Q2 2020 Earnings Call
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Good day, ladies and gentlemen, thank you for standing by welcome to the CAC, our international quarter to fiscal year 20 earnings Conference call. Today's call is being recorded at this time all lines or in listen only mode. Later later, we will announce the opportunity for questions and instructions will be given at that time [laughter]. During this call. Please.
Press Star then zero and someone will help you at this time I would like to turn the conference over to Dan, Let Leckburg Senior Vice President of Investor Relations for CAC. Our International. Please go ahead Sir.
Thank you Jackie good morning, everyone.
I'm, Dan Leckburg Senior Vice President of Investor Relations for CAC, I International and I. Thank you for joining us this morning.
We are providing presentation slides, so let's move to slide number two please.
There will be statements in this call that do not address historical fact, and as such constitute forward looking statements under current law.
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 our describing the company's FCC filings. Our safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call.
I'd also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with gap.
Let's turn to slide three please.
So, but our discussion. This morning here is John and Gucci, President and Chief Executive Officer of CAC I International John .
Thanks, Dan and good morning, everyone. Thank you for joining us to discuss our fiscal year 2022nd quarter results with me. This morning are Tom Mutryn, Our Chief Financial Officer, and Greg Bradford President of C. said limited who is joining us from the UK.
Moving to slide four please.
Last night, we released our second quarter results for fiscal 2020, and I'm very pleased with our performance.
Actually I again delivered strong financial results across the board significant revenue and profitability growth accelerating organic growth and robust cash flow.
We also won $2.7 billion of contract awards with approximately 60% of that value representing new business for CAC right.
These results round out a great first half two our fiscal 2020.
The beginning of the fiscal year, we guided to accelerating organic revenue growth and margin expansion. Today, we are raising revenue and net income guidance to reflect further organic acceleration with ongoing margin expansion.
Slide five please.
We continue to see healthy demand trends across our addressable market supporting both revenue growth and margin expansion I mean illustrate this demand with awards from this quarter first safety I want to five year $1.1 billion enterprise and mission technology contract to modernize their customers business and mission applications portfolio.
Including extensive cloud migration. This is one of the government's largest agile software development programs, which we won by leveraging our unique past performance and the award winning innovative capabilities of our agile solutions factory safety I now delivers on two other federal governments largest agile development programs.
Emission technology site Cc I want to $475 million sole source contract with an intelligence community customer to enable their critical national security missions. We one of this opportunity by offering new unique intelligence in communications technologies, leveraging the R&D field innovation of Lgf.
This contract represents new a recompete work for CCRI.
Slide six please.
These awards are just a few examples of the high value contracts, we are consistently adding to our backlog. These are larger longer duration and enduring drivers of organic growth and margin expansion. In fact today the contracts were winning heavier weighted average contract duration that is 1.5 years law.
Other than those we won over the past three years.
This results in a dependable revenue base and allows us to focus items, such as BMP investment on additional growth rather than simply maintaining our book of business via Recompetes.
Many of these contracts are also more complex technology development efforts that initially ramp slowly but provide the high quality long term growth we're focused on delivering.
Well, we're now seeing is something we have discussed the past several quarters.
As we successfully deliver on these contracts and then are higher volume phases, we are driving accelerating organic growth. In fact, we now expect fiscal 2020 organic growth of at least 7% up materially from just six months ago, when we guided to about 5.5%.
Slide seven please.
Turning to the market environment, we continue to be very encouraged by what we see the two year budget agreement signed back in August was followed by the passage of government fiscal 20 appropriations bills in late December funding of the government at levels about 4% higher than government fiscal 19.
More important to us than the absolute budget levels are the multiyear investment plans of our customers. When we map CCIX capabilities against these priorities, we see tremendous opportunity across our $220 billion addressable markets.
And our enterprise business customers are modernizing infrastructure and business applications.
And our mission business customers are investing heavily in signals intelligence electronic warfare cyber communications in space, our alignment to these critical areas enable our ability to take market share and gives us confidence in our future growth.
Slide eight please.
To ensure CCR remains ready to address our customers emerging needs. We continue to invest for future growth. We're developing differentiated technologies ahead of customer demand through our research and development program. When we went on differentiation, we deliver more value to our customers and our shareholders.
Or business development and operations organizations are developing solutions in pursuit of the right growth opportunities testing technologies, what our customers when opportunities that will provide long term sustainable growth.
And we're consistently investing our leadership and our people.
Ready strategic leaders like retire general Mike Decata, who will establish the strategic advisory group of industry and customer experts to ensure CAC remains ahead of market trends and on a broader people side, we continue to offer highly competitive benefits, including training certifications and work life balance to the Im just a few.
This continues to attract and retain the industry best talent.
In closing I'm very pleased with our second quarter performance, we remain committed to our successful strategy that has served us so well when new business deliver operational excellence and deploy capital deployed capital to support future growth.
Relentless focus across the organization on this strategy drives growth and margin expansion, which generates increasing levels of cash flow. We then deploy that cash to as strategic capabilities in customers critical investment areas. This combination of organic and acquired growth has successfully compounded cash generation.
And shareholder value over the long term, we remain very confident looking forward with that I'll turn the call over to Tom.
Thank you Tom and good morning, everyone. Please turn to slide number nine our second quarter revenue was $1.4 billion, 18% greater than last year with 8.1% organic growth organic growth celebrated from first quarter as our new business awards ramped up in existing programs continue to deliver.
Net income for the quarter with $79.2 million up 15.5% from a year recall.
