Q3 2022 CACI International Inc Earnings Call
At the same quarter last year.
As a result as a result, we are reducing our outlook for fiscal year, 2022, which Tom will discuss in more detail shortly.
Slide six please.
Looking past these short term funding issues, we have a large and growing addressable market and the budget environment is even more constructive today than in the recent past for example, we see increased spending across defense, where we have a robust footprint the intelligence community, where approximately 30% of our revenue is generated.
An important non D O D customers like DHS will be providing cyber and applications development.
From a capability perspective, we see increased spending in it modernization across the federal government the space domain, including Photonics and space situational awareness and continued strong spending across the electromagnetic spectrum to include SIGINT EW and cyber.
Slide seven please with those spending priorities as a backdrop I'll cover recent investments we have made in 19 modernization and space.
First on the monetization side, we continue to invest in commercial solutions for classified or CFC.
You've heard us talk about you've heard us talk before about our subscription based software as a service steel box application for secure communications, we continue to invest in new capabilities and are seeing successes with recent deployments within the intelligence community.
And our recent acquisition of <unk> technologies expands our portfolio of software base. The SFC for classified networks, combining combining these CFC offerings with our existing network modernization capabilities provides a compelling end to end solution to capture increased spending in it modernization.
Second we continue to invest in the increasingly important spaced on me.
Photonics and partnership with DARPA and SDA recently demonstrated the connection of an optical link and data transfer between satellites in orbit. This success is an important step in establishing space based communications to transmit greater amounts of data and a more secure modality.
We also recently completed an important milestone for two mission payload that we'll launch into lower orbit early next year.
These upgradable software defined payloads will demonstrate AT&T and alternative to GPS as well as tactical ISR from space.
These space payloads are great examples of taking exquisite terrestrial capabilities and investing internally to deploy them in space.
Slide eight please.
The bottom line is our business is performing well on the things under our control.
We are delivering with quality winning.
Winning new business driving profitability generating robust cash flow investing ahead of need and relevant and differentiated technology hiring great talent and being recognized in several surveys by our employees is a great place to work.
Before I turn things over to Tom I wanted to make it clear that our business is performing well and long term prospects for positive. While we are still going through our FY 'twenty three planning process, our preliminary assessment indicates healthy organic growth profitability and cash flow, we have the capabilities the contracts.
Our robust backlog and a track record of winning business to continuing delivering shareholder value next year and beyond.
That I will turn the call over to Tom.
Thank you John and good morning, everyone I'm still on slide number eight let.
Let me start off by providing some additional color around FY 'twenty three.
As our customers begin to execute on what is now a fully appropriated budget and get plugged on contract to meet critical needs. We expect plenty to revert to more normal levels in early FY 'twenty three.
As is our practice our fiscal year plan and guidance is based on a program by program bottoms up process.
This activity is well underway and has provided enough insight for us confident that we will be able to generate healthy organic growth profitability and cash flow in FY 'twenty three.
We will provide formal FY 'twenty three guidance with full details in mid August .
With that I'll turn to our third quarter result in FY 'twenty outlook.
Please turn to slide number nine we generated revenue of $1 $6 billion in the quarter, representing two 1% growth with organic revenue down approximately 2%.
Third quarter adjusted EBITDA margin was 10, 2% below our expectations due primarily to fewer heightened bartered mission technology sales as a result of the funding issue as we spoke of.
Our 17, 9% tax rate benefited from increased R&D tax credits of approximately $9 million related to FY 'twenty through FY 'twenty, two which we recognized this quarter.
Slide 10.
GCI continues to generate strong cash flow and free cash flow per share.
Third quarter cash flow from operations, excluding our accounts receivable purchase facility was $314 million in free cash flow was $297 million.
This includes $160 million of tax refunds related to the FY 'twenty one tax selection, we have previously discussed.
Excluding the tax benefit free cash flow for the quarter increased by 26% from a year ago.
Our continued focus on working capital management drove DSO to 51 days, demonstrating the consistent and efficient performance of our business.
We closed the third quarter with net debt to trailing 12 month adjusted EBITDA at two eight times.
Together with our recently expanded credit facility and continued access to capital, we got flexibility and Optionality as we consider all capital deployment opportunities slide.
