Q3 2021 CACI International Inc Earnings Call
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Okay.
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Take care, ladies and gentlemen, thank you for standing by and welcome to the CACI International third quarter FY 'twenty One conference call.
<unk> call is being recorded at this time all lines are in a listen only mode. Later, we will announce the opportunity for questions and instructions will be given at that time if.
If you need any assistance during this call. Please press star zero and someone will help you.
At this time I would like to turn the conference over the dam Lekberg Senior Vice President of Investor Relations for C. H D. I International. Please go ahead.
Well, thanks, and good morning, everyone and Dan <unk> Senior Vice President of Investor Relations for CACI and thank you for joining us this morning.
We are providing presentation slides, so let's move to slide number two.
There will be statements and 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 are described in the company's SEC filings.
Our safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call.
I would 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 financial measures prepared in accordance with GAAP.
Let's turn to slide three please.
And so open our discussion this morning, Here's John <unk>, President and Chief Executive Officer of CACI International John.
Thanks, Dan and good morning, everyone. Thank you for joining us to discuss our third quarter fiscal 2021 results and guidance with me. This morning are Tom uterine, our Chief Financial Officer, and Greg Bradford President of CACI Limited, who is joining us from the U K.
Turn to slide for please.
Turning to our third quarter fiscal 'twenty, one results, we again performed well delivering strong growth profitability and cash flow. We grew revenue by 6% net income by 49% and earnings per share by 51% compared to a year ago.
We also continued to deliver double digit growth and technology revenue a key driver of our March and and margin expansion.
And in addition to the increasing technology mix and our continued strong operational performance our profitability again benefited from fixed price program cost efficiencies and the Covid environment.
Drove only about a third of our year over year adjusted EBIT margin increased the rest was core operations.
We generated strong cash flow from operations and strong free cash flow.
And lastly, we want and $1 $6 billion of contract awards, representing a book to Bill of 1.0 times for the quarter and 1.5 times on a trailing 12 month basis.
Slide five please.
As we've discussed before we are investing ahead of need to ensure we solve our customers and our nation's most critical priorities.
This strategy enables CACI to provide our customers with high value technology to execute their missions and hence our competitive differentiation generate improved profitability and drive future growth and shareholder value.
Broadly speaking the need for it modernization and the heightened global threat environment, our two key market trends driving our investments and both play to our core technology strengths.
Let me highlight a few investments and recent successes that demonstrate the value of our lead with software or software defined everything strategy.
First.
CCI as a leader and agile software development, which enables us to rapidly address customers' needs as they arise.
We did so this quarter when our Beagle team developed and deployed mobile applications and only a few weeks to enable customs and border protection to better handle the immigration challenges at our southern border.
That is simply not possible without deep agile at scale capabilities, its widest customer selected CACI to increase the efficiency and speed the delivery of mission critical technology to users.
Second and area of investment I discussed a few quarters ago was artificial intelligence or AI.
Recall that CCI has over 100 projects incorporating AI capabilities across our business.
These capabilities span all type of AI, but one particular capability I'd like to discuss is referred to as computer vision Sim.
Simply put computer vision, Leverages AI to identify and track objects and imagery and full motion video.
During our third quarter, our military services research lab conducted a formal competitive evaluation to assess AI capabilities of CACI and a number of other companies.
Government provided all competitors with the same raw data, including imagery video and publicly available information.
CACI was the most successful company and the competition delivering highly accurate and reliable outputs further positioning us for future opportunities across a broad AI customer set.
Its capabilities just like these that differentiate CCI and allow us to win contracts like the five year $376 million National Geospatial Intelligence Agency award to implement and integrate cutting edge AI computer vision and mission technology.
At CACI are investments result, and tangible value, creating intellectual property and capabilities.
These are proven deployed technologies advancing our customer's modernization and national security missions, and further differentiate and CCI and the marketplace.
Slide six please.
During the quarter, we executed a $500 million accelerated share repurchase program.
This is the next step and a more opportunistic and flexible capital deployment strategy. We continue to view strategic M&A is an important use of our capital and believe our approach to M&A and proven ability to integrate our strategic differentiators.
That being said M&A is just one element of our capital deployment strategy going forward, our healthy cash flow strong balance sheet and overall financial strength provide us with the flexibility and optionality to be opportunistic on multiple fronts and not and or strategy.
This flexible approach reflects our commitment to shareholders to deploy capital and a number of waste based on the long term growth plans for the company.
I want to emphasize the on an ongoing basis, we are committed to evaluating all capital deployment opportunities to deliver the greatest long term shareholder value.
Slide seven please.
Turning to the market environment, we remain very optimistic.
Partisan support for defense and National Security spending and the new administration's stated priorities align very well with our capabilities.
While the detailed government fiscal year 2022 budget proposal has not yet been released the administration has released the top line proposal for aggregate defense spending of $753 billion.
Up almost 2% from the current government fiscal year.
Our offerings are lines of priorities that will continue to be funded and this gives us the confidence that we will be able to continue to grow faster than our addressable market expand margins and generate strong cash flow.
Slide eight please.
Looking at the remainder of our fiscal year, we are navigating COVID-19 challenges delivering growth and expanding margins that said, we continue to see higher than expected impacts from O Conus deployment delays tasking delays and other COVID-19 related factors.
Putting this altogether, we now expect organic revenue growth of approximately 5% at the midpoint of guidance slightly lower than our prior guidance, but still well ahead of our addressable market growth.
Moreover, the increase to our net income and EPS guidance reinforces our relentless focus and growing both topline and bottom line, which highlights our dedication to creating shareholder value.
Our organization continues to deliver strong operating performance, while addressing our customers' most pressing needs and we are more confident than ever about the strength of our strategy with that let me turn the call over to Tom to provide details on our financial performance and outlook.
Thank you John and good morning, everyone. Please turn to slide number nine our.
Our third quarter was another excellent quarter of growth accompanied with margin expansion.
We generated revenue of $1 $6 billion, representing overall growth of five 9% inorganic growth of five 3%.
Our technology business grew 12% from year ago, and our operating performance remained strong with both factors contributing positively to margins.