This is higher than the expectation.
Our and we were able to drive higher operating profit, even lower effective tax rate.
Slide 10 please.
We continue to generate strong cash flow with $134 million of operating cash flow in the second part.
Days sales outstanding was 51 day down from 73 days last year.
One major driver of the reductions lower accounts receivable as a result to the our purchase facilities on Mark costs, which we put in place in January 2019.
In addition, we have continued to drive efficiencies in our billing and collection processes.
We ended the second quarter with net debt to trailing 12 month adjusted EBITDA at 3.0 times. This provides ample debt capacity to undertake additional acquisition to had high value strategic capabilities.
Slide 11 point.
We are raising our fiscal year 2020 guidance to reflect strong operating performance.
Almost expectations for lower tax rate, we now expect organic growth to be at least 7% in fiscal year 20 up from 5.5%. When we provided by 20 initial guidance driven by our strong contract awards in our program performance.
As a reminder, farm granite growth purposes Mastodon anniversaries at the end of January in LNG at the end of February .
Our guidance assumes an effective tax rate of approximately 22% down from our original expectations of 23%.
Drivers of this include increased benefits associated with the testing and equity grants given strong stock price performance as well as higher tax credits.
We continue to expect fiscal year 20, adjusted EBITDA margin to be around 10.3%.
And we are increasing our operating cash flow guidance to be at least $430 million, excluding any impact at the market facility.
Slide 12, please our forward indicators remain healthy as John mentioned, we again had strong contract awards in the second quarter coming in at $2.7 billion more than doubled Bob will be achieved last year.
On a trailing 12 month basis. This increased our book to Bill to 2.4 time and drove record backlog of $20 billion up 61% versus last year.
Our pipeline metrics remained healthy at Anfield rubles reported last quarter.
Submitted bids pending awards are $8 billion with over 70% of that for new businesses.
We expect to submitted another 13.4 billion dollars' worth of bids during the March and June quarters with over 70% of that for new business. The CCR.
Finally at the midpoint of our revised guidance, we now expect to 97% of our revenue will come from existing contract 2% from re competes in what percent from new business with that I'll turn the call back over to job.
Thank you, Tom and let's go to slide 13.
The strength of our performance through the first half of this fiscal year positions us to deliver continued gross margin expansion and shareholder value over the long term.
None of this happens at up the talent innovation and commitment of our employees I'm incredibly proud of the expertise and technology, we deliver to our enterprise emission customers and I think you all for what you do each and everyday to make CCBI a great company.
Great companies rely on their culture to define the right way to conduct business and there are people to embrace that culture is a success factor.
Our culture of good character and innovation is foundational to our success.
Fortune magazine's recent listing of CCRI as the world's most admired company and as a top 10 information technology services company worldwide recognizes that our culture drives our success.
With that Chuck let's open the call for questions.
Thank you we will now begin the question and answer session.
A question you May Press Star then one on your telephone keypad. If we are using a speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then too please limit yourself to one question and one follow up and if you have further questions. You may reenter. The question queue. At this time, we'll pause momentarily to assemble roster.
Thank you.
And our first question will come from Gavin Parsons of Goldman Sachs. Please go ahead.
Hey, good morning, gentlemen.
Good morning, Kevin.
So this is a pretty high class problem to have but I mean, you've won a ton at what point do say.
We have one enough in the backlog to drive say mid to high single digit growth for a few years now we want to slow down on winning and just make sure. We can execute on what we have or those that that they're not mutually exclusive.
Yes, David Phase.
Yeah I guess.
Clearly, we don't plan on slow on slowing down.
We actually started.
As many of you on the on the call no with a very specific strategy. Several years back in that was to focus on growing both top and bottom and bottom line and we made a quite a substantial commitments that will never sacrifice margin to get the kind of growth is that that you're now seeing today.
And that's that's really foundational to us because it's a belief the growing profit and cash flow overtime as the best way generate shareholder value in some of that was going to be organic and some of that was going to be two acquisitions, we've been talking for quite some time now.
Around when does the organic growth show up and how does that.
At what point does that equals some of your peers and then at what time does that does it does this or facet.
If we look at up why 20, I'm really pleased and confident on the organic growth potential.
Because we've consistently one larger and longer term business in the areas where customers are going to spend real real dollars, we've been able to maintain rates over the last three three years. So we're not pushing cost of our investments onto our customers were just managing a very.
Have a strong god cost basis, when we when we do that when we win larger longer duration, we actually generate this what recon of BMP efficiency, which means that if I'm winning longer duration larger awards, then as I get a couple of years off im spending far less to me.
Maintain the book of business and an plowing more money into continuing to win so coming back to your when do we slowdown and just focus on execution.
Our actually Threep our strategy. The first the first two parts when new business, which the team's done an outstanding job. The BD mission machine is work extremely well and then second deliver and our.
Team has done an outstanding job on delivering because as you all know once we get the awards, we don't we don't gain margin unless were.
Generating revenue and so across the.
Our board were very happy and don't really see any end in sight.
That makes us Tom on the free cash flow conversion, thank god supplies about a 110% that's down a good amount from the last few years I appreciate your drawing a lot faster but.
Can you help walk to bridge over the next few years, what is free cash conversion to look like and can you improve that even if you continue to grow at a similar rate to this year. Thanks.
Yes. Thank you on one of the things I'll note in the last two years. So we've had a higher capital spending our than we had previously in so that obviously you didn't impact the numbers that you articulated that capital spending is a direct result of dean divestments that we're making into wins.
