CACI International Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Fiscal 20 24 First Quarter Conference Call. Today's call is being recorded. Instructions will be given at that time. At this time, I would like to turn the call over to George Price.

Speaker 1

Thanks, Brianna, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning. We are providing presentation slides, So let's move to Slide 2. There will be statements in this call that do not address historical fact and as such constitute forward looking statements under current law.

Speaker 1

These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night's press release and are described in the company's SEC filings. Our Safe Harbor statement is included on this exhibit and should I would also like to point out that our presentation will include discussion of non GAAP financial measures. You should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's turn to Slide 3, please.

Speaker 1

To open our discussion this morning, here is John Mengucci, President and Chief Executive Officer of CACI International. John?

Speaker 2

Thanks, George, and good morning, everyone. Thank you for joining us to discuss our Q1 Fiscal year 'twenty four results as well as our fiscal 'twenty four guidance. With me this morning is Jeff McLaughlin, our Chief Financial Officer. Before we get started, and as I previously informed many of you, George Price now leads Investor Relations for CACI, replacing Dan Leckburg, who has taken an executive role elsewhere in the company. My thanks to Dan for the fine job he did and my congratulations to George, who brings his 4 years as a Deputy to Dan and his significant experience And both the sell side analysts and investor relations executives in the position.

Speaker 2

So with that, let's move to our Q1 results. Slide 4, please. Last night, we released our Q1 results for fiscal year 2024 And I'm pleased to say that our actions and results in the Q1 were directly aligned with our value creation model. As we've discussed, net value creation model is one that is built to drive growth and free cash flow per share by utilizing a combination long term predictable organic revenue growth, efficient management of working capital and CapEx, Profitability, supportive of continued investment and prudent opportunistic value creating capital deployment. Against those elements, we delivered 15% organic revenue growth, dollars 174,000,000 of EBITDA, Free cash flow that exceeded our expectations, we executed $150,000,000 share repurchase program.

Speaker 2

In addition, we won $3,100,000,000 of contract awards, which represents a 1.7 times book to bill for the quarter at 1.4 times on a trailing 12 months basis. More than half of our awards were for new work to CACI, We had strong performance on our recompetes as well. Our first quarter performance provides us the opportunity to raise elements of our fiscal year 'twenty four guidance. And Jeff will provide the financial details shortly. Slide 5, please.

Speaker 2

We've talked about network modernization being a critical need for our government and a significant long term opportunity for CACI. Secure, modernized networks are the required foundation for many priorities, including AI, cyber In Chassis 2. We have invested to develop innovative network modernization capabilities, both organically and via the acquisitions of LGS and ID Technologies. As a result, we were awarded an 8 year contract valued at up to $1,300,000,000 to modernize the network of a major DoD Intelligence Community customer to support critical intelligence missions around the world. We had the highest rated technical proposal.

Speaker 2

We displaced a long entrenched incumbent. We established a new beachhead for network modernization with this customer, And we increased our visibility and access across the broader intelligence community. In addition, We're just notified of a $200,000,000 DoD network modernization win, this one specifically leveraging our commercial solutions for Classify or CSFC Technology. We continue to see healthy demand for network modernization and a strong pipeline of additional opportunities. Next, you've heard us discuss the importance of software as an enabler for customer missions and this software is our superpower.

Speaker 2

CACI has continued to demonstrate that we have the most mature, advanced software development capabilities, building open systems and software defined offerings in the market today. These capabilities led to the award of a 5 year contract With a maximum ceiling value of $917,000,000 to continue providing software and systems engineering to support Battlespace awareness for the United States Air Force. In addition, our unique software defined capabilities, coupled with our deep understanding of signals and the electromagnetic spectrum continues to differentiate CECI in the marketplace. We are seeing increased market adoption of our software defined technology, particularly in the areas of singles intelligence and Electronic Warfare. This is evidenced by being selected to supply our technology offerings to an Army program of record as well as the evaluation of the same offerings for another Army program that enables dismounted soldiers to quickly detect, Identify, geolocate and defeat signals of interest.

Speaker 2

These successes are great examples Of our ability to deliver software defined innovation in a fast, agile manner to support critical and enduring national security priorities. Slide 6, please. In addition to winning during new work, we are executing and performing with excellence on the 3 large awards we announced in our last fiscal year. Let me provide you with an update. First, Our Air Force Enterprise IT as a Service or ITAS contract is ramping up as planned.

Speaker 2

We are on track to stand up our enterprise service desk before year end and assume day to day operations of existing systems with additional program milestones on track for the second half of the fiscal year. Both of these actions accelerate support to our customer and support our financial goals for FY 'twenty four. Next, the transition of our large NSA, Intel and Cipher award is also progressing well. We continue to show the value of our technically And we are receiving positive feedback from our customer executives. Finally, our Navy Spectral program is off to a great start.

