CACI International Inc (CACI) Earnings Call Transcript & Summary

[Technical Difficulty] navy ship. Obviously, you're not a -- you're more of a mission...

Hey, David, sorry to jump in and interrupt. We just got -- I think with just the Zoom format, we were just put into this main room. So we missed the first part of your question. If you don't mind starting from the beginning.

Yes. Sure, no problem. Something weird happened on my end as well. All right. So let's start over. I was speaking to your wonderful quadrant diagram where you break out technology and expertise. And I want to focus first on the technology side of the house. So can you talk about, Tom, the areas that you see CACI well-positioned? I think you've highlighted in the past, space and EW and comms. Just talk about where you guys really see having a strong foothold from a technology perspective?

Okay. David, very good. Thank you. So when we talk about technology, we're looking at technology both to support enterprise activities and to support mission activities. And they're both equally important. Some of the enterprise technology is large software undertakings. Agile software development programs, business systems, new pay and personnel systems, financial systems, where we implement new capabilities when we support enterprise IT cloud migration, networks and the like is part of the technology focus. The other part of the technology focus is the mission technology, kind of space operations, signal collection devices, electronic warfare, kind of writ large as well as some other software-enabled capabilities to support intelligence customers, for example, with data visualization capabilities. So a broad spectrum of technology, enterprise, kind of broadly speaking, and then the mission. And then within some of the missions, some of them are product-led in signal collection devices, wireless technology, EO/IR sensing devices and the like.

Got it. So you've highlighted what is a very strong bid pipeline. I think $7 billion in already submitted bids, another $13-or-so billion, I think, you're talking about will be submitted. How does that break in terms of thinking about your quadrant diagram, how does that break out? I mean will you -- is this more on the technology side? Or is this more on the expertise side?

Yes. So all in all, if I look at that capability, the quadrants in our bid pipeline is consistent with the direction we're going. Now all 4 quadrants are important to us, one informs another one. And so they synergistically kind of work together but the technology is generating more margin than expertise. And the reason is, is because it's differentiated. It's less commodity-like, there are some secret sauces or capabilities in when a company has unique or differentiated capabilities, they can typically charge more. So the technology has greater margin opportunities than the expertise. And so everything else being equal, we like to bid more on the technology side. So when we look at our pipeline of submitted bids or bids under adjudication, a good portion of that is for new business to CACI, which is nice to see us continuing driving new business and organic growth. And at the same time, it's more technology weighted, which is consistent with our stated objective is to increase our margins.

And do you have a target that you're shooting for or an objective in terms of the mix of your revenues as you think about this, think about expertise versus technology? Obviously, you've seen a lot of growth on the technology side. It's becoming a bigger and bigger portion of the portfolio. Do you see an end state, a stated of kind of end state or objective you're trying to hit there?

Yes. I would think that over time, given the market dynamics in the profit capability in the size of the markets, technology would grow at a faster rate than expertise. And so over time, approximately, today, we're at 50-50, the technology will grow. We do not have specific targets for some obvious reasons. There is good work on the expertise side, the equation or above the hemisphere -- or the equator rather. And it behooves us to continue to pursue that good work. So we'll do both simultaneously and the mix will fall out in a natural course. But given the margin characteristics and the market characteristics, technology would grow disproportionately as we move forward.

Okay. And then from an M&A standpoint, you've talked about you're looking to fill in capability gaps, which makes sense. Could you highlight what -- where you might see capability gaps today? And are those more again on the technology side of the house or the expertise side of the house?

