Q2 2024 CACI International Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the CACI International fiscal 'twenty 'twenty four second quarter 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.
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At this time I would like to turn the conference call over to George Price Senior Vice President Investor Relations. Please go ahead.
Thanks, Sarah and good morning, everyone I'm, George price Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning.
We are providing presentation slides, so let's move to slide two.
There will be statements in this call that do not address historical fact, and as such constitute forward looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause actual results to differ materially from anticipated.
George Price: 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.
George Price: 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.
George Price: To open our discussion this morning, Here's John Man, Gucci, President and Chief Executive Officer of CACI International John.
George Price: Yes.
George Price: Thanks, George and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal year 'twenty four results with me. This morning is Chuck Mclaughlin, our Chief Financial Officer.
George Price: Let's turn to slide four please.
Jonathan Raviv: In the second quarter, we delivered 11% organic revenue growth EBIT dollars consistent with Q1 and solid free cash flow. In addition, we won $2 $2 billion of contract awards, which represents a one two times book to Bill for both the quarter and on a trailing 12 month basis.
Jonathan Raviv: More than half of our warrants were for new work to CACI and we continue to have strong recompete performance as well.
Jonathan Raviv: Looking forward, we see the second half of fiscal year 'twenty four playing out stronger than we originally expected and as a result, we are raising our full year guidance.
Jeff: Jeff will provide the financial details shortly.
Jeff: Overall, our performance continues to be well aligned with our value creation model focuses on long term growth and free cash flow per share.
Jeff: Slide five please.
Jeff Smith: I'm pleased to say that we are seeing growth ahead of plan across many of our new business wins, including our <unk> Award with the Air Force spectrum with the Navy and our <unk> Cyber award with the MSA.
Jeff Smith: This performance is reflected in our increased fiscal 'twenty for guidance.
Jeff Smith: We expect these programs to support continued growth healthy profitability and increasing free cash flow per share in the future.
Jeff Smith: We continue to win in the market by providing differentiated capabilities investing ahead of need and leveraging our strong past performance and our business development organization is executing at impressive levels and winning new work and re competes as well as sustaining a strong pipeline of new opportunities.
Jeff Smith: The execution of our strategy is currently delivering results just a few years ago. Our focus was to win one new strategic billion dollar plus award each year.
Jonathan Raviv: Last year, we won three included.
Jonathan Raviv: Including our largest ever by far.
Jonathan Raviv: This year, we've already one one and we have a strong pipeline of additional opportunities, including several greater than $1 billion in total value.
Jonathan Raviv: I'm also pleased with our strong track record of Recompete wins this year.
Jonathan Raviv: Which is critical to maintaining the foundation of which we will grow.
Jonathan Raviv: We win our re competes through strong execution industry, leading talent and delivering innovation well beyond the initial award.
Jonathan Raviv: Slide six please.
Jeff Smith: One area of our continued success as it modernization.
Jeff Smith: This is an area of enduring demand driven by the need to modernize our secure network and secure networks developed software at scale and migrate workloads to the cloud.
Jeff Smith: During the second quarter, we won two additional network modernization contracts solidifying our presence across the Vod.
Jeff Smith: Following our Gia win last quarter.
Jeff Smith: Dr Khan Technology, we acquired as part of <unk> technologies was critical in securing this work.
Jeff Smith: <unk> software enabled end user technology allows out of the box commercial devices to securely access classified networks from any location.
Jeff Smith: The combination of our comps technology, and our existing capabilities and past performance is differentiated UC ACI in the market.
Jeff Smith: In addition.
Jeff Smith: CACI continues to demonstrate industry leadership in digital application modernization and cloud migration we.
Jeff Smith: We are seeing customers accelerate their adoption of cloud hosting classified and unclassified environments. Our recently announced strategic collaboration agreement with Amazon Web services was the first in the federal space and places us at the forefront of the next wave of migrate applications to the cloud or.
Jeff Smith: Our partnership with a technology leader like AWS enables us to deliver high value to our customers.
Jeff Smith: And finally agile software development is increasingly a must have capability in the market.
Jeff Smith: CACI continues to lead the industry and agile software development development at scale executing the two largest agile programs in the federal government.
Jeff Smith: One of the largest agile programs as Beagle with U S customs and border protection, which has seen increased demand given heightened activity at the southern border.
We see a number of additional agile opportunities in our pipeline.
Jeff Smith: Slide seven please.
Jeff Smith: And the electromagnetic spectrum, we continue to execute our software defined strategy investing ahead of need and demonstrate differentiated capabilities to enable our customers to dominate this critical domain.
Jeff Smith: With the expanding global threat environment, we are seeing firsthand everyday how the rapid pace of change in technology, and our adversaries capabilities necessitates a faster and more flexible response.
Jeff Smith: For the Navy. This critical need is precisely what spectrum is addressed.
George Price: While our traditional hardware model cannot readily adapt to these changes our software defined technology with open architectures allows us to deliver with the necessary agility speed and flexibility.
George Price: It allows us to build for today's threats and easily adapt as stress change.
George Price: In fact, we continue to see demand across all domains and areas of signals intelligence and electronic warfare as we mentioned last quarter. The army was evaluating some of our SIGINT EW technology for a program to enable dismounted soldiers to quickly detect and identify geo locate and defeat signals.
George Price: Of interest we're pleased to say that evaluation went extremely well and we currently expect to receive an order in the second half of fiscal year 'twenty four.
Excuse me. In addition, we are also seeing increasing interest in our software defined counter OAS counter UAS capabilities from the U S as well as from our allies.
