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

All right. Good afternoon, everyone, again. Welcome back after lunch. We're very excited to have Jacob Solutions with us. With us are Claudia Jaramillo, who is the new CFO, Jacobs, EVP of Strategy and Corporate Development. Before that, Jon Doros, who is the VP of IR.

As I walk over here, Claudia, maybe I'll just ask you like your first impressions as the new CFO of Jacobs has gone through significant transformational changes. Bob is the new CEO, you're the new CFO. So can you talk about your first impressions? And do you have any thoughts on how you evolve, augment or change the strategic direction of Jacobs?

Thank you, Andy. I like how you start the question, highlighting the transformation. And that's because I see a lot of opportunities with that through the portfolio transformation, Jacob's positioned its core sectors and these spaces where you have secular growth and you have these macro trends that are driving the growth. And it's really our core sectors, and you can see them on the slide. I know you see the energy transition playing a big role. Critical infrastructure and we talk a lot about IIG, IRA, but that's also playing a big role in Australia and in other countries where the modernization of the infrastructure is a huge factor in advanced [indiscernible] national security. So already, the portfolio transformation, big foundation, and I'm very happy to have that foundation to build upon. And then we have the accelerators that are really what we show with the strategy. And the accelerators, when you think about the accelerators are more the opportunity to enhance growth and margin improvement, driving growth in the margin. And it is -- when we think about climate response, you hear about climate response in many different places. Is it sets governments, companies that have pledged net zero, so you have opportunities everywhere and also to mitigate risk is the resiliency that we play a role there. Data solutions with the recently created divergence and is really applying the data that we create and generate through our domain expertise and consulting advisory. They all connect well. When I put all that together, which are the opportunists and the good foundation that I see, my focus and same as Bob is really bringing all that together and execution. So it's still an operational discipline. We have a good strategy. Now it's about executing on that strategy. And the execution and the discipline also applies to the capital deployment. So when we think about effective capital deployment, always thinking what is the risk adjusted return and what are we going to do when we make those decisions? Is it the capital that we have, how we deploy it and always thinking through the shareholders lens. So lots of opportunities. But again, it's a lot about leveraging that very good platform and the good foundation that we have.

It's very helpful, Claudia. So I know we're going to talk about it more when we talk about PPS, but maybe just addressing sort of what you just said, like climate response. And if I think about ESG in general, it seems like it's accelerating in terms of growth. Maybe you guys could talk about sort of what you're seeing on the ground in terms of the projects because obviously, your growth in PPS has started to really improve. It's one I think it's IG, but maybe it's more sort of this underlying sustainability focus that you guys have.

Yes. And thanks again. It's a very interesting question because we tend to see the big thing. So people thing climate response, energy transition, everybody sees energy transition for many different reasons. Is it because Europe dealing with is not only transition, it's energy security. It starts with energy security, but you also see -- I mentioned the companies that have pledged net zero that have their own sustainability plan published. Many companies don't know how to make that a reality. So what do they do? They go to companies like ours to say, okay, you are experts in this field. We have been working on this for many years and CH2M, the acquisition of CH2M a few years ago was a big addition to our portfolio in that respect. So we see that companies needing help for that. It's also the resiliency. It's the aspect of I'm more exposed to climate rising sea levels, winds, hurricanes and all that. So your help and we do a lot of coastal resilience, for example, those are solutions that we provide. Those are also opportunities. And then the design and planning of cities, infrastructure in general, the element of how do we make those designs and the engineering more -- or more resilient to those changes is starting to play a huge element. Now to make that more tangible, we went to a number that we highlighted in the rollout of our strategy was $6 billion. We recently published our ESG report is that the equivalent is $7.7 billion. So the opportunities are there. And are there in multiple places, even recently in the Eastern Hemisphere, we have been participating some very interesting projects around that.

Got you. Let me be clear on a couple of things, right? So the $7.7 billion, what is that now just versus the $6 billion? What are you saying by that?

So the $7.7 billion is if you take a project where you have the elements of sustainable or the project as a whole has elements of sustainability, we include that revenue.

Got it. So you've changed the sort of definition a little bit. Got it.

Is the whole taxonomy that we get from the bottom up. And as the project as a whole is considered.

We aligned it to the UN sustainability goals. Is a third-party taxonomy to align it. So it's not Jacobs making the call today.

Yes, that makes sense.

Third party.