We are having on your all in a couple buckets you as we when were often times that work is provide sci locations.
Oftentimes the new facility some of the cat skipped space, which is expensive facility awesome new spaces, we have have customized laboratories in a relatively expensive test and assembly equipment, our internal capex internal so thats driving some as you that conversion I'll just add a.
A relatively straight forward walked down from net income to operating cash flow AWS, we have a good number of noncash items depreciation stock compensation expense intangible amortization. So we'd expect the levels that you articulated to be somewhat consistent going forward.
With that level of Capex.
Thank you.
Okay.
And our next question will come from Edward Caso of Wells Fargo. Please go ahead.
Good morning congratulations.
Can you talk go back in your your history here and give us a sense the upcoming election cycle, how that May impact award decisions, both before and after our and whether its a.
You know maintained to current administration or or change to the other party.
And then maybe weve into that your commentary around extended duration and how does that help you hear total over the hump. Thank you, yes. Thanks Ed.
So look we've done business for 57 years in county, and we are I would like to say, we fared well under various admin administrations. They clearly have differing priorities. We can debate whether this year's field has even more divergent sets, but we won't do that here.
Part of part of why we see a growth coming and continuing regardless, whether there is in our or a D.
A leading the nation is we've got a well balanced portfolio of business and if we look at our enterprise and our mission customers in the numerous capabilities that we have AD I mean, we've got some pretty strong expertise and technology offerings. So if we if we talk this discussion around a mission business.
And our enterprise business on the mission side I mean, we are well aligned to critical defense and National security areas, you've always heard as say the was a very dangerous place and the defense budgets have historically been a highly bi partisan part of the federal government budget. So we believe that were well cover cover there.
On the enterprise side every time, we moved social funding and a different programs around.
Both the fed civil and.
And the defense side are always looking to modernize and updating their systems and make it more.
Technological infrastructure investments and that really drives long term cost savings.
So we believed that our business is less susceptible.
Than maybe some pure services business because as you as you mentioned a we've in the kind of work that we do a much larger portion of our portfolio today, maybe going back five years is more of the type of in more of technology in nature and its with high end mission customers and those are very immune.
Two.
You know Monday afternoon budget budget budget cuts. So you have at the end of the day, great power competition continues to be a focus.
And some of the capabilities that we have to go fight those and also counterterrorism missions at least in the W. area has eroded and our strategy has always been to position this company to where the government's going to spend their budget dollars less than at the end of the day the election is the election.
It is congress it actually boats on and Aloe case in a spends the.
But just which are out there so and we are looking forward to who who gets reelected or who fills that role in believed that where that kind of business that will continue to grow regardless.
Thanks, the other question it's around.
You had a sort of an uptick and cost plus all work here is can you give us a sense what's in the pipeline.
Just to sort of a short term phenomena or is there more cost plus and your future and up what the implications there for on margins. Thank you.
Yes so.
That's that's one of those things that.
As a as a leader leadership team.
We're always watching but when you see.
Minor movements in cost plus versus fixed price and timing.
Material and we did the Lgf acquisition, a large portion of their work is cost plus so when we bought that acquisition then that would have driven the percentage of cost plus work up.
The rest of the minor movements there is really on mix.
Theres different awards that are out there when we looked at the pipeline.
At a macro level and the more technology work that we're winning.
More of that as our products business begins to spin up will be for fixed price.
And the expertise work is sort of a split sort of 55 ft. So we like that mix and of course contract type is only one.
Ill or not that we have to be driving driving margins.
So it will continue to watch that but there's there should be done nothing inferred that we're winning more costless work there for margins are going to go to run direction.
Great. Thank you.
Thanks.
Our next question will come from Seth Seifman of JP Morgan. Please go ahead.
Thanks. Good morning, this is actually ban on for Scott.
Good morning band.
I was hoping you could add a little color on the upside in organic growth.
Is this something that is broad based across the portfolio is this something stemming from.
The mission or the enterprise or one of the four quadrants that you've had laid out the investor day.
Yes. Thanks.
If we look at our organic growth. It truly is a function of a multiyear plan. The now you're all starting to see the.
And the benefits of Draenor generating awards that are longer in duration.
And.
That are much larger in dollar in dollar value.
You know as when we think we were at a 2.8% when we came out of last year, we guided to five five were at seven and what you're starting to see is based on the mix of business, which is the other other other part of your question.
When when the mix of business is more towards the technology side those are longer term programs. They have a longer term ramp up so you'll start to see that growth later, possibly 3699 months After award in for the more expertise jobs that we win where were.
Living talents those have a much quicker ramp up across the four quadrants you know if I were to put it in that that quadrant speak expertise starts up quicker and holds a sustained level of of revenue.
And on the technology side those programs are going to start up.
Slower and then deliver their growth the combination of that and the multiyear nature of book to bills far far beyond one and a half into I think we're at 2.4 now on a trailing tremont trailing 12 12 months the mix of that work really is driving future organic organic.
Growth in the more we continue to win back to Gary's question, we have no intention sort of of slowing this training train down at the other day broad growth across both our enterprise in our own mission businesses.
Ill add can one comment on.
Here is also growth potential, which we're seeing on existing work.
A large number of a base of business and we have.
Strong tenant program management discipline, we're buying we do everything else power to provide more value on existing programs are still open positions quicker on labor base types of activity in looked at scope on existing working so thats another source of new organic growth going forward.
Got it thanks, and I guess.
No maybe piggybacking a little bit on Gabens question, but.