Speaker 2

Even with an extremely complex environment and technical requirements, We've hit the ground running because we invested ahead of customer need. We have a great partnership with the Navy and our customer is pleased with our performance. With the ever evolving threats in the Indo Paycom theater, Spectral is the type of program Built with an open software architecture that breaks vendor lock and provides capabilities at the speed of the fight that the Navy requires. Slide 7, please. Turning to the macro environment.

Speaker 2

We continue to monitor the government fiscal year 2024 budget process closely. We're prepared for a number of scenarios, most of which we believe are addressed within our guidance range. As we've said many times, the world is a dangerous place and recent events have only confirmed that view. Customer demand remains high, driven by the elevated global threat environment, the pacing capabilities of our adversaries and a significant opportunity for modernization in government to enhance both efficiency and security. GCI remains very well positioned in key enduring areas of demand, including broad IT modernization, The Electromagnetic Spectrum, Cyber, Space and Intelligence.

Speaker 2

Slide 8 please. As a trusted national security company, our government customers rely on CACI to meet their most urgent and critical needs. Given the recent budget uncertainty, just such an opportunity arose when we received requests to purchase nearly $200,000,000 of network equipment, cybersecurity licenses and other material before the government fiscal year ended. We are proud that our team was able to rapidly and efficiently respond to these requests with $100,000,000 of the material delivered in our Q1 and another $100,000,000 slated to be delivered next quarter. Excluding these material purchases, our underlying organic growth was 9%.

Speaker 2

In summary, our Q1 results were strong and fiscal year 2024 is off to a great start. Demand signals are healthy and we are well positioned to address key customer priorities. We are successfully executing our strategy to invest ahead of need, to build differentiated capabilities. And as a result, we are winning in the marketplace and we are leveraging Our financial strength to deploy capital in a flexible and opportunistic manner to drive free cash flow per share growth and shareholder value. With that, I'll turn the call over to Jeff.

Speaker 3

Thank you, John, and good morning, everyone. Please turn to Slide 9. Our Q1 of fiscal year 2024 is a strong start to the fiscal year. We generated revenue of $1,850,000,000 in the quarter, which about $100,000,000 was related to the unplanned government material purchases, which Sean just described. This activity drove 6% of year over year growth with essentially no profit.

Speaker 3

The remaining 9% growth was driven by strong To pursue fewer and larger opportunities and invest ahead of customer need, a further indication of the success of our approach is that the weighted average duration of our awards extended to over 6 years this quarter, an all time high. Slide 10, please. 1st quarter reported EBITDA margin reflects 60 basis points of drag from the higher material volume I just mentioned. In that context, our underlying profitability is strong. Adjusted diluted earnings per share of $4.36 were unchanged from the prior year.

Speaker 3

Higher interest expense was offset by higher operating income, A lower tax provision and a lower share count as a result of our share repurchases. 1st quarter operating cash Excluding our account receivable purchase facility was $93,000,000 reflecting solid profitability and strong cash collections. We reported days sales outstanding of 49 days, just one day above last year's record low as we continue to efficiently manage working capital. Free cash flow was $79,000,000 for the quarter. Slide 11, please.

Speaker 3

Recall that last year our Board authorized a $750,000,000 share repurchase program. As Sean mentioned, our value creation model is focused on driving growth in free cash flow per share, including through flexible and opportunistic capital This standing authorization has positioned us to be even more responsive to evolving market conditions. Accordingly, we initiated a open market repurchase program at the end of August and through quarter end executed the repurchase of another 470,000 shares at an average price of $3.19 per share. After completion of this latest share repurchase, We have approximately $337,000,000 remaining in our share repurchase authorization. Since the 750,000,000 Our Board authorization in January, we have repurchased over 5% of our shares outstanding.

Speaker 3

We ended the quarter with 2.3 times leverage of net debt to trailing 12 months EBITDA, reflecting the funds used in the quarter for the share repurchases. The healthy long term cash flow characteristics of our business, our modest leverage and our access to capital continue to provide us with significant optionality. We remain well positioned to deploy capital in a flexible and opportunistic manner to drive future growth and shareholder value. Slide 12, please. With our Q1 results and additional share repurchases, we are raising our fiscal year 2024 revenue, Adjusted EPS and free cash flow guidance.

Speaker 3

We now expect fiscal 2024 revenue to be in the range of approximately 7 point $2,000,000,000 to $7,400,000,000 essentially all of which is organic. This $200,000,000 increase in revenue reflects The higher material purchases we discussed earlier. This increased volume is split evenly between the 1st and second quarters. I want to be clear that our EBITDA dollar expectations for the full year are unchanged. Beyond the material purchases, the underlying operating results of the business are consistent with our expectations.