Slide 11 please.
We are updating our fiscal year 'twenty two.
The short term funding headwinds, which impacted both our third and fourth quarters.
We reported results plus clutter, we anticipated that 3% of our revenue would come from new business.
A good portion of that was related to material and technology, probably knew which did not materialize due to funding issues.
While we now have a fully appropriate budget. It is unlikely that funds will be received soon enough to enable us to deliver and recognize any associated revenue, but at the end of our fiscal year.
For fiscal year 'twenty, two we expect revenue to be between six 2% and $6 to $5 billion with total revenue growth of 3% organic revenue growth of about 1% at the midpoint.
Yeah.
Adjusted EBITDA margin to be around 10, 5% at the midpoint, reflecting the delays in funding associated with higher margin technology.
Capex of about $80 million.
In an effective tax rate pretty constantly.
Yes.
We are maintaining our free plastic free cash flow guidance of at least $720 million in our other assumptions remain materially unchanged.
Year to date, we have realized $190 million that you expected $230 million cash tax benefit from the 2021 method change.
We anticipate the remaining $40 million to curve in the fourth quarter, but the timing of the tax refund is dependent upon the IRS.
Slide 12 please.
Turning to our forward indicators, we now expect virtually all of our FY 'twenty.
Program.
We have $10 billion of submitted bids under evaluation with about 90% of that Purdue.
And we plan to submit another $20 billion over the next two quarters with about 90% of that for new business and with that I'll turn the call back over to Jonathan.
Thank you Tom Let's go to slide 13, before we transition to Q&A I want to leave you with a few important takeaways for short term funding headwinds are just that they're short term.
You did not change our large addressable market north positive demand signals, we continue to see bipartisan support for national security and modernization.
<unk> is well aligned to these key spending priorities.
<unk> peer adversaries continued to develop capabilities that we will need to counter regional tensions remain and counterterrorism requirements have not gone away.
It means like cyber space and the electromagnetic spectrum are increasingly important and broad based monetization across the federal government is essential.
So our 22000 talented employees.
You for everything you do and service to our customers and our nation each and everyday.
Your dedication your talent, you're good character and your spirit of innovation is truly foundational to our success.
With that Seth, let's open the call for questions.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad. If you changed your mind time wish to withdraw your question. Please press star two please.
Please a lot of time for one question and one follow up only give equal opportunity for everyone to ask questions.
First question today comes from Gavin Parsons from Goldman Sachs. Please go ahead.
Hey, good morning, guys.
Good morning, Kevin.
John You mentioned, the construction budget environment right.
'twenty two is plus 23 this growth across the board, we actually have a setup.
How does that translate back to a level of confidence in spending at your customers and what does it take for them to get comfortable and actually spending at these higher levels.
Yeah Gavin thanks.
As we mentioned in our prepared remarks, it really comes down to issuance of funding.
You know the way the way, we our third third quarter played out it's not that the government didn't have that funding. It was getting those those funding orders out. So you know bottom bottom line up front, we are very confident about about things going forward.
From a from a big picture from a bunch of a bunch of stand standpoint, I think the FY 'twenty to budget in the play that's why twenty-three budget as further proof that the world is a really dangerous place and I believe that you train was a wake up wake wake up call.
But China and other near peers and counterterrorism threats are all are all still it's still there.
You know, we're hearing potentially largest yogi budget in our history as we get into government fiscal year 'twenty three potentially greater than 800 billion $1 billion of we're working through a $14 billion multi your supplemental spending for you mean for Ukraine, which includes operational and Intel support for.
A U S European command, which is a a combatant command that we support broadly.
And as I shared in my prepared remarks, we're going to see increased spending in the intelligence community, where we provide a wide range of advanced cyber and Intel.
Analytical technology and expertise, we're going to see increased spending by D. A DHS it really supplements, what we do with the DHS Cisco organization as well as our large customers and border.
Customer there through our Beagle.
The program, we're going to continue to see increased spending on I T. Monetization. So you know when we when we when we look at our industrial market bring in $240 billion and we look at that we continue to invest in differentiated capabilities and alike.
And and we're in the right areas of spend where in space <unk> cyber weren't any.