Adjusted EBITDA margin of 11, 8% and in the quarter with more than 200 basis points higher than last year.
Similar to the prior two quarters, we benefited from the fixed price contract, which is delivering with reduced costs under COVID-19. This benefit as temporary adding $12 million of pretax profit and the quarter, which represents around 80 basis points of year over year margin expansion too.
The remaining 120 basis points of expansion was core operating performance.
Indirect costs are slightly lower than last year, despite our revenue growth.
This improvement is driven by ongoing activities to control expense and improve efficiencies and.
So all of this reduced medical travel related and other expenses and the Covid environment.
Overall, another strong quarter of operational performance that is consistent with our commitment to expand margins.
Net income and the quarter was $120 million up 49% from a year ago.
In addition to the strong operating performance, we benefited from materially greater R&D tax credit than we planned.
As a result tax expense and the third quarter was $8 million lower than expected with a corresponding increase to net income.
Diluted earnings per share were up 51%.
Slightly higher than in other income due to fewer average outstanding shares due to our accelerated share repurchase.
Slide 10 please.
I'd like to draw your attention to two new financial disclosures, we are making and our earnings material to provide additional transparency and clarity to investors.
Cash and associated and metrics are important to both ourselves and investors.
As such we are now, including free cash flow and our earnings release, which we defined net cash from operations, excluding our AR facility less capital expenditures.
In addition, we have started disclosing adjusted net income.
And adjusted diluted earnings per share, which excludes the tax effected impact of intangible amortization associated with acquisitions.
Our M&A program drive material non cash intangible amortization expense and we believe that these disclosures and make it easier for investors to evaluate our performance, both absolutely and relative to our peers.
And we plan to provide guidance for these metrics beginning in our fiscal year 'twenty two.
Slide 11, and place third quarter operating cash flow, excluding our re our facility with $128 million reflective of our revenue growth margin expansion and effective working capital management less capex of $19 million free cash flow was $109 million day.
DSO was at 53 days, excluding our AR facility down four days from last year.
We closed the third quarter with net debt to trailing 12 month adjusted EBITDA at two five times.
As John mentioned, we executed a $500 million share.
Our repurchase and mid March representing around 8% of outstanding shares.
Within the context of our flexible and opportunistic capital allocation strategy. We believe this ASR with a great opportunity to create value for our shareholders.
Our leverage at the end of the QUADRA and includes the incremental debt associated with the ASR and we continue to have significant capacity to execute M&A and undertake additional capital returns, while maintaining leverage within a reasonable range.
Slide 12 please.
Turning to fiscal year 'twenty, one guidance, let me start off by discussing a tax benefit we expect to realize and the fourth quarter.
The tax benefit is enabled by the carry back provisions and the cares Act and recently finalized tax regulations.
By making various tax elections, we are able to shift expenses recognized tax losses, and the third and the current period and carry those tax losses back to prior periods with higher statutory tax rates.
This results and $60 million of lower tax expense in FY, 'twenty, one and a comparable net cash tax savings over the next few years.
This benefit will have two other impacts.
First the current portion of our state taxes will be lower in fiscal year, 'twenty, one reducing the amount of recovery at our cost plus contracts and lowering fourth quarter revenue and EBITDA by $16 million and.
Net income by $12 million.
This has the effect of lowering both fourth quarter revenue growth and EBITDA margins by 100 basis points.
This revenue EBITDA and net income will be recaptured in future years.
And second our cash taxes paid and FY 'twenty, one will increase by approximately $75 million from what we had planned. Despite this we are maintaining our fiscal year 'twenty, one operating cash flow guidance of at least $600 million as we are able to offset this impact with our strong collections.
And again that $60 million of cash tax savings, we expect over the next few years is the net of the $75 million payment and the fourth quarter.
Slide 13, please getting back to our fiscal year 'twenty one guidance, we now expect revenue to be between six zero and 607 $5 billion to key factors impacting revenue are first higher than expected impact from Covid and the third and fourth quarter.
These include the inability to deploy people outside the United States due to travel restrictions.
Slower government processing of deployment orders and delays and tasking and second to cost plus revenue impact of lower state taxes due to the tax spending for what I just mentioned.
And to emphasize the point John made earlier, our updated revenue outlook equates to organic revenue growth of approximately 5% at the midpoint of our guidance well ahead of our addressable market growth.
On the new income side, we are raising guidance materially to reflect strong program performance.
Lower cost delivery got into fixed price program, we've previously discussed.
Over indirect expenses.
Higher than expected R&D tax credits and the.
The large fourth quarter tax benefit I detailed already.
As a result of the tax benefits, we expect our full year effective tax rate to be between eight and 9%.
Share reduction and and additional interest expense of $1.9 billion from the ASR are also reflected and our updated FY 'twenty one guidance.
We now expect full year FY 'twenty, one adjusted EBITDA margin of about 11% at the midpoint on a reported basis and.
And at this point the underlying margin normalized for a number of COVID-19 related and other factors and FY 'twenty one is tracking to 10, 7%.
This is a reasonable normalized underlying margin to think about for our business and FY 'twenty, one and fulfills our commitment of annual margin expansion.
Slide 14 please.
Turning to our forward indicators are prospects remained strong for fiscal year 'twenty, one and we have an immaterial amount to for Recompete and new business remaining at our guidance.
We have $6 $8 billion of submitted bids under evaluation with about 70% of that for new business to CACI and.
And we expect to submit and another $13 $7 billion over the next two quarters with almost 80% of that for new business to CACI.
In closing, we delivered another quarter of growth margin expansion and robust cash flow.
Our team continues to execute well and we remain confident and our ability to generate long term shareholder value with that I'll turn the call back over to Jos.
Thank you Tom Let's go to slide 15. Please.
We're very pleased with our third quarter and year to date performance, we delivered strong growth margin expansion and cash flow and we deploy capital Opportunistically taken advantage of a disconnect between performance and equity valuation.
All of this represents a relentless focus to deliver on our performance commitments and generate long term shareholder value.
Our business is purposely aligned with.
