CACI International Inc Q3 2023 Earnings Call
Speaker 1: ?
Speaker 2: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Third Quarter Fiscal Year 2023 Conference Call. Today's call is being recorded. At this time all lines are in a listen-only mode.
Speaker 2: Later we will announce the opportunity for questions and instructions will be given at that time. If you should need any assistance during the call, please press star and then zero and someone will help you.
Speaker 2: At this time I would like to turn the conference call over to Dan Lechberg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.
Speaker 3: Well, thank you and good morning everyone. I'm Dan Leckberg, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning.
Speaker 3: We are providing presentation slides, so let's move to slide number two.
Speaker 3: There will be statements in this call that do not address historical facts 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.
Speaker 3: 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.
Speaker 3: 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 performance measures prepared in accordance with GAAP. Let's turn to slide three, please. slide three
Speaker 3: To open our discussion this morning, here's John Mingucci, President and Chief Executive Officer of CACI International. Thank you for joining us today.
Speaker 4: Thanks, Dan, and good morning, everyone. Thank you for joining us to discuss our third quarter fiscal year 23 results. With me this morning is Chuck McLaughlin, our chief financial officer. Try four, please.
Speaker 4: Last night, we released our third quarter results, and I'm very pleased with our performance.
Speaker 4: with growth in both expertise and technology.
Speaker 4: Profitability was strong with an adjusted EBITDA margin of 11%, and cash flow was solid.
Speaker 4: A trailing 12 months book to bill of 1.4 times remains very healthy.
Speaker 4: raising our fiscal 2023 revenue and earnings guidance. And Jeff will provide additional financial details shortly.
Speaker 4: Let's go to slide five, please.
Speaker 4: Turning to the external environment, market and demand trends remained very favorable to CACI. Government fiscal year 23 budgets showed healthy growth and we continue to see positive funding trends.
Speaker 4: In addition, the President's GFY 24 budget request calls for further growth in defense, which is just the starting point as Congress begins the budget process.
Speaker 4: While budget indications are positive, we will continue to monitor the process and debt ceiling negotiations.
Speaker 4: We see continued growth in key areas of focus for CACI.
Speaker 4: driven by the heightened global threat environment, bipartisan support for national security, and the need for modernization. From a capability perspective, we see continued government demand in several important areas for CACI, including broad modernization of both applications and networks, and accelerating demand for cloud migration.
Speaker 4: the space domain with photonics and situational awareness.
Speaker 4: and the electromagnetic spectrum, including software-defined singles intelligence and electronic warfare, and their convergence with cyber.
Speaker 4: CACI's industry leadership and commitment to invest ahead of need position us extremely well to deliver innovation to our customers and value to our shareholders.
Speaker 4: We see eye industry leadership in commitment to invest ahead of need. Position us extremely well to deliver innovation to our customers and value to our shareholders. Slide 6 please.
Speaker 4: We continue to successfully execute our strategy of building differentiated capabilities rooted in software and deep domain expertise.
Speaker 4: Just as important, we remain focused on exceptional execution.
Speaker 4: but also retain, expand, and extend that work over time. Let me give you some examples.
Speaker 4: ITAS award with the United States Air Force is the largest contract award in our company's history.
Speaker 4: This award demonstrates CACI's leading position in broad IT modernization. While the award has been under protest, I am happy to say that our win was recently upheld by the GAO.
Speaker 4: We are ready to get to work and look forward to beginning this important program for the Air Force in the near future. Second, I want to highlight the Army's Integrated Personnel and Pay System, or IPS-A. IPS-A is the largest PeopleSoft implementation in the federal government.
Speaker 4: And arguably, the most complex people-soft implementation at scale in the world, serving more than 1 million soldiers. We are excited to have rolled out the latest version of the system earlier this year.
Speaker 4: For the first time, the Army has a single system for managing more than 1 million soldiers across the Army, Army Reserve, and Army National Guard.
Speaker 4: That is software development scale. We look forward to working with our customer to provide additional functionality and enhancements to further support our soldiers.
Speaker 4: This performance is yet another example of CACI's industry service and software development for both enterprise and mission customers.
Speaker 4: In a space domain, we continue to see strong demand for our photonics technology for most government and prime customers. We also continue to invest in and advance this critical technology, and as a result, continue to achieve important performance and interoperability milestones.
Speaker 4: CECI's photonics technology enables secure, space-based communications networks using more powerful, efficient technology that transmits more data faster.