Speaker 3

To assist with your modeling, we expect 2nd quarter revenue and EBITDA dollars to be relatively flattish with the Q1. As was the case last year and as we shared in our guidance call last quarter, we see higher profitability in the second half of the year. This second half improvement is driven by declining levels of Mission Technology investment from the first half as well as second half increases in new fixed unit price work and higher volume of some Mission Tech programs. We are raising our adjusted EPS guidance to reflect the lower share count as a result of our additional open market share repurchases. Our full year diluted share count guidance is now 22,700,000 shares.

Speaker 3

In addition, our full year interest expense is now expected to be in the range of $100,000,000 to $105,000,000 reflecting the additional share repurchases. The minimal net income impact of this change is accommodated within the existing adjusted net income guidance range. We are raising our fiscal year 2024 free cash flow guidance by $10,000,000 to at least 410,000,000 We expect that this increased free cash flow combined with the benefit of the reduced share count results in an increase of 4% versus our initial Free cash flow per share expectations. Slide 13, please. Turning to our forward indicators, CACI's prospects continue to be strong.

Speaker 3

Our first quarter book to bill of 1.7 times reflects strong performance in the marketplace And our Q1 awards have a weighted average duration of over 6 years. 1st quarter backlog of $26,700,000,000 grew 7% from a year ago and represents almost 4 years of annual revenue. These metrics provide good long term visibility into our business. For fiscal year 2024, we now expect 89% of our revenue to come from existing programs, 7% from recompetes and 4% from new business. Progress on these metrics reflects increased confidence in our expectations for the year.

Speaker 3

In terms of our pipeline, we have $11,000,000,000 of bids under evaluation, about 65% of which are for new business to CACI. And we expect to submit another $10,000,000,000 of bids over the next two quarters with over 80% of that for new business. These metrics reflect healthy demand and disciplined bidding. To wrap things up, Q1 was a great start to the year and we're pleased to be able to raise our Full year revenue, adjusted EPS and free cash flow guidance. The business is performing well and we remain confident in our ability to And with that, I'll turn the call back over to John.

Speaker 2

Thank you, Jeff. Let's go to Slide 14, please. Our fiscal year 2024 is off to a great start. We continue to show that we are strategically positioned in the right markets with differentiated capabilities. We are winning high value Enduring work that supports long term growth.

Speaker 2

We're deploying capital in a flexible and opportunistic manner. The combination of these successes Zeech is driving free cash flow per share growth and shareholder value. Key to our business success It's a tremendous talent CACI has been able to attract, develop and retain. As a leading national security company, CACI offers boundless opportunities for our employees to serve their country, grow their skills and expand their horizons. Ours is a long standing culture, where character meets innovation every day.

Speaker 2

The investments we've made and the value proposition we offer our people continue to drive a number of positive outcomes, including lower attrition, Increased referrals of new hires by existing employees and numerous awards recognizing CACI is one of the best places to work in the country. In fact, for 12 years, CACI has been recognized by Fortune Magazine as one of the world's most admired companies. CACI also continues to be recognized as a top workplace for women, graduates and diversity. I'm especially proud that CACI received a number of recognitions for our support of our veterans, including being named the best employer for veterans by Forbes. As is always the case, we achieve our success because of our employees' talent, innovation and commitment.

Speaker 2

I want to thank the entire CACI team for what they do for our company and our nation each and every day. With that Brianna, let's open the call for questions.

Operator

Thank you. Our first question comes from Mariana Perez Mora with Bank of America. Your line is open.

Speaker 4

Good morning, gentlemen.

Speaker 3

Good morning.

Speaker 4

So my question is going to be about the Macroeconomic environment and political environment without the budget. How much of the growth into this year depends on actually having a funded budget? And more Specifically, when you see those like €10,000,000,000 of like bits that you're going to submit in the next 6 months, How much of that depends on new contract awards and actually how many budget and how much of that is just takeaways?

Speaker 2

Marianna, thanks. I'll start with this one. Look, as I mentioned in my prepared remarks, Look, we're monitoring the budget process closely. We're prepared for a number of different scenarios. But here's what we know.

Speaker 2

We know the Senate has passed all 12 appropriations bills or on a committee. They're going to start bringing those bills to the floor The House now has a speaker, appears to be committed to avoiding any debt ceiling impacts. And we're very aware of the 1% cut in spending. The 23 of Congress can't pass those, but we are actually Planning that those do get passed by the April 30 deadline. It's hard to say I like you a full year CRO or a shutdown is, but we're pretty confident The majority of our work will continue with the funding.