George Price: I'd also like to highlight our successful Recompete wins supporting the Trojan family of systems for the Army work CACI is supported for over 20 years.
George Price: Similar to spectral and Trojan, we will utilize software defined technology will open architectures to deliver the speed and adaptability necessary to address the evolving global threats and enable the army's multi domain operations.
George Price: Slide eight please.
George Price: In Photonics, we continue to see healthy demand and capture market share and deliver innovation with our optical communications technologies.
George Price: And our bespoke photonics business, we are demonstrating.
George Price: Precedented achievements.
George Price: Currently our deep space optical communications technology, disconnected and transplanting data to Earth from a distance equivalent to the orbit of March.
George Price: Farthest ever demonstration of optical communications and.
George Price: In addition, youll.
George Price: Alumina laser communications system was recently launched on international to the International Space station with CCI raised our communication hardware onboard and the system has successfully communicated from the ISS tuners based ground station.
George Price: This technology and innovation is also being driven into the lower cost higher volume low swap terminals. We are building in delivery Hello, Earth orbit with higher order volumes coming sooner than we expected we've accelerated R&D investments through our P&L for both our technology and our capability to produce in volume.
George Price: These investments will help underpin future growth profitability and increasing cash flow.
George Price: Slide nine please.
George Price: Turning to the macro environment, we continue to monitor the government fiscal year 'twenty for budget process closely.
Despite the ongoing deliberations in Congress it remains clear that investments training for national security and modernization needs to continue.
George Price: Customer demand remains high funding remains healthy we continue to see good levels of Rfps awards and customer exit.
George Price: I continue to be very pleased with our strategic positioning and enduring and well funded areas of need as evidenced by our strong awards and robust pipeline.
George Price: Slide 10 please.
George Price: In summary, our first half performance was in line with our expectations and we're raising our fiscal year 'twenty four guidance reflects stronger momentum in the second half.
George Price: We are successfully executing our strategy of investing ahead of need developing differentiated capabilities bidding on fewer and larger opportunities and delivering superior performance to our customers.
George Price: As a result, we continue to win in the marketplace and our strong performance positions us to deploy capital and a flexible and opportunistic manner to drive long term free cash flow per share and shareholder value.
George Price: That turn the call over to Jeff.
Jeff Smith: Thank you John good morning, everyone.
Please turn to slide 11.
Jeff Smith: Our second quarter results are in line with the expectations, we discussed with you last quarter we.
Jeff Smith: We generated revenue of $1 $83 billion, representing 11% organic growth. In addition to a modest contribution from two recent acquisitions in the U K.
Jeff Smith: As John mentioned, we continue to successfully execute our strategy and to win high value enduring work.
Jeff Smith: Second quarter EBITDA margin was nine 3% in line with our previously discussed expectations of delivering relatively flattish EBITDA compared with the first quarter.
John: Call that the second quarter EBITDA margin includes approximately 60 basis points of drag from zero margin material volume, we discussed last quarter.
John: Adjusted diluted earnings per share of $4 36.
John: Were 2% higher than a year ago.
John: Our interest expense was more than offset by greater revenue and operating income a lower tax provision and a lower share count.
Second quarter operating cash flow, excluding our accounts receivable purchase facility was $83 million.
John: Reflecting solid profitability and strong cash collections.
John: We reported days sales outstanding or DSO of 47 days, a new record as we continue to efficiently manage working capital.
John: Free cash flow was $68 million for the quarter.
Slide 12 please.
John: We ended the second quarter was two three times leverage of net debt to trailing 12 months EBITDA flat with the prior quarter.
John: The healthy long term cash flow characteristics of our business, our modest leverage and our access to capital provide us with significant optionality.
We continue to have approximately $337 million remaining of our original $750 million share repurchase authorization.
John: In addition, we are actively engaged in an M&A market that is beginning to look more attractive from a buyer's perspective.
John: As we've discussed our value creation model is focused on driving long term growth and free cash flow per share.
John: We remain well positioned to deploy capital in a flexible and opportunistic manner to drive long term shareholder value.
John: Slide 13 please.
John: We're pleased to be raising our fiscal 2000 and for guidance, let me take a minute to provide some context on the evolution of our guidance for the year.
John: When we provided initial guidance last August we told you that we expected revenue to be 7 billion to $7 $2 billion with EBITDA margins in the high 10% range.
John: Additionally, without giving specific quarterly guidance, we indicated that the second half of the year would be greater than the first in terms of revenue and margin.
John: In the first quarter, we raised our revenue guidance for $200 million of zero margin material sales and reiterated that the underlying profitability. Excluding those materials sales was unchanged.
John: Today with first half performance in line with our expectations and accelerating business momentum in the second half as well as our strong recompete win rate have strength of New awards, we are raising our revenue guidance by an additional $100 million.
John: To between $7 $3 billion in seven $5 billion.
John: We are also reiterating our underlying EBITDA margin expectations in the high 10% range, which again excludes the previously discussed $200 million of material sales in the first half.
John: As a result, we are also increasing our adjusted net income guidance to between 450 million to $465 million with an attendant increase in adjusted EPS to between $19 91.
John: And $20 58 per share, reflecting the higher adjusted net income as well as our first half share repurchases.
John: And finally, we are raising our free cash flow guidance to at least $420 million based on the increased earnings continued strong working capital performance.
John: Our increased free cash flow combined with the benefit of the lower share count.
John: Results in a 7% increase in free cash flow per share versus our initial fiscal 'twenty four expectations.
John: To assist with your modeling, we now expect full year diluted share count to be approximately $22 6 million shares.