Yes, that makes sense. And then Claudia as a new CFO, you kind of inherited what happened last year, the sort of guidance, all that kind of stuff that's out there. So a, does it a good view? And then b, like can you update us on your progress, the 7% to 10% sort of CAGR that Jacobs is aspiring to over the next couple of years?

Yes. So we're not commenting on '24, '25. So we're really focused on '23. So I'll comment on growth and the drivers and so on. So I'll start with P&PS being our largest business. So P&PS had a slow start, but then it accelerated. And we have many tailwinds that are helping us and are expected to play out for several years to come. And by that, I mean IIJ, IRA and even the CHIPS Act. So if you see the most recent quarter, we reported 13% growth on a constant currency basis. And if we look at the outlook that we provided, we're expecting P&PS to be in the range that we have in the strategy. So that's a very good opportunity, and it is looking good. We feel very good about P&PS. The second one is PA. So PA, if we go back to last year, they grew double digits. And this year, we also see the backlog, for example, it was up 24% on a constant currency basis. And we're running PA, the way we're running the resources and the additional resources are focused on getting double-digit operating profit growth. So really long-term views, and we are quite positive about the outlook and the backlog all the underlying demand. So those are the 2 businesses. Now I focus on divergent and CM. So there are some actions to take there, divergent being the first one. We are projecting very strong growth in the second half of the year, so double-digit growth. And the drivers of those -- of the growth are really a lot linked to infrastructure. So that's more -- when you think of divergent, there is a big part that is linked to national security, cyber and intelligence. And then the growth that we expect in the second half is more linked to the infrastructure piece, and we see that in the second half of the year. And then CMS is that's where we need to focus on in terms of the execution to make sure we align with the growth.

All right. So let me ask you a couple of follow-ups there. So P&PS, again, you talked about the strong growth, right? So I think you did 8% net service revenue growth even with FX as a headwind and your guidance longer-term guidance is 6% to 9%. And I don't think IIJ is ramped up that much yet. So do you see the potential to sustain maybe towards the higher end of the sort of longer-term growth, especially if FX starts working a little bit for you? Like what maybe is trending a little better than you thought if IIJ's ramping up a little slowly?

So you have within P&PS. So again, I want to -- while it's not the largest part of our business, it's still a very important business, the international piece of P&PS. So that's -- if I put IIJ and IRA and IIJ because IRA is not the funding is not flowing yet, is the international piece is one and the other one is the advanced facilities. And advanced facilities, we have several things working in our favor and expect it to play out for quite some time. What are those? Life sciences is one. And 2/3 of advanced facilities is life sciences. Last year, we had a lot of semiconductors, and we still see that. And those drivers are a lot linked to geopolitical reasons that are driving the national security element with reshoring some of these facilities. The other one is also our customers changing business models. One of our main customers decided to become a foundry that in the past wasn't so that is effectively you're designing, engineering a lot of these facilities. So that really -- if you look at last year, the growth was very positive. And even this year, you continue to see that even at the end, the demand of the user is in there. So again, it goes back to modernization of infrastructure that is also taking place in other countries around the world besides the U.S. and then the ones that are linked to life science semiconductors. And the last one that I forgot to mention is EV. Those are quite a few drivers...

Quite a few. So I do want to ask you -- let me ask you first actually about Jacobs is not thought of maybe like it should be as more of an onshoring play in the U.S. And again, what you seem -- like maybe talking about that customer who want to build a foundry, like are you seeing a lot of examples of global customers sort of means of saying, like Jacobs, help us redesign something here in the U.S. because we got to be closer to supply chain. I know semiconductors has definitely like that. But I'm -- I think we all know about semiconductors. So in life sciences, maybe like that, but EV is a good example. Like what's your role in sort of the EV battery proliferation, for example, that we're seeing in the U.S?

So we are playing a role there and not only in the U.S. and Europe as well. So it's very important, and it goes back to our understanding of the science and the engineering and just in general, the business of our customers. So the moment they start dealing with that, and they start preparing plans for that, they go to us and say, we need to help. Now whether it is for reshore or simply just put in place or build something and design it because they need additional capacity, just new capacity, which right now in life sciences, I would say, is the new capacity that is playing a bigger role.

So I mean, I think we -- most people believe that semiconductors were strong last year, maybe slowed down a little bit this year. But then if you talk to -- you said 2/3 of your business and advance life sciences. And then -- so if I think about the business, right, and I say, okay, semi-conductor is maybe slowing down a little bit. Does everything else kind of either consistent or getting better? Like how would you define it?