I wear and mission mission Tech solutions.
So we are.
Even more confident as we go into FY 'twenty, two 'twenty three Gavin and again I want to close this question off with our FY 'twenty two struggles in the second half of this year are they an absolute issue with funding.
Okay I appreciate all that color so.
Maybe just following up on that do you expect the funding to revert to normal levels. In early 'twenty. Three have you started to see that yet or is that still a wait and see from the customer.
Yeah, Kevin Thanks.
Yeah.
It's a fact that our contract funding orders in the third quarter were down about 20% versus versus last last year.
These are temporary and we do believe funding is going to begin to flow.
What I can share is through the 25th of this month, which was the first month of our fourth quarter.
Funded orders were up about 8% from the same period last last year, but clearly not in time to support our FY 'twenty two efforts.
The only 60 days remaining in our current fiscal year. So.
We're going to continue to assess our FY 'twenty one 'twenty three plan.
In light of what we saw in April we would expect May and June to show that same level of reversion back to the normal which will.
Support a F.
FY 'twenty 'twenty three are reverting back to you know strong organic organic growth great margins and increased cash cash cash flow. Thanks, Kevin.
Our next question is from Mariana Perez Mora from Bank of America. Please go ahead.
Good morning, everyone. Good morning, Amit.
When was it.
<unk> from <unk> group.
Thanks Bonnie.
Yes.
We're looking for positive impacts of the FY 'twenty three.
But you're spending during our FY 'twenty to 'twenty three year.
As well as increased funding coming up during our fourth our fourth quarter.
[laughter].
You know me.
We are.
We're continuing to focus on high quality revenue and as I mentioned, the Gavin or in the right places.
Our technology continues to be more profitable and grow faster than our than the expertise portion of our business.
We are continuing to focus on high quality revenue and we want who want to want to be able to grow and expand margins within that tech sector.
We've got very healthy awards, we got a great healthy backlog, we are committed to driving driving growth above our addressable market, which today is $240 billion Mark Rihanna.
We get a chance to assess the full.
2023 planned going forward, we'll have a new addressable market with the goal of our the acquisitions that we've done over the last couple of years has really been focused on growing that addressable market were $6 billion company today, we're in a $240 billion addressable market. There's no reason why with the appropriate funding we cannot continue to grow.
As we have.
Our year over year.
Perfect.
Paula how lots of snow.
Oh sure today and.
It could be like I guess that now.
Yeah. So what we do in space today is a really really focused.
And our mission mission Tiger area, we were very focused on the ethane photonics acquisition because.
Because we believe that our role in space would not be in building satellites, but actually by both doing mission payload sit right on at all Leo Geo MEO satellites as well as optical community communications.
We were very successful. This this past month as I mentioned during my prepared remarks to be able to close and optical link in space.
Which is a great step forward for <unk>.
For CCI for our satellite.
Partners as well as DARPA M. S N S D a.
I would also tell you that these two experimental payloads that we have being launched I believe its January 'twenty three is very important and we're spending a couple of minutes on it because it's very germane to what our space strategy has been.
We're looking at an alternative PMT a solution that will work in a contested space domain.
And it won't completely replace two etfs, but it will greatly support systems out there when GPS signals are jammed when the attack.
Our plan for our solutions to be more resilient and less and less vulnerable to jamming and there are billions of dollars that are going to be spent over the next five years when space to continue to insure Noncontrastive GPS through the war to the Warfighter.
The second area and the tactical ISR area is very basically taken our mastodon type terrestrial solutions today for tactical I as I I S. R. Since they're so they're very low size weight and power there were very little cost and making certain that we can space qualify those boxes in.
Those assets, where we can continue to prosecute all of our growth strategies within the space domain.
Okay.
Yes.
Our next question comes from Tobey Summer from a tourist Securities. Please go ahead Tobey.
Hey, Good morning. This is Jasper Bibb on for Tobey I was just hoping you could comment on your experience with recruiting and retention of existing SaaS. Some of the private companies have described the issues with the staffing up new contracts.
Has that been an issue for you at all in these past few quarters.
Yeah. Thanks.
Look the demand for talent.
Still remains remains high.