And with critical National security and modernization priorities and we believe our strategy and differentiated technology capabilities will continue to deliver growth margin expansion and cash and shareholder value.
I'm also immensely proud of our people and their commitment to our customers our shareholders and we each other each and every day they embrace our our culture of good character and innovation, which is foundational to our success. It is because of this the CACI was selected for the 10th time as a fortunate mag.
Disease world's most admired company.
In addition, CACI was selected as a 2021 top workplace and top technology company by other gauge.
CACI is delivering value through growth margin expansion robust cash flow and opportunistic capital deployment and I continue to be excited about our prospects looking forward.
With that highly let's open the call for questions.
We will now begin the question and answer.
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Also ask that you please limit yourself to one question and one follow up.
Our first question today will come from Robert Spingarn with credit Suisse.
Hi, good morning, good morning, Rob.
Just.
We just talked about organic growth and John I wanted to ask you. How you think about on a go forward basis technology versus expertise organic growth under the new administration based on.
A little bit of strategic and budget insight that we currently have and might this cause you to accelerate M&A to supplement that growth and how does the M&A pipeline look today.
Okay, Rob well first of all thank you for that for that question.
Let's talk a little bit about.
And I guess on a qualitative level, how I see some of those and I'll and I'll try to give a few comments about how we see FY 'twenty two coming as well.
Tech and expertise and enterprise and mission are very.
Well understood across the company foundational framework for us and.
As we look at the growth levels of expertise and technology, we do see differentiation. There I mean, there is there is no doubt in our mind nor has there been down over the last three to four years that expertise at least on the enterprise side would continue to face.
Faced pricing pricing pressures and level you could differentiate there was going to be.
Pretty much muted I don't want to call enterprise expertise, a commodity, but it's really really tough other than price to be able to differentiate and as you. All you all very well know we are a topline and bottom line growth company. So if I look at the budget moving moving forward.
There's a lot of nice work there. There is there's there are some good under understanding of what's in the 753 billion $1 billion.
I think it gives a nice spending levels for our customers to continue investing and critical requirements.
I think they are stated priorities are very much in favor and there.
And very much in our favor if theres a focus on technology for.
And at the speed of software not hard hardware and I'm reading portions of it just as much about bits and bytes and bombs and bullets.
On the positive side, our strong budget and the technology side respectable budget on the expert and the expertise side.
<unk> expertise.
And we have to sort of head into this administration's commitment to withdraw from Afghanistan by September <unk>.
11th so theres a lot of moving Windows, There's there's a lot of a lot of different dates that and as you would imagine we are operating two I'd also say beyond the potential pull out of our folks from Afghan Afghanistan will still a very dangerous place. There is a lot of budget and a lot of focus on near peer threats.
That actually are and and two were counter counter terrorism goes.
Yesterday about gaps.
We are strategically based company strategy is where we come from.
We're pulling together, our FY 2020 two planning thoughts now and we're about to re review, where we go and our five five markets.
I feel very comfortable Rob around the capabilities and the customer sets that we have today, but.
If I wanted to double down in any area. It would be as I mentioned Pryor and the mission Tech area anything related to cyber and data analytics I like our AI portfolio I mean, I like it so much and I spent some time during my prepared remarks talking on it.
And we've got a strong enterprise tech credentials and we've got strong agile sharper credentials, we moved more applications to the cloud and the intelligence agency and the next five companies combined so that's not a pure pure focus of if we were to do M&A, where we want to head next.
I think your last part was around.
M&A properties and pipeline.
For some reasonable number of properties.
And the market and that are coming to market.
We're a highly acquisitive company, we do think that's a strategic differentiator against folks and our sector and outside of it frankly.
But there is some nice.
Our properties out there we continue to look at those Mike Lewis and his team do an outstanding standing job and.
And.
And as I mentioned and talking about capital D and employment and.
M&A is going to be one of our future capital deployment options as we move forward.
That's very helpful. Just quickly. Thank you John quickly for Tom.
And just this fixed price contract that you've been recognizing the really strong profit on this year could you talk a little bit about what that relates to and does that contract or renewal of it extend into next year. Thank you.
Yes, thanks, Rob for sensitivity reasons, we do not want to signal to the customer that we're getting outsized profitability on a particular piece of work. So we're going to be somewhat circumspect.
We have been it is a fixed price contract, we're able to execute in the COVID-19 environment.
At lower expenses.
Expenses driving materially higher profitability and.
As Covid restrictions go away.
We expect for customer to revert to a more normal operating tempo with that particular contract.
So we keep on stressing the benefit is short lived but that is a piece of work we had for a number of years and we expect to continue that piece of work, albeit at most likely lower profitability levels still respectable, but lower than the outsized profitability we've been realizing.
Our next question will come from Gavin Parsons with Goldman Sachs.
Hi, Good morning, I'm wondering Kevin.
Guys I wanted to ask about the pace of growth, but just kind of heading into the fourth quarter and into next year.
And obviously.
I think that is 5% at the midpoint this year, but that's worth more than 200 basis points of Covid impacts.
And there is the state tax disruption and the fourth quarter.
And because what drives the implied slowdown, but how do you think about the pace of growth next year, whether or not you can grow at or above 5%, given you'll presumably have a large tailwind from COVID-19 reversing.
Yes, Kevin this is John Thanks, I'm not I'm not sure I'll give you.
Our point estimate is you look at FY 'twenty 'twenty, two but look.
Part of your question and stated something very very well look there's a lot of moving parts here right and we're in the third quarter of FY 'twenty one.
Tom and his team have done an outstanding job looking at taxes and other areas.
Areas of savings.
And Theres, an awful lot of print and awful lot of numbers here, if I look at FY 'twenty, one and I look at how that sets us up for FY 'twenty two.
Sure.
Extremely proud of our organic revenue growth.
Performance.
A major distraction of our growth as we are delivering margin expansion I'm, sorry, a major distinction.
Is that we're delivering margin expansion at the same time and I think we are uniquely differentiated.
Across.
Other and and entities out there.
This growth plus margin expansion accelerating cash flow generation, which to me is extremely important to our strategy and commitment to deliver shareholder value. So tactically.