Life Sciences, definitely. If you look at some of the latest FDA approvals, there are very good opportunities and some that are like materializing now. And I would like to highlight, for example, one that we capture because of PA, where PA was the main strategic partner of this pharmaceutical or biotech customer, and they were advising them and then PA needed an execution arm and they say, "Well, we have Jacobs. And this company is planning a few facilities around the world. So that's more our customers actually have a lot of cash that they got through different medications that they got it and now they need to employ that capital. So that's -- the driver is different. It's either because of recent FDA approval, in some cases, being proactive about deployment of capital. So it's -- the phases may be different -- and it's also important to highlight, it's not only the U.S., Europe, it's also playing a big role.

Yes. So Claudia you've highlighted international several times already. So let's talk about it. So I think of Jacobs is pretty strong in the U.K., Middle East, maybe Australia, you tell me like where are the hot beds, if you may have activity and sort of what's going on over the next couple of years? Because, again, you're almost highlighting international more than your highlighting U.S., which I find interesting.

I'm highlighting it more to say...

Don't forget about it.

Don't forget about it. You're right. And I would tell you, there are things happening in the Middle East -- you may have read about the Giga projects in the Middle East, which did very well in the energy transition. The energy transition sustainability. These are projects that are expected to go on for a while. They're quite, let's say, futuristic. So you have at Australia is also having -- we have some very interesting renewable and the refresh modernization of infrastructure, you have New Zealand, you have Germany, Israel and some of those are chips as well, Ireland, so EV will also have Scandinavia. So you have quite a few, but is the diversification of our portfolio that is interesting. The same core strength is just the customers are probably also thinking of the value of diversifying their own footprint.

And how do you evaluate the visibility of the international opportunities versus the U.S.? Because like we all see and we're here, right? So we see the IIJ, IRA and like this stuff, it's hard to sort of see everything that's going on in these other places. Like how do you guys get good visibility? And what is your visibility compared to the U.S. in terms of continued growth, to these other places?

Yes. We look at opportunities through the lens of the strategy. So we look at them through the pipeline. We have presence in all these countries, and we have a global delivery platform. So even for some US customers, we deliver with teams that are in different parts of the world where the expertise is and when the ramp-up is very fast, we have the ability to tap or use those resources in the different countries. So visibility is there. We have teams in different countries. They can be redeployed or they can work remotely depending on the conditions that the customer has. But the reality, for example, the EVP of People and Place Solutions, it lives in Australia.

Interesting.

So we have a big presence in the U.K. Now the U.K. also covers Scandinavia. I know I mentioned Germany and all that. So you have a well-distributed coverage. The reporting is -- they all report centrally. So we have backlog and pipeline and all those element to...

Yes. And then you guys have mentioned that you're starting to see some funding from the bills here in the U.S. So maybe talk about the ramp-up period that you guys expect. Do we have the people we need at the state and local level to actually distribute the funds? Like what does the funnel look like if I go out, let's say, over the next 2 to 3 years, and sort of "some ramp up?"

So I'll let Jon talk about it because we had our government...

Yes, our Head of Government Relations is with us yesterday. But I think maybe just stepping back, I think IIJ was just a huge piece of legislation. I think everybody, the whole industry got very optimistic. We saw this huge amount of money, almost doubling in size, billions and billions of dollars and we all knew that the U.S. infrastructure is in dire need of a refresh, and we want it to come as soon as possible. The reality is the state and local municipalities just weren't staffed up to deploy that money at the speed I think everyone wanted to that. They've gotten stepped up. They've kind of parsed out the bill. Some of that money is formulated. A lot of the Department of Transportation money is flowing through as we speak. And that in the next couple of phases are hitting right now. So I'd say, from an IIJ perspective, you're going to start seeing it start to accelerate. We're seeing some specific examples of that. And then from the IRA's standpoint, the inflation reduction act which is more around the energy transition, we're going to see that start to hit in the next couple of months. And the difference between those 2 pieces of legislation is the IIJ is more kind of a recurring type of spend over the next, call it, 5 to 10 years depending on how it flows through our P&L and on to the market, but the inflation reduction act could be front-end loaded just in the way of set up. So you could start to see some significant amount of money going towards solar, some other pieces of the energy transition as early as by the next 12 months.

Jon, maybe you can talk about the renewables exposure you do have, like how -- what role would you play from IRA funding perspective?

