CACI International Inc (NYSE:CACI) Q2 2024 Earnings Call Transcript

CACI International Inc (NYSE:CACI) Q2 2024 Earnings Call Transcript January 25, 2024

CACI International Inc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Fiscal 2024 Second Quarter Conference Call. Today’s 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. [Operator Instructions] At this time, I would like to turn the conference call over to George Price, Senior Vice President, Investor Relations. Please go ahead.

George Price: 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. Those factors are listed at the bottom of last night’s press release and are described in the company’s SEC filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call.

I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let’s turn to slide three, please. To open our discussion this morning, here’s John Mengucci, President and Chief Executive Officer of CACI International. John?

John Mengucci: Thanks, George, and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal year ’24 results. With me this morning is Jeff MacLauchlan, our Chief Financial Officer. Let’s turn to slide four, please. In the second quarter, we delivered 11% organic revenue growth, EBITDA consistent with Q1, and solid free cash flow. In addition, we won $2.2 billion of contract awards, which represents a 1.2 times book-to-bill for both the quarter and on a trailing 12-month basis. More than half of our awards were for new work to CACI, and we continue to have strong Recompete performance as well. Looking forward, we see the second half of fiscal year ’24 playing out stronger than we originally expected.

And as a result, we are raising our full-year guidance. Jeff will provide the financial details shortly. Overall, our performance continues to be well aligned with our value creation model focuses on long-term growth and free cash flow per share. Slide five, please. I’m pleased to say that we are seeing growth ahead of plan across many of our new business wins, including our EITaaS award with the Air Force, Spectral with the Navy, and our Intel and Cyber award with the NSA. This performance is reflected in our increased fiscal ’24 guidance. So, we expect these programs to support continued growth, healthy profitability, and increasing free cash flow per share in the future. 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 and had an impressive level in winning new work in Recompetes, as well as sustaining a strong pipeline of new opportunities.

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. Last year, we won three, including our largest-ever by far. This year we’ve already won one. And we have a strong pipeline of additional opportunities, including several greater than $1 billion in total value. I’m also pleased with our strong track record of Recompete wins this year, which is critical to maintaining the foundation of which we will grow. We win our Recompetes through strong execution, industry-leading talent, and delivering innovation well beyond the initial award. Slide six, please. One area of our continued success is IT modernization. This is an area of enduring demand, driven by the need to modernize our secured network — and secured networks, develop software and scale, and migrate workloads to the cloud.

During the second quarter, we won two additional network modernization contracts, solidifying our presence across the DoD, following our DIA win last quarter. The Archon Technology we acquired as part of ID Technologies was critical in securing this work. Archon’s software-enabled end-user technology allows out-of-the-box commercial devices to securely access supply networks from any location. A combination of Archon’s technology and our existing capabilities in the past performance is differentiating CACI in the market. In addition, CACI continues to demonstrate industry leadership in digital application modernization and cloud migration. We are seeing customers accelerate their adoption of cloud both in 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. Our partnership with a technology leader like AWS enables us to deliver high value to our customers. And finally, Agile software development is increasingly a must-have capability in the market. CACI continues to lead the industry and Agile software development at scale, executing the two largest Agile programs in the Federal Government. One of the largest Agile programs is BEAGLE with US Customs and Border Protection which has seen an increased demand given heightened activity at the southern border, and we see a number of additional Agile opportunities in our pipeline.

Slide seven, please. In Electromagnetic Spectrum, we continue to execute our software-defined strategy, invest ahead of need and demonstrate differentiated capabilities to enable our customers to dominate this critical domain. With the expanding global threat environment, we are seeing firsthand every day how the rapid pace of change in technology and our adversaries’ capabilities necessitate a faster and more flexible response. For the Navy, this critical need is precisely what Spectral has addressed. While a 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. It allows us to build for today’s threats and easily adapt as threats change.

In fact, we continue to see demand across all domains in areas of signals intelligence, and electronic warfare. As we mentioned last quarter, the Army was evaluating some of our SIGINT and EW Technology for a program to enable dismounted soldiers that could be detect, identify, geo-locate, and defeat signals of interest. We’re pleased to say that this evaluation went extremely well. And we currently expect to receive an order in the second half of fiscal year ’24. In addition, we are also seeing increasing interest in our software-defined counter UAS capabilities from the US, as well as from our allies. I’d also like to highlight our successful Recompete wins supporting the Trojan family of systems for the Army, a work CACI has supported for over 20 years.

Similar to Spectral and Trojan we were utilized software-defined technology with open architectures to deliver the speed and adaptability necessary to address the evolving global threats and enable the Army’s multi-domain operations. Slide eight, please. In Photonics, we continue to see healthy demand to capture market share and deliver innovation with our optical communications technologies. In our bespoke Photonics business, we are demonstrating unprecedented achievements. Currently, our Deep Space Optical Communications Technology is connecting and transplanting data to Earth from a distance equivalent to the orbit of Mars. The farthest-ever demonstration of optical communications. In addition, the ILLUMA laser communication system was recently launched on international — to the International Space Station where CACI Razor Communication hardware onboard and the system has successfully communicated from the ISS to an Earth-based ground station.

