Jacobs Solutions Inc. (J) Earnings Call Transcript & Summary

Okay. Thank you very much to all of you guys joining by remote video in this new age. We're very pleased to have with us Jacobs. And representing Jacobs is going to be Dawne Hickton, who's an Executive Vice President and Head of the Critical Mission Solutions segment, CMS. We also have with us Brian Shelton, who is the Chief Financial Officer of that segment. And of course, you all know Jon Doros, who leads the Investor Relations effort, who's also on the line. This is meant to be kind of a freer-flowing interview/presentation from Jacobs. And if you have questions from the audience, please feel free to reach out to me via the chat feature that you'll see. I will get to the questions if you ping me early enough in the interview. Dawne, why don't I turn it over to you and welcome.

Thanks, Gautam. And let's just jump right in. Dawne Hickton with Critical Mission Solutions, our line of business within Jacobs. Why don't we just go right to the first slide? This really gives you the high-level corporate overview of what we've been doing lately. So we are delivering on those innovative solutions, and we've had a pretty disciplined execution as we've been driving change in the organization. This really started a couple of years ago when Steve Demetriou joined as the then new CEO, but here we are several years later with a really strong focus on driving towards that top solutions provider. We really have an organization today that continues to grow, and it gets very exciting. And we really -- today, we operate, I think, as most of you know, in 2 lines of business. One we call People & Places Solutions, and then the Critical Mission Solutions line of business. So a really strong focus to engage our employees and to deliver on solutions. And I think 1 of the 4 bullets there kind of say it all, we've continued to increase our portfolio mix, driving toward those higher-value sectors. And then really focusing on this technology-enabled delivery of solutions, the whole world of digitalization. And you see the reports there. I'm not going to spend a lot of time on that, because I really want to drive into Critical Mission Solutions. So if we can go right to the next slide. This slide, from a leadership perspective really tells a very strong message. The classic a picture's worth a thousand words. We've been driving to become a truly diversified organization. There's an incredibly strong leadership team at CMS, really some great folks that work within the organization, from the business unit leaders running our various different business lines to our team that supports, whether it's from a digital solution standpoint or an operating standpoint or an HR or financial standpoint. But also, if you look at it by the numbers, Critical Mission Solutions today has grown to in excess of $5 billion in revenue. We had $385 million in operating profit last -- in our fiscal year 2020. We've got over 18,000 employees in this division, with 53% highly cleared individuals working on some of the world's highest national security priorities. We do, do business in over 15 countries, although a large portion -- certainly the largest portion of our business is located within United States; and then following on that, would be the United Kingdom, a lot of the work we do over in the U.K. and in Europe; and then following on that with the Australian MOD. And we have grown today to have over 50 clients that are in either the U.S. government or other government in civil base. So next slide. What I really want to say about this slide, the most important bullets on this slide I would draw your attention to under strategic, strategy aligned to critical national priorities. And it's really this bullet that says, aligned to the high-priority areas in digital modernization, strategic data utilization, low earth orbit satellites, hypersonics and cyber. These are key areas where we are focused for growth and where we've been driving the business. And you can also see here in terms of the numbers, looking at the right, we've been expanding our margin. This is really a function of our portfolio shaping. And it follows on this key business strategy we've been executing on for the last several years within Critical Mission Solutions. In Q1 alone, our op margin was up 90 basis points from the prior year. And this expansion has really been based upon 3 primary reasons, really. Some of it's the rebid of our current work, where we can add higher-value components to our existing customer base as well as some strategic pricing as we do the rebids, Second, the focus on new enterprise work in the IDIQ contracts, those indefinite duration, indefinite quantity contracts. These also focus on higher-value work and they also bring in improved pricing. And lastly, we're increasing our exposure to shorter-cycle, higher-margin IDIQ vehicles. So while we will continue to have that base of very strong, large, long-term enterprise contracts, we're now driving toward a higher percentage of higher-margin, shorter-term, quicker-turnaround opportunities. We refer to that as kind of a 2-speed approach to doing business these days, and we've actually recently optimized our growth in sales organization, our business development team, to really recognize the strength in going after this 2-speed approach to doing business. And then, of course, that speed too, that faster speed, is really the focus where you see in the cyber intelligence and space ISR world. Some of it also, you'll see in our large legacy telecom and international businesses where for the most part we have the capability to go to that double-digit part of the portfolio that will continue to help drive our overall CMS margins. I'll pause there. Brian Shelton is on the line. Brian, any additional highlights you want to report?