Covid has had an impact on our top line growth.
But I also would note and we continue to materially expand margins, even heading into that headwind. So COVID-19 to me, it's a short term blip.
And our long term growth margin and cash flow and shareholder value creation trend. So.
We don't have an exact number of what we're targeting next year Gavin.
But what is important and I guess from a quality qualitative statement.
Look we continue to grow above our addressable market and we have since we since we laid that strategy on the table. We continue to expand margins at the same at the same exact time, we're compounding cash flow, which we're committed to deploy across any number of new options to generate the greatest amount and long term shareholder value and we expect this performance to.
Continue over the long long term. So you are probably going to hear me say it. Many many times, we're highly confident of our ability to continue delivering on our commitments to grow above the addressable market at ever increasing margins.
Okay.
That's helpful and Tom.
Bret for ask on cash flow just to clarify that for $75 million headwind. This year, becoming a net 60 million tailwind does that mean in future years, you'll get back $1 35.
That is correct yes.
What I say future years that will be over the next three years 'twenty to 'twenty, three and 'twenty for somewhat non linear or late as we provide guidance for FY 'twenty, two and August will be more clearer of operating cash flow and that particular year.
And I will remind you that we also have to repay the deferred payroll tax, which we had some benefits.
In the last two years associated with the cares Act.
Okay perfect that was the context to my question as well then it is.
Is there a starting point free cash flow like the 10, 7% ex Covid EBITDA margin is there a starting point normal free cash flow level that we should think of as the base to grow up.
Okay.
Gavin a reasonable number would be this year, the $600 million plus the $75 million, we were able to offset the tax which is 675 less $15 million of payroll tax so I would think so.
$6 25 ish.
In terms of a.
Good kick off line.
Okay. Thank you very much.
Yes.
Our next question comes from Cai von <unk> with Cowen.
Yes, thank you very much so John.
You and your peers have kind of talked over the last couple of quarters of slowdown administration changeover various issues.
Two parts, one you mentioned O Conus could you just refresh us in terms of what percentage of your revenues are O Conus related and.
Secondly, could you give us an update are we starting to see these delays abate or are they continuing what do you look for and the next couple of quarters, yes.
Yes, Cai, let me, let me cover the D O Conus piece first and I'll talk a little bit around COVID-19.
It wasn't but.
10 years ago, where we were talking about.
You know how much work, we would do on an S. Three and how much pass through war related work we had.
And.
And those those were numbers at about 13 to anywhere it's at 20% of our annual revenue.
And were were based on.
Efforts that were O conus.
We we have been tracking about 2% of our annual revenue is tied to some of those O. Conus measure. So one that is a large measuring stick that that really.
Explains the kind of company, we'd become versus the kind of company that we were you were also tell you that we've been rolling out of our O. Conus work for some for some time right I mean, Afghanistan and a high of about 100000 troops in 2011 were down to 20 2500. So.
If I look at a couple of percent of revenue. That's that's not an overwhelming head wind as we look to move forward and FY 'twenty two.
And if we look at Covid.
This is this is one that when Tom and I and the rest of the team sat down and looking at the rest of FY 'twenty. One we really believe we were starting to see signs of.
And things and improving.
But in general facilities have not fully reopened at the level, we expected due to some of these densification current.
Concerns and we saw the spike at the end of January we saw another spike around March.
So that continues to put.
Pressure on us.
Tom mentioned deployed resources remained sidelined we're unable to travel due to different restrictions we have to use mill at military trans transfer for for it we have to use military deployment processing all of those things have been greatly greatly slowed and now we're at a point, where that's an area. We don't expect to come back.
If you tie and the presence commitment to withdraw from Afghanistan by September 11th.
And then we still see general slowness, and tasking and which we've mentioned and the in the <unk>.
And the past so.
Covid COVID-19 impacts both direct and indirect are still here.
And looking looking forward I firmly believe that as the vaccination program continues to rollout.
We're going to see those those pressures lessen.
Do believe that tasking pressures will begin to lessen because as more of our customers and the functional areas to come back to work that's going to free those up in fact, we saw a couple of very nice tasking has come out.
Adjusted recent recent recently, but we expected those to come out last June and they've just come out come out now. So I do believe things are going to pick up Cai I think we will see COVID-19 abate and.
And.
We're all very much looking forward to continuing our record of top line growth that ever increasing margins.
To what extent the slowdown reflects customers being much more cautious and tasking.
And because of Covid, but because of the anticipation of a Democratic administration and a much tighter.
Budget and so now that we're looking at like a one 7%.
And I just wanted to recur.
Request, they may start to loosen up a little bit has that been a factor.
But.
Kind of from where from where we sit not not really I mean, we.
We're looking at a G F <unk>.
<unk> 22 increase of a couple of percent.
It's at least at a very high level.
Well balanced budget and of course, where that kind of company and that that's going to look at more balanced towards bits and bytes versus bombs and bullets.
There is still a strong bipartisan support.
Still procurement increases for counter counter UAS Theres still army Rd Rd, teeny funding around SIGINT, and cyber and and he and E. W. A.
A lot of it modernization priorities a lot of new.
New network build outs a lot of talk around what where does the mill and military.
And the like head and.
As it pertains to fight for five G and.
And you know and I believe that.
Customers understand where they where they can spend they understand what the threats are I think cai.
Not I think I know the one area that we're absolutely focused on is.
<unk> continually discontinuing debate around is it near peer, Russia, and China or is it counter terrorism.
And I hope I'm I'm I'm very positive that there's folks and the administration and wonder stand that pulling out of Afghanistan does not mean that that <unk> mission has gone away. Okay. It's just going to when we pull out there's going to be ways that we're gonna have to find to make certain we keep very keen situational awareness on those areas and those are things that.
Uh huh.
Ah well adapt at <unk> and our technology offerings. So overall I do believe it's the cultures and mission and looking at near appears and I do believe at a very high level.
This budget has covered down on some of the key areas that we'd like to see them cover cover Donna. Thanks.
Thanks Cai.
Our next question will come from Clark <unk> with J P. Morgan.