Speaker 4: We are currently under contract to deliver optical communications terminals for the FDA under Tronch Zero and Tronch One for both the transport and tracking layers. And we continue to provide our photonics technology to a wide range of additional classified programs at multiple orbital altitudes. Finally, we continue to demonstrate leadership in the electromagnetic spectrum, an increasingly important area of focus for national security.
Speaker 4: particularly in the Pacific in European theaters. C.H.E.I. is one of the largest providers of sensing systems across all domains, land, air, sea, space, and cyber. As we've discussed before, one of our key differentiators is a strategy focused on soccer-defined technology. This allows us to update capabilities in a faster, more agile manner enabling our national security customers.
Speaker 4: to stay had a rapidly advancing neighbor series and threats. In a latest example of this capability, we recently executed the first over-the-air software upgrade of an operational system on a Navy ship at sea. Rather than waiting for the ship to return to port, we deployed it over the horizon update to enhance capabilities while keeping the asset on mission.
Speaker 4: This software-enabled speed and agility is critical to the context of near-peer competition. In summary, we delivered strong results and I remain confident in our long-term prospects. We are successfully executing our strategy, we're making the right investments, hiring and retaining top talent, winning new work, and we are making the right investments.
Speaker 4: delivering with excellence and leveraging our financial strength to drive free cash flow per share and additional shareholder value. On top of all that, well, we are effectively managing our capital structure to allow for flexible and opportunistic capital deployment and taking advantage of all available value-creating initiatives like the tax method change we recently affected.
Speaker 4: As a result of our performance today and our strong position, we are raising our fiscal year 2023 revenue and earnings guidance.
Speaker 4: With that, I'll turn the call over to Jeff. Thank you, John . Good morning, everyone. Please turn to slide seven. Tecco, John Sedeman, I'm very pleased with our third quarter results. We generated a revenue of $1.7 billion in the quarter, representing year over year growth of 10% all of which is organic.
Speaker 4: expertise revenue grew 13% in technology revenue grew 7%, both reflecting the ramp up of new awards as well as the balancing of existing work. Adjusted even though margin was 11% in the quarter and is 10.6% on a year-to-date basis.
Speaker 4: which is consistent with our full-year guidance.
Speaker 4: As we previously discussed, we expected margin in the second half of the year to be stronger than the first half, and our third quarter results are very much in line with that expectation.
Speaker 4: Third quarter adjusted deluded earnings per share were $4.92. Up 6% from a year ago was strong operating performance more than offsetting higher interest expense and higher tax rate.
Speaker 4: Side 8, please. Third-quarter operating cash flow, excluding our accounts receivable purchase facility, was $56 million.
Speaker 5: This primarily reflects higher working capital as a result of our strong revenue growth in the quarter.
Speaker 5: free cash flow was $41 million. As it relates to cash flow, we've had several extraordinary tax items that have influenced cash flow in fiscal years 2020 through 2023.
Speaker 5: We thought it might be helpful to lay them all out in one place to make it easier for you to normalize our reported free cash flow, as some years have enjoyed a tailwind while others experience the headwind.
Speaker 5: Each of these items has been previously disclosed. We have to mirror only to aid your analysis.
Speaker 5: For example, as we have previously discussed in fiscal 23, between the CARES Act, the tax method change, and Section 174, we expect to have a $222 million cash headwind. This year will be the largest cumulative headwind experience for these three items.
Speaker 6: Slide 9, please.
Speaker 5: You will recall last quarter we announced our Board had authorized a $750 million share repurchase program. We deployed an initial $250 million of that authorization as an accelerated share repurchase on January 30. We expect that ASR to be complete by August .
Speaker 5: As part of that authorization, we also initiated an open market repurchase program. As of the end of the third quarter, we have repurchased an additional 45,000 shares in the open market and an average price of about $283.
Speaker 5: When we discussed the ASR, we noted that this remaining $500 million authorization provided us with the ability to be even more flexible and opportunistic.
Speaker 5: our stated strategy for some time.
Speaker 5: This additional flexibility is key to our commitment to drive shareholder value by deploying capital based on business and market dynamics over time, and that is exactly what we are doing.
Speaker 5: We ended the quarter with net debt to trailing 12 months adjusted even to 2.5 times.
Speaker 5: This leverage reflects the impact of the $250 million ASR as well as the open market share repurchases.
Speaker 5: The healthy long-term cash flow characteristics of our business, our modest leverage, and our access to capital continue to provide significant optionality to deploy capital in support of future share growth and shareholder value.