I know everyone wants to say like one specific thing, but the thing is we're touching the whole life cycle. So if we start off and say, we're consulting people and saying, how should you think about sustainability for your community. We're doing EV battery facilities designing them. We're doing EV charging stations, both from an engineering standpoint and then from a Software-as-a-Service standpoint with our StreetLight Data platform, where you're looking at data analytics to determine where should you put these EVs charging stations. So it's really the whole life cycle all the way to program management of potentially like an offshore wind farm in the East Coast that could be a job that Jacobs would pursue.

Got it. Helpful. So Claudia, maybe I'll just go back to like you talked about PA Consulting a little bit. So let's talk about a little bit more. Backlog has been strong. Revenue has been strong in constant currency, but margins have kind of been not as strong, let's say. And so what should we be looking for as investors to sort of monitor like the health of PA Consulting, if you may? And well, let me just ask that question and you tell me?

Great question to help everyone have a reference. So the short answer to your question is we're managing PA to deliver double-digit operating profit, at let's call it 20% long term. So it's not only 2 quarters. It's not only 1 year, it's long-term double-digit operating profit around 20%. Now...

On a growth 20% profit.

No, 20%...

Margin. And then double-digit profit I just want to clarify.

Yes. And thank you for clarifying -- we don't want to...

You set a new bar.

Yes. And then now you need to help me again.

That's fine.

Then I'm going to answer the first part that you say, how do we tie that to what is the last couple of quarters. And the demand has been very strong. It's still in backlog. The most recent update over 20% backlog growth on constant currency basis. And if we go back to -- I mentioned this before, on the growth and all that, if we go back to a year ago, the business was running at very high utilization levels, unhealthy. -- unhealthy for different reasons. The people that work there, can we retain them and we keep running at very high utilization levels. And also, you miss a lot of opportunities in some cases. So the business started adding resources ahead of the opportunities. And what happened is in the second half, they were impacted by macro events. The most visible one was the U.K. government with all this volatility that you have. So the opportunities were there. The backlog is there, which means we have a contract signed and what changed was the burn rate slowdown. And to make it clear, what do you mean you have a contract and the burn rate is not really you're going from the contract to how fast you build and compared to revenue it's slower. And it's really linked to -- for PA, the largest market is the U.K. and the U.K. government, it's agents is a big part of that, and that's really what happened. So while they were adding resources, utilization dropped because the consultants are waiting for the customer to assign the task quarters linked to that, and we took action and now it's a matter of those opportunities and the burn rates absorbing the resources that we're at it.

Claudia, what's your confidence that Q1 was the bottom for you guys in terms of margins?

I think because of holidays and all that more than Q1, we're confident that we're going to go back to 20%, and we're ramping up.

Got it. And I often get the question of, well, because again, I'm an industrial and so it's hard to sort of monitor a management consulting business in a sense and so I think the question, well, you look at PA, half of it could be cyclical. How do you respond to sort of that because, again, like the U.K. seems to me like it's already bottomed out, but I don't want to get too excited about that because I'm not an economist, I'm industrial, how do you guys think about the portfolio that PA has?

So first, it's always good to step back and say, why did we acquire PA or the investment that we have in PA. So a lot of the connectivity that it has, ARA is one very visible example, energy transition. So it's really the connectivity, especially with P&PS, where BA will work in the boardroom will help companies define their strategy, then P&PS will be the execution arm very complementary. And the business model for the deal, PA is delivering -- is way ahead of the business yield. So if you look at it, even with the last 2 quarters, it's ahead of its business model, its delivered, I'd say, over 20% in '21, double digit in '22. So then you say, okay, what is the cyclicality? It is, it does get impacted by some of these macro events. What the benefit that PA has compared to some of what you could call peers is the first one is they have this very large presence with the U.K. government being a strategic partner is one. And the second one, they translate ideas into tangibles. And by that, I mean they can deliver products, they deliver codes in the sense that they deliver software and so on. And the NHS in the U.K. is a very good example. So they went from I have this scope of work, you have your framework agreement. Now the government is asking me to reduce my spend. Okay, PA I need your help to reduce my overall spend. I'm going to repurpose your contracts. Help me digitize my workflows, so I can reduce my spend. So that sort of elasticity and their capabilities to be able to execute or to implement compared to many management consulting companies that don't have the ability to implement that makes them less exposed to those cycles. But again, the investment thesis is more with how being together with P&PS the company [indiscernible].

And in that vein, like how do you assess the rollout of PA into the U.S.? Like how is it going?

It's a huge growth opportunity for us. This is -- it's still under scale. So it's really bringing all those capabilities and the huge position they have a premium position in the U.K. to do the same in the U.S. It's a huge market and PA is still underscaled.