You know as I've as I've said, many many times the hiring environment remains very competitive and very challenging, but it's no different than it has been over the last several years, you know I'm I'm a big trend line.
A person in looking at trend lines of stem graduates out there.
Can throw this great resignation wave in the middle of that as well as wage inflation.
Doing an outstanding job with it but we we strive to be the employer of choice within our sector. We've got two great programs one's hashtag, making moves and one is our highly a highly.
Hi, Lee successful referral program, you'll hashtag, making moves is really about ensuring that as people wanted to do different work within the company.
They have the ability to in fact do that and that reduces attrition. We've invested a lot of internally. We are very focused on exciting and important work I don't want the expertise side of our business, but in the technology side and that very much differentiates us within our sector.
We we make certain our employees know how much we value diversity and inclusion.
And just to just to share a few a few points.
Tricia for us continues to be lower even post COVID-19 .
Which is an outstanding signal that we are doing something right and sort of flashes back to everything that we can control we're doing it in an outstanding job and one in four of our J ours is filled internally, which is significantly better than it was just a few years back.
Our positive free referral trends one out of three hires as a referral and thats great for retention. It's also great for filling filling new rolls out there. So you know I'm not I'm not going to leave this when I'm, saying that it's really really tough I mean, our talent acquisition group.
And our HR organization does a phenomenal job you know at the end of day, we're not we're not immune to it but I like the position. We're in so that we don't find ourselves in a dire talent shortage because of the great reading reading renegotiation wave as well as wage inflation.
Yeah.
Thanks, and then I just wanted to ask about customer exposure from the initial O&M request. It seemed like maybe an air force might be relative winners at the expense of Army could you just talk about how you're positioning stacks up with the with each of them each of those customer accounts.
Yeah, Let me, let me take Air Force first because I hear about Air Force I think about the intelligence community.
Quickly time myself back to space.
So we are very well positioned within where the air force is gonna be a spending money throughout 2023 and beyond.
We like to focus on space there are within the army, whether it's battle animal battlefield comms, whether its decision those types of collection technology technologies those continue to be very well funded within the Army's budget, we're not as major of a Navy Navy player, but one.
Very important area, where we are we are responsible for the majority of the system Engineering and engineering is done and all surface ships. So as the Navy Shipbuilding program continues to be greatly funded we are right in the sweet sweet sweet spot there.
At the end of the day, we've been very very focused to ensure that we are in those swim lanes, where the customers are going to spend money you know AI cyber it modernization and and the like Oh. One example, 19 modern monetization.
It's using the acquisition that we did with LG asked their network design team when the army OSP job on a half on half a billion dollar job, which is gonna be transforming all of the army's networks here and abroad.
Make it making certain that they can handle a faster data data rates in a much more secure manner.
That is extremely well funded and just another great example of <unk>.
CCI, one investing ahead of need and to invest in those areas that are going to have long term funding streams as we move forward.
Okay.
Our next question is from Matt Sharpe Morgan Stanley . Please go ahead, Matt.
John Tom Good morning, gentlemen, and thanks for taking my question.
Yes, good morning.
John New business as a percentage of contract awards and dropped off pretty materially in this past quarter, I think a 45%, whereas the.
The long term average is north of <unk>.
60 last.
Last quarter was 70. So my question is how did your win rates there in the corner and more broadly what's the competitive environment look like right. Now are you getting more aggressive in the end market has tightened or.
Power for the course.
Yeah, Matt Thanks.
Start and Tom will probably get it for me.
Look I guess.
My My simple answer every awards question right is what sort of lumpy.
It's why we don't get really high on a great book to Bill quarter, and why we don't get low on something which is with much lower.
You know the numbers that you mentioned relatively sound in range.
But you know that the.
The new business we have.
Versus REIT Reed.
Recompete, so those numbers bounce around.
If I, if I talk a little bit about.
Competitive pressures I really take it back to our to our framework, which as you know we put in plan a place we put in place a plan.
It really looks at the the dynamics of the expertise pursuits, we have out there and the technology pursuits, we have.
And it's exactly that aggressive bidding stance and trying to drive very low rates and trying to be the most cost competitive provider out there, which is which is a strategy that CACI moved away from a number of years back you know better buying power, one and two to dot O and O O P. LPTA.