John: Our full year interest expense to be towards the lower end of our previously communicated $100 million to $105 million range.
John: Slide 14 please.
Turning to our forward indicators caci's prospects continue to be strong our trailing 12 months book to Bill of one two times reflect strong performance in the marketplace and our first half awards have a weighted average duration of nearly six years.
Our backlog of $27 billion increased 2% from a year ago and represents almost four years of annual revenue.
John: These metrics provide good long term visibility into our business.
Exiting the second quarter, we expected approximately 94% of our revenue to come from existing programs with less than 5% from re competes and less than 2% from new business.
John: Today less than 3% of remaining of the remaining increase is from re competes.
John: US increased confidence in our guidance for the year.
John: Progress on these metrics reflects our strong business development and operational performance and yield.
John: <unk> increased confidence in our expectations for the year.
John: In terms of our pipeline, we have $11 billion of bids under evaluation over 65% of which are for new business to CACI.
John: And we expect to submit another $14 billion of bids over the next two quarters with 80% of that for new business.
John: Our ability to maintain a strong pipeline even as we deliver strong awards reflects healthy demand successful strategic positioning differentiated capabilities and disciplined bidding.
John: In summary, we delivered second quarter and first half results in line with our previously discussed expectations. We're seeing good momentum in our business and as a result are raising our full year guidance and we are winning and executing high value enduring work that supports long term growth increasing free cash flow per share.
John: And additional shareholder value.
With that I'll turn the call back over to John.
Thank you, Jeff Let's go to slide 15. Please.
John: In closing I am pleased with how our business is performing both near term and how we are positioning for future growth.
John: We continue to successfully execute our strategy and our performance enables us to raise our fiscal 'twenty for guidance for revenue adjusted net income adjusted EPS and free cash flow.
We are investing.
John: We are winning.
We are executing well we are delivering on our commitments to our customers and to our shareholders. We remain.
John: Confidence in our ability to continue to drive long term growth increase free cash flow per share and generate additional shareholder value.
John: As is always the case, our success is driven by our employees talent innovation and commitment to.
Jeff Smith: To everyone on the CACI team I am proud of what you do each and every day for our company and for our nation.
Jeff Smith: And to our shareholders I. Thank you for your continued support of CACI.
Jeff Smith: With that Sarah let's open the call for questions.
Jeff Smith: Thank you if you have a question. Please press star one on your telephone keypad.
Jeff Smith: You wish to withdraw your question simply press Star one again.
One moment. Please for your first question.
Jeff Smith: Yeah.
Jeff Smith: Your first question comes from the line of Robert Spingarn with Melius Research. Your line is open.
Jeff Smith: Hi, good morning.
Jeff Smith: Good morning.
Jeff Smith: So nice.
Jeff Smith: Nice set of numbers here I wanted to ask a high level budget question, though just given the uncertainty in D C that the potential for supplemental and I.
Jeff Smith: Underlying the word potential how are you thinking about the guide if we were to end up in a full year CR and then on the other hand, it seems like you're off to a solid start to this fiscal year. So what would happen what would need to happen to get to the high end of the guide.
Rob: Yeah, Rob Thanks.
Rob: As you are.
Rob: Appropriately stated there is an awful lot of moving parts look were.
Rob: We're monitoring we're monitoring monitoring the government fiscal year 'twenty budget process.
Rob: As.
Rob: You all know back in August we plan for very different scenarios I think on the low end, we said funding would be slow where we have a full year CR on real.
Rob: The real question will the government fiscal year 'twenty budget process on the upper end, we said ACR would be shorter.
Rob: In a budget would be.
Rob: Past so.
Rob: Somewhere in between there is how we're seeing this lay out now that were in June and January.
Rob: Our full year CR appears less likely at this point.
Rob: Congress come to an agreement by by the March deadline, but even so based on how it impacts us.
Rob: Our large and Colin Ward is ongoing work is critical national security priority and remains completely funded.
Rob: Our IRI Taz.
Rob: Air Force awarded large airports priority as well funded at the government fiscal year 'twenty three levels in that funding support continues spectral is a very critical program for the Navy, particularly supporting the <unk>.
In other recent wins are sort of getting through their process protest windows those are starting to ramp up with ample funding. So as always Rob when we talk we're talking about budget, we focus on things that we can control.
Rob: Running the business driving long term grow shareholder.
Rob: Shareholder value.
Rob: On the other under this look the world is a dangerous place yoga pacing threat as China <unk>.
Rob: Got the Ukraine and Russia.
Rob: It was a wake up call.
Israel Hamas actuation shows that you know as I've always said that counterterrorism is still there it's going to be there for a long long time, but we.
Rob: Remember that our strategy is strongly aligned.
Around <unk> security and modernization priorities.
Rob: And invest ahead of need and differentiated expertise and technology positions us extremely well.
Our resiliency to the budget is not accidental.
Rob: Absolutely happens to be due to the strategy, we have consistently share and that was to make sure that our pipeline of jobs that we go after the jobs that we win are and well funded extremely important mission expertise and technology areas of the federal government. So long story short.
Rob: Budget process does support us through this fiscal year and as you all know when we get to next August we'll be talking about our next fiscal year. So thanks, Rob.
Jeff Smith: Well, that's great color, John and just quickly for Jeff on section 174, if that were repealed or deferred on a retroactive basis back to 'twenty two.
Jeff Smith: If that were to happen would you expect to receive a cash tax refund and then how might you deploy that could that go into a repo.
Rob Smith: Well, yeah, Rob Thanks, as you know.