On the M&A front this is pretty.
The focus of your strategy here.
Organic growth being so strong this year.
You know when you're at three times leverage like.
We've seen a number of deals in the space that pretty lofty multiples on is there any.
Can you comment on maybe your willingness to go out and pursue more M&A with elevated deals into space or would you be willing to build little cash and get the leverage.
You know, maybe down down a little bit or closer to two times.
Yes, thanks, So I'll have a star and I'll, let Tom talk some of the round of leverage levels look.
M&A is always going to be a key priority for capital deployment, just beyond organic growth in the way, we look at M&A and how it grows US is worth strategy based company. So strategy is a place where we come from we consistently look at a any gaps that we have or any new areas.
Of weight of White space, where we have no capability in but we believe that the government is going to spend a materially over the next 13579 years.
Okay. So if we are we did a couple acquisitions in the March timeframe. We just came off of doing three others are you still have dry powder.
But where we where we come from on the M&A side, whether the large transformational ones or smaller smaller ones. The acquisitions kind of provide long term strategic value. It has to fill capability gaps or has that come with a customer relationships that we actually need for long for long term growth and then it needs to create.
Shareholder value.
You mentioned something around where all the multiples yes, there they are somewhat elevated perhaps.
You know what what we're looking at and we look at an awful lot of books that coming here, but we also look to build relationships with companies that aren't looking to be sold today, but over time working with us enjoy and get delighted and the fact that when they get integrated inside to see Cie the majority of them see.
Additional growth and additional opportunities for their employees. So yes, and we were watching some of these multiple numbers again, that's sort of a number that comes along after the deals done you know to our shareholders out that we've been very prudent and very focused and just a disciplined buyers of other.
Properties and again it has to drive fundamental long term growth for this company.
Yes ill comment on kind of both leverage and independent the elevated multiples that you kind of referenced on.
When we look at acquisitions we.
Kind of base our decisions.
Once we establish its strategic into the right company on and present value analysis in so the value of enterprise is future cash flow, we discounted back we spend a lot of time trying to accurately forecast future cash flow, depending no easy task.
But companies, which are expected to grow materially are going to command higher prices, then companies, which have an anemic slow growth just had mathematically so to a certain extent you get what you pay for you in acquisitions in and often times we replaced.
The higher multiples simply because the company does have materially higher growth potential argue which we've identified.
The leverage 3.0 times today, we're comfortable with that in the absence of acquisition, we will de lever off of but Theres no intersect target to de lever everything else being equal given todays debt capital markets, we would prefer borrowing money at relative.
Early inexpensive rate up and investing in the business for long term success via acquisitions. So it is not a constraint for us off and we refined to kinda unilife leverage effectively I'd to allow us to kind of grow shareholder value.
Got it thank you.
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Thanks.
Our next question will come from Joseph Denardi of Stifel. Please go ahead.
Hey, good morning, everybody.
John I want to ask the M&A question, a little bit differently. If I can it was about two years ago that you guys put in a bid for CSRA that would have involved a lot of stock and your stock is almost doubled since then.
You've been able to find other transactions over that period that seem to be working for you in its smaller ish transaction I'm just wondering if.
You know that experience influences the way that you look at larger scale M&A if it influences the way you think about using your stock.
Do you want to keep doing smaller type transactions or are you agnostic as to size. Thank you.
And Joe Thanks, I think.
We're we're very.
We are focused on small niche once we're focused on acquisitions they have capabilities of customer relationships that can fill a single gap and we're focused on some what we would we have been calling transformational ones that really the way I see the were transformational is just an asset.
Which feels a multiple gaps with one with one transaction I'm, probably not going to go down the scene, sorry path and we have our own views on that one.
We did believe when we still believe that that acquisition.
Would've helped both companies and we believe that we will recognize the value that we had talked about but unfortunately, we can't win them when the mall.
There are a lot of companies out there today.
There are folks out there are paying very high high multiples as last question mentioned, but at the end of end of the day, we're gonna be a disciplined.
Spender of our cash and make certain that we're getting the best value that we absolutely can so it's not transformational versus small it's really does an asset out there have a capability that we can use now at the end of the day. We've now become a company that is investing far more internally to generate our own intellectual property. So.
On the way I look at act acquisitions, we have a gap I would much rather invest if we see that gap early enough and I can meet the timely than our customer needs Act that kind of a solution I'd much rather spend are in R&D funds on the intellectual property and those cases, where we didn't see that coming than we do for.
Hi, and gas will go out there so.
Im sort of in different towards small versus versus large.
When we don't have something we don't have a.
And and edict to do a certain dollar value worth of acquisitions each year. So it really is strategically based I will tell you that LG EPS is still a lot of gaps on the intellectual property and some announced that they have if we look at communications of Fiveg and the like so very very Oh.
Open to all the kind of companies, which are out there and we'll continue to build upon a long history of doing successful emanates, Tom anything you want it I'll add just one arguably in follow on comment on the the ultimate kind of decision should be my company or not is well the drive long term shareholder value.
We'll see the stock performed better with the acquisition than without the acquisition and that's how we measure kind of long term shareholder value at the end of the day off and then as consistent with my previous comments you to focus on future operating cash flow is associated with the acquisition and then once we start.
Which is a strategic fit its economic how do we ultimately consummate the transaction and as acquisitions gets larger all we would have to rely not only on net financing, but I'm using our equity capital outperformance consideration on in we're very.
Cognizant of the higher cost of capital for equity and that goes into our calculus determining what the appropriate you to purchase consideration.