Speaker 2

And in case of a shutdown, we're quite Confident that the work that we do are going to be continuing and ongoing through the shutdown because of the current world events. Getting closer to home, in our guidance, we considered many variables, Mariana, and one of those The duration of the FY 'twenty four budget process and the CR. If you all remember, the low end of our guidance, we assumed a full year CR During this entire fiscal year, the high end we assumed a short CR and the budget passed sooner. As it pertains to The jobs that we have already submitted, we're waiting for the government to select the awardee And for the submitted bids, look, we're very confident that the work that we have is in the deep streams of funding That are exactly those areas of the budget that are not being touched. Whether we're in a CR or whether we're not, We spent a long time within this company making certain that the work that we've been on has to be long and enduring work.

Speaker 2

That is the major reason why we moved from being a pure From a services company into one that offers both expertise and tech. So we don't see any near term impacts to it. I don't want to predict our FY 2025 year given that I'm only 140 days into FY 2024. There's nothing that we're submitting today that we're sitting on the table saying, boy, if the budget is cut or the CR continues, Does that present any growth to us or any concern to us?

Speaker 4

Perfect. Thank you very much. And as a follow-up, you just mentioned Transitioning to a more technology focused company, high supply chain?

Speaker 2

Yes. Thank you. Look, we you've talked about supply chain quite a bit. We've done a couple of things. One is that over the last few quarters, we have purchased in a very cost effective but wise manner To make certain that we could get our Mission Technology offerings delivered without any future delays In the supply supply chain.

Speaker 2

So that's 1. 2nd, we've also instrumented all of our billable materials With frankly AI technology that actually alerts us to parts that are either going to go obsolete or predictive Longer supply chain delivery dates. And when that happens, we immediately go in and we make all the right business calls to make sure it doesn't get in the way Of us delivering our mission technology offerings. Thanks, Marriott.

Operator

Our next question comes from Bert Steuben with Stifel, your line is open.

Speaker 3

Hey, good morning.

Speaker 2

Good morning, Bert.

Speaker 5

Hey, John, Jeff, George. Maybe just a good follow-up to Mariano's question there. Is the CR having any impact on the current ramp process for the three contracts you highlighted in your slides? Or are things progressing sort of as expected?

Speaker 2

Yes, Bert, thanks. We truly have not seen CR create any impacts in a number of areas. RF, RFPs and RFIs are still coming out in a timely manner, if you all heard me In the past, every organization has their own awards DNA and some professionally or always deliver late, some deliver early. So no impact there. As for funding for our 3 major, major programs, ITAS, our large Intel program in Spectro are fully funded through fiscal year 2024 Sorry, yes, through the current fiscal year that we're in.

Speaker 2

And we just haven't seen any slowdown in the rewards, RF, RFPs, deliveries and then funds.

Speaker 5

Okay, great. And then, Don, Just a more, I guess, high level question. Historically, you've talked about ever increasing margins for CACI. Now that you have pretty clear line of sight into growth over the next couple of years, has that view changed at all near term? I guess that is to say, does the dial shift more toward growth

Speaker 2

Couple of things here, and I'll have Jeff add his view as well. Look, we are very much focused on value creation model that drives free cash flow per share, Right. So the way we built this company, and again, we're purpose built for exactly the position we're in today. We realized 7 or 8 years back that we were winning work that wasn't generating the right level of full value return. So first step, focus on margins and focus on the things that we're out there bidding on.

Speaker 2

Let's build a great capable capability bench, So we can go after more longer term enduring work, moving a little bit from expertise to technology. That drove margin focus from the high 7s to the high 10s. Now that we're there, What we talked about coming into this fiscal year is an absolute focus on free cash flow per share. Top line growth, Reliable organic top line growth, bottom line growth, capital deployment, Making certain that we're running a cost effective business. So what it's no longer the focus on 1, it's the focus on all 4.

Speaker 2

And for us, every one of those levers that we have are now availed to us and we're very happy that we've driven an additional 4% of free cash flow per share since our original guide. Jeff, anything?

Speaker 3

Yes. No, I mean that's exactly right. I think it's additive. It doesn't replace the profitability focus because obviously generating earnings is an important part of generating free cash flow. But it's sort of we kind of think of it as taking it to the next level.

Speaker 3

So now, we've made significant progress on profitability And we're not taking our eye off that ball, but we're now adding to that a focus on increased focus. We've always been focused on it, but increased focus On capital efficiency and the free cash flow per share, as John shared it.

Speaker 2

Bert also follow-up to as it pertains to This current year that we're in, because I know we had some initial moving parts with this $200,000,000 worth of Material, I want to make very, very clear that as we look at the underlying business without that $200,000,000 We are focused on a high 10% margin period, full stop. The fact that we had $200,000,000 of 0 margin revenue come in. It was our decision to make that very transparent. And I understand that the math works out to 10.5% or 10.6% outstanding, But we are the underlying business is executing at a high 10s rate and will continue to do so throughout this year.