This technology and innovation is also being driven into the lower-cost, higher-volume, low-swap terminals we are building and delivering below earth orbit. With higher order of volumes coming sooner than we expected, we have accelerated R&D investments through our P&L for both our technology and our capability to produce in volume. These investments will help underpin future growth, profitability, and increasing cash flow. Slide nine, please. Turning to the Macro Environment, we continue to monitor the government fiscal year ’24 budget process closing. Despite the ongoing deliberations in Congress, it remains clear that investment spending for national security and modernization needs to continue. Customer demand remains high, funding remains healthy, we continue to see good levels of RPs, awards, and customer activity.

I continue to be very pleased with our strategic positioning in enduring a well-funded areas of need, as evidenced by our strong awards and robust pipeline. Slide 10, please. In summary, our first half performance was in line with our expectations and we are raising our fiscal year ’24 guidance to reflect stronger momentum in the second half. We are successfully executing our strategy of investing ahead of need. Developing differentiated capabilities, bidding on fewer larger opportunities, and delivering superior performance to our customers. As a result, we continue to win in the marketplace. And our strong performance positions us to deploy capital in a flexible and opportunistic manner to drive long-term free cash flow per share and shareholder value.

With that, I’ll turn the call over to Jeff.

Jeffrey MacLauchlan: Thank you, John. Good morning, everyone. Please turn to slide 11. Our second quarter results are in line with the expectations we discussed with you last quarter. We generated revenue of $1.83 billion, representing 11% organic growth in addition to a modest contribution from two recent acquisitions in the UK. As John mentioned, we continue to successfully execute our strategy and to win high-value enduring work. Second quarter EBITDA margin was 9.3%, in line with our previously discussed expectations of delivering relatively flattish EBITDA compared with the first quarter. Recall that the secondquarter EBITDA margin includes approximately 60 basis points of drag from zero-margin material volume we discussed last quarter.

Adjusted diluted earnings per share of $4.36 were 2% higher than a year ago. Higher 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, reflecting solid profitability and strong cash collections. We reported days sales outstanding or DSO of 47 days, a new record, as we continue to efficiently manage working capital. Free cash flow was $68 million for the quarter. Slide 12, please. We ended the second quarter with 2.3 times leverage of net debt to trailing 12 months EBITDA, flat with the prior quarter. 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. In addition, we are actively engaged in an M&A market that is beginning to look more attractive from a buyer’s perspective. As we’ve discussed, our value-creation model is focused on driving long-term growth in free cash flow per share. We remain well-positioned to deploy capital in a flexible and opportunistic manner to drive long-term shareholder value. Slide 13, please. We’re pleased to be raising our fiscal ’24 guidance. Let me take a minute to provide some context on the evolution of our guidance for the year. 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.

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. 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 material sales was unchanged. 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 and strength of new awards, we are raising our revenue guidance by an additional $100 million to between $7.3 billion and $7.5 billion. 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.

As a result, we are also increasing our adjusted net income guidance to between $450 million and $465 million with an attended increase in adjusted EPS to between $19.91 and $20.58 per share, reflecting the higher adjusted net income, as well as our first half share repurchases. And finally, we are raising our free cash flow guidance to at least $420 million based on the increased earnings and continued strong working capital performance. Our increased free cash flow, combined with the benefit of the lower share count, results in a 7% increase in free cash flow per share versus our initial fiscal ’24 expectations. To assist with your modeling, we now expect the full-year diluted share count to be approximately 22.6 million shares and our full-year interest expense to be towards the lower end of our previously communicated $100 million to $105 million range.

Slide 14, please. Turning to our forward indicators, CACI’s prospects continue to be strong. Our trailing 12-months book-to-bill of 1.2 times reflects strong performance in the marketplace and our first half awards have a weighted average duration of nearly six years. A backlog of $27 billion increased 2% from a year ago and represents almost four years of annual revenue. 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 Recompetes and less than 2% from new business. Today, less than 3% of remaining — of the remaining increase is from Recompetes giving us increased confidence in our guidance for the year.

Progress on these metrics reflects our strong business development and operational performance and yields increased confidence in our expectations for the year. In terms of our pipeline, we have $11 billion of bids under evaluation. Over 65% of which are for new business, CACI, and we expect to submit another $14 billion in bids over the next two quarters, with 80% of that for new business. Our ability to maintain a strong pipeline even as we deliver strong awards reflects healthy demand, successful strategic positioning, differentiated capabilities, and disciplined bidding. 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 to support long-term growth, increasing free cash flow per share, and additional shareholder value. With that, I’ll turn the call back over to John.

