CACI International Inc (CACI) Earnings Call Transcript & Summary

All right. So let's get started. So good morning. I'm Matt Akers from the Aerospace and Defense team here at Barclays, excited for our next guest, CACI International. We've got John Mengucci, he's the CEO; and Dan Leckburg, who Heads up Investor Relations. Thanks for joining us, guys.

You bet.

Thanks, Matt. Thank you for having us.

I guess, maybe just to kick it off, high level, so got the budget request last week. Can you talk just a little bit about which areas were supported, which areas may be less so? And maybe -- you've talked about kind of this quadrant way of sort of laying out the business and where -- which area sort of did well?

Yes. So first off, Matt, thank you for having us. When we look at the budget, we often get asked, how does the Fed Civil piece look and the DoD piece and the intel piece look. Overall, the way we're structured, we actually look at what's the government spending in different areas that we have capabilities for. We like the way the budget is shaping up. It's very well-funded in the electronic warfare, signals intel, Cyber world, which is where we moved more of our business, too, over the last 2 to 3 years. So it's -- the government is spending the right level of funding. It does support $220 billion addressable market for us. So more than enough spending there for us to continue growth.

Got it. I think you've talked about this kind of, I think, 2% growth on kind of the enterprise side and 6% on the mission side. Is that still the right way to kind of think of it?

Yes. I mean, those are numbers, we have an independent party look at that every year. An outside firm shreds the entire federal government budget, and they understand what we can address out there. And just this last year, we went to Investor Day. On the enterprise part of the market, that market is growing at about 2%, but it's a $140 billion addressable market for us. On the technology side, we're still relatively new there, so our addressable market is $80 billion. It's growing at 6%. And this year's budgets support those numbers. We'd like to see those numbers continue to grow. As we invest in new capabilities, and we acquire other companies, we'd expect that addressable market to continue to grow and see some of those compound annual growth rates grow as well.

Sure. Do you have any thoughts on kind of where we are in the budget cycle? I mean, kind of hard to predict, but do you think we continue to grow from here? I think like services has been maybe a little bit less cyclical historically -- sort of where are we?

Yes. So if we look at budget growth, I always harken back to we're a $5.5 billion company. We're in a $220 billion addressable market. So whether the budget has been $754 billion or $720 billion, it's probably enough. What we'll be -- really look for is to make certain that the key components of what CACI provides are well funded. As we move more towards this mission tech world, where we're actually investing ahead of customers' need, as long as we see funding continue to grow in those areas, which this past year was no exception, and this coming year looks even better for us, at the end of the day, budgets have to be appropriated. We get a lot of questions around being an election year, how does it fare for us? We sort of moved away from a pure people-type business where we're delivering labor hours, and more into long-term solutions. And the upcoming budget serves our $220 billion addressable market very, very well.

Okay. Maybe could you touch on the fourth estate, so the sort of the non-services part of the defense budget? A lot of headlines of potential cost cuts in that area. Is that something you guys have a lot of exposures to? And have you seen any pressure?

Yes. So I actually give Secretary Esper some great applause there. I think what he's looking at is, how do I trade some of the work that may not be highest value add, or how do I do that work at a much more cost-effective manner. So on the enterprise part of our business, to us, that means potential more shared service centers, moving things more to cloud, more in a managed service kind of buying style to really reduce the personnel costs. So one, on the enterprise side, that's great for us because those are new opportunities for us to help the government become much more cost effective. On the mission tech side, the more money we're able to save, or Secretary Esper is trying to save, the more money we see to be put into the mission tech side and actually delivering solutions that actually impact the warfighters' mission. So I think it's more of a balance. The actual sum may not be less, but if I can save more here and be able to free up funds to fund here, we're actually on the right side of both. We're a company that can help them save money. We're also someone who can help provide more cost-effective mission-type solutions.

Sure. So you mentioned the election year, how do you think of sort of the political risk? We get one party versus the other, how important is that?

Yes. I don't know how many of you watched the debate last night. I think I'm still scratching my head. But at the end of the day, 57-year-old company, we've seen plenty of administration change. Our experiences are a couple fold. One is, if you run on a -- to run on a platform that says the world is not a really dangerous place, and we can spend less on the defense, defense side, it takes about 10 7:30 a.m. briefings for the incoming president to realize just what dangerous place we all live in. I'd also tell you that bipartisan support for National Security and the defense of this nation has never wavered. It is a bipartisan issue. And also, we also point back to -- in the 57 years we've been in business, the President makes the recommendations for the budget, but it's still congress that actually does the authorization in the spend. And they have longer-term experience, frankly. So if we look at where this year's budget is, where next year's budget is lining up to, we don't get ourselves caught in the swinging all the way to empty and all the way to full. Again, I always harken back to -- we're $5.5 billion company, $220 billion addressable market, whether the top line spend is coming up 7% or declining 3% or 4%, there's plenty of other work for us to go out there and grow from.