Really opened the market up for people, providing expertise to the federal government you can call them can sell tents or they'll be like.
Which is why we've been very very judicious in what we want to bid and within that space.
If you look at some of our Recompete work.
Majority of the Recompete work that we haven't been successful on in the last 36 months has predominantly been in that enterprise.
Expertise quadrant, because frankly at the end of the day, we want to be a growing company, both top and bottom and bottom line, we want to be generating profit dollars to invest in the technology side of our business, where we see much greater funding what are your streams.
Has it become more aggressive in our hourly pricing rate area, absolutely. So and you can see that because we are one of those few companies that although it's tough to find talent as somebody asked earlier, 50% of our business is pure technology, where where we direct the efforts of our people each and every.
Day, where our people can take the training classes they need to make us a much more productive company and that is the one differentiator that we continue to point out is that we arent that company out there talking about we cant find talent because we haven't been overly aggressive bidder and again back to what we can control we're going to continue.
To bid work that we can responsibly don't do deliver on time or anything like that.
At that.
Take a step back and look at our.
Okay. This is development activities.
If you feel positive about our total backlog $23 billion in a significant amount of backlog you know for us kind of winning some large contract durations have increased materially over time.
This quarter $1 $2 billion of awards.
There are some lumpiness in awards. So we look at it on a trailing 12 month basis kind of 1.5 times had a book to Bill.
Kind of looking at capture rates for both new business and Entre Recompete business. There you know quite respectable.
Happy with that what we saw so all in all you can feel positive about our ability to win new work and consistent with my prepared remarks, we have a significant amount of activity under evaluation or beat to be submitted so an opportunity rich environment.
Yes.
Got it okay. Thanks, Paul that's very helpful.
And then just as a follow up looking at the implied for Q. Rev Guide It looks like I think six 5% or so growth at the midpoint in.
Two ish on an organic basis.
Fairly large step ups relative to reach you and even if I look at it on a sequential basis.
I'll jump how.
How much of <unk> is already in backlog and should I think about the quarter as having any sort of catch up from three huge disruptions or is there anything else going on in the background to consider maybe Afghanistan headwinds fading a little bit.
Yeah. So if I look at the fourth quarter on here. We are in April so were once they're done.
You feel pretty good about that on the.
Funding issues, which impacted us in the third quarter on our turning to Corp, but it's going to take some time for that even if you get the funding to translate it.
Into revenue, but a lot of visibility yet to where we stand between now and the end of the year. So you can feel positive about that.
It will have a lot of line of sight.
And there are some product deliveries, which we're tracking very closely there are some material sales I wish we're tracking very closely but we feel pretty comfortable about those fell off at all at all.
Again.
Yeah.
Cartilage in the guidance that we've provided.
Yeah.
Our next question comes from Scott Phillips Jefferies.
Please go ahead.
Good morning, John morning Dom.
Martin guidance came down 20 bps on these kind of short term funding items is there any way to sort of frame the margin bridge into FY 'twenty three I mean, what are the major moving pieces as we move into next year and what's the right way to think about the underlying margin base for fiscal 'twenty two.
Yeah. So you know again, you know very good question and we're spending some time looking at that as well.
You know the kind of margin did decline from our prior guidance.
Seven to 10, five and that was primarily due to the slippage of or the reduction in high margin technology sales. Some of the technology all b cell that we disclosed previously with the mastodon and AVG acquisition in the 30%, 40% EBITA margin range. So it has a material.
No impact one of the questions is beautiful.
As always rebound will there be a bow wave et cetera.
Excuse me.
A lot of.
Kind of discussions internally as we built the plan to try to assess that right now, we're seeing an ever increasing margins and <unk>.
We still have yet to think about what the appropriate takeoff point is.
10, 5% is it.
Kind of lower than we anticipated so let us spend some more time as we prepare our FY 'twenty three plan with some degree of fidelity to kind of be more specific with regards to that.
Scott Let me also add on.
On the revenue side.
You know it.
There will be questions around whether the revenue didn't show up in the fourth quarter or is that going to be delayed or is it lost and I think it's very.
Helpful to share a couple of comments on the revenue side as well because we're looking at that as we start to assess our FY 'twenty 'twenty three.