John Mengucci: Thank you, Jeff. Let’s go to slide 15, please. In closing, I’m pleased with how our business is performing, both near-term and how we are positioning for future growth. We continue to successfully execute our strategy and our performance enables us to raise our Fiscal ’24 guidance for revenue, adjusted net income, adjusted EPS, and free cash flow. We are investing, we are winning, we are executing, and we are delivering on our commitments to our customers and to our shareholders. We remain confident in our ability to continue to drive long-term growth, increased free cash flow per share, and generate additional shareholder value. As is always the case, our success is driven by our employees’ talent, innovation, and commitment.

To everyone on the CACI team, I am proud of what you do each and every day for our company and for our nation. And to our shareholders, I thank you for your continued support at CACI. With that, Sarah, let’s open the call for questions.

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Q&A Session

Operator: Thank you. (Operator Instructions) One moment please for your first question.Your first question comes from the line of Robert Spingarn with Melius Research. Your line is open.

Robert Spingarn: Hi, good morning.

John Mengucci: Hey, Rob. Good morning.

Robert Spingarn: So, nice set of numbers here. I want to ask a high-level budget question though, just given the uncertainty in DC, the potential for supplementals and I underline 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?

John Mengucci: Yeah, Rob. Thanks. As you appropriately stated, there’s an awful lot of moving parts. Look, we’re monitoring the government fiscal year ’24 budget process. As you all know, back in August, we planned for very different scenarios. We’ve gotten the low-end, we said the funding would be slower. We have a full-year CR, and real questionable government fiscal year ’24 budget process. On the upper end, we said a CR would be shorter and a budget would be passed. So somewhere in between there is how we’re seeing this layout. Now that we’re in January, a full-year CR appears less likely at this point should Congress come to an agreement by the March deadline. But even so, based on how it impacts us, our large Intel award is on-going work.

It’s critical national security priority and remains completely funded. Our EITaaS Air Force award, it’s a large Air Force priority. It’s well funded at the government fiscal year ’23 levels and that funding and support continues. Spectral is a very critical program for the Navy, particularly supporting the INDOPACOM fight. And other recent wins are sort of getting through their process both as windows. Those are starting to ramp up with ample funding. So as always, Rob, when we talk about budget, we focus on things that we can control. We’re running the business, driving long-term growth, shareholder value. On the other end of this, look, the world’s a dangerous place. The pacing threat is China. You’ve got the Ukraine-Russia, was a wakeup call.

Israel-Hamas situation shows that as I’ve always said, the counterterrorism is still there. It’s going to be there for a long, long time. But remember that our strategy is strongly aligned around key national security and modernization priorities and invest ahead of need and differentiate expertise and technology positions us extremely well. Our resiliency to the budget is not accidental. It absolutely happens to be due to the strategy we have consistently shared and that was to make sure that our pipeline and jobs that we go after and the jobs that we win are in well-funded, extremely important mission, expertise and technology areas of the Federal Government. So long story short, that the 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.

Robert Spingarn: 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 ’22, 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?

Jeffrey MacLauchlan: Well, yeah. Rob, thanks. As you know, 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. You ought to think about the size as basically being a reversal of what we communicated previously as the negative impact when it expires. So that would basically be undoing those earlier hits, almost dollar for dollar, really. And with that extra cash, it would get factored into our normal capital deployment rhythm of evaluating all of our opportunities. And we have a very — as we’ve talked before, very disciplined, return based paradigm or framework for evaluating those options. And as we have more capital, we’ll deploy it effectively and efficiently.

John Mengucci: Thanks, Rob.

Operator: Your next question comes from the line of Bert Subin with Stifel. Your line is open.

Bert Subin: Hey, good morning.

John Mengucci: Hi, Bert.

Bert Subin: Jeff, I think my first question is for you. If we look at the current guide, it implies about 57% of your earnings will come in the back half with a solid step up in margins at least looking to the midpoint. Can you just walk us through how good your visibility into that improvement today is? Because it would imply that there’s a pretty substantial step up in technology sales, and historically, those have been a little less predictable.

Jeffrey MacLauchlan: Yeah, I would not — I don’t think you can draw that conclusion. But let me give you a little bit of color and John will likely want to add some to this. If you look, first of all, at 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. And we have really very, very strong visibility into what the rest of the year look like — looks like. I would also call your attention to a couple of things we talked about in the prepared remarks, which may have been a little bit subtle 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’re nearing the end of.

And then we also have, as you allude, as you point out, sort of the classic timing and mix that we could see in the second half. But this activity is in backlog. We can see it. You’ve noticed, if you’re looking at second order kind of consequences, you’ll notice a little bit of inventory growth in the quarter, all of which is sort of setting up the second half that we see. That gives us really strong confidence in what the next couple of quarters look like.

John Mengucci: Yeah. Bert, let me add a couple of other things to that. But this is around confidence and how we see the back half playing out. Look, confidence 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 seeing stronger second-half momentum than we expected back in August, namely our three large programs, as well as other recent wins. And all of that work is at the underlying margin rate, which is in the high 10s. We’re raising guidance for revenue. We’re not keeping it as is, which shows confidence we have in the second half. We pulled the bottom ranges of net income, and we’ve raised free cash flow, which would denote confidence.