Rob: The Devil here is in the details and while there appears to be pretty strong bipartisan support a lot of the implementation steps are still unclear.
Rob Smith: You ought to think about the size as basically being a reversal of what we communicated previously.
Rob Smith: The negative impact when it expired so that would basically be on doing those earlier hits almost dollar per dollar really.
Rob: And with that extra cash it would get factored into our normal capital deployment.
<unk>.
Rob: With them.
Rob: Evaluating all of our opportunities.
Rob: We have a very as we've talked before.
Rob: Our disciplined return based paradigm or framework for evaluating those options and as we.
Rob: More capital, we'll deploy it effectively and efficiently.
Rob: Thanks, Rob.
Rob: Your next question comes from the line of Barry <unk> with Stifel. Your line is open.
Rob: Hey, good morning.
Hi, Bert.
Rob: Jeff I think my first question is for you. If we look at the current guide it implies about 57% of your earnings to cover the back half.
Rob: Solid step up in margins at least looking to the mid point.
Can you just walk us through how good your visibility into that improvement today is.
Jeff Smith: Imply that there's a pretty substantial step up in technology sales and historically, there's been a little less predictable.
Jeff Smith: Yes, I would not.
Jeff Smith: Thank you can draw that conclusion, but let me give you a little bit of color and John will likely want to add something to this if you look first of all.
Jeff Smith: What we shared with you as far as the statistics for the rest of the year's revenue base, that's an important part of that.
Jeff Smith: And we have really very very strong visibility into what the rest of the year look like looks like.
John: I'd also call your attention to a couple of things we talked about in the prepared remarks.
John: Which may have been a little bit.
John: Subtle.
John: To answer your question, but we talked a little bit about increased investment in some of our photonics activities in the first half, which we are nearing the end of and then we also have as you allude as you pointed out sort of the classic timing and mix that we could see in the second half.
John: But this activity is in backlog.
John: Can see it.
John: You've noticed if youre looking at second order on a.
John: As youll notice a little bit of inventory growth.
John: In the quarter, all of which are sort of setting up the second half.
John: That we see that gives us really strong confidence of what the next couple of quarters look like yes, Bert Let me add a couple of other things to that right. This is around confidence and how we see the back half playing out.
Bert Let: Look at conference for US It really starts with the fact that we delivered our first half of the year in line with our August expectations. It's bolstered by seen stronger second half momentum than we expected back in August, namely, our three large programs as well as other reasons recent wins.
Bert Let: And and all of that work is that the underlying margin rates, which is in the ipads.
Bert Let: We're raising guidance for revenue, we're not keeping it as it is which shows confidence they have in the second half.
Bert Let: Hold the bottom ranges of net income and.
Bert Let: And we've raised free cash flow, which would you know confidence.
Bert Let: We are holding to our fiscal year 'twenty for EBIT EBIT.
Bert Let: Margins when the underlying business.
Bert Let: Sure.
Bert Let: We're executing on our strategy, we're investing that any we've got strong award strong execution as I.
Rob: It's Rob on his earlier question, we do look back at our 24 guidance call in August we provided six reasons why we could end the year at the low end.
Rob: That's why we can put it into some tougher.
Rob: Yeah.
Rob: Since August we've captured five of our six of our upper end guidance range of expectations, but you all should expect that we'd be raising guidance that is what we did that additional 100 $100 billion has come in at our high 10% area.
Rob: And we believe that we're on track what's not covered.
Rob Smith: And to your question and Rob the government completely shuts down for three months, probably not covered by our <unk>.
Rob: Our August guidance.
Rob: We're going to stay focused on what we can control we've got the book of business, we got ramping up happening.
Rob: And much stronger than we thought and love to be sitting here at <unk>.
Rob: You have the year.
Rob: Talking about a successful fiscal year 'twenty four for the company.
Speaker Change: Got it okay. That's very helpful. Just as a follow up I mean, Jeff just mentioned you know some of the photonics divestments in the first half.
Jeff Smith: Obviously some of the investments you've made in EW, SIGINT and cyber and software development are paying off.
Jeff Smith: Can you just talk about what inning you think we are in when you when you focus in on your tech investments, reaching the payout based.
Jeff Smith: And then relative to that how does that make you think about M&A over the next one to two years or are there still capabilities do you need to bolster.
Bert Let: Yes, Bert thanks.
Bert Let: Let me unpack that.
Bert Let: Yes.
Bert Let: Technology investments SIGINT and EW I really like where we are.
We have invested.
Bert Let: The larger tranche as.
Bert Let: When we expected to and it's already paying paying off youre seeing that our margins are now into the highest the high 10 area that plus a growing revenue base is going to continue to provide nice strong growth for free cash flow per share.
On the photonics stuff.
Bert Let: Look it's modestly.
Bert Let: Relative.
Bert Let: So the size of the overall.
Bert Let: Company.
Bert Let: We've been discussing.
Bert Let: And as our prepared remark shared.
Bert Let: There is strong demand from both government and our and our satellite primes.
Bert Let: We're a proven were deployed were operational and were tested for various orbis as my prepared remarks stated some of those bespoke solutions that are out there sending signals from.
Bert Let: Ours to Earth.
Bert Let: That's all high Tech algorithms, a lot of government and CACI investment dollars to get the art of how to connect.
Bert Let: Laser signals between two different points over millions of miles all of that technology at all levels. Those algorithms go into the lower swap lower cost.
Bert Let: Terminal market.
If we look at demand look where we are seeing a higher order volume than we expected, which is why we accelerated some of the P&L investments that tied to just comment.