Hey, Thanks, very much and good morning, everyone. Good morning Seth.
So I was wondering.
Talk about growing.
Excess of market should we think about that kind of.
2% increase in the budget for that kind of is that the underlying market or are you looking at it segment.
The budget that.
And that's faster growing than that.
Yes, so answering that with just a high level look at what we have and FY 'twenty two budget, which you all know was and is not the final final final one.
If we look at the Skinny budget and we started to shred that that's that's a pretty good assumption looking at how our FY 'twenty two starts to shape up I mean, we do believe that our addressable market will sort of track along somewhere close to that number and that will sort of set that floor as to what we're looking at growth twice for FY 'twenty two.
And then as a follow up just to kind of put a fine point on it.
Okay.
And those areas down to 2% or so.
And I assume Afghanistan is still only a portion of that crude supply and different places around the world. So.
And sort of maximum headwind that we could anticipate from that from Afghanistan for CACI.
It would be and a range of 100 basis points for yourself.
Yes, I'm going to.
Net.
And numbers that I shared with you are closer to 2% of our revenue. It is true we have a lot of folks doing awful lot of other O. Conus work very very different from that number that that is all fully fully funded no issues, there and we don't see any of them are.
Real changes changes there. So I would tell you that 2% of our FY 'twenty, one revenue is tied up and and the efforts and what's going on inside of Afghan Afghanistan.
And just for protection of our own folks and probably not going to give too much of a finer point on that because I don't want to get into number of folks we have there and.
And the like but very much appreciate that question and stuff.
Okay. Thank you very much guys. Okay you bet.
Our next question comes from Joe de Nardi with Stifel.
Hey, gentlemen, and this is actually Rob in for Joe how are you.
And we're doing it doing great. Thanks.
So if I could just sort of ask the M&A question, a different way just given some of the volatility and the industry over the past several months.
And the headwinds facing the business environment.
And that impacted the way you think about capital deployment between M&A versus buybacks and.
And then just to clarify the strategy should we now assume more balanced between the two going forward versus previously where it was pretty clear was mostly M&A yes.
Rob Thank you.
Yes, there has been a lot of our activities and the M&A World and we're always more than welcome we're always more than willing to comment on things that were out there doing.
And be very honest I don't I don't pay an awful lot of attention as to what everybody else is doing and that area, but as it pertains to capital deployment.
Look when we issued the press release and you heard in my prepared remarks.
<unk>.
We'd like to believe that Youre hearing us talk a little differently about capital deployment.
And that was very purposeful.
With a commitment to a continuous evaluation and of all capital deployment options, we could talk about additional repurchases and.
M&A internal investments.
Debt reduction and and other potential uses so.
And when I, when I say, there that that orders and no way and tenant to prioritize our options, but rather that they are all on the table.
We as I mentioned earlier to I believe Rob's question, we're and our semiannual strategic planning.
Sessions now.
Always going to look for our capability and our customer gaps so.
So I don't want to downplay M&A, because I would never downplay somebody should a differentiator to us.
But I wanted to just signal more of a balance as this company moves forward and what I would look at us and not quarter to quarter, but year over year. So.
There are some nice properties out there.
We're going to you know.
Constantly consider equity valuations, but I think the key word.
And just like I talked about counterterrorism and near peer and is the key word and our capital deployment plan going forward, M&A and repurchases and internal investments and debt reduction and whatever else for happens to be so and we're also looking at a combination of those two so because we do a share repurchase.
Doesn't mean, we can't do and M&A now I think we're at two five times leverage Tom and.
We have plenty of dry powder, there and we're going to continually drive growth across this entire enter enter enterprise. So that we're always growing better than our addressable market growth and ever increasing margins and Tom anything you want to add anything to that.
And <unk>.
Thank you Rob we continue to evaluate it as John says.
Given you know changing and and facts and circumstances and the valuation of CCI stock.
You know is a key factor.
Are we attractively priced and we believe we are in hence the ASR.
The acquisition pipeline John mentioned, some attractive candidates in the next three 612 months that influences our thought process.
And debt levels interest rates and the like so it is a real time continue with.
And valuation of what makes the most sense.
With the definition of making sense is how do we drive long term value to our shareholders that is the ultimate decision.
And again that is a continuous process that we take quite seriously.
Thank you.
Thanks.
Our next question comes from Jon Raviv with Citi.
Yes.
Thanks, Good morning, everyone and as.
John referenced that this administration is clearly pitching.
It's a modestly growing defense budget its a big number is still a very high number.
But.
The big focus seems to be on a non defense or other things that have been kind of starved over the last for years, but still a lot of things that require a complex technology solutions like the IRS. So let's just say for example is there any comment or perspective on current and future exposure to other call. It non defense end markets.
Yes, John Thanks.
Yeah look at it as we look at the at the overall government funding and funding budgets moving and moving forward.
It modernization from what we see is.
Is is a priority whose money maybe whose time has finally finally come I'm very very excited about the monies. This administration is putting towards it modernization not only in the face of it.
Continuous cyber attacks, but in the face of Covid and in the face of it. It is in dire need of having further updates the one thing that.
Covid taught us is that we all most likely will not return back to the same facility, we used to do our work and and that is emblematic of the entire.
<unk> expertise and the technology world So.
Look we think there's ways to save and improve efficiencies there.
There are plenty of non defense customers that we have today.
The Beagle program with customs and border the large.
<unk> top and system software and solutions support job, we have with the broader DHS, yes, we're always looking at those and when we talk about defense funding and spending all of our human capital budget for.
Financial systems, although they find their way and the defense budget. Those are all large scale enterprise technology build outs that are all built in and agile agile manner. So there's there's plenty out there.
For us to continue to grow on whether it's in the enterprise Tech area or and the mission Tech area.
And just one quick follow up a little bit of a pivot, but just onto your European exposure and no. Greg is on the line just to remind us of how much of the total corporation. At this point is exposed to the U K business and.
And just how you see that trending going forward any changes and your customer behavior and loyalty program is kind of what they want is the continent, I'd say price for emerge from the Covid period.
Yes, so couple of couple of things there.
