CACI International Inc (NYSE:CACI) Q3 2024 Earnings Call Transcript

CACI International Inc (NYSE:CACI) Q3 2024 Earnings Call Transcript April 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 Third 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 Dennis, 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 2. 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 our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night’s press release and are described in the company’s SEC filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call.

I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let’s turn to Slide 3, 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 third quarter fiscal year ’24 results. With me this morning is Jeff MacLauchlan, our Chief Financial Officer. Move to Slide 4, please. CACI delivered outstanding third quarter results across the board. We grew revenue by 11% with contributions from both expertise and technology programs. EBITDA margin of 11.3% showed significant expansion from last year, consistent with our expectations of stronger margins in the second half. And we delivered healthy free cash flow of $102 million. In addition, our third quarter awards of $3.5 billion represents a 1.8 times book-to-bill for the quarter and drove trailing 12-months book-to-bill to 1.5 times.

About half of our awards were for new works at CACI, and we continue to demonstrate excellent performance on our recompetes as well. Our third quarter results are well-aligned with our value-creation model, which focuses on long-term growth and free cash flow per share. As a result of our strong performance, we are again raising our full-year guidance. Slide 5, please. Let me provide a few thoughts on the macro environment. Recent passage of the government fiscal year ’24 budget and supplemental is a positive development and removes an element of uncertainty for our customers. Budget levels and growth are very consistent with what was laid out last year by the debt ceiling agreement, and the supplemental could provide funding that would support additional growth of our Counter-UAS technology.

The proposed GFY ’25 budget is also in-line with our expectations and like most years, we expect we’ll begin with a continuing resolution, which typically does not have a material impact on our business. One thing remains clear, national security and IT modernization remain key focus areas for our government. As we’ve said many times before, the world is a dangerous place and we continue to see clear demand signals driven by world events. CACI continues to be strategically positioned in enduring and well-funded areas that align with our nation’s most important priorities. Slide 6, please. A number of years ago, we undertook a strategy to become a more focused, differentiated and resilient company. It was even better-positioned to drive long-term growth and shareholder value.

This strategy has five key elements. Focus on key enduring priorities for national security and IT modernization, leverage software to rapidly address critical needs, bid less, win more and prioritize larger, longer duration opportunities, invest ahead of need to develop differentiated capabilities, and deploy capital in a flexible and opportunistic manner. All of these elements are focused on driving long-term growth, particularly in free cash flow per share, which we believe is the ultimate metric for long-term shareholder value creation. Slide 7, please. Today, you can see the successful execution of our strategy manifest in several ways. First, we are well-positioned in key national security and IT modernization priorities with the Federal Government, with agile software development methodologies and software-based technologies.

On the national security front, our capabilities in the electromagnetic spectrum are differentiated and in high demand. Every day, world events are demonstrating the increasing importance of signals collection, intelligence, geolocation and electronic attack. Software enables us not only to provide these capabilities to our customers, but also to adapt and update these capabilities with speed and agility as adversaries change their