Bert Let: On FTE <unk> zero and one we're currently under contract to a glimmer terminals SDA tranche two we've got roles with a two two trials for both beta and Alpha we expect tracking awards in the quarter to quarter three.
Bert Let: <unk>.
So look we believe it's a burgeoning by the 10 year market I'd say, we're probably in the <unk>.
Bert Let: Seventh to eighth inning of investment we're probably in the early second inning of a growth.
Jonathan Raviv: So I see this as a business being much more meaningful contributor.
Jonathan Raviv: As we mentioned exiting 'twenty 'twenty, four but really playing into 'twenty, five and beyond which was our investment thesis when we bought MSA photonics side, just a couple of years ago.
Jonathan Raviv: Your next question comes from the line of Peter Arment with Baird. Your line is open.
Jonathan Raviv: Yeah. Thanks, Good morning, John Jeff George.
Jonathan Raviv: Hey, John maybe just a.
John: Circle and follow on with Burts kind of questioning as this technology.
John: Mix continues to grow.
John: It sounds like Youre in there as you mentioned the seventh inning roughly on the investment side as the volume starts to pick up on the technology.
John: We still view this to be.
John: A lift to margins longer term and then just related to this.
John: Jeff made the comment that the M&A environment is getting a little more you know potentially attractive is that there's just more assets coming available where are prices resetting any color there would be helpful. Thanks.
Peter J. Arment: Peter Thanks.
Peter J. Arment: Let's see let's start with margins first because whenever I hear margins I sort of get my head back into free cash flow per share growth.
Peter J. Arment: And look that has that has many many levers right.
Peter J. Arment: First we're taking a long term approach to driving organic revenue growth in areas that actually matter and I think based on the earlier discussion dot dot dot and are also going to be well funded right. We can't guarantee everything we're going after is always going to be well funded but.
Peter J. Arment: Given the size of the overall defense budget and the size of CACI and the size of things that we need to have funded.
Jeff Smith: At risk or it gets low at the top level when it gets lower and lower as you really look at those narrow deep funding streams that we're part of.
Jeff Smith: Margin expansion for US yes. It is still it has our attention.
Jeff Smith: Our focus is the long the long term I think I've mentioned I'm not going to short arm investments that are going to be driving long term future growth, where I can do unnatural acts to achieve it I would also say that our EBITDA is just that an EBIT plus DNA theres no other additives and order subtraction no adjustments.
Jeff Smith: So on the.
Jeff Smith: The margin growth side, yes that plus beginning to push this company from the low single digit revenue growth to the mid single digits.
Jeff Smith: Our revenue growth business, there's been a large achievement over the last number of years and we will continue to look for.
Jeff Smith: For growth on both.
As you talked about M&A and I'm going to let Doug.
Speaker Change: Jeff Brian some commentary as well, but we're going to continue to look in those key technology areas, we're always going to be looking at in Eden W. It's a massively large front. So we are watching as my prepared remarks stated we're watching.
Some of these events around the globe, just how quickly the atmospheric changes their behaviors.
Doug: There used to be a time, where we had a lot of a cat one programs and you know you're anniversarying would change there.
Doug: Once every three years. These are changing once every three days.
Doug: Let's try this and see how that works to see how that reacts then let's make changes in the in the second and the.
Doug: EMS world that needs great software defined check that can be built quickly our agile.
Jonathan Raviv: So anything in that SIGINT EW area. It modernization I love the hand that Dr. <unk> and her team have been playing that's sort of been double down on network modernization as well.
Jonathan Raviv: And frankly, <unk> got technology and recent technology from other <unk>.
Jeff Smith: Recent acquisitions is what it is.
Speaker Change: Our physicians as well so I'll, let Jeff talk about all the M&A market is looking today.
Jeff Smith: For the for the second part of your question. The short answer is both.
Probably more important to us.
Jeff Smith: As we're seeing a little bit of modulation modulation.
Jeff Smith: Tempering of valuation expectations. So.
Jeff Smith: We're starting to see some of the consequences of the interest rate environment and broader.
Jeff Smith: Broader regulatory constraints.
Jeff Smith: But not sort of manifest themselves in a little bit more reasonable.
Jeff Smith: Valuation premises.
Jeff Smith: But also probably is accompanied by a little bit more in the pipeline in terms of volume, but its really more about valuation expectations that could afford us with some interesting opportunities.
Jeff Smith: Thanks, so much I appreciate it.
Jeff Smith: Sure.
Jeff Smith: Your next question comes from the line of David Strauss of Barclays. Your line is open.
Josh <unk>: Hi, Good morning, this is actually Josh <unk> on for David.
Josh <unk>: Just wanted to ask we've seen you know.
Josh <unk>: Really strong growth in D O D revenues over the last couple of quarters.
Josh <unk>: And a little bit of a decline.
Josh <unk>: In the federal civilian.
Josh <unk>: So I just wanted to ask how that May look going forward and what the bid pipeline looks like there.
Josh <unk>: Yes, the driver the driver of that is.
Josh <unk>: As our background investigations work, which.
Josh <unk>: He has a long standing established franchise. It has been administered for a number of years through the office of personnel management OPM, you'll know as the Civil agency and then transitioned a year or so ago, two Dcs a defense contractor services agency.
Josh <unk>: No.
Josh <unk>: While it is a change on the chart, it's not really a substantive change to the business.
Josh <unk>: It's been a few other small changes, but the driver is that true.
Josh <unk>: I will also add to the.
Josh <unk>: As a part of your question that was looking forward.
You know we're in we're in.