And on the expertise and the enterprise Tech side.
Our new business business wins in any con contract mods think of additional work that the customer has given to us.
Those are those which are expanding.
Experiencing funding shortage shortages those are going to cause delayed starts and ramp ups. So that work will be recouped over time, but time is to find over the life of that contract. So it could be.
One year it can be three years.
It can.
It can be as long as long as five the.
The mission technology sort of cycle of deliveries that Tom mentioned.
In most cases, we're going to look at those as being delayed.
As of the funding and funding issues, we will have more on that as we complete our FY 'twenty three assessment and I really wanted to get a good handle on the next two months worth of funding orders whether that trend line.
Continues to move to move forward on the material sales those are really a mix and just as an illustrative example, if a customer typically buys 100 units of something each year and they didn't buy it in FY 'twenty two because of funding delays are they going to buy 200 units next year are they going to buy 100 or some other.
Number. So again you know that's an ongoing assessment as much as we're looking at margins. We're looking at a revenue that can drive those margins as well so sort of a mixed bag more more delay than lost.
But again, it's gonna be that element of time.
Yeah, and the last comment I'll make on that is it has to be looked at 'twenty three both trial and I in our prepared remarks, you expressed confidence in FY 'twenty three we certainly have the backlog we have the demand signals by the customer we have the technology, we have the capabilities and we have the people in place.
So when we put all that together that bodes well for FY 'twenty.
Thank you.
Yeah. Thanks, Scott.
Our next.
It comes from Colin Canfield from Barclays. Colin Please go ahead.
Hey, good morning, guys. So just.
Crystallizing the growth conversation, a little bit organic guidance walk down you know, 2% through the year and more defense R&D cyber threats of I T O growing 10% you just self funding orders that growing at kind of 8% through the month.
It should accelerate through the year. So then if.
If you think about looking out to FY 'twenty three what are the kind of pain points that stop you from achieving high single digit organic is it more a program exposure perspective, or a supply side perspective.
Yeah Colin.
I'm not going to break my.
And your track record of not talking about twenty-three until August , but havent respectful of your of your question look.
We do expect our customers.
To begin to execute on our fully inappropriate in budget and finally went through folks are middle of this month.
We do expect funding to revert to normal and early 'twenty 'twenty three again, we're going to watch it the next couple of months.
$300 million, 20% dip in the third quarter as you would imagine causes us some level of pause, we really wanted to watch where the funding orders.
Go <unk>.
Supply chain still going to be an issue, but consensus is that that should get better in the back half of our of RFS fiscal fiscal year, we're not trying to give guidance per per per se. When we are trying to do though too to the point of your question is trying to convey the confidence that the headwinds we have seen.
Our short term and we have plenty of backlog, we have plenty of ongoing growth on our current plan O grams, there's nothing more frustrating than having everything we absolutely need having a well run business, a very cost effective business and not getting a funding order, which allows us to you know clearly generate revenue. So we're going to provide formal guidance.
With all those details when we report in mid in mid August because I do think it's still prudent frustrate viewed the funding picture through the fourth quarter, but having said all of that.
This is more funny than it is customer demand demand signals.
Got it and then in terms of the demand signal environment, what sort of demand signals are you seeing that youre investing in low earth orbit constellation and kind of how does your capability sit within the framework of high end classified stuff versus some of your commercial peers like spire contacts from 60.
And the like.
Yeah.
I would tell you that our absolute focus is on our is on our D O D and air force customers and how they utilize space.
It's true that in the in the commercial World a world there'll be many constellation's put up at Leo and that was absolutely why we did the SA Photonics acquisition right, what we picked up with lgs and their photonics business is a phenomenally well.
Well run a business that is driving high and Geo based bespoke solutions.
Low quantity think very very highly act accurate carrying both unclassified and classified information over highly.
Hum.
Over high bandwidth links what else at Photonics gives us is.
Different look at algorithms, but also the ability to produce those those types of optical solutions at a lower rate at a at a higher volume lower price target.
Level.
What I like about the assay Photonics Act.
Physicians combining that when we deal with LNG, Yes, we now have high end bespoke and high volume Leo based solutions that will both over time collapsed at the same type of baseline makes it even in our high end bespoke ones more cost effective so there could not be a better example, frankly collin.