Yes. Just a couple of things, Dawne. One thing that's important for everybody to appreciate is, as we note on here, fairly low-risk portfolio, 96% of it is cost reimbursable, time and materials are lower-risk, fixed-price services. So we don't see a lot of volatility in performance in the portfolio. And then as you can see a good bit of backlog growth. Backlog grew year-over-year by 14%, which is outstanding. Delivered a very solid first quarter, $110 million of operating profit, which was 22% year-over-year growth. We feel very good about delivering double-digit profit growth this year as well for the full year. And to Dawne's point, if you look at the revenue by customer profile, you can see that the intelligence business is now 17% of our revenue and growing our international business. It's growing to 15% of our portfolio. And those are both businesses that are accretive to our current margin profile. And so as those businesses continue to grow in size as a proportion of the overall business that will be one of the drivers that continues to help us with margin performance.

And before we leave this slide, I'm going to -- you can read it, but I do want to highlight our recent customer wins, because I'll come back to those later on in the presentation. But certainly, the Navy Kings Bay win. That was our win there. We credit that with the use of this, IAM, Intelligent Asset Management. And then, of course, new opportunities on our hypersonic test cell design build, and that really plays off the work we have done historically with NASA on creating and managing and operating the wind tunnels. And then, of course, I'm going to talk about our 5G buildout opportunities and how we're taking that not just to build out across the country and different countries, but how that applies specifically with respect to a recent win opportunity we had with the NYU Hospital. And most exciting, and again, I'm going to save this for later, but we'll talk about the launch of Mango One and then certainly, this satellite intelligence solutions that we're providing for the Air Force. So more to follow as we go through the slides. So next slide. I really wanted to highlight the deliberate journey we have been on and that we're going to continue on as we grow this line of business. And it really dates back to, if you look at the organization, just a few years ago, while we had a core base of capabilities, a lot of those were operations and engineering and facility support. And then the first real acquisition that started to change the direction in kind of a more deliberate, strategic manner was the acquisition of the FNS business from Verizon. And then we did 2 bolt-ons, Van Dyke and Blue Canopy, which moved us into the cyber space. And then, of course, the much larger acquisition of CH2M Hill, while the majority of that acquisition today resides as an integrated part of the People & Places Solutions business, it brought to Critical Mission Solutions our whole North American nuclear operation, and there is some work not only with nuclear remediation, but nuclear [Technical Difficulty] as well as the work we do with weapons sustainment. I am getting a little background noise. I don't know if anybody else has dailed in, [ but I'll ] pause there. Okay, great. And then, of course, KeyW. Hardly seems like it, but not much more than -- a little more than a year ago KeyW really catapulting us into that Space Intelligence world, C5ISR, also additional Cyber & Intelligence capabilities. Then Wood, and perhaps the most unique thing about the Wood acquisition, we closed that deal 2 days before the world literally shut down. I was over in the U.K. with some of my team to do our celebratory town hall and welcome our new employees into Jacobs and had to literally get on a plane and get home before I'd be locked out of the country. What's exciting about Wood? We were able to do that integration completely, virtually and I have to say, it may have been one of the most successful integrations we've ever done, really has brought a great team to the organization, allowed us to continue to grow the work we do, not only in remediation, but also with weapon sustainment and nuclear new build, as we think about energy transition and where Jacobs can play in that market. And then, of course, even more exciting -- of course, these are all exciting to me -- but the most recent excitement comes with the Buffalo Group, which has really taken us to that next level for Cyber Intelligence and Space intelligence. And I'll talk a little bit about that in more detail. But you can see this journey. And we didn't continue the arrow on the bottom, but instead of a J on the bottom, I'm going to tell you there should be an arrow because the journey doesn't end today. So next slide. I spoke a little bit to this, but this really highlights. If you go back really before this deliberate journey, you can see our existing capabilities. We still do all of that today, but it's really the [ 0 6 scanned ] capabilities you see on the right. Again, getting near that C5ISR, nuclear, cybersecurity, information technology services. The facility engineering and operations using that intelligent asset management and then, of course, technical engineering services and really taking it to that next level. And when you think of it's really been these last couple of acquisitions that have brought these new capabilities, some of it added greater scale, the Buffalo Group to the ISR capabilities, including space ISR. And this is where, again, later on, I'll highlight that Mango One Space radar payload launch where we were aboard the SpaceX Falcon 9 Transporter at the end of January. So very exciting to be able to bring those expanded capabilities. Go to the next slide. And don't forget Gautam, you can interrupt me here, so it is not just me talking all the time.