Got it. And then I forgot to ask you one thing on P&PS that I think is important. You did have really strong margins in the last quarter, over 14%. And again, it doesn't seem like it still seems like you're relatively early in whatever you want to call this infrastructure cycle. So what's going right there? And is there more opportunity for margin improvement from here?

I do think we have with the operational discipline and the higher utilization of your resources with the growth going there. There are still a lot of opportunities to start with the growth opportunities, the additional enhancement that you can have an enhancement, I mean, growth and margins by using data solutions, where you raise your entry barriers and you're also decoupling a little from the having to at you want to grow 10%, you need to add 10% of people in that business model. In this case, you're adding street like data, some of the divergent solutions, you're making the model more efficient, and you're also amplifying the value that you're delivering in terms of the customer, improving their efficiencies and reducing their costs and so on. So we see good opportunities in P&PS.

So Claudia I want to ask you about these other businesses, but let me step back and ask you one big picture question before again to the other businesses like, again, as a new CFO, just your opinion on this, right? So a lot of investors will say to me, oh, Jacobs has become so complicated like why is this so complicated? Can't you simplify? Like, so what are you saying? Is that on the docket free, would you -- do you want to simplify the business? Does it need to be simplified? What do you think about that?

So the short answer is yes, starting with how we talk about the business internally and externally. So as the huge trends and benefits that we have of this very strong platform gives us the opportunity to play in so many spaces. At the same time, we're not focused as easy to complicate it. So yes, the answer is yes. And we're working on simplifying the messages and also defining very clearly what are the metrics of the strategy that we want to focus on. So that's -- we're currently working on that. We hear all the feedback that we get on that...

None of us are shy, Claudia.

Yes I know, and that's very good because we want to get the feedback. What is the -- how can we communicate clearly because at the end of the day, the business is what we're doing is really good is how can we share that message better. In terms of how we -- one part is the message and the rest is how do we operate? Is that focus that I was talking about. If it is, we're operating in these spaces where we have the secular growth. And then if we start playing on the fringes where you don't have the same margins, you don't have the same growth, maybe not the same connectivity is really the discipline of maybe this is not exactly where we should be playing. So that ruthless prioritization is very important for us, and I see that as an opportunity for us.

Could we talk for a second about that because Jacobs goes through these periods I've covered the company for a long time, where it's very acquisitive, then it sort of slows down, maybe consolidate a bit. Are we in a period of sort of consolidation here, would you say or still assessing?

If I -- I'll start with the last point, which is those periods, we have been acquiring. We made a lot of acquisitions in the past few years, and some of them or several of them are within divergent. So having carved out many of these so acquisitions plus homegrown solutions from P&PS, CMS and putting them under one roof is the very first step for that is how are we integrating all of them under standard workflows to deliver one and user solution is the first one. And the capital discipline. What is the standard product that we're going to deliver as that. So that goes with, let's extract as much value as we can from those investments that we made. Let's make sure they're fully integrated. When full integration is the right model. And in most of those cases, full integration is the right model. So a lot of that is going into -- let's focus on those 10 platforms and products that we selected as the winning products to scale up and divergent. So you pretty much have most of the acquisitions and that one of the PA is separate and CH2M is now Jacobs.

Yes. So that makes sense. But like -- so if I look at the margin then, like again, this is -- I know just your initial assessment, but like we saw the margins and we're like, the mid-single digits, right? So does that suggest to you opportunity? Like how do you look at it and say, is that because the things are not together and they're all kind of running in different directions? And is that the goal to get them to run together? Like how do you think about that?

I'll explain the margin, and I hope that answers your question on the margins. Day 1 of Divergence, 3/4, give or take, 3/4 of the business is cyber and intelligence, federal agencies more like CMS like margins. The growth engine is infrastructure base. It's the same customers we've been selling to 4 decades where we have a premium position, water, transportation, that is the growth engine. When we look at the second half of the year, we see double-digit growth. And those are when you think about software platforms, it's about reaching scale. So your gross margins that are healthy today, you will see it in...

Going down.

Yes, going down on profit margins. So that's really what is driving it. When you say is it all tied together? No, the cyber piece, which is 3/4 and the future is expected to be a much smaller share of the total. We do see opportunities in cyber being applied to critical infrastructure. So some private customers as well, but since the biggest engine of growth is more on the other pieces where the partnership with Palantir on the intelligent O&M and where we save on power consumption, we save on chemical consumption that's going to be important where we have streetlight data being one of the acquisitions. Those are expected to be -- the growth is expected to be much faster. So you see that they don't necessarily grow together, but they do grow together with P&PS. At the same time, they can go to market individually or independently from P&PS, but a lot is same customers that we've been selling to and working with for decades.