Yes, thank you for that perspective.
To do the capabilities or the gaps that you had hoped yes array would build through those still exist do you still want to build own and Tom If you could just remind us what what a leverage you're comfortable getting to kind of at the high end with a transaction. Thank you.
Well I'll start that had PCR lender, we said in the past dog, you're getting to foreign half times leverage is something that we would be comfortable doing kind of recognizing that we'd be able to de lever relatively quickly given strong a unit free cash flow performance and so off in your mind I would think of.
Kind of poor and a half is times.
You can maximum leverage maybe.
10, or 20 basis points thereafter, but generally that's where we're well.
Yeah, Joe and on a has been on your other question.
Trying to shake CSR a away at the end of the day, we were looking at.
Doing some things in the managed services area and in the past three years since that deal has been finished.
We have come up with those caper capabilities. We're after winning managed services jobs. So we have filled that gap.
If you if you look at where we are on the suffered development front.
We were starting that 50 to 100 million dollar award range now we're at the five year $1.2 billion doing agile Oh, we actually own the own were actually performing on.
Two of the largest or agile software.
Programs out there and did all that without having closed on the acquisitions might say that weve quote unquote healed nicely and.
We're out there seeing growth in the areas that we'd like to grown. So thanks, yes. Thank you very much.
You bet. Thank you.
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Our next question will come from Scott Forbes of Jefferies. Please go ahead.
Hey, good morning, guys I mean, it looks like you guys have a bit of a margin ramp in the second half and I'm. Just wondering if there's anything to call out there in terms of products and product mix efficiencies or any one time items.
Thanks.
Yeah. So we're guiding to 10.3 present at EBITDA margin for the full year I've. One can do the first half calculation implied that the back half is.
Higher than.
That on nothing particular to call out all of you like awards, sometimes margin performance is lumpy into between quarters. If you go back over the past several quarters, you'll see that we can fluctuate in some of that timing of unit product deliveries coming in higher margin sometimes errors.
You award or incentive fees, which are unique to a particular are up or other singular events, which are driving that some expense items on so I would not.
Our call lot any specific you items driving that job in the underlying across the portfolio, we're seeing positive momentum in driving our higher margins both on existing work on and on the new work Thats ramping up that John mentioned.
And probably lastly, you as we get larger we're able to take our indirect costs and spread it over a broader based and thats productive to markets as well.
Thanks, and then I mean, the protest environment seems to picked up recently and just are you guys seeing any challenges coming from that or any delay of new opportunities.
Yeah. Thanks.
No challenges there, there's always a a ambient level of a protest going out there.
Today, we actually have to awards that were awarded to US that had been protests are there was one back from the fourth fourth quarter last fiscal year, one this quarter.
But now you know nothing that gives us gives us pause and Oh I think our.
Track record on sustaining awards to see side has been.
Quite amazing over the last few few years I would expect these outcomes to be no different.
Thanks, guys.
Thank you.
Our next question will come from John revamp of Citi. Please go ahead.
Morning, guys. This is calling canceled on for John are these one false following up on the the protest environment kind of talking so shipping to the bid environment can you talk a little bit to the competitiveness of bids and how 12 to 18 month on your competitors scaling up has impacted both the competitive bid.
And then also kind of the margins that flow through for the more traditional services work.
Yeah sure.
Where we're we're still looking at.
60% to 70% win rates on new business. So I like the odds are what are you spending money.
To take market share seven to 10 times were successful.
So I like those odds and I'll continue to invest when the odds favor me to that to that level.
As for margin simply look at the.
And our expertise work versus our technology work sort of getting back to our two by two quadrant.
It's it's true this far more competitors on the expertise side and that does have an.
And impact on the on them on the margins and also the of a risk factors that go along with delivering talent has a slightly different different risk model.
We are looking to continue to grow the expertise elements of our business, even though those me maybe at a at slightly lower margin. If we look at the technology side, we're looking to accelerate growth within that parts of our but part of our business and because.
The other day those those higher margins are going to be what we used to.
Drive bottom line growth.
So.
Margins that were seeing I'll, there clearly when we differentiate based on that technology in the way, we're going to solve our customers' problems and our customers buy on value, which is the kind of work that we're looking for and we're continually going after larger contracts versus smaller ones, which also narrowed the bidding the number of.
Potential bidders down and we lay on the table our intellectual property in ways that we can deliver faster than ever you'd everyone else that drives the best value decision that also gives us a great reason to ask for higher margin because we're investing ahead of customer need at the other day every time, we differentiate on the technology and the people.
All of this business, we find customers wanting more of cc I versus others and when they want more or less than everybody else. We went longer jobs that come with a a higher margin that over a time continues to drive bottom line grows.
Got it thanks for the color and just just following up on that.
If we think about the timing of that transition right and say for example, if you look at ldcs and the sick and fixed price transition that's going on there can you just talk a little bit about how.
Timing of of that transition happens and fixed price and then maybe within the context since the aspirational.
Mid teens margin.
Yes. Thanks. Thanks.
The way we look at it is probably not by contract type, but it's more by the kind of work that we've been out there and had been winning now we have augmented all of our awards press releases with whether its expertise or a technology program because we are trying to.
I'll provide more information allows you all to sort of model, where our top in our and our bottom line growth throughout their going.
On the technology programs, which I think as close as call onto relating to some of the LG <expletive> and massive down from fixed price work those technology programs take time for facility build out we've got to put labs in place. We got additional material purchases I mean, we're also working on finalizing the requirements with our customer.