Speaker 5: flow characteristics of our business, our modest leverage, and our access to capital continue to provide significant optionality to deploy capital to support a future share growth and shareholder value. So I tend, please.
Speaker 5: As a result of this strong execution, we are raising our fiscal year 23 revenue, adjusted net income, and adjusted EPS guidance. We now expect fiscal 23 revenue growth to be in the range of approximately 7.5 to 9 percent.
Speaker 5: I'll remind you that two points of our expected growth in fiscal 23 is from acquired revenue with the balanced being organic growth. We continue to expect our full-year adjusted EBITDA margin to be in the mid to high 10% range. We are raising our adjusted net income.
Speaker 5: Let me remind you, the interest expense this year is about $20 million.
compared to our initial expectations, primarily due to the rate increases we've seen over the last few quarters. I'm very pleased that the underlying strength of our business puts us in a position to offset that additional interest expense and raise the low end of our adjusted net income guidance. Paul also mentioned that during the third quarter, we entered into...
us from rain volatility. We are updating our fiscal year 23 free cash flow guidance to reflect the delay of a $40 million refund related to the tax method change we previously discussed....?
The refund was expected to be received this fiscal year, but has been delayed due to IRS timing. We now expect to receive the refund in fiscal 24.
Slide 11, please. Turning to our forward indicators, CACI's prospects continue to be strong.
Our trailing 12 months book-to-bill of 1.4 times reflects strong performance in the marketplace, and third quarter backlog of $25.3 billion grew 8% from a year ago.
For fiscal 23, we now expect virtually all of our revenue to come from existing programs, with minimal recompete and new business remaining.
Our pipeline metrics are also very healthy.
We have $7.2 billion of submitted bids under evaluation, approximately 65% of which are for new business CACI.
And we expect to submit another $18.7 billion over the next two quarters with over 80% of that for new business.
So in summary, we're seeing the successful execution of our strategy manifest in our strong results.
Our performance enables us to raise fiscal 23 revenue, adjust in that income, and adjust an EPS guidance.
And we remain confident in our ability to continue to drive long-term growth, increase free cash flow per share, and generate shareholder value.
And with that, I'll turn the call back over to John . Thank you, Jeff. So let's go to slide 12, please.
In closing, CACI delivered another quarter of strong financial results, 10% revenue growth, 11% adjusted EBITDA margin, and solid cash flow.
We're well positioned for continued performance with a strong track record of awards and a healthy pipeline of additional opportunities.
Our performance is not by accident. We have a strategy focused on differentiation, innovation, operational excellence, and flexible capital deployment.
Our objectives in executing that strategy are to drive long-term growth, margin expansion, strong cash flow, and free cash flow per share, and ultimately, customer and shareholder value. And Jess did very well. We're pleased to see the successful execution of our strategy manifest in our results.
It's also important to remember that CECI success is driven by our employees' talent, innovation, and commitment to our customers' missions and to each other.
I'm immensely proud to lead such a capable and diverse group of people.
It's your dedication, your good character, and your innovative spirit that's truly foundational to our success. Thank you all.
And to our customers and to our shareholders, thank you for your continued support and confidence in us.
With that Emily, let's open the call for questions.
Thank you. If you would like to ask a question today, please do so now by pressing start followed by the number 1 on your telephone keypad. If you change your mind and would like to be removed from the queue, please press start followed by 2.
We ask that you allow yourself one question and one follow up to allow everyone the opportunity to ask a question today.
Our first question comes from the line of Bert Subban with Stiefel. Please go ahead Bert. Thank you very much
Hey, Bert. Sorry, am I connecting? There you are. Hey, hey. Hi, everyone. I'm John . Hey, Bert.
Hey, good morning. Good morning, Bert. Just my first question, you know, organic – hey, good morning. Organic growth inflected to 10% in fiscal 3Q and looks to be on track to go around 6% in the fourth quarter, I guess depending on where you fall within that range you gave.
Can you just highlight what's driven that inflection? Has it primarily been on contract growth just as outlays have rebounded in hiring these? Or has it been more a function of the new contract you highlighted when you guys were going through your prepared remarks? Yeah, Bert, thanks. It's a little of both.
We put our FY 23 plan together last August . It is playing out as we expected. During our second quarter call, Jeff mentioned that I think on the margin side, at 10-2 and 10-4 the first couple of quarters, he begged everybody. Thank you.
nobody panicked, you know, because this is the way the year is going to play out. That's what drove our confidence in ensuring we would finish the year at the mid to high end of the 10s on our margin numbers. As for the revenue mix, you know, it's really a combination of both over the last few years.