Well, I'm happy to do so. Actually, I was -- I felt badly because you were on a roll. But I wanted to harken back to a couple of slides ago when you talked through the margin expansion, and you're right. I mean, over a couple of years, the margins have really picked up. I am curious though about the comment -- maybe Brian made it on intelligence and one of the other end markets allows for better margins. Is that because of -- it's a different contract structure, i.e., you go from cost-plus to T&M or fixed price? Or what is it that's allowing the greater pricing in some of those other verticals that you highlighted?

I would say that -- a couple of things. One, as Dawne talked about, it's partially work mix. So in the Cyber and Intelligence business, we tend to bid a lot of programs that are medium to good-sized programs, but also a lot of IDIQ vehicles, where we do task order work. And we have a mix of cost reimbursable and fixed price services work in those businesses. And so it just allows us to generate a stronger throughput of margin, and it has created a better balance in the business overall, but it's also going to serve to continue to help us with margin expansion. Again, as those businesses become larger contributors to the CMS business as a whole. And what I just said about the Cyber Intelligence business is also more or less true in our international business, but obviously, it's a U.K. business serving public sector clients and commercial clients. And so it's got a little different attributes than the core government business and favorable margins as a result.

And also, I'll just follow-up on that, Gautam. I mean, in some respects, if you went back to the capability slide, it's the difference between doing ops and maintenance, and doing highly sophisticated cyber technology, cybersecurity, C5ISR work. Some of it, we will continue to do those base capabilities, but it's adding on much higher to the goal and at the end of the day more profitable business.

Okay. And, Dawne, you also mentioned -- I think it was referenced on the slide the Kings Bay win leveraged some of your intelligent asset management capability. And I think this -- I wanted you to explain this a little better for our purposes, because it sounds like more automation, but I don't know what specifically is the IAM offering? And does that also help kind of accrete margins over time?

Sure. And maybe what we can do is why don't we jump ahead for the time being, if you can, to Slide 10 for me?

Okay. Here we go.

So let's just jump -- yes, let me just talk a little bit about intelligent asset management. This is proprietary technology to us. And, Gautam, you've heard me say this before, but sometimes it is a little bit easier for me to explain things in specifics. But it's the ability to take and digitalize used data to improve the operations and the maintenance of a very large-scale facility. So our first foray into this was at the Langley NASA site. And you think you have a multiple square mile site with a lot of operations, a lot of equipment, whether it's generators, running the wind tunnels. Highly sophisticated equipment running a very large site that these pictures alone on the screen show you the size of some of the sites we are today doing. In traditional ops and maintenance, you have a large-scale team of people running around, making sure everything is running properly. So with IAM, we are able to put sensors on the systems, collect data, and use predictive analytics that will help provide a much more sophisticated approach to operating an asset and in doing that, we have been able to save our customers anywhere from 20% to 40% of their annual costs on maintenance. It's predictive in how you can run a facility. So if you think about it, instead of your car, the oil maintenance light on your car automatically it was programmed to come on every so many miles, our analytics will actually predict when you really need to make that change. We can determine in advance when a piece of equipment might fail and needs to be addressed, and this new technology that we've been using, it was really a key player in some of these recent new wins we've had by being able to go out into the marketplace and offer a capability that allows us to take additional market share, but also offers a solution to the customer. And it's really going into that world of digitalization of the assets. And so you can see how we've been doing that, working it through some of our existing customers and some opportunities with some new customers.