Yes, that's very helpful. I want to ask you quickly a follow-up on capital allocation, and I'll open up to the audience in a second, like -- so what's your view then on Jacobs' capital allocation, right? I understand that, like, again, you're relatively new as CFO. So do you continue medium, long term with the acquisition strategy? Do you take a step back? Like how do you think about...

Well, I reflect on -- so I have a long career in energy and capital allocation and capital discipline and energy, it determines your ability to survive. In my previous role before joining Jacobs I was a Treasurer for Schlumberger. So big cycles determined by commodity prices. So that's just to say my own personal philosophy as you manage capital to the shareholders lens. And so at the end of the day, it's the shareholders capital that you imagine. So with that, I say, what is your capital allocation? First, we're committed to investment grade, but that's something in our leverage ratios are good. So if you go to the second one, and there is not mutually exclusive, excess capital, you return to shareholders signed the dividends for stock repurchases and then M&A. M&A I think the bar needs to be very high. And why it needs to be very high is because M&A is risky by nature. And not because our sector is particularly risky. Our sector is actually very stable compared to many other sectors. It's more because there's a symmetry of information. Integration is very important, especially in a people business, you can easily destroy value so focusing on integration first. So the higher bar is really risk-adjusted returns that are significantly above cost of capital. So all that, when I look at our portfolio, we have so much. That is, I would say, difficult to find those that are much higher return on a risk-adjusted basis and that's really how I look at the capital allocation.

Yes, that's good to hear. Questions from the audience. Any questions from the audience? All right. We still have a few more minutes. So let me just ask you a couple of quick questions on CMS. So you talked about -- if I look at backlog, it's been multi flash, but you talked about mid-single-digit revenue growth and that the company feels pretty good about programs in terms of funding these programs have been funded. So maybe you can talk about your confidence level in sort of growing CMS as you've talked about. Why are your programs in the right places, if that makes sense?

I think the growth of CMS, our statements are very much based on what we have in the backlog. So it's really the backlog and then the gross margins of our backlog. So it's really our long-term view. And then you have some other things that we expect to play out longer term, which are nuclear new builds being one of those. So the energy security piece through the acquisition of wood, we have probably the best expertise in the world and we're playing a big role in Hinkley Point C in the UK...

[indiscernible] growing significantly, like within the portfolio.

So what we're starting to see is many countries as a result of Ukraine, they're starting to say, now, I need to find a solution for this so they're starting to come to us and say we need to start doing this. And these programs are from the moment you have the green light at least 7 to 10 years until you have everything up and running and we get involved from the moment you decide to go. We get involved even from the permanent base and so on. So those are some opportunities, the one 5G telecom. So those are things that you don't necessarily assume [indiscernible].

Right. And then you had your Head of Government Affairs with you yesterday, like so I'm sure you get the question of like the noise in Washington, what does it mean for Jacobs? Maybe just that question.

I'll let Jon answer because he likes those [indiscernible] question.

So I think the good news is that last year, the budget went up so much. We're starting at a really good place. So even if there is a CR or even a prolonged CR, the base level is pretty strong and there's a lot of funding from that that we can still take advantage of. And then if you look -- if your question was directed more towards CMS, CMS has a lot of long-term recurring revenue, people that are in very strategic locations like working for the Missile Defense Agency, NORAD, just a very, very long-term, fully funded kind of vehicles that aren't really that don't have subjectivity to like new starts that would be impacted by a CR. But on the stand local side, there's just so much funding from IIJ and IRA CR really wouldn't impact that business.

Right. And Jon, you tried to say that like you guys said you have conviction 8% plus margin in CMS in '23. That's because of what you have in backlog already. "It is higher margin stuff," is that fair?

You ask me? Yes, it's a combination of the backlog, right? We have visibility into the backlog. And then we have a pipeline of opportunities that are higher margins. So you kind of put those 2 together and that's kind of informs our fiscal year '23 guidance.

Got it. Okay. One last question, I've asked everybody. So I just want to ask you guys is, what are the top 2 or 3 innovations, megatrends or structural changes that are going to affect your company over the next 5 years? Are there any emerging industry trends that are perhaps being overlooked?

Say, AI, and you talk about ChatGPT you see it everywhere.

I hope it doesn't replace us. All right. We appreciate the time, guys. Thank you very much for coming.