And I would say that.
Greg's U K businesses.
For.
For the 5%.
The overall revenue and if I'm wrong, there, John and I'll be able to correct and before I get done talking because I'm looking at Tom.
But.
A lot of what Gregg faces is the.
The UK is still very heavily in COVID-19 and everybody is locked and the doors that bodies working from home.
Greg and his team have done an outstanding job.
Revenue slightly off profit very very profitable just as we're seeing here that will absolutely change as as Greg price cost structure changes, but Greg is there anything you want to add or.
Yes, John a quick and.
Sequentially throughout the U K.
For a mixed business over here.
Yeah.
And that 70% commercial and we shall be true technology and Andrew.
Alright.
Our government.
It has performed very well.
Cash 15 months or so despite COVID-19, especially orange.
And Joe we have been hammered a little bit on the commercial side, because we work with retail shopping centers restaurants.
Sure.
She didn't close.
And from last year.
And John Chad, but notwithstanding all of that revenue quarter, three versus last quarter, three and it's up 1%.
Alex and I will jump back and Bell.
But our net income and significantly like it.
Loss from operation were up 20% and that's.
And really true operational performance.
Related savings and <unk>.
Got a really strong EBITDA margin almost 20% for quarter.
True.
And so we are coming out of this.
Okay, and starting to open up a little bit there's talk about going into June and it will be more.
And the much open.
And I'm, sorry, and you see a lot of our commercial clients come back to life.
And to prepare to.
Good luck.
Emily and we're seeing increased orders there so.
Sure we'd look at finishing off for your fight and we look to death.
Slide 22.
Gross margin in commercial.
And our government business continues to grow much from them.
Thanks, Thanks, Greg and Tom one other.
Thank you. Thank you Greg for revenue just to be clear, it's a little bit south of 3%.
Okay.
With materially higher levels of profitability. The other comment I will add is and the last few years, we've made some acquisitions and the U K, we saw and national defense businesses and the U K.
We now have access to in other market and we are.
Creating a connectivity between suddenly the mission technology product.
We're doing country, you were yes, I E <unk> devices and the signal collection devices.
With our counterparts in the U K and that is in my mind, a nice potential.
Market for us to prosecute with that.
With the technology.
Thanks, Sean.
Our next question comes from Tobey Sommer with true Okay.
Alrighty.
Thank you.
And I was wondering if you could comment on.
And the spending environment, and changes and administration and whether or not that may impact any of the trends you've been seeing and the industry has been seeing in recent years such as customers at the margin more willing to look at.
Solutions.
And.
In other <unk>.
Dips of contracting that can be added.
<unk> pages to you and the industry from a profitability perspective.
Yeah, Tobey Tobey thanks.
I draw your attention to a couple a couple of things.
One is.
Good.
It's more.
Because of Covid, maybe then because of where the budget sits today, but there are some there's a there's what I would call.
A renewed for.
And expedited interest and talking about technology and how it can be used.
To solve customers' needs without as much expertise being delivered and a couple of examples there that we've used internally you all know that there'll be three years. This July we create our shared service center.
Oklahoma City.
Somewhere between 20 and $30 million cost savings annually for us and.
And we've got that team out there, saying hey, we can do a lot more if we use things like <unk> and if we were to use more technology rewrite some of our Paul it policies.
And take some of the some of the personal hand touch element out of some of those transactional transactional and tactical things that were out there doing.
AI and data analytics machine learning are going to play a large role so if I would know where to bring and the budget.
Under budget pressures I've I've said this many many times the word joint is no longer a really bad word because you have to understand how you can build once and use and many many different different places and I think.
And op centers and those type of environments looking.
Looking for Rfps to talk more about technology, and less about I need and number of people for EM and.
And number of years I think that's going to change over the next three to five years, how we see some what may have been enterprise expertise RF rfps come out looking more like enterprise Tech.
As for the administration.
Yeah.
There is bipartisan support and funding for a lot of critical National security priorities I mentioned some of those earlier.
But I do believe this administration and I've seen signs of it that they are pretty concerned about cyber and things and that bits and bytes world. Okay. Cig and is not a war time D. O D effort. It is a situational awareness tool.
So do I see funding and areas like that and frankly protection against a UAS is out there that are going to only expand and get larger and larger threat as we move forward. So there are some absolutes that we need to continue to spend money on and then there are you know quantities of platforms and.
And the like that have a little different spending model to those and I think that that's what this administration is going to have to balance spending and both of those areas.
Thank you.
Thanks Tobey.
Our next question comes from Sheila <unk> with Jefferies.
And good morning, Jonathan for.
And then I think you mentioned technology businesses up 12% in the quarter.
And kind of what was driving that and then on the.
Other side of that does that mean the emission businesses.
And is down on the quarter and maybe what's going on there.
Yeah, So if I look at our mission and versus I'm sorry.
Technology versus our etch for Ts business day, I believe it's around 12 for 12% there and around flat on the expertise side.
Having said that Sheila.
It'd be elated, if my expertise business was up 12, and my technology business and worked well.
Totally.
But it's it was predictable enough for US you know many years back to really make certain that we had a strong technology offerings, because we knew our customers are going to eventually start moving heavier towards that direction. So the old days of pure government services.
Becoming a little bit more cloudy, it's a you know it.
And it's it's it's a lot of customers out there beyond a.
A large platform what is it that I need to have done and what's the most cost efficient and agile minded way too.
To deliver and deliver that so what you're seeing is the impacts of things like <unk>.
Customs and border patrol Beagle program.
There was one and we won.
18 months back by that yes, and we had talked about that at the beginning of FY 2021 and said we have a large ramp up plan and knock on wood, even through our Covid, we have achieved some phenomenal growth on that.
Program and it's also one of those programs. It is very crucial towards the administration goes on a lot of.
Items so.
So it's things like agile and things like <unk>.
Beagle.
Programs that mastodon and lgs are involved in.
The other the folks at Macedon on the mission Tech side done an outstanding job.