Speaker 3

Yes. It can't be said too many times that the

Operator

Our next question comes from Seth Seifman with JPMorgan. Your line is open.

Speaker 6

Good morning. This is Rocco on for Seth.

Speaker 3

Good morning, Ross. Good morning.

Speaker 6

The 9% organic growth ex material buys was impressive in Q1. With the new guidance increase for the unplanned material buys, should we expect sales growth to be front half weighted ex Devise or will Q2 be lower with a build throughout the year as indicated on the prior call?

Speaker 3

Yes, our view thanks for the question, Rocco. Our view is that the 2nd quarter, you ought to expect to be fairly flattish from the first. Remember, there's $100,000,000 Of the unplanned material buys in each of those two quarters. And I think the underlying operations of the business, while we reiterated the year in our guidance, We feel like we're off to a really strong start, but we're going to operate here for another quarter or so and Reassess.

Speaker 6

Great. That makes sense. And then how are you thinking about future capital deployment? Is there potential for there to be a consistent share repurchase program? And how does the M and A pipeline look?

Speaker 2

Yes. Boy, that's a Go on for days, Rocco. Look, first of all, look, we're flexible and And those are the dynamics that we've actually laid out there. We are going to continue to evaluate a range of factors either what our M and A pipeline looks like as you mentioned, What our stock price is, what our valuation is, leverage, interest rates, demand trends, business outlooks, And frankly, those are all those options are always on the table. So they all create value as you all know given dynamics At the time, because they all drive free cash flow per share over time.

Speaker 2

Leverage feels right. And we're going to evaluate all of the options. We have to look at share repurchase versus M and A. We look at internal investments versus M and A. Our decision is going to be based on relevant rates of return on whatever two options that we're looking at over Time and with that, Jeff, anything you'd like me to add?

Speaker 3

Yes. I mean, look, this is a very I know you guys probably get tired of hearing Flexible and opportunistic, but that really is what where we are. I mean, we are continually looking at the pipeline And when we see a combination of factors, where we don't see maybe near term opportunities that are interesting to us, We see some market weakness in our share price. Those are times that we're going to stop and buy back some shares. I mean, it's continually under evaluation.

Speaker 3

It's a very disciplined return driven exercise, it does not make much sense for us to be any less levered than we are. We have a very favorable capital structure in that regard. Those of you that follow us and study us know that and I won't bore you with the details, But it's not particularly appealing to us to become any less levered. And so we're constantly looking At that range of options, and you'll see us continue to act as appropriate as we look at changing circumstances.

Speaker 2

Rocco, you also asked about M and A. And look, you all know we've done some really good acquisitions in the past. They've addressed a large number of gaps. But as the frankly, the valuations And the sellers' expectations have been relatively slow to adjust to a changing market dynamics. That's our view In light of rising interest rates and a lot of other factors, but we do have a pipeline that is starting to build.

Speaker 2

We're always looking at things in the Siga and EW area, in the cyber and in the space area. But when we see the market shifting back To a buyer's market from a seller's market, we may see more opportunities in the near term. But we're really looking at that moderate sized company that drives Capabilities and customer relationships, so that 5 years from now we can talk about what that company did to sort of change the way our company looks now. And again, with the type of returns that are going to continue to drive longer and longer term free cash flow per share growth. Thanks for the questions.

Operator

Our next question comes from Matt Akers with Wells Fargo. Your line is open.

Speaker 5

Hey, guys. Good morning. Thanks for the question. So you mentioned that I guess the $200,000,000 of material buys that I think Maybe shifted based on some of the uncertainty that's going on, maybe people pull that forward. I guess if you strip that out kind of your base business, Was there any kind of pull forward in that business as well?

Speaker 5

I'm just curious how people are sort of your customers are acting around some of

Speaker 2

the uncertainty around the budget.

Speaker 3

Well, let's make sure first, let's unpack a little bit the premise of your question. The unplanned material buys We're not pull forwards. So that was unplanned customer activity, which we were efficiently and responsibly addressed. Beyond that, the underlying performance of the business is slightly ahead of our expectations for the Q1, And we think we're on a good path. We may have anything be well, we think we're on a good path.

Speaker 3

So, we'll be continuing to evaluate that, but it's early in the year. I mean, as John said, We're 100 days into the year, and we're happy with our position and we'll continue to manage it.

Speaker 5

Got it. Okay. Thanks. And then I guess just any thoughts on some of the things happening in the Middle East now Between kind of U. S.

Speaker 5

Involvement over there and the $100,000,000,000 plus supplemental that sits on the table, any potential work you think that maybe could come out of that for

Speaker 2

Yes, Matt, thanks. Look, we've said many, many times, right, that unfortunately the world was a dangerous place. I think that what's going on in Ukraine was the 1st wake up call. It certainly weighs the urgency level around defense and National security globally, frankly. I think the attack on Israel is a reminder that despite the increase of near peer threats, You've all heard me say this.