And your point is, like these are fixed-price contracts, these are kind of outcome-based contracts, I would imagine, right? Is that...

For the most part, and this is an opportunity for us to improve not only our margins, if you will, but also benefit the customer at the same time. So it's really a win-win.

Okay. Can I ask -- sometimes we think of the traditional competitors to the CMS segment as being the public companies like CACI and ManTech and competitors to the legacy KeyW and what have you. But I'm curious, in this space, in the IAM space, who are your competitors? Is it a different group of the competitors than are the traditional bill-by-the-hour guys?

So I'm going to answer that slightly differently than how you're asking it. So this is a differentiator for us to use IAM as we go after this business and win it. The traditional competitors in the old-fashioned way of doing this business are not the Leidos and the [ indiscernible ], so like a PAE. This is an opportunity for us to differentiate ourselves and provide a new solution that's really taking it to the next generation solutions.

That makes sense.

Yes. Yes. Let me go back a couple of slides to where I was. Gautam, if you can continue on that, another one. One more, yes. Okay. Right. So I just wanted to talk about our different markets we're operating. So you see in the civil market. This is primarily where you see our NASA work as well as the work we do for the U.S. Treasury, the Department of Education, the Patent and Trademark Office. So you've got a pretty strong annual revenues, over $2 billion within our civil market. Large portion of this, as you can see around 8 of the 10 NASA sites. And then a lot of the work I talked about with the hypersonics and building thematic and [ indiscernible ] facilities. And then lastly, some of this is within our Tier 1 nuclear operations. In our defense market, that's a low, slightly over $1 billion, where we're doing a lot of war fighter support work. A lot of work with the Department of Defense and really trying to drive opportunities within defense. Now one of the areas here is we recognize that under the Biden defense budget, we expect it to remain pretty flat during fiscal year '21. But for us, we're really operating in those worlds where the administration has a priority, protecting the U.S. from internal and external threats. And then preparing for that increased rivalry between the U.S. and the China relations. So we see this as a great opportunity here, continuing to grow with our technical solutions. If I could go to the next slide. I've spoken a little bit to this with our intelligence market and how we've been able to grow this market. Some of this growth has been organic, but this has also been played up with the acquisitions between KeyW and then the Buffalo Group and opportunities to grow this business by bidding on those IDIQ facilities. The vehicles that allow us to have those quick wins and increase our customer base. So today, we've kind of thrown it on the right-hand column. But today, we're operating in 11 out of the 17 intelligence agencies. So a real big increase to our customer base in the intelligence world. And here again, within that market, we believe we will be benefiting from increased defense spending as this is a high priority. When you think of something like the SolarWinds hack recently, this is where there is a huge focus by the current administration in the United States. And it's not just -- we're not just in the U.S. with our intelligence market. So if you think about it, our allies around the world, the Five Eyes opportunities, as we think about protecting the cyber -- protecting our infrastructure from a cybersecurity standpoint.

Okay. May I ask -- Dawne, may I interrupt and ask 2 questions related to this? If I recall, in the defense side, there were some big chunky new contract pursuits that CMS is pursuing. Is that right? I mean, I thought there were some big ISR opportunities, some weapons system sustainment opportunities.