<unk> came in and as you all may or May not remember, that's about a five or $7 million business soaking wet and you know we've we've they've done an outstanding job and they have positioned us very very well they provide the hardware that allows us to deliver software definable everything devices out there so and the future Sheila if I looked at it.
Slide 22, I don't have numbers for you, but I think that trend is going to continue it doesn't mean expertise is bad business for us we have a lot of phenomenal pizza hut people out there doing phenomenal work.
But at the end of the day, we are a top and bottom line growth company.
And as we see things and the expertise either enterprise or mission start to come to more and more pricing pressures, that's not who we're going to be in the future.
Okay.
And then maybe just adjacent to that somewhat Tom in your remarks, you mentioned.
And the EBIT impact of course, the fixed price contract is helping and left a little bit but you also did mention 120 Bips and just.
Core profit improvement and so.
And how much of that is sustainable.
We enter fiscal 2020 two how do you think about that 10 to 20 bps Bancorp.
Covid impact.
And maybe if you could just clarify that sure Sheila there is some COVID-19 impact and does that 120 basis points I did reference slope of medical expense travel expense and the like I do not have that quantified.
But there is some of that.
And those particular numbers.
The other.
Back to point out looking at EBITDA going forward is that the margin performance of technology is anywhere between three and 500 basis points higher than and expertise.
And by growing technology at a faster range that.
And that will be productive and a true margin performance.
The fact that it has higher margins and it's not surprising it is differentiated and different levels of skills, we're able to use.
Solutions more fixed price type of work all of that contributes to that higher margin performance and I did point out in my prepared remarks that looking forward 10, 7% is a good estimate for a clean unadjusted and adjust.
It could.
Margin and FY 'twenty one.
Well, thank you for all right. Thanks Sheila.
Our next question comes from David Strauss with Barclays.
Thanks, Good morning.
Good morning, David.
So based on what you're seeing and you've seen and recent bookings and what's in your pipeline. How do you think your mix shifts going for.
And expertise I think this quarter youre about 51%.
So you were 47 48, so how does that how does that mix shift.
Going forward based on what Youre seeing in your.
Your book of business.
Yeah, David Thanks, So you know.
Yes.
If I if I looked at.
Tom shared some numbers around.
Awards to be to be made and the six months some metals.
Based on those numbers and just some preliminary as they come out of FY 'twenty one looks.
And that the tech versus expertise makes it is going to continue to grow more favoring the tech the tech side.
Just from the nature of the bids we have submitted David and <unk>.
And the ones that we have recently recently won and I was talking about some of those tasking that had been held up.
Throughout two hour Covid some of those tasking showed up in the mission Tech area that we've been waiting for for quite a long time.
So if that's any indication and I use the government's skinny budget that they have out there I would have to believe that.
<unk> is going to grow faster than our expertise is which then should give our investors a peace of mind that the other portion of what we're focused on which is growing bottom bottom line by the nature of the numbers that Tom share 305 hundred basis points stronger and margin.
We.
Are getting more and more comfortable with continuing to grow bottom bottom line for.
And wherever we take off and.
From FY 'twenty, one as we get into FY 'twenty two.
And following up on that should we think about your tech portfolio, just being more exposed to the modernization budget as opposed to O&M and and maybe at a high level of your revenue base. How much do you think at this point is exposed to <unk> and the O&M portion of the budget versus the monetization portion of the budget.
Yeah, I mean, it's it's a pretty even split David.
We've been successful at doing is even and the O&M budget. If we can do modernization through sustainment and that allows us to do a lot of.
Yeah and system up and grades.
And which includes wholesale changes like taking someone elses.
David boxes out of different platforms, and inserting ours, that's really O&M dollars, there's not a lot of Rd Rd teeny dollars there.
And we also are very well position. The fact that we invest ahead of need we've been talking to customers. So we sort of have insight as to what they are looking to do it allows us to invest on our own dollars. We only the intellectual property, but that left the customer do is buy things as a catalog item. So they can do more with O&M dollars versus just.
Pure Rd Genie dollars.
And our next question comes from Josh Sullivan with the benchmark company.
Good morning, Josh and good morning.
Just kind of a follow up on the conversation with the Commoditization of the expertise side and the focus on the technology side can you talk about the development risk profile of kind of that longer term transition and where do you see risk how do you mitigate it.
Tom mentioned, you've got 300 to 500 basis points improvement with that expertise, but is that inclusive of any potential overruns or over our other hurdles you might see with pure technology development.
Yes, Josh excellent excellent question.
Hugh.
We love talking about 305 hundred basis points, Big and right, but you know it is a risk and reward model right I think which is where your question is aimed at.
And that's exactly why we created that two by two framework frankly, I mean, it does inform us across the entire company Hey gang and this is what we're focused on and we want high quality revenue, we want quality of earnings year over year over year and it is possible given the capabilities and our customer sets we have and.
And a very strong business development team, it's possible for us to bid less and win more because we want to bid exactly and those sweet sweet spots.
So delivering expertise as you mentioned lower lower risks the actual risk of that is can I find the individuals' that the customer wants and then kind of hang onto them and many times, it's a very price sensitive market.
So the risk is lower and therefore margins are going to be lower you know when we get into the tech side, you're you're absolutely right. We have many more development programs and many more labs and this company than we had seven to 10 years back.
And as you see some of these cyber protection and <unk>.
And what's come out there and making certain that our development environments are cyber proof, making certain we can.
Tracked.
And talent from high and engineering schools answer to that is we've done a phenomenal job.
Can we retain them answer for that is phenomenal job.
But we are we believe and our folks and since I've been here I've.
Firmly believed that and we get involved and fixed price engagements.
Which is more what you'll see Josh on the on the mission mission Tech side, we have for strong conviction with and our employees that we're going to deliver and we're going to and not only deliver to our customers, who absolutely need that technology to be to be working better than spec.
We have to be delivering the appropriate financials as well. So we do watch that we have a reasonable and rational he sees out there we have reasonable and.
Rational booking rates as well and but yes, there is higher risk on the tech side, but we are very well positioned to be able to deliver.
Got it. Thanks, so much yeah you bet. Thank you.
And our next question comes from Mariana Perez Mora with Bank of America.