Sure. I guess, do you think of sort of the mix of defense versus civil differently at all, given kind of the growth we've already seen in defense? Or how do you balance that?

Yes. So the way we structured -- about 6 years back, we took our company. We were aligned like many government services providers are as an intel, a DoD and a fed civil business, and the flaw we found in that structure is that we sort of take on the personality of our customers. Which is good at to a certain point, but it also freezes information sharing, and it doesn't allow our teams to think clearly to how would I provide this type of solution to our end-item customers. So we're actually focused around -- we're structured in sectors to focus on our enterprise customers and our mission customers and what we deliver. So it's much less about whether fed said it's growing more than DOD, it's more of that DeEtte Gray, who runs our enterprise business, she delivers IT systems and services to the entire federal government. It could be the NSA, it could be the Department of the United States Army, and it could be the Department of Justice. We actually see that in a better way, and it's driven better growth numbers for us because she can invest one time, she can also go in to see customers and inform customers, here's what other people across the federal government are out there doing. So it gives us the ability to invest once and deliver multiple times versus having my civil sector lead, invest and delivers to the civil customers and my DoD customer, when the end of the day, they're buying relatively the same solutions. It's allowed us to take millions of investment dollars and push that towards business that we're not in today to be able to grow our overall addressable market. So we see enough growth across the federal government budget. It allows us to be very, very confident about future growth.

Got it. Makes sense. I guess, maybe pivoting a little bit to M&A. So your acquisition has been a big part of the story, obviously, for CACI. What are you seeing out there in the market kind of the pipeline? A lot of people are talking about maybe higher multiples for deals. Are you having trouble more difficulty finding things that are reasonable?

Yes. When multiples are at all-time highs, it sort of keeps that M&A pipeline active, frankly. We see a lot of companies -- as you mentioned, Matt. We're a very acquisitive company. We finished our 77th, 78th and 79th acquisition during this past summer, picked up 3 other companies that really provide some great capabilities. But we're a strategy-based company. Strategy is a place where we come from and twice each year, we look at gaps that we find. And we'll either invest internally, we'll partner or we will acquire. Doing acquisitions is an art and a science. There's actual people involved in those. There's founders involved in them. So the pipeline of companies out there is greater today than it may have been last year. On the quality side, it's tough for us to say we're finding companies that can fill future gaps, frankly. On the multiple side, we're a very balanced buyer, we're not going to get into a property, say, we own it. It has to have a good financial model for us. It has to have reasonable accretion targets, but it also has to fill a long-term need. So we are not the kind of company that's going to look at a $1 billion company saying I could pick up $1 billion of top line growth. We're not buying revenue, we're not looking to scale for scale's sake. I don't need to say that on the largest provider. I need to say that on the most capable one. And so those companies that can provide a level of expertise or a level of technology for us that fills a customer or a capability gap, that's where we're focused. But a large pipeline of folks are out there, frankly, we'd like to do is the best acquisitions we do are those that, of course, are exclusive to us. So we spent an awful lot of time looking for companies in the technology space. We like to do work relationships with them first. 2 acquisitions we recently did, one was LGS, one was Mastodon. Working with those companies up to a year before they came up for sale, be able to get to know their leadership team, some are founder owned, some are PE-backed, gets to understand the entire management team. But it also gets to make sure engineers from this company could work with the engineers of ours, and make certain that there's a good cultural fit because the thing -- after doing 79 acquisitions, the one C word that matters other than capability and customer is cultural fit. We like to pride ourselves that we like to expand the value of acquisition when they joined us and, allow them to have some level of autonomy if that's what that the company needs or bring them in tighter to the fold. Overall, we're happy with where we are on the M&A front. We'll continue to look for additional properties.

How do you think about sort of the mix of smaller kind of bolt-on deals versus larger? I mean, you guys clearly have been willing to look at both. Is there one area that has more competition for those deals or another? Is it one area that you're focused on more now?

Yes. It's a mix. And when we get asked about larger ones, those usually come with that title of transformative. The way CACI looks at it is, if there's a larger property out there that fills more gaps with 1 acquisition, then that works for us. If it's a medium to a smart-sized company, and it sort of fits us, and that's where we're -- we have gone after larger ones. We've gone after medium sized. I think, last March, someone asked me what we've learned most, and that was the time we did 2 acquisitions in the same day, and I always say, that's something we won't do again. So we didn't. This past year, we did 3 acquisitions in the same week. So it's not so much size, it's really -- can this company fill a gap for us over the long term? If a customer is talking about defensive cyber today, is defensive cyber market is going to be out there for 20 years or are they going to be a 2-year thing because of that with AI and machine learning? We're going to look at areas like that. We provide capabilities in those areas. And if there's a large or a smaller company that helps us grow there, then we'll do it.