There are. We continue within our defense sector to go after -- we do a lot of work on the -- we do work on the test ranges today. We're one of the leaders in that arena, and we continue to see expansion opportunities in the test ranges. We are going after some additional pursuits. And our ability to bring that software development and skills training and a technology -- higher-level technology approach is what's driving our continued pursuit of those larger-enterprise opportunities.

And within these submarkets, do you have a sense for, like, over the next 2, 3, 4 years, which submarket will grow the fastest for Jacobs and what that confers to margin, if you could speak to that? If you were to rank order, civil versus defense versus intel, commercial, international. Like what are the effects of growing...

Certainly, the trend today is our Cyber & Intelligence market is on a huge growth trend. And I would expect that to continue. But a close second is really our international market, because while we're calling it international market, it encompasses some of that cyber intelligence from a Five Eyes perspective. And then frankly, the commercial market with the strength we have in 5G and identified with our relationship with not only AT&T, but Verizon and DISH, and some of the other players, I think that's a growth market over time. Certainly, our civil market is already pretty large. I mean, we're already on 8 of 10 NASA sites. So that will grow. But again, since you've asked me to rank order, I'd put the intelligence market and the international market kind of on that higher faster growth trajectory at the moment.

And PA Consulting plays how with CMS when it closes?

Yes. Thanks for asking. That's a great question, because I think there was some misconception that PA Consulting was really a play that supports only our PMP's side of the business. But in fact, we see there's synergies across the board. And we're really excited because from a CMS standpoint, today, PA Consulting does a lot of work with the U.K. Ministry of Defence. And we've even had opportunities before this announced acquisition, where we have worked together with PA as partners in pursuing business and in partners and actually winning business. And so as we bring them into the family, so to speak, we see this as helping on our digitalization journey, and there's opportunities for us to continue to partner with some of the solutions they provide. And now we'll have even more capabilities we can offer to our existing customer base as we look at that ongoing relationship.

Okay. That's helpful.

Okay. I think I've probably covered everything on the slide. I mean, I didn't really speak to commercial, but you can see it there. We -- there was a little bit of -- certainly during COVID, the 5G implementation was a little bit slow, primarily because of getting access onto sites, but we're seeing that start to pick up. So we're really excited. Next slide. I thought it would be helpful to really just highlight kind of 3 opportunities, although I've already talked to one of them. So that was the Intelligent Asset Management. But really, when I think about the journey we've been on, this is a nice story when we talk about our space solutions because with -- we've been a leading provider of space solutions with our relationship with NASA. But when you think about it, NASA alone, we've got over 5,000 employees working on these sites. We bring strong strategic engineering, technical and mission IT and communication capabilities to our customers. And we're really excited about a lot of the work we do at the various NASA sites, whether it's working on a payload out of our Houston operations or getting ready for a launch out of Cape Canaveral. Very large opportunities for this long-term when you look at this. But there's also other initiatives that sustain this portfolio when we think about what we do across the board and how these capabilities can play out. And this is where I also wanted to highlight the recent launch of the affordable space radar payloads. So we launched Mango One. That was one of the 140-plus satellites that was -- it went off Cape Canaveral on January 24 off the SpaceX Falcon 9 Transporter-1. We were part of that mission as a rideshare launch. And this was an opportunity for us to showcase and to demonstrate our qualified radar communications and intelligence capabilities in space. And so what we've been able to do through the acquisition of KeyW is become one of these key providers in this arena, bringing 25 years of airborne and terrestrial radio frequency synthetic aperture radar technologies into this payload hardware and processing. So this is really exciting that we've been able to launch this. And we are today still communicating with space, if you will, as we continue to test this out. So this is an opportunity for us when we bought KeyW. We see it continuing to grow, and we continue to see major opportunities there.

Dawne, on that MangoOne opportunity, I was wondering, do you guys actually have a customer for this now? Are they -- is like DISA or some other agency -- ?

So there is a customer, but the customer is unidentified.

Okay. So there's a -- it's a classified customer as opposed to a commercial customer?