Good morning, Miami.
For sure Yeah, what's going on there.
COVID-19 normal.
Moving to your ongoing discussions with customers.
And kind of headwind.
Thank you to Amit and.
Alright, thank you.
Yes and.
Now I'd like for.
Could you help us understand how we should think about that like a.
Tommy and destination goes away and.
And the environment normalizes.
Yes so.
If I were looking at and my Crystal and Crystal ball right. What I can generally tell people about COVID-19 is it's a it's a horrific.
Generational pandemic that we're all living and living through but there will come a day and when we will be out of it.
So there are going to be some things that are going to be a forever changed for us I think our tailwind to things that we do.
It modernization network Security network protection, and how do we build networks out that will that will be more of a plus side.
We.
I would expect us in the future that we can do more software development work and and very distributed manner, which not only.
Relieve some of the pressures of government facilities and released the pressures on our facilities and then we can talk about something I love talking on which is how do we come back to work from Covid.
That is a tailwind to us as well.
So how do we do classify software development and the future how do we interact with our customers and the future I honestly believe those are tail tailwind I don't know if you can measure that in the next six months you know some of these are going to take one to two to three years.
Some of the headwinds.
And are going to be just how long will it be before we can re densify buildings and keep things like our labs and operation centers safe.
You know when we started Covid go by Clorox wipes, right, now, which I'm not really sure. If you can get it from actually touching things all of those things. If you picture trying to keep a lab facility with two or 300 people and it's safe.
You need to have more than just shift work just sort of.
Alleviate some of those risks so theres a lot that we don't know yet about COVID-19 and its lasting effects. We will see some further headwinds there, but I'm actually more positive than I am negative based on where we sit today, we clearly we're more positive back and the January timeframe, but that wasn't so much.
Covid doing it to us it was the actions we were taking as as customers and providers as we were going going through Covid and so I do believe that budgets around cyber and cyber protection are going to continue to increase.
I do think and some way the attack vectors and your tax base for <unk>.
Cyber attacks is going and you're going to get larger as we reshuffle, where our work does where I work force does their work from but so I'm actually more positive than I am negative Marianna as we look for because we're gonna see budgets are going to support doing things differently and different things for us means greater and a greater growth.
Yeah.
Thank you and then.
Your line, giving us more color on this lower order processing.
And just specific agents is related to like technology versus expertise Todd thanks related to contracts ramping up would like and.
What do we need to see for back to normalized.
Yes, so and those deployment orders so when when we deploy folks overseas.
We need to have folks processed during.
And we need to have folks process through government facilities and government policies.
And Ah different different processing centers when those centers can can handle 102 hundred people a day windows go to 10 to 20 people a week that is an absolute almost near shutdown and for the limited number of flights and Mil military transport that all gets reduced as well so we're in the.
Q looking to be able to deploy people. So we can't deploy as quickly.
And so will that will that loosen up as we go forward certainly, but then we'll have to take a look at the headwind around where are those large troop deployments that we're gonna have overseas and how to CACI.
Right along with them, so I don't have an and and exactly where and over 60 to 80 different different countries out there are prosecuting.
Military operations around the globe.
And so.
If if if we see the processing centers and loosen up we'll see revenue.
Pick up as we go forward, but as it pertains to Afghan Afghanistan, it's about 2% of our annual revenue that we have under careful watch as we get into probably first and second quarter of FY 'twenty two.
Okay.
Our next question will come from Matt Sharpe with Morgan Stanley.
Hey, good morning, gentlemen, good morning, Matt.
Uh huh.
Jeff and I just wanted to touch on the margins once again looking into Q4, if I back out and $16 million headwind and it looks like.
The implied margin is around 10%.
And that's stepping down call. It 150 basis points from what you guys had been running at the first three quarters of the year is that reversal and the result of the benefit.
And <unk> from COVID-19, or is there anything else and there that that is actually causing for that sequential decrease.
Yeah. So Matt this is Tom I'll.
Take that one.
First when we look at margins, we guide to a full year and any particular quarter it may be higher or lower.
Fluctuations.
As you point out state tax.
Impact.
Changes are a.
Fourth quarter EBITDA margins by 100 basis points or so in addition to that we're expecting some higher expenses medical expenses, which had been depressed during COVID-19.
Appear and be cutting back to a more.
Normalized level. So that is one factor associated with that we have product sales, which occur throughout the rest and price which tend to be both lumpy and very high margin. So that has also impacted the.
EBITDA margins and then in addition, there are some other.
Expenses, which we expect to realize in the fourth quarter and no one single a and what I wanted to point out, but the $1 billion here $2 million here.
All add up and that is the primary drivers of that sequential margin decline.
And I'll leave it at that.
Got it thanks, Tom and then.
And then.
John Real quick.
Skinny budget and what we know now about the administration's broader priority.
Update to the view on expertise and technology and market growth I think last time, you guys updated us is look like 1% and for percent respectively for sort of a composite and market growth rate of two.
Yes.
And when we look at the Skinny Skinny budget, yes, we're looking at the day.
That budget coming up by two 2% and we're looking at our addressable market. Most most likely pegging out at that at at that two 2% point, Matt and we haven't we haven't done the you know the absolute math, yet because we're right in the middle of our.
Our strategic planning, but two 2% from where we sit today feels like the right addressable market growth.
As we move forward and how that plays out.
And I firmly believe it's going to be higher on the tech side and it is on the.
Expert expertise side.
And we have a we have a choice on what we want to bid on and you know dollar for dollar pound for pound if it's a dollar spent for <unk>.
Tech versus X for T youre going to see is voting and the Tec Tech area. So to show for 2% rough number today.
And at the end of April.
That's for how we see it thanks, Matt.
This concludes our question and answer session and I would like to turn the call back to John <unk> for any closing remarks.
Okay, well, thanks, Allie and thank you for your help on today's call and we'd like to thank everyone, who dialed in or listened to our webcast for their participation. We know many of you will have follow up questions, Tom uterine, Dan Lekberg and George price are available. After today's call. Please stay healthy and all my best to you and your families. This concludes our call.
Thank you and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.