Josh <unk>: Hi, Mark it's out there today, we're actually structured around markets think about that is gaining capabilities, where we run every single customer through it. So from time to time those numbers aren't going to move around based on where we can win network modernization work one quarter may be with DHS, which is inside of that may have won ramp up period.
Josh <unk>: And then in other areas like Army G. I E. In the other areas. We're out there winning many network monitoring memorization workers as well.
Josh <unk>: We sort of look at that year to year.
Josh <unk>: Different different quarter to quarter points things move around take another example, if you look at the commercial work, yes, maybe over one quarter that work sort of moves around because something got delayed or something came in early but took over two quarters is sort of flat. So.
Josh <unk>: Thanks.
Josh <unk>: Okay. Thank you that's all for me thanks.
Josh <unk>: Thanks, guys. Thanks.
Josh <unk>: Your next question comes from the line of Matt Akers of Wells Fargo. Your line is open.
Matt Akers: Hey, guys. Good morning. Thanks, Thanks for the question.
Matt Akers: I wanted to just ask quick on this hiring trend head count.
Matt Akers: All of you can give there on sort of how youre doing year to date.
Matt Akers: Yeah.
Matt Akers: Matt Thanks, God hiring do you guys think I'm, just a business broker broken record.
Matt Akers: It hits.
Matt Akers: The demand for talent remains high.
Matt Akers: Given all of our recent wins our talent acquisition team has been doing an outstanding job, we set a goal each year across the entire company as to how well.
Matt Akers: All of us because we're all involved in talent acquisition.
Jeff Smith: Is working it's working extremely well.
Jeff Smith: We we continue to strive to be the employer of choice.
Matt Akers: All three of our programs our hashtag me, making move program. Our referral program you know great people and a lot of great people and our employee value value proposition around your potential is limitless. So as ours theyre all contributing to strong hiring and the flip side of that piece, Matt is that our retention numbers across the company are at.
Matt Akers: Exceptionally strong levels over to show what those numbers are but it suffices to say, it's a material level below what we saw prior to COVID-19.
Matt Akers: We've expanded our internship program.
Matt Akers: We're making sure our employees know the value of diversity and inclusion.
Matt Akers: We're engaging directly with all of our employees.
Matt Akers: And it's sort of working we continue to win numerous best places to work Awards and again. These are based on our employee survey, it's not you know what the CEO beliefs.
Jeff Smith: And we're able to find talent you know part of what drives that talent pipeline R. R. R. R employee referral program and our intern program right. Both of those are bringing large numbers of folks in the referral program just under 50%. So think about that 50% of the people of this company brings in.
Jeff Smith: Come through referrals.
Jeff Smith: And that has.
Rob Smith: A double positive effect folks one is it gets us employees faster than her proven secondly on the retention side people, who refer somebody statistically stay materially longer than those who don't like us who leaves a comprehensive they've really referred some great talent and that talent that was referred stays longer because they.
Jeff Smith: Quote unquote, I'll look up to and always to somebody who is already in the company that has really heard them. So it's really working extremely well that ties back to the culture of this company a 62 year old company deeply involved in mission very closely coupled to a customer grew 8% veterans.
Jeff Smith: It has all the right mix and I hate to say it makes their job easier, but it makes it easier for us to continue to be the employer of choice.
Jeff Smith: Got it thanks, and then I guess, if I could do one more on margins just I guess a lot of sort of noise in the EBITDA margin. This year first half.
Jeff Smith: Second half is there a way to think about kind of going forward. The starting point for fiscal 'twenty five is that look more like.
Jeff Smith: The 24 hours and look more like what the back half of implied just any way you can sort of free.
That for us.
Yes.
Jeff Smith: We're not gonna kind of front run our 25 guidance at this point I'd be youll appreciate still actively at work.
Jeff Smith: I don't know that there's a lot to add to the earlier question. I mean, we have a couple of areas, where we're investing in the first half.
Jeff Smith: And we see that sort of winding down as we achieve a number of milestones and we've got good visibility into the backlog and theres, some timing and mix.
Jeff Smith: There as well so I don't think there's I don't think there's a lot to add to what we've already said about it.
Jeff Smith: Okay.
Jeff Smith: Your next question comes from the line of Seth Sigman of Jpmorgan. Your line is open.
Jeff Smith: Okay, Thanks, very much and good.
Morning.
Seth Seifman: Wanted to ask one more question about the.
Seth Seifman: The M&A pipeline and you talked about things, maybe loosening up a little bit and I wonder if it's stuff that you see more that might be kind of almost like an investment.
Jonathan Raviv: Can you know technology, or where R&D to help build out capabilities, maybe more on the product side or if you see more opportunities for.
Jonathan Raviv: You know companies that might be.
Jonathan Raviv: Solid earnings stream, now and might be more accretive to earnings and cash flow in the in the near term.
Jonathan Raviv: And it really goes across the spectrum.
Jonathan Raviv: You know we talk about the fact that our program is grounded in strategy.
Jonathan Raviv: Filling gaps, sometimes that's a technology gap.
Jonathan Raviv: Sometimes it's a mature.
Jonathan Raviv: Physician with a customer or an area that.
Jonathan Raviv: We see a need to add to the portfolio.
Jonathan Raviv: It really it really runs the spectrum, it's really across the board.
Jonathan Raviv: Got it.
Jonathan Raviv: No.
Jonathan Raviv: I think just to have the right right its capability.
Jonathan Raviv: Customer relationship relationships, we've done a number of acquisitions that actually bolster customer relationships. So.
Jonathan Raviv: And that examples that we've got a strong hand, and you know again.