And that's usually a three to six month delay quote unquote delay in a scene.
Material revenue from those awards so the more technology work that we win the better margins are our but it has a longer protracted ramp up period.
So if you looked at our backlog grown when you look the kind of what we've won the last six to nine months, what you're seeing now are those technology programs. We won whether they're LG asked where their core CA CAC I. We won those in the fourth quarter of last year and those are now starting to generate higher levels of revenue and then mark merchant.
Merchant growth.
Got it okay Scott.
Thanks, Tom.
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Our next question will come from Matt Accor's of Barclays. Please go ahead.
Hey, good morning, guys. Thanks for the question.
Working capital and you guys talked about.
Some of the strong collections in the quarter, how much more kind of runway is there to go there and how should we think about where that could kind of going along right.
Yes, so we've been doing a very good job of you're focusing on.
Tightly cash collections kind of driving kind of lower DS. So on the there's opportunities for continuous improvement you kind of getting the invoices optidure quicker and working closely with the government paying agents to make sure builds are paid contemplate on time.
Making sure invoicing is dying to accurately we have several programs, which have in fairly complicated invoicing requirements are which take time for us to ensure that the invoices would 100% accurate and if it's not oftentimes you get rejected.
Going upstream of we're working with various contracting organizations to had to rethink. Some it's always invoicing requirement is it really necessary for the government to have that level of detail in backup usage for invoices on in often cases, you know our belief the answer is.
No and we're happy to its dialogues to try to kind of change the nature of those requirements in payment terms to facilitate some corporate payment processes and so there is some opportunities to continue to drive lower DSL.
Got it thanks, and then I guess could you maybe comment just on how ldcs and mass Donna doing you talked about I think it's a started the year kind of ramp up as you go through the year on those.
A new acquisitions I, just kind of an update on on how that's going.
Yeah. Thanks.
Look overall extremely pleased with their performance.
And as a proof point last quarter I was talking about the beginnings of having some customer meetings, where they would bring some of our core seaside technology and we had folks from both massive on an old Gs and those meetings.
And now we're one quarter of quarter later, and we've been getting great response and support by those customers.
On a couple of facts one the fact that we continue to invest ahead of head of knees and then also being very easy to work to work with so they can consolidate requirements that they may have done with three or four other vendors sort of sit with us and say you can take technology from LG EPS and this device for mass and on some of your core technology technology.
We see a much better future for us in how we want to address some of our mission needs.
So so the reason why we bought both of those two continue to provide us a great library of technology that on that front story well financially.
They are both doing well in line with our long term expectations.
With an understanding that some of the product nature of their deliveries can result in quarter quarter lumpiness be it in deliveries or in margin as Tom mentioned earlier, but again, we're running the business on annual basis over that period, we expect any lumpiness will smooth that solve out and then on the awards front or the one award that I've mentioned during my prepared.
Right marks.
That was a rather large LG EPS award.
That is going to support our intelligence customer so whether it's what we're delivering in the customers.
Take up rate on what they see from sea side moving forward given the fact, we have LG SMS Yvonne I, but I would I would check that is a positive financially over the long long term I would check that box as being very successful and their ability to come into this company be fully integrated and.
Under their leadership team when a $475 million sole source job is sort of a nice punctuation points out well those two assets are out there doing.
Great. Thank you.
Thanks.
Our next question will come from Josh Sullivan of Benchmark Company. Please go ahead.
Hi, good morning.
Good morning.
I just didn't I mean in light of the.
Acquisitions, you just talked about there can you talk about strategy to push out into some smaller tech hubs regionally you know any metrics on headcount growth in these areas you know looks like method on consumer reports might be quadrupling headcount.
Any metrics you can give us on the on that front.
Yes sure.
Yes, so we.
We have we have mentioned.
A lot around something we started I mean, probably five or six years back back now, which was trying to leverage more but disbursed work workforce to get some of our technology programs are sub development done.
Going extremely well.
Actually our method on folks up in Rochester have doubled the number of employees I mean, I'd like to hear that it had a drupal maybe you have information, Josh what do you share and yet, but I'm very excited.
Because it's this model that when we look at the background clearance processing, we look at the competition for talent in Northern Virginia area. The more technology programs. We win the less important is that we do work outside of our customers from dates. So we can move that work too many many locations in the Rochester area in the Sarah Sarasota.
Area, Denver, Colorado Springs Tampa.
Some really a form floren park, some really great talent there and.
Folks love the technology that we're.
Delivering like the mission and when we can check those two two boxes. The fact that they can report to work where they want to Oh live and raise a family works out really well for us. So we've got the infrastructure in place.
And as we do more more acquisitions or they have beachhead and also university, we knew universe relationships.
Help us as well so the more disperse our technology workforce is the better relationships that with the that we are able to obtain that allows us to a higher even quicker.
Got it and I appreciate that and then just kinda, though longer term duration I assume that the contracts you think that's unique because he's the guy or was that broader reality of the defense contract and in general on the VIP said.
Yes, I probably can't speak for.
Someone else within our sector, but what I can tell you is just the same thing I talk to my team about weekly one or $220 billion addressable market, we want to drive top and Bottomline growth and we want to be driving shareholder value.
So the real thing that we changed in this company was.
Just just the discipline in the focus that it takes to go shaped the right deals that make sense for our customer sat and for our shareholders.
So there has always been larger dollar value jobs.
I I tend to enjoy those more than we winning work I won last year next year.
