in our targets, and we'll take advantage of the opportunity to reiterate those here. We see continued modest expansion. The real story about margin for us, though, is balancing with the objective of increasing free cash flow, balancing investment and growth. So if we have the opportunity to generate greater cash flow with slower growth, we'll do that. If we can maintain the margins, not expand them, but grow more quickly, generating more dollars, we pick that route. So the decisions that we make every day are with our hands on those levers. That's right. So it's free cash flow per share is the North Star.

I'd also say that our EBITDA margin is pure. It's EBIT, and it's DA. It's where you're going to see a long page of adjustments that we've done, right? Take $20 million of M&A expense, but we decide to do an M&A, we decide to add that expense, it's all in there.

Right. So no add-backs of stock comp.

There's no A.

No.

Yes. No, I got you. It's definitely a cleaner presentation. It's interesting. We've seen other companies in the sector, if you will, get dinged by DOGE, get dinged by tweets. You guys have been pretty resilient to that. I'm just curious, like how would you describe your relationship with the DOW, if you've had any opportunities to interact with them? And kind of their procurement reform efforts, how does the company, in your opinion, align with that?

Yes. So two different pieces there. The first piece is quick. It's -- DOGE was sent out to do what DOGE was going to be sent out to do. I'm not here to debate whether it was successful or not. It was a concept. I think in some areas, it worked well. We use DOGE as if there was ever an independent auditor of the fact that we are different than the rest of the folks in the sector. I would have thought that might have been -- like in some police departments, they call that a clue, right? That, geez, we lost less than $5 million or $7 million of work we were doing across a $9 billion corporate spend and revenue. That should be a clue that we don't do a lot of consulting. We don't sell an awful lot of people. We don't do a lot of things that DOGE was looking for. We actually are a technology company, technology-first company that delivers, and we're going to be in this marketplace for a really long time. So that was the first part. The second part on...

DOW procurements, changes that they're...

Yes. Look, I think what we're faced with today is we have a -- the way the government works in national security space is administration is coming in, it doesn't matter whether it's an R or D, it really doesn't matter to us. But the administration coming in and saying, hey, all we hear about is you all, whatever group of people that is, you deliver late. You cost more money than what you're supposed to cost, okay? And you're not really agile when the threat changes, okay? Well, you bought a 12-year long program, you bought it under cost plus and you make thousands of changes after you say you're not going to make any. There's nobody at fault in there. That's just the facts of it. For the administration coming in, it's -- well, why don't we change the way we're buying? If the threat is going to change all the time and long-term programs don't really work for us, then let's sort of change that. There's a number of different things that the Department of War and intelligence community has done. They're all -- some are further ahead than other parts of the United States government. OTAs is another way of the national security customers to be able to buy things. It's a little different model. That's a you invest and we invest. We'll see how it goes for a while. And if it goes well and it's a product that we can use and you can update it continuously, we'll go into a full rate production immediately. That is a breath of fresh air to a company like ours. Okay? We're not going to spend 3 years on the requirements, 2 years talking about how we're going to build it with a lot of oversight and consultants involved. We're going to put -- both put money in. We know the mission, and we're going to go deliver it. So in those worlds, that has worked extremely well, okay? And it drives great productivity and allows software-based systems to be able to change. So in that regard, it's done really, really well, and that does differentiate us.

The OTA mechanism really fits our model really well. And if you think about some of the things John has been talking about in terms of shaping and investing ahead of need and collaboratively working before you get to the meat of the program, that really is exactly what they are. And in fact, we've seen 2.5x the number of OTAs in the last 2 years that we saw in the prior 5. And I think we have 40 or so active at the moment. So it really -- it's a procurement -- it's an acquisition strategy that really aligns well with our priorities.

And it doesn't fit every model, right? It's not -- we're not going to fix everything. Some things, you're going to break, and they have to go back and back and fix. But at the end of the day, what I'm really focused on -- because we're a mission-based company, 40% of our workforce are veterans. So we understand when you say the word mission, it actually means something. And that is that you've got to be able to be dynamic in what you're delivering because the threat is going to continually change. And the fact that we can deliver that with different acquisition models works really well for us.

I was going to ask, like what is the best example of an OTA that you're delivering under that has turned into something much bigger than anyone thought it was at the beginning?

There's a number of them. One is there's a U.S. Army program in the electronic warfare area where that program belonged to a major aerospace and defense prime. They had a 5.5-year development schedule. We built some kit and approached them about 6 months into that window. We approached the government customer and said, "We think this is what you're looking for, how does this work?" And they said, "We like that a lot better than waiting 5 years." So let's sign an OTA. We put some money in, the customer puts some money in. 6 months later, it's a $0.5 billion production program. What's important isn't the number. What's important is how fast both sides went from a concept to an absolute war fighter need to delivering. And it's a model that also continually enhances what that product. So if it did 80% of it, in another 6 months, we'll get to 90%, 95%. By then, the enemy forces will change their tactics. We need to make more changes to it. So that's a perfect example of how a customer moved from a multibillion-dollar multiyear program, right, long, well overrun, not able to change to something that was more -- much more dynamic. And our company does that day in and day out.

Makes sense. That's a great example. I was curious, we haven't talked about ARKA, and I did want to give you the opportunity to do so. So ARKA, a big acquisition for the company. And what are you most excited about? How is this going to help bolster the capabilities that you were lacking, I guess? I don't know if you were actually lacking them. Just augments them, but...