Jonathan Raviv: And we're not deeply in customer X and some other company has got great relationships. There they've got a long term a mature delivery track record cash performance was strong cultures match and you know what wait a better step and repeat with the capability, we have and we're not a customer set them to sort of bring those kinds of customer relationships and so on.
Jonathan Raviv: Sort of you know <unk>.
George Price: <unk> relationship plus a core CGI capability as well as add what the incoming company has and that allows us to really focus our pipeline more efficient efficiently allows us to continue this long long history of successful M&A that are driving top and bottom line growth.
Matt Akers: Okay very good I'll stick to one this morning, thanks very much.
Melissa: Thank you Melissa.
Melissa: Your next question comes from the line of Mariana Perez Mora with Bank of America. Your line is open.
Melissa: Good morning, everyone.
Melissa: So I, probably like to dig deeper on pipeline of opportunities. When you see the bids are expected to be submitted in the next two quarters. We raised $2 14 billion from just like $10 billion last quarter.
Melissa: Oh, that's significant increases.
Melissa: Hello trend or is it indicative of any change it seemed like strengthening our environment evolving.
Melissa: The ACI strategy or new opportunities.
Melissa: Martin I think so so when we look at the pipeline I actually look at a visit are under eval and ones that are going to be submitted so $25 billion in total.
Melissa: And maybe a little a little more.
Melissa: Color in here.
Melissa: I'm on the line comes down in my mind to two or three elements I hate to say three years and I'm done I'll forget when all ended up at two but no.
Melissa: The first is size right.
Melissa: You know, we always have said as we rebuilt the business development machine here is bid last room anymore.
Melissa: And if given the choice always been larger right because larger ore tons longer duration, which although it may not ramp up as fast as some of you would likely win some of these program. We're looking at that 456 year dependable growth stream that we have out there so.
Melissa: So one is gonna be size or several billion dollar opportunities in the pipeline across a number of our markets.
Melissa: And these and other long duration, one provide confidence in our long term growth.
Melissa: The second one I sort of would put in a bucket called location.
Melissa: Network modernization cloud <unk> software.
Agile software development, well funded right so back around milestones general process of seven different milestones when we submit and get awarded.
Melissa: Bid.
Melissa: Is this the right size.
Melissa: Can we differentiate that we invested ahead of customer need is it in the sort of ZIP code or work that we do very very well and then the last piece is what I would call. It isn't mission tight is it related to the work we do well we do today is it a nice separately Pete how are we doing work with the Navy that we wanted to introduce the army to spectra.
Melissa: So it would be a perfect example of how do we build something to win like spec pool for the Navy how do we take all of that technology and look right to a 20 year customer and army Trojan and bring some of that capability forward. So our pipeline is built you know.
Melissa: Here's ahead of when we actually actually have to execute it because at one time to build the relationship we want time to invest and show the customer the art of the possible. So our pipeline today is made up of a lot of those offers opportunities. We can't win all of them, but you know we like to make certain that we're sort of stacking the odds in our favor.
Melissa: As we put these into the pipeline and we all collectively all of those through the bid through the email and then through the ramp up cycles. Hopefully that provides you some additional color.
Jeff Smith: Yeah, that's great color and you mentioned that you have been working on this bid less when Morris tried to G. Four for quite time now what.
We used to target win rate.
Jeff Smith: Do you want to achieve when you do this.
Jeff Smith: Made proposals and how is that trending lately.
Jeff Smith: Point of around 100% no.
Jeff Smith: Look.
Speaker Change: I hate to get into you know sharing really bad when Martin Dana but.
Speaker Change: We like our recompete rates year over year more shares than not over 90%.
Speaker Change: And if you take our collective win rate you know is it'll be in the Fortyish percent 50, some years 30, and others, but we're very well in tumor lessen our pipeline. We don't have a lot of bluebird bids that come in you know two months before the bids do find somebody else's shape that win but we want to get our bid submitted number up they really are.
Speaker Change: <unk> methodically bought out that goes through a very rigorous process.
So.
Speaker Change: I think we have a.
Speaker Change: A respectable win rate again.
Speaker Change: Manage a business out of business driving for a much higher win rate, which only but on things you did you ever 100% chance of winning the top tough question to give a pinpoint answer too but look over the last.
Speaker Change: Seven to 910 years I'm really impressed with the changes we made in our business development organization.
Speaker Change: So if I understand it how to do that and our BD organization is extremely deep.
Speaker Change: Below the sector level into all of our BD leads which includes our technology sales sales team as well.
Speaker Change: <unk>.
Speaker Change: Your next question comes from the line of Sheila <unk>.
Speaker Change: With Jefferies. Your line is open.
Sheila: Sure Sheila.
Sheila: Oh, sorry, guys.
Sheila: Thank you for the time appreciate it.
Sheila:
Sheila: Lots of questions on margins first half over second half so.
Sheila: I was wondering if we could talk about.
Sheila: Photonics investments because you mentioned that quite a few times.
Speaker Change: Can you talk about maybe the impact on each one but also like how do we think about this investment what program opportunities that could open up as well.
Speaker Change: I don't think we're going to get into any of the specifics, but it's generally related to.
John: Two the photonics programs that John mentioned related to our family of SBA programs.
John: Familiar with.
John: And a number of our other photonics product as opposed to the bespoke solutions for photonics products business.
I think we've been pretty open about.
John: Our win rates, there and the programs that we're on our position with a couple of times.
John: So DARPA contracts.
John: Just an accelerating portion of the business.
John: Sure.
John: Focus on produce ability.
John: Transitioning from development to production.