Got it. So I mean, it sounds like you separate your business more on sort of the product that you're making as opposed to the customer. Should we think of more deals that's fitting more in that kind of lower-right quadrant mission technology? Or how do you sort of balance them across the portfolio?

Yes. So we're always looking across all of our quadrants, whether it's expertise or technology, whether it's enterprise, whether it's mission. On the mission tech side is where the competitive space for us looks different. We're actually looking at companies in the more aerospace and defense area. And so how do we compete against those? But we have gaps in our other areas. Clearly, if it's an opportunity cost of filling a gap in the enterprise expertise area, that traditionally comes with lower margins or mission tech that comes at higher margins. That's one of the deciding factors if I'm pressed to only win the deal on one. But we equally go out there and look for deals in all 4 quadrants. If you talk about what we're looking at now? Right now, we believe in the mission tech area and the electronic warfare area. We're pretty steeped with technologists and solutions that will continue to grow that market, but there are other niche gaps that we have. So if somebody came in, had a great electronic warfare company, proven customer base, that would be something that would fit in nicely today.

Got it. So I think you said that for the foreseeable future, M&A is kind of the #1 priority for the capital. Is there any scenario where that changes that multiples get to a certain point, and you just do a repower or something like that?

Yes. So we're asked that often. I don't do any of these talks without saying M&A is our #1 focus. But we have done others. First of all, our Board continually looks at how we deploy capital and everything is always in play. An example when M&A wasn't, was 2011, 2012. We repurchased 8 million shares of about 25% of our outstanding stock because the market for M&A there was the depressed and there weren't great targets. We believe we were materially undervalued. And that was a great time to use cash and buy back shares. For the foreseeable future, we see some incredible growth in the mission tech area. So I would say, at least for the foreseeable future, M&A is a #1 priority for capital, is probably where we're going to be at.

Got it. I guess, just talking about any big contracts coming up this year we should watch out for recompetes? And how does sort of the recompete level for this year compared to the typical year?

Yes. So typically, in any -- every given year, we always share during guidance period, how much of our current year revenue is in the active backlog and what we have to win, what we have to either keep through our recompetes or what we have to win new. Traditionally, our recompetes, 10% to 15%, and about 5% to 7% worth of new business. So in any given year, 82% to 85% of next year's revenue is already in-house. There is no one major contract to recompete for us out there. There's no one contract we have that's worth more than 4% of our overall revenue. So we've got a good mix across those 4 quadrants. Dan, anything that you...

Yes. I agree. A very diversified portfolio. So we don't have that in any 1 year kind of large overhang of a single recompete?

Sure. Yes. I guess, sort of thinking about the mix of contract types of fixed price, cost plus. I kind of think more of this mission technology stuff as maybe more fixed-price and depending on mix of customers, and I know you guys are focused by maybe civil, a little bit more fixed I would think? So I guess, how do you think sort of the mix of contracts going forward and where that can go?

Yes. So we are the type of company with the engineering talent that we have, and that has been bolstered greatly with the acquisition last March of LGS. We enjoy doing, and enjoy -- we favor doing firm fixed price work. And it's really a measure of risk. So in our mission tech area, we're delivering anything from systems, to products. If we know where we're headed, and we have a great solution, and our customer is very favorable of it, the more we can do firm fixed price is tremendous. One, it fixes what our customers are going to spend. The more we can get customers to buy solutions on a best value level, the better for us. And actually, the better for them. And I was telling someone else, every year, we get 1 or 2 customers a year that we get to have the full discussion around, you're buying expertise today. An example that I used, so we had a customer who was buying 200 people to run their operations center. And you look at them and say -- and that's -- let's just, for example, take this $200 million. That's great revenue for us, maybe at 6% to 8%. I'd rather have $100 million revenue at 20% margin. So the more I get my customer to say what the outcome you want? You want an operation center to stay up for 364.5 a year? Let me worry about that. Let me bring technology in. Maybe I have 40 people in an operations center, and get the government customer to pay us that value. And if I can do it for $80 million versus $200 million, I've got many customers who'll be flipped that they come back with $120 million to buy even more value, like we would in our daily lives. But -- and that drives much more firm fixed price and also helps us drive margins. On the product side, clearly, we're investing ahead of need. We're spending $25 million to $30 million a year where we believe the next conflict is going to be and the kind of technology that's needed. So we will spend ahead of need for the opportunity to sell devices and solutions in a fixed price manner. So true, the more firm fixed price, the better for us. I honestly think it's better for the federal government as well, the more they're able to spec. But it's difficult for them to say the outcome I want is x, therefore, I can buy on value. And frankly, given our growth and the kind of business we've been out there chasing, we're being so much more selective. So we're out there looking for arrangements where customer needs an outcome. We've already been investing in it. We can add some small amount of customer funds and deliver something at a higher margin.