Yes. Well, look, we serve 7 markets across the federal government. We have for a long number of years. We're very -- we have a maniacal focus on staying in these 7 markets. Why the 7 markets? Because they're national security, #1. They always have bipartisan support. So you won't see us in the federal civilian space a lot because it's rare that they get full bipartisan support. Just -- you go to where the money is stable and you can actually deliver. And the work that wasn't in that manner, we've gotten rid of over the last 7 to 10 years. So ARKA is an example of our acquisition strategy. We're a highly acquisitive company. Those 7 markets, we look for the gaps. ARKA fills a fantastic gap for us, which is in the space market. We are in that market today. We build optical terminals, and we do a lot of optics work in space, basically moving data. Instead of using radio frequency or RF, we use optics. It's really hard to do. It's not for the faint of heart. But when it works, it's awesome because the ability to jam is nearly impossible. And that's what tomorrow's space force needs. Having the fact that we deliver that to a lot of commercial and A&D satellite primes, the next extension is how do we get to the larger payloads that are on these that have got a long-term use. ARKA is a 60-plus-year-old company. They've been doing EO/IR from space as well as space-based radar. They're responsible for a lot of the GEOINT collection missions. But they did a unique thing in that they got ahead of everyone else, and they were able to bring Agentic AI into the ground side. A lot of stuff gets processed up in space. It gets sent down -- it gets captured in space, sent down the ground. And then there's software that processes all that information, what all those zeros and ones mean. They were able to get an authority to operate on the operations floor to bring Agentic AI in to make quick use of that data. We, as a company, CACI, we're on the signals intelligence side of space. And so the absolute phenomenal ability to now take the GEOINT pictures and the signals pictures and blend those things together to give warfighters much more actionable information, it would be similar to me giving you a map of downtown D.C. And other than a map, give you all the cell phone traffic, everybody who's shown in those maps. You make much better decisions if you've got more ints, more information about what's going on there. So the ability for us to take their Agentic AI models and move those into another part of our business across all 7 of our markets is massive for us. We did the acquisition without cost or revenue synergies. And also, all the numbers you hear are -- we just acquired that -- the asset there. And it builds a much tighter relationship with both commercial and traditional A&D satellite providers. So great market, billions of dollars being spent. It adds to our gold and Golden Dome set of capabilities that we can deliver and also is very germane to $150 billion of defense of the homeland as well. So a good market move, a good technology move to a 20-year-plus forward-looking market, and it's very well funded.

And accretive to earnings and growth -- or to EBITDA margin and growth rate right away. EPS accretive or neutral in the first year, accretive in the first full year. So really kind of ticks all the boxes for us.

That makes sense. I have to ask some technical questions, like very nuanced ones because people ask. You guys have given guidance for the fiscal year, which ends in June. And in that, there's kind of a bit of a step increase sequentially in the fourth quarter relative to the third. Could you just elaborate on what drives that?

Yes, there are a couple of things. First, let me say, if it needs resaying in light of some of yesterday's chop and noise, we remain very comfortable with the guidance that we articulated in our second quarter earnings call. So we talked about the next quarter's revenue being roughly in line with consensus, $2.3 billion. That remains the case. We remain comfortable as well with our guidance for the year and feel very bullish about our 3-year IR Day targets, which we also talked about. So break, break. So what I just said, for the algebraically inclined, you will see a tick up in the fourth quarter, which is your question. So there's a couple of pieces to that. The timing of some of the EW technology deliveries is part of it. We have a number of programs recently won that continue to ramp that have steps in the fourth quarter. NCAPS is one. EITaaS continues to accelerate. That's part of it as well. And then we also have the beginning of some early reconciliation funding where we're starting to see some growth in some of those areas as well. So those are really the drivers of the third quarter to fourth quarter step.

Got you. And JTMS was another one, right? Was that...

Sorry, I should have mentioned that. The JTMS protest, where we prevailed, also is starting to accelerate actually in the third quarter and will continue to in the fourth.

In the fourth. And then just broadly on the bookings environment coming out of the shutdown, how has that trended in the quarter? Are you seeing much?

Yes. There are a couple of things. The bookings -- the acquisition structure of the government has been one of the slower, stickier areas to restart. It takes a little bit of time, obviously, for that to happen. The actual revenue activity we've already talked about was relatively unaffected. Cash flow bounced back pretty quickly, payment offices opened, things kind of got back on track relatively quickly. We didn't see any real disruption, other than a few weeks to cash flow. But the awards -- the acquisition process has been a little bit stickier. If you look at the awaiting awards number -- and I'm going to refer now to some of the data that we shared in our second quarter call, which is still germane to us talking about this question. The awaiting awards number, relatively flat, which you would expect with attenuated awards activity. And then when we talked about the pipeline and what we expect to submit over the next 180 days, you see a pretty pronounced step up, which, again, consistent with things kind of getting back to a more normal tempo.

Yes. One other thing worth saying, we're not a hand-to-mouth company. We've got 4 years of backlog, okay? We've got exquisite looks as to the duration of the contracts we put into backlog. The average duration of those we put in recently is approaching 6 years long. So it's not as though we have to be awarded this quarter. I have coined the term awards are lumpy. I don't much care whether they come in on March 30 or April 3. You all may, I don't. We're a long-term growth business. Every time we can add to backlog, it's a positive because these programs last 4 to 6 years.

Yes.

So it's not so much of a pronounced revenue hit because awards are not being awarded as quick as it used to.

Well, we're at time. So I'm going to adjourn here, but thank you very much, gentlemen.

Yes. Thanks for having us. I appreciate it. Thanks, everybody.

Thanks again.