John: Yes, Sheila the electrics are closer in our photonics business as you remember when.
John: When we did the SA photonics acquisition combined that with the photonics business of lgs as well as our own.
John: Capabilities I mentioned that.
John: But for that basically wouldn't be investing through fiscal year 'twenty four.
John: As we saw volumes starting to pick up sooner than we expected on the produce ability side, we decided to double down on our investment more now as as we look at it in hindsight more on one of the first half of the year versus.
John: One that <unk>.
Jeff Smith: Binds us with some produce ability.
George Price: <unk> that gives us more confidence in 'twenty five and beyond we can deliver in a timely fashion and then two just that delta between what was spent in the first quarter first half shows up as positive to margins.
George Price: Yeah, no. Thank you I appreciate that color.
Matt Akers: Maybe one more if I could ask you announced that new $525 million 10 Mod contract. This quarter, how do we think about that program as a driver of growth and that's about 24 and any additional color you can provide on what you're doing there.
Jonathan Raviv: Yeah, I mean, it's it's a fantastic.
Jonathan Raviv: Fantastic program, it's another network modernization job.
Jonathan Raviv: And we've got others in our.
Jonathan Raviv: The pipeline of things that we're looking for work, but it's going to be going to.
Jonathan Raviv: On Pax similar to other <unk>.
Jonathan Raviv: Larger network modernization technology technology jobs.
Jonathan Raviv: We've got a lot of unpacking of basically one a lot.
Jonathan Raviv: They are all come in at different different rates. So on that one it's going to unpack.
Jeff Smith: More into 'twenty, five and beyond based on timing of when we won that job, but there are other programs out there that are doing an outstanding job of actually ramping up at a plan. We've got a high tab, which is ramping up ahead of plan. We've got additional work we mentioned it would start with upfront planning and design team has done an outstanding.
Jeff Smith: Any job it ramped up faster customers, adding installed that that has a hand in the guidance range, if we like a spectral.
Jeff Smith: One is ramping up ahead of plan as well customer really likes the open architecture and our software based approach.
Jeff Smith: We mentioned that that would start up with planning and design.
Jeff Smith: Clearly given the nature of the world events, we've had many more meetings that we believe me without a navy is very very pleased and very impressed by the pace of our work in innovation in the last you know many of you have written about this are largely of Intel job ramped up ahead of ahead of plan, we're providing network exploitation.
Jeff Smith: We're delivering as you would assume it was the government selected technically superior solution and Theyre getting superior results and Thats driving even better top line growth that we had originally expected.
Jeff Smith: Your next question comes from the line of duty Dipalma with William Blair. Your line is open.
Jeff Smith: Okay.
Jeff Smith: Good morning, John Jeff and George.
Louie: Hey, Louie.
Louie: You referenced your three.
Louie: Large wins over the past year and it seems there are four if you include your defense Intelligence Agency ECS Three award.
Louie: Slide deck also discuss tayo.
Louie: Words or newer awards over the past.
Louie: Year have approximately a six year.
Louie: Duration is.
Louie: You are in a group these for like Mega billion dollar contracts together when would you expect the revenue run rate to be fully ramped and I think John you just said that spectral is ramping faster than initial expectations, but is it.
Louie: A smooth three year runway.
John: Yeah. That's that's the initial question.
John: John will want to add to this but they really vary Louie.
Speaker Change: So not the NSA Intel job.
Speaker Change: Relative is ramping relatively quickly and it will kind of reach a steady state run rate.
Speaker Change: You know over the next handful of quarters.
Spectral in particular are a little bit.
Speaker Change: Little bit slower ramp just the front end of the program really is focused on planning so the fact that the.
Jonathan Raviv: <unk> planning phases are proceeding ahead of schedule.
Jonathan Raviv: Doesn't obviate the fact that they are still in the planning phase. So those will continue to ramp it too.
Jonathan Raviv: Well at the FY 'twenty five.
Or so.
Speaker Change: I don't know if you want to add to see about ECS free.
Speaker Change: I mean look that's a that's a very recent win you know we're working through.
Speaker Change: I'll start up with our with our customer set Louie very de Minimis as we get out of 24, so you'll see that one ramp more in the 25 period.
Speaker Change: Okay.
Speaker Change: Great and a lot has been made about like increased R&D associated with S. A photonics, but as these programs are ramping did.
Seth Seifman: Do they initially carry a lower than <unk>.
George Price: Company average margin structure, and so should the margin profile for these four awards increase over the next two years.
George Price: So there isn't necessarily a one size fits all here, but as a general rule, you're thinking about it the right way I mean there.
Matt Akers: They are less profitable in the beginning as we are ramping up and focused on produce ability transitioning into production and of course rate production becomes.
Jonathan Raviv: Core profitable.
Jonathan Raviv: Both more profitable in terms of rates, but also volume.
Jonathan Raviv: Thanks.
Jonathan Raviv: There are no further questions at this time I will turn the call to John Laing Gucci for closing remarks.
Jonathan Raviv: Thanks, Sarah 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 Chuck Mclaughlin towards price and Jim Sullivan, who has joined our IR team are available after today's call stay healthy and all my best to you and your families. This.
Jonathan Raviv: Concludes our call. Thank you and have a great day.
Jonathan Raviv: This concludes today's conference call. We thank you for joining you may now disconnect your lines.
Jonathan Raviv: Yeah.
Jonathan Raviv: [music].
Jonathan Raviv: Okay.
Jonathan Raviv: Yeah.
Jonathan Raviv: Yeah.
Jonathan Raviv: Yeah.