Then then what we're doing in that in that space to own domain.
Yes, there are other folks out there working on Africa cross links or other salaried providers, saying, they're going to go.
No creator of their own.
As I mentioned, when we did the assay photonics at.
Acquisition, we're looking at volume and margins improving as the market picks up in the FY 'twenty four time period. You know this was a a very.
Timely acquisition for us So we did buy it on the lower end of that growth curve curve. So as we disclosed about four to five quarters more of strong investments there.
But again the success, we just had on this mandate to mission has been outstanding and it really does set the.
Tone for us seen greater out your growth in being a long term growth company, we'd be we need to be focused out in that 'twenty three 'twenty four 'twenty five timeframe.
Our next question is from Matt Akers with.
The Wells Fargo Mats. Please go ahead.
Hey, good morning, guys. Thanks for the question.
I Wonder if you could put maybe a finer point on some of the slowdown Q3 Q4, I mean, it sounds like somebody who was like technology product kind of a pet.
Shifting out was that the biggest part or you know any color you can give on how that broke out kind of by customer or end market.
Yes, so I'm, giving you think hey, Matt This is Tom.
And there's two kind of major impacts of that shorter term funding.
Some of the longer five year programs.
We get funding on a regular basis, we have a large number of people working on either expertise or technology program is there.
It is somewhat immune from these short term funding fluctuations.
<unk>.
The funding.
Punting impacted some of the shorter cycle activities in two categories, one are material buys into sometimes government.
T O D customers Army customers will ask us to procure.
Not necessarily commodity like materials, but specialized capabilities.
You would think a satellite dish with special features and technology embedded it upon it we would procure it and a dry one of our contracts to provide to the government then we have our own technology.
You could think mastodon E P T.
And in the light.
The former category materials.
Our higher revenue, but lower margins.
It's we're getting a material handling fiat those so that slowdown in funding impacted revenue.
On our own products and a very high margins. Those were also impacted on had a disproportionate impact not on revenue, but on margin. So those were the types of challenges we had with the funding things some specialized material.
At lower margins higher revenue and didn't think our mission technology lower revenue contribution, but materially higher margin. So that was the two major components of that.
Got it.
Helpful. Thanks.
Also on the free cash flow you were able to maintain the free cash flow guidance. Despite some of the slowness was there an offset that to help you to still get to the 700000.
Yeah, Yeah, absolutely so.
A few things operating cash flow if I go excluding D.
Hum.
The tax issues.
Kind of down a little bit around $10 million odd.
And is largely driven by some of the reduction in our net income from.
From where we initially had it pegged, but that's offset by some better collections DSO at 51 days extremely low.
For us all.
One of our peer group, so very proud of that slightly lower capex as well so.
The lower operating cash flow somewhat was offset by the lower capex.
The collections have certainly improved and so we're able to maintain that.
Free cash flow guidance.
Yeah.
Our next question is a follow up from Gavin Parsons of Goldman Sachs. Gavin. Please go ahead.
Thank you for the follow up I just wanted to ask if you could give us a sense of.
Total product revenue in a normal year and what that looks like this year.
[noise] Gavin.
We're going to keep our disclosures around our technology and expert expertise.
And that's clearly just due to to competitive reasons.
Reasons, we do believe that you all can measure how the mission tech sectors going we do show what those growth rates are a highly respect. Your question. We're just not going to provide too much additional information there.
Totally fair totally fair.
This might be a little nitpicky, but what was the cadence of the <unk> funding decline.
Pretty concentrated in January was a real to omicron or was that kind of more widespread as a result of the C. R.
Yeah, So Kevin good question.
To be candid, we tend not to look at it at a month by month basis.
So I do not have that fidelity I would just be speculating.
Yeah.
Triggering against Tobey.
Yeah.
And the triggering event or what are the trigger events with the passengers of budget on March 15th and so I would guess and we can get back to you on that.
Once the budget was passed there was probably some more positive trends.
Kevin I'll add one other.
Item frankly around that second second question.
You know we've been we've been trying to study what the most likely reason was for that you know because as we mentioned when we got through the second quarter, we were pretty much flat with where we were last year, you know, our our assumption and probably best well founded.