We've really been focused on online contract growth. When you win some of these large programs, pretty much the first year of revenue is 100% in sight. Then you really have to go grow capabilities across the company and sort of take current capabilities to more and more customers out there. That's what our line leaders have done.
growing at seven, mostly happy with the tech. And I often answer, I'm actually glad when they're both grown. So the fact that it identifies, may have grown larger than our technology business, you know, is actually positive news for us. So I've always said, as we look at growth, you just don't fix eight on one quarter. You know, things are going to move around quarter to quarter.
we've gotten to this point to close our third quarter and are very, very happy that we're able to raise both top and bottom line guidance.
Yeah, thanks for that, John , maybe to follow up to that point, you guys have had some notable wins recently across expertise and the enterprise tech side. You know, with a few multi-billion dollar wins, so it seems like that part of the business is sort of evolving. At least as good or better than you expected.
Can you walk us through how to think about the mission tech sales side of the business? Because I feel like that's the part that ebbs and flows more quarter to quarter. You noted in your prepared remarks that the optic part of the business is seeing some success with both Primes and government customers. Can you just walk us through sort of how we should think about the next few quarters?
I'll actually relate it back to the third quarter that we just finished, right? So expertise outpaced technology on the revenue side, but still at the margins that we expected. It doesn't take a lot of mission tech. Although you will see that in the revenue side, it really has a pronounced effect on our margins. And we continue to make progress.
You know, what's very different in a historical government services business is not just selling the expertise piece. The technology rate of orders is very, very different. It rarely hits backlog. You know, we'll get an awards for X number of units. And then before that quarter is done, we have usually shift shifts.
What you're also seeing on the product side is eventually everything does come back. We talked about some funding issues with our investors during second and third quarter last year. That funding is all backed up. It has allowed us to make more product deliveries thus support our margin.
You asked about SA Photonics and where we're going in the optics world and I could not be more pleased with their performance overall. We're very confident, I continue to gain confidence every quarter that we're going to realize the strategic value that we expected and just remember the way to look at this is we're in the very early innings.
of optical comms. We are seeing strong demand. We've got great relationships and contracts with our government and our industry satellite primes.
We are doing a great job of the transition and the connection, as you remember, to our heritage LGS electronics business, so that's going well. We're expanding our production facilities down in Orlando, and we're still in the investment phase. We're going to tell you, you should look for growth at the end of 24 and into 25.
based on the current schedules and on funding. From a technology side, we've done an outstanding job. We're looking at bandwidths from one to 100, 100 gig. We've got decades of development experience. We're continually get pulled into many C-RAD efforts.
where we can expand what we're doing doing there. And during the quarter, we've also secured contracts for both LiDAR and COM's applications in the year domain.
So, you know, work we're sort of already looking at capability that the airborne layer is going to require as it comes out to go comms. So, you should continue to look for revenue and margin growth in this space, as well as what we do in our ID Tech R, Rcon acquisition as we get more towards the end of 24 and as we continue on.
Thanks for that question Bert.
next question. Very helpful. Thank you, Jim.
Our next question comes from Robert Spring on with Milius Research. Please go ahead Robert. Good morning everybody.
Right. John , I want to follow up on that on that growth question, the revenue growth question. And you talked about that's both, I guess, a function of demand and supply, supply being outlays moving faster and so on. How do you see that trending from here? And as separately, as you were, if you notice, why the demand is closing down. It's why we're talking about
What have you, you know, you mentioned the death ceiling fight has customer behavior adjusted for that I would it's a tough question to ask in a quarter of a set good revenue growth But wanted to see if you could talk about that a little bit
Yeah, sure. So it's always going to be a function of budget outlays and what the subcommittee budget looks like. And we're sort of, I hate to use this term again, but we're in the early to mid innings of putting together our F-2024 plan.
You know, we've got, I think the government has a lot of work to do to get us to a clear 2024 budget. There's a lot of talk of, is that going to be a full year CR? What is the debt ceiling impact? And, you know, I don't have the best crystal ball. But I would tell you is, I like the hand we play.