Because every time I'm spending investment dollars to re when what our already have.
That's just taken up capital I'd, much rather pile that money into new technologies and new offerings to go gather together new market market share. So I don't want if it's a trend in the sector. It's been a trend for us and the fact that we're focused on large longer duration larger larger jobs.
And everybody's patience I mean, we're actually starting to see how that actually pays off and back to Cabot's first question.
This is a train we're not going to get off of this. This this model works I would have joined our company tour and $20 billion addressable market. There's plenty of things we know how did under do well and we can be very selective as to how we want to go after new business pursuits, yet and I would say it I don't have the broad statistics across kind of the into.
Stream up, but I'm pretty confident saying the longer duration is a function of the size of the awards in the differentiated capabilities within those awards and those are two would be.
Tenets of our business development that we put in place multiple years ago, and we're seeing the fruits of that.
Great appreciate it thank you.
Yes.
Our next question will come from Tobey Sommer Suntrust Robinson Humphrey. Please go ahead.
Hey, good morning. This is a jasper bip on for Toby So from our view it seems that agency customers have increasingly look to wrap cyber intelligence capabilities into a single contract award. So I was hoping you could comment on that dynamic and how that might impact the sci.
Yes, sure. So I mean, there's theres multiple customers that.
Our out there and when we actually assist customers and taking multiple concrete contractual v. vehicles and collapsing those into one one it takes on a less.
Contracting power from our customer freeze them up to work on other.
Items and also gives our customer someone who is going to ensure that what they're looking to have delivered gets delivered so if you look at.
Our in intelligence from many customers they are combining various con contracts, we support that move.
We also support helping those customers move work from an expertise tight contractual arrangements to more of a technology, one and from a cost plus buying talent to a fixed price delivering outcomes, we become a very good company at delivering technology.
It gives a customer the outcome that they're looking looking for.
So we have seen that DHS is doing some of that workers as well Josh there they're out there.
Combining contract when a largest awards that that we've had over the last five years was our.
FSD he contract with.
Detroit, where the customer combined 11 or 13 different different contracts what that does for us it allows us to.
Have a one on one relationship with that customer to help them drive productivity level levels are higher than they would have gotten with 11 different contractors out there and also drives as Tom mentioned earlier, some great on contract growth that as our customer sees gaps.
Within what Theyre out their buying that allows us to bring more folks on board and drive our organic growth.
Thanks, and then I think we touched on LG SMS found the can you provide an update on smaller acquisitions from last quarter.
Yes, we did it you know a few Medicaid index century industries in deep through there are all performing kind of well I index century was the largest one together to were relatively small but important capabilities and do you on everything's on track for those three acquisitions to deliver what we.
He said, we're going to deliver off for fiscal year 2000.
Okay.
I appreciate the detail.
Thanks, Josh.
Our next question will come from Cai von Rumohr of Cowen and company. Please go ahead.
Hey, good morning, guys stem flick on for CPI.
Yes.
So just a few points on the agile task order from this quarter.
So is it fair to assume that the ramp on that looks.
Like you described textbooks.
Earlier in the call when the full 1.1 billion included in backlog this quarter and down should we continue to expect agile contracts of the scale moving forward. It sounds like this was one of the.
One of the larger ones that we've seen thanks.
Yes sure.
So yes, it isn't our backlog at the $1.1 billion level.
The ramp for this is very similar.
To both our expertise that are mission technology programs, it's probably a three to six month ramp.
Which which means we'll see some revenue assisting us in the third quarter little more in the fourth but we'll see.
Clearly a more material ramp as we get into the first two quarters of next year, and then from that point and beyond just about a $225 million skewing contract each and every year.
I think that are part of question is.
Uh huh.
The nature of agile software content contracts in the size Boy I hope So we were were actually.
Shaping customers, we have quite an extensive investment we made about four years back in Ashburn, Virginia, It's or agile solutions factory, where if you picture delivering a hardware product is between a factory line. We have the same type of building layout and functional lay down for us to divide.
All of software is well customers can see it they can feel that they can touch it they can witness the much better metrics that are being done out there and like any production line when should we find it and you're delivering 99 in two nines error free software.
That drives a lot of attention. So what's your seen as customers, taking multiple suffered development applegate applications and work that they need and they are consolidating those and buying those from one specific contractor and were Oh enthused and you know very pleased and very happy that we are performing.
And on two of the government's largest than we would expect that trend to continue.
Great. Thanks.
You bet.
Our next question will come from Louie Dipalma of William Blair. Please go ahead.
Good morning, John and team.
Good morning.
What has been your secret sauce that has enabled you to move up market and when these larger billion dollar deals is it a function of how you have always been strong at software development and.
These large software development programs didn't previously exists.
These mostly aren't.
Take away wins right.
Correct. So.
Part of it is a focus three to four years back is to what gas do we have in how do we feel those and then once we had those gaps filled our business development in our line leadership team during outstanding job was shaping customers.
So what we mean by shaping isn't directing customers, what they buy and how they buy what it really is is that being able to come to a C shy location or through numerous meetings showing the customers. They are to the possible. So not just tell me what we have today, but here's the augmentations investments were willing to make to help you get your missions salt.
So a lot of it is an intentional investment and intentional meetings that really drive the customer to not just by what they believe they need but actually by the out outcome when a customer buys an outcome that they've seen from us we're able to differentiate when using that term a lot during this call because it truly matters.