Isn't it is it's another issue we talked about it during the second second quarter.
When when Ukraine prices started it just became yet another compounding factor.
On a government customer that was already spending below what their what their CR budgets budgets were in sort of like throwing another ball in that six balls Juggling act of how am I going to fund everything that I have.
You know that that's frankly, where we where we believe that that funding issue starts as to the specifics by a month to month I'm sure Dan and George can.
Gets you the rest of them information, but as we talk about funding you know I wanted to continue to.
Ria iterate.
Funny to US is a very short term head when you know we the national security priorities are important as ever.
2022, and FY 'twenty three plan budgets are very constructive we've got a large and growing addressable market. We're investing in an aligned to all of these keys rented spending areas. What we can control is being run exceptionally well.
And we're looking forward to closing on 22 within our updated guidance and then driving future growth in FY 'twenty three.
Makes sense. Thank you again I appreciate it yeah. Thanks, Thanks, Kevin.
Okay.
We also have a follow up from Colin Canfield about please call them. Please go ahead.
Okay.
Hey, just going back to the low Earth orbit.
Constellation there it is.
So you mentioned producing countries like sub coupon T optical links.
But at the same time, you're cutting your Capex guide. So then how do we think about kind of how that alio narrative interacts with capex and when do we.
Kind of what sort of Capex and <unk>.
Should we assume from C. A T. I, you know kind of on a year on year basis or a percentage of sales.
So let me start off with Capex kind of generally speaking.
Three major buckets for our capital spending for PCI, one is facilities on it will be continue to.
Look at our real estate portfolio and make appropriate investments sorry, sometimes we're doing some consolidation and that requires some you know cause.
Long term capex to support that activity on the second major bucket is internal.
Spending honest some.
Some of it's the simple cut replacements of laptops, and desktops and audio visual equipment.
And we do make it investments and some are in enterprise.
Capabilities, you know think of budget system take a contract system. Thank you no other data repository systems.
She tried in capital spending in.
And the third bucket is capital spending associated with program, we have a series of laboratories, they require very simply.
Sophisticated test equipment.
I.
Manufacturing capabilities like it so that's the piece that you're looking at.
So with that I'll turn it back to John and he can talk.
More specifically about some of the requirements for some of the space activity yeah. So.
Colin.
Actually beyond bound space everything we're doing that mission Tech quadrant.
The first nine nine months.
Capex was around 40 40 million, which tells you that you know it's sort of timing you know the slower funding environment.
Slow some of the ramp up of some some of that work nothing slowed down what we're doing and that's a photonics something to slow down what we're doing in the air just mastodon business someone's just normal Oh, that's a ways.
It would be very very clear, we're not backing off on investments for growth because of these very very short term headwinds headwinds or near term investments drive long term results.
We will not cease any of those investments as we continue to support you know new and growing customers, especially when it's backed by very strong funding streams. Our mantra of investing ahead of customer need does not take time out because of a one to two quarter short term funding issue, which is predominantly the.
Majority of the issue why we had to take down guidance.
To close our FY 2022 you know unfortunately, our fiscal year has sort of fallen following pulling out that for others, who have a January through December fiscal year, you know as many of you have already written you know you all are expecting growth starting in those companies third quarters.
They happen to be our first quarter of FY 'twenty to 'twenty three so there's there's nothing alarming theres nothing shocking there's nothing going on inside of the company overall, we're going to continue due to invest ahead of customer need and that mission Tech quadrant as well as in the enterprise stack area, because that's what's going to fuel future growth and future margin expand.
Got it.
Got it appreciate the follow up.
Yeah. Thanks Colin.
Yeah.
Yeah.
We have no further questions on the call. So I will hand, the floor back to John .
Yeah.
Thanks, Seth and thank you for your help on today's call, we would like to thank everyone, who dialed in or listened to the webcast for their participation.
We know that many of you will have follow up questions, Tom uterine, Dan, let Berg and George price are available. After today's calls please stay healthy and all my best to you and your families. This concludes our call. Thank you all and have a great day.
Yeah.
Thank you. This concludes today's conference call you may now disconnect your lines.
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