I like the capabilities that we have created ahead of customer needs. And yes, there are times where funding doesn't totally line up with that, but all is not lost because we are in the right areas of very healthy, healthy spending trends. You know, if I talk about the budget, on one side,
There's legitimate concerns about the government's deficit and our debt situation. But on the other side, there remains significant bipartisan support for national security. We've got a war going on in Europe . We have near-epiratrust like China, who in some ways has surpassed us.
You know, cyber is that great de-equalizer. A decade ago, we were at war in Afghanistan where we sort of owned the skies and we owned the electromagnetic spectrum. That's not going to be the case in the next flight. And we're going to have to rely heavily on space and that domain is now contested. So at a macro level, we're going to have to rely heavily on space and that domain is not
I like the capabilities we have. We've been working just for a number of years. So then when we break that down into the mission, mission tech side, you know, from the Mastodon LGS acquisitions and what we had internal to CACI, we're seeing demands for those products to pick up.
Some of our counter UAS systems, we've got some testing going on in Europe looking at enhancing what we do in the counter UAS domain and really work through our federal government, Bill LaPlante and his team as to how we may be able to help in the Ukraine fight. So that's a positive trend here.
Again, we're the long-term company. We're not going to look quarter to quarter. Long term over a number of quarters, a number of years, I like where the funding is showing up. We've really expanded our relevance to those areas. We've got terrific relationships working with large OEM primes who are building those tools.
the exquisite platform be a space or be a airborne or be a land that we find our products on. So, you know, if I look at the long-term growth plan, I really like how we're positioned. When we get to the other time frame, we're talking about 24, but you know, we've also got some really nice large programs that we've won as well.
Okay, and then just on the on the supply side on your ability to staff up, you know, these recent intelligence leaks of the documents that were leaked. Is that going to slow down the approval process for security clearances?
And can that, you know, and if so, you know, how significant could this be? Yeah, I mean look we've talked for as long as I've been in this market, which is a long time, around the ability to get not only our folks cleared, but our government folks cleared. I think that's going to continue to be an issue.
There is no perfect answer there. You know, at the end of the day, we're all assessing whether somebody has the right aptitude and the right, you know, what the rights, the good stuff that, you know, helps people make the right decisions there. So you know, more to come on that. I know that folks in the House and in the Senate have been talking about how to, you know, how we all.
a better plan for that. But you know under the categories of things that we can you know control, I like what we've been doing on hiring and retaining our talent. Look, the demand remains high and to your point Rob, we've got to get through that and hire is wicked as well.
But you know, we've got our attrition that's the lowest of, you know, in a number of recent years, definitely lower than what it was as we entered COVID. We are still filling a lot of our open, open wrecks.
through our referral program, about 40% of our hires come to us through referrals. One in four of our openings is filled internally. So for those folks who are looking to come to a company, not for a job, but to build a...
and careers, there's a lot of places that they can move around. So from a funding, from a budget, from the clearance process, CRs, we're a 61-year-old company now. We've been operating in that environment for a while. And I'm really, really excited by both the expertise and the technology hand that we have.
as well as some of these large recent awards and really looking for continued long-term growth and add even more shareholder value. So thanks Rob. Thanks for all the power John , appreciate it. Our next question comes from Matt Aches with Wells Fargo. Please go ahead, your line is open.
Thanks. Good morning, everybody. I wanted to talk about kind of the longer term.
Good morning. I wonder if you could talk about kind of the longer term.
I mean, like you go back a few years ago when you guys started first talking about kind of the technology versus expertise, you were kind of a high, high nudge, 10% business and you're, you know, now you're kind of high, high 10. Is there, is there a lot more room to go? Could you get to kind of like 11, 12% margin or, you know, does it sort of get harder to improve from here? Yeah, Matt, thanks. You know, it really comes down to mix.
Frankly, I love the fact that we're talking with analysts in our shareholders about what else can we do to continue to grow margins. You're absolutely right about six years back to where we are today and we're up about a little north at 200 bips. And while at the same time, we restructure healthy gloves in the market. We've added an entire part to our business in the mission tech area.
budgets and we were a nation at war. You know we were looking for that day when budgets would be tighter frankly and with tightness and with spending constraints comes what are new ways we can look at the technology that we need out there so how we do suffer to find devices how we collapse you know five devices into want
How do we do over the year upgrades, which I talked about during my prepared remarks. If we end up in a conflict in the Indo-PECOM region, it's a long haul to a shore to do a hardware card upgrade to change the capabilities on ships.
The fact that we can do that via software, and software is this company's superpower, you know, that will drive margins. Some of the work we've done with our IDTech acquisition...