Speaker 2

Counter terrorism is still a major concern. Yes, there is more money going to be spent on the near peer threat. I've always said is in our mind, it was never an or, it was always going to be an and. But look, most of what we're doing as to specifics, I frankly, I can't address those on this call. I can tell you that we're engaged and we're supporting.

Speaker 2

We're hearing the same thing that you're all hearing about the $100,000,000,000 plus up As well as other international spending, look, we deliver mission And technologies to all the 5Y countries today. I'm convinced that the Eastern European allies are also going to be increasingly interested in Our products, we've made a few trips there to some key countries. We know what they're looking, they're looking for. It's exactly what our software defined Mission Technology Suite was built for the electromagnetic spectrum and everything in the EW world ensuring bidding the signal. Nations around the country want to know where that signal is, what it is and how can they defeat it.

Speaker 2

So I'm sure that expansion throughout Eastern Europe and NATO In other select countries, what we'll start taking a look at. But Frank, it's too early to discuss the specifics. We're going It will be very, very conservative and very, very calculating As to how we enter the international markets with the offerings that we have. Thanks, Matt.

Operator

Our next question comes from David Strauss with Barclays. Your line is open.

Speaker 7

Hi, good morning. This is actually Josh Korn on for David. Good morning. I wanted to ask if the materials purchases in the quarter were considered expertise or technology. It sounded like Technology, so if that's the case, ex those purchases, it seemed like expertise growth was up 20% and tech was flat.

Speaker 7

So I wanted to ask if that implies anything about the remainder of the year or anything specific in the quarter? Thanks.

Speaker 3

First of all, they were technology. John will want to add to this, but I don't think there's a particular conclusion to extend from that. I mean, These statistics move around obviously and we're generally kind of managing mix.

Speaker 2

Sure. Yes. Thanks, Jeff. Look, I've probably said this, right? The good news is they're both growing, Right.

Speaker 2

So I'm extremely pleased with every dollar of expertise growth just as much as I am excited by every dollar Of technology growth. I think some of what you all see in some of those tables, whether it's expertise in tech or FedDev or DoD, Look, we see expertise is seeing the benefit of lapping the Afghanistan withdrawal And then also the ramp up of our new MSA Intel and Cyber program. At the end of the day, they're both extremely important to us. Expertise informs tech and tech enables more cost effective expertise. And I have to tell you, within our mission technology space, Todd Grover here does An outstanding job of picking up all the mission expertise work that we're doing and all those tips in queue to understand how we invest.

Speaker 2

And, Diette Gray, who runs most of our enterprise work, does an outstanding job of finding ways to bring new technology, Whether it's AI or Anthro Software Development at scale, anything that takes the cost of expertise down, Which frankly when we do that, that helps us drive margins as well. So I think quarter over quarter, Josh, you're going to see different Pieces of our business grow at different rates, but there's usually some large movements that are easily explained with the latest 12 months of work that we

Speaker 3

Yes. And I think

Speaker 2

we're ready for our next question.

Operator

Our next question comes from Connor Walters with Jefferies. Your line is open.

Speaker 8

Hi, guys. Congratulations on a strong quarter and thank you for taking my question. I just wanted to dig into some of these major programs a little bit more. Now that Focus Fox is over a quarter into the ramp. Can you provide an update on the cadence and progress around hiring and how we should think about the contribution of revenue and profit in the next few years there?

Speaker 2

Yes, thanks. So look, it's a major expert expertise program for us and we've always said it At a normal level, expertise ramps up faster than our technology Programs. We won the work Because our CECI proposal was technically superior. And frankly, programs are ramping up, just as we proposed, maybe slightly ahead, But nothing but positive feedback from our customer to date. What's crucial to know about that program is we won that By making certain that we would have a low to 0 risk transition from the long term incumbent To us.

Speaker 2

And that transition is well down the path of the way it was planned in our proposal. I would I'm not going to talk about the exact But I'll tell you it's $1,500,000,000 worth of awards that we recognize. I would say we're somewhere in the 80% ramped up phase today, Connor, and I would expect that great performance by Michelle, let's see and her team to continue.

Speaker 8

Got it. That's super helpful. And maybe in the same vein, as it relates So the new $1,300,000,000 award with the intelligence community customer, how should we be thinking about the timing of the ramp and contribution at scale from that?

Speaker 2

Yes. Conor, I think that's I think it was an 8 year award, 1,300,000,000 That's a network build out job, so that ramp up occurs to me a little bit different, right? When we do these large scale network jobs, There's a lot of front end work, specification, making sure that we revisit what the customer wanted. Technology is changing either in the full Network realm or at that last mile or at where the actual device is connecting, which is what makes our CFC offering so unique. But those programs start up a little bit on the light side, Connor.