We can differentiate on the technology side and deliver faster better cheaper than my customers on so focused on that I'd make 8% in a cost plus model or 12% in a fixed price on that actually focused on getting something that they absolutely need.
So you know this didn't start over night of we looked at some larger transformational acquisitions are two years back to give us this capability sooner those didn't go the way we wanted them too.
But you know we then go to that to the next arrow in our quiver, which is let's internally invest.
And those investments are out there are paying off so we'd like to believe that the trend of our customer's going to be buying more of these larger larger scale jobs at the end of the day.
We've built in we make our own successes and the more we say this disciplined and focused on how we win larger more profitable business other better off will be in you know as I mentioned earlier this training isn't going to stop anytime soon and I'll add to that.
It's John in your prepared remarks, you talked about having a company will quit character and culture I mean, it really starts with that starts with a strong vision of where we want to go everyone's roaming the same direction and then you get to people processes and technology. So some very you highly talented and motivated.
People here throughout the organization with some consistent processes.
Which gives us confidence that we have embraced building blocks in place for that success.
Okay and on this topic of differentiation via M&A versus internal investments you guys are obviously, one of the leading providers that signals intelligence and electronic warfare sensors to other sensor providers over the past several years Raytheon and slip.
ER acquired drawn platforms to vertically integrate their sensors his abilities and laid us recently acquired a key positioning gremlins do you feel that you need to own or internally develop a drawn platform in order to further expand your signals.
Intelligence capabilities.
Yes. Thanks.
We.
We are a very careful and very focused on where we see the market going.
We've been very.
Vocal around it's our intention to be a platform provider.
That's that's another step right now, it's a step too far.
We think that are accompanies alter the built outstanding plant platforms. They know how to bare metal and some of the larger space and defense companies one of the I'm, a and alumni up to an outstanding job there, but we're really looking at the mission package as part of where all these platforms go.
If we look at the outlook at the outcomes in the in the in the capabilities our customers need.
Not so much of the more platforms, where they need is an ability to have a single way to find a new signal out on the battle battlefield and have that reverse engineered in a manner that we can not only detect it but we can.
I understand how to mitigate midea mitigate around that signal or or communicate through it. So we believe that the far longer term larger dollars are in the technology packages that right on those flat platforms. So when a new signal comes up I don't need a new drug.
On Cape Caper capability, what I need is a new algorithm in a shared manner and this this both our cost our deal D. and our Intel customers are really looking for shared work from multiple vendors that can help them address these needs. So we believe in the signals intelligence electronic warfare our spectrum.
World that changes so dynamically so that a digital footprint is not going to be solved with better and faster.
And more elegant platforms is going to be solved with.
Processing power there on those plant platforms and the algorithms any ability and the amazing people. We have within this company Corsi I believe picked up without just and we mass or not or some of the nation's leading folks on understanding signals and how quickly can we turned around a solution to a signal, it's giving our warfighter issues, we actually believe that.
For the Sweet Sweet spot is and that's where we'll we'll stay park for some time in so the ability to build a platform to us is not where the.
Under the day greatest growth is coming is coming coming from.
Thanks for the color.
Thanks.
Our next question is they follow up question from Joseph Denardi of Stifel. Please go ahead.
Okay. Thanks, Thanks, very much Tom I think there's a question you get asked from time to time, but there's a narrative out there that the topline defense budget growth is slowing and that should translate into slower growth for for your business.
Doesn't seem like that number the topline numbers really factors much into how you view your addressable market. So as you look at your markets as a whole. The next few years do you do you see trend slowing or not.
Yes, so while you we've mentioned a 220 billion dollar addressable market you could have very kind of robust.
The irrs that we're focused on kind of mission capability to enterprise capabilities are swim lanes, which have faster current probably see my metaphors here.
Are you, which are kind of sweet spots are and kind of given that we do not see you the foreseeable federal defense budget or civilian budget to be an impediment for us to realize our goals of you're increasing your organic revenue increasing margins I will initially so.
We feel we're very well positioned off providing services and technology in a dangerous world odd our technology solutions that John just alluded to play a key role in those areas.
Thank you.
Again, if you have a question. Please press Star then one our next question is also a follow up from Gavin Parsons of Goldman Sachs. Please go ahead.
Hey, Thanks for squeezing me in just a quick when the follow up on Matts question earlier, what percent of your current outstanding kind of submitted bids includes some form of LG as capability and where do you think that'll be a year from now thanks.
Yes, Kevin I.
Over the number of Thats a at the on the tip of my.
Tom.
What I, what I would tell you is that clearly it's involved in less today will be involved in more tomorrow to treat and ask a follow up question to get to get that kind of genius threed.
Response, but.
You know.
Algae EPS came with a a really nice book of business. They continue to perform on those I think over the coming quarters as we see our customers builds requirements are really pulling on the strength. So corsi Sai technology, the massive Don devices and the and the intelligence.
Algorithms LG S provides that they will be part.
And parcel to Oh, I'm, a larger percentage of our awards out there to the extent that we're looking at singles Intel last tronic warfare anything in the in the electronic domain I would expect to see both El just en masse Saddam play more.
Prominent roles.
Thanks again.
Yes.
This concludes our question and answer session I would like to turn the conference back over to John the G. for any closing remarks. Please go ahead.
Well, thanks, Chuck and thank you for your help on todays call, we would like to thank everyone, who dialed in or listen to the webcast for their participation. We know the many of you will have follow up questions and Tom Mutryn, Dan Leckburg in towards price are available to take your call. After after today today's call. This concludes our.
Our call. Thank you and everyone have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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