Yes. I would think most of the M&A opportunities will be on the technology side. We use M&A consistent with our strategy. Imagine a strategy where we look at the market, we look at the demand of various government agencies and government customers. We look at our capabilities. We look at the capabilities of our competitors. And we're looking for areas, which are more kind of revenue and profit opportunity within that framework. And we're looking for gaps in our capabilities. And so let's use M&A to fill those particular gaps. One large gap set would be related to technology on the mission side. In recent acquisitions -- fill some of those gaps, kind of Mastodon provided various handheld portable signal collection devices, which are a lot of applications and among a number of different customers. LGS had some very exquisite technology in a variety of areas ranging from photonics, kind of laser-based communications as well as a lot of expertise in wireless capabilities in products. Most recently, AVT EO/IR collection devices with embedded computing capabilities. So those are some obvious areas where there may be other technologies, which we do not have, and we could fill those gaps from an acquisition perspective. That being said, there were also some acquisition targets potentially on the enterprise side of the ex enterprise side of the equation. Several years ago, we bought a division from L-3, their NSS division, which had significant size and scale in large enterprise, system maintenance, cloud migration for some intelligence community customers. Capabilities in programs, which we did not have previously and that created a very strong foothold in a very difficult customer to enter. And so that filled another type of gap, which is more of a customer-centric gap.

Okay. So I want to transition and talk a little bit about your fiscal '21. So through the first half of the year, you've seen about 5% organic growth. I think for the full year, you're calling for a little over 6%. So call it, 7% in the second half of the year. What's driving that step up? Do you actually start to see expertise grow in the second half of the year? Or is it really going to be carried by the continued high level of growth on the technology side of things.

Yes. So David, we guide to full year kind of set of numbers, kind of recognizing that at different points in time, every quarter is going to have some uniqueness in terms of slightly higher or slightly lower revenue just due to normal fluctuation. So we're on track to hit our full year targets, both for cash flow and margin and kind of revenue growth. For our first half of the year, there are some unique things occurred. One is there was a COVID impact in the first half of the year, which we're seeing abating in the back half of the year. Now it's February, we have a few months to go, but we're seeing an abatement of some of those particular activities. We also had some very strong profitability on a fixed-price contract in the first half of the year, which drove higher margins first half kind of versus kind of back half. So some of those forces created a differentiation between the first and the second half. And then within it all, we just have the normal growth of the business. We've won some awards, programs ramp up. We reached a steady-state level of funding in manpower and development. And those factors will allow us to hit those full year organic growth targets that I articulated. So several different factors in play there.

And then taking it from an EBITDA margin perspective, you highlighted the benefit on the fixed price side. I'm not sure if the COVID impact was negative or positive for EBITDA margin. But you're talking about a pretty large step down in the EBITDA margin, I think, close to 10% in the second half of the year. You did 11.5%, I think, for the first half, 11.9% in the second quarter. So just what is in that mix to drive the EBITDA margin so much lower in the second half of the year versus what we saw in the first half of the year?

Yes. So I think, David, the major kind of takeaway to that question is the first half of the year was high, somewhat unusually, due to some of those fixed-price contracts that we mentioned, which contributed to higher-margin levels. In the second half of the year, we're targeting full year margin at a particular ambient level. Some of the declines in margin was the absence of that fixed price program as well as product sales kind of move from one quarter to another kind of which are kind of driving those particular margin characteristics. So I would suggest that the best way to look at margins, the way we look at it is -- although we pay attention to it every month when we kind of close our books, try to do it on a smooth basis since there are those fluctuations. So kind of there's nothing abnormal in the full year that would lead us to move away from our objective of increasing kind of EBITDA margin. And too soon to talk about specific guidance for our fiscal year '22, but our stated objective is organic revenue at ever-increasing margins. And so we feel that we're on a trajectory to continue to deliver those ever-increasing margins.

And what is the gap in margins between your technology portfolio today and the expertise portfolio?

Yes. So on average, the margin gap presented were between 300 and 500 basis points. So a relatively broad kind of differential between the margins in those 2 parts of our business. Then within our technology portfolio, which is 50% of our business, there's some programs, product sales, which are at very high margins. When we purchased AVT, we stated that we're expecting EBITDA margins of that business to be 35% to 40%. So there's some technology margins, which are quite high versus overall CACI EBITDA margins of 10%, 11%-ish. So -- but again, the takeaway is significantly materially higher margins on the technology side of the equation.

Right. Okay. And then last question on the '21 forecast. The operating cash flow side of things. So I think you did about $400 million in the first half, benefit from some positive working capital. Is that all that happens in the second half of the year to -- it looks like you're calling for about $200 million operating cash flow in the second half of the year. Is it just the reversal of some of that working capital goodness?