Speaker 2

And I would say over a period of the next year, We'll have what that design looks like and then we're working with the customer as to how we would roll that out. That's a network that is used globally. And so and again, we just won that work. So we'll be putting that plan in place. If there are no protests on it, we'll see some lighter revenue come in, in the 3rd Q4, but nothing that is going to change what our guidance Thanks.

Speaker 2

Thanks, Connor.

Operator

Our next question comes from John Franz Engelbrecht with Baird. Your line is

Speaker 9

open. Good morning, John and Jeff. I'll ask for Peter today.

Speaker 3

Good morning.

Speaker 9

Great. So just wanted to quickly revisit the M and A comments that you made and with net leverage of 2.3 today. Could you provide some color on sort of how high you would go if you identified an attractive target?

Speaker 3

Yes. That's a not a perfect answer to the hypothetical. For a long time, we said that we would occasionally perhaps consider 4.5%. I think in the current environment, that's going to be less. But I could imagine for the right asset, 3.5%, maybe a little more is sort of In the zip code we consider it, it's difficult to answer that obviously outside the context of a specific target.

Speaker 3

But certainly, you should think about us as thinking about up to a turn or so of what we've historically said.

Speaker 9

Great. That's really helpful. And then just a quick follow-up on the Spectral award. Just given the heightened threat environment in the Indo Pacific Strength in the Navy budget that should likely continue for the next couple of years. Are there any sort of additional bidding opportunities that you see in the next 12 months to 24 months, Specifically related to Navy electronic warfare signals intelligence that we should look out for?

Speaker 2

Yes. Yes. Great. Look, our electronic warfare and our electro I think that spectrum detection and countering equipment is deployed on a lot of assets today. Actually, it's not so much about the next 12 months to 24 months.

Speaker 2

What are the other bids that we can put out there? It really talks about The reason why my prepared remarks mentioned that Spectral is the program, right? Our customer on Spectral is already looking at How do we morph the program as it was awarded to something that can do 2 things. 1, that it actually gets updated for today's current current trends. Remember, We began investing on Spectral, I think it was fiscal year 2016, if I remember right.

Speaker 2

That job was awarded this past year and we're having a lot of detailed discussions around what does the threat look like today? Is there anything we can do to get delivery sooner? And then can we address more platforms that we have set up in the contract today? When we won that program, there's a $1,200,000,000 award. I believe we booked that at 600,000,000 And we're sorting through what the other $600,000,000 looks like.

Speaker 2

So we've done an outstanding job. We are all over this market. The Navy is the perfect purpose built customer for us as we're out there Delivering. And I'd also say that as we start to show what Spectral has and we deliver to the Navy, There's other customers out there that are getting another look at where our capabilities have moved to. And then tied back to another question, In light of what's happening on the global stage, there's other countries that are seeing those types of capabilities.

Speaker 2

So one, love the funding that we have in place on spectral. 2, we made all the right rate calls to invest ahead of customer needs, so we would start up immediately and then 3, A great technology team here is working with the Navy to find out how can we deliver that even quicker because that near period threat in the entire Indo PACOM region is going

Operator

Our next question comes from Tobey Sommer with Truist Securities. Your line is open.

Speaker 2

Thank you very much.

Speaker 4

Could you

Speaker 2

talk about trends that you're seeing In terms of billable headcount growth and the outlook for that, any sort of changes in difficulty in recruiting and the implications for Kind of both revenue growth and associated expenses as we turn into calendar 2024? Yes, Tobey, thanks. First off, look, I love when Expertise and technology growth. I'm looking for material growth in both of those markets as we get through the year. Just having everybody's guidance says we're going to have organic growth between 7.5% and 10.5%.

Speaker 2

And based on some of the jobs that we're winning, frankly, whether they're expertise jobs or they're technology jobs, we're going to need talent. Look, we're well positioned there. We've got 3 great internal hiring programs, MakingMoves, Frank is one where we want people to move around the company on different projects. That's the beauty of building a technology business here. Folks are much more fungible and we can move them around and that helps them build their career.

Speaker 2

Over 40% of our hires to the HOV come from a referral, Which is outstanding for us. It keeps our talent acquisition costs down. And we already know people have assessed people, right? We sort of have this tagline, Great people know other great people, and it's working very, very well. And then last, how does the job market look?

Speaker 2

Look, we've done a lot To draw people to our business, we've got it we have a large intern program for our company size, well over 300 interns. And then we move to this flexible time off and financial wellness program, which is what new hires are absolutely looking for. And frankly, we find a way to differentiate ourselves in the marketplace around expertise for technology, Labor, this is a company they're going to find that from first. So flexible time off, A really good financial wellness program that comes free of charge to all of our employees. So look, we finished FY 2023 with attrition running about a full percentage point lower.

Speaker 2

No, you can do a percent on 22,000 people and back into how many less people we have to have to go out there and hire. So for both expertise and for, I like what the market's giving us, our ability to hire and retain talent. And if I could get your perspective, what do you think on the proposed changes in merger guidelines at the FTC? And how does that Impact your acquisition program and thoughts around that?

Speaker 3

Yes. John will probably want to may want to add some thoughts to this. It's not I don't expect it to have a large impact On our thinking about managing and evaluating the pipeline, I mean, We're in a position where our focus is on gaps And sort of billing strategic areas that are of interest to us, there's very little in our pipeline that involves Either vertical integration or acquiring competitors. It's really about complementary capabilities, which is probably One of the less threatening areas in terms of competition, but I don't know, John, any

Operator

Question comes from Louie DiPalma with William Blair. Your line is open.

Speaker 10

John, Jeff and George, good morning. Hi, Louie. Hey Louie. Electronic warfare has proven particularly disruptive in Ukraine and your CTO, Glenn Karofsky at AUSA, he gave a great presentation on your success with integrating Spectral Siv, Your payload into 89 different drone platforms and has CACI and spectral So it distinguished itself versus the many other electronic warfare Firms out there and are there opportunities beyond Ukraine for your solution to be Integrated like across the European Union as the country appears to be investing in preparation of other future conflicts? Thanks.

Speaker 2

Yes, Louie, thanks. Look, Here's where my mind goes, right. We believe we have some best in class Electromagnetic Spectrum Tools, whether it's fine fixed, whether it's GOO, GOO, When we put a technology model in place, our goal was that we wanted to be a mission package provider to the platform companies as well as deliver our offerings directly to customers. And which we heard Glenn talk about is the very first part, which is when we build these tools and we I'm sorry, we build these offerings, It's all software defined. So at the end of the day, if I can put my software defined unit in someone's hand, I can put it on someone else's flat The form factor almost doesn't matter to us because the goal is the software inside.

Speaker 2

That's why we talk about software as our superpower. If we look at delivering to an international front, those are going to come with ITAR regulations and the like. So it is not a difficult modification To take a variant of what we use in the U. S, some of our partners will want to unilaterally work with us. And if they're a Five Eyes country, they're going to get potentially more capability.

Speaker 2

If they're not a Five Eyes country, they're going to get slightly less. But the beauty of that is the timeline and the small amount of investment we need to make those changes, whether it's a form fit or function, It's very easy for us because everything is software defined. So whether it's Spectral SIB or Spectral Guard or Magpie For Acordeon or SkyTracker, all of those mission technology offerings for us have a relatively shared baseline. When we spend money to make that investment case better, we're able to spend it in one time and distribute all of that logic and all those algorithms to many different offerings out there.

Speaker 10

Thanks, John. And that relates to my several my second question. You just discussed this Shared baseline for your software offerings and the CACI The CACI team has also developed software for Saphyr, FADE and Mist and you also have the large Beagle program, for these different software platforms, are you able to recycle A lot of the common components such that you have like favorable operating leverage on the next Platform?

Speaker 2

Yes. So let me take the first part of that. We build and we deliver a lot of AI based systems and Visualization systems that allow both our DoD and our intelligence customers the ability to take Terabits of data a minute and take all that data and transform that into information, So we understand what has to be targeted and what doesn't. Those systems have been in place for a number of years. We continue to move those from one intelligence customer to another and our team has a phenomenal job of bringing Other users on board.

Speaker 2

So one is all of those data visualization tools And all those mapping tools, frankly, are all foundational AI work we've been doing for a long amount of time, whether it's computer vision Or whether it's other facets of AI, we're actually delivering the base reference models And making certain that those models frankly are real and they're deployed. We're not advising customers how to make AI happen. We're actually delivering It's used by the warfighters, both DoD and Intel across the board. As it pertains to the software, Yes. Those baselines are also built in a manner that we can share those preference models in all of that software All of our products.

Speaker 2

So in that domain, Lilly, not so much the actual form swap Type of things that we would assign to a hardware solution. It's really more about software being this company's super power And just how well we have architected things. So when we get the capabilities in place, we're able to step and repeat what we deliver. Thank you for the questions.

Operator

This concludes our question and answer session. I will now turn the call back over to John Mengucci for closing remarks.

Speaker 2

Thanks, Brianna, and thank you for your help on today's call. We'd like to thank everyone who dialed in or listened to our webcast for their participation. We know that many of you will have follow-up questions and Jeff McLaughlin and George Price are available after today's call. Please stay healthy. I'll make best to you and your families and thank you

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Earnings Conference Call
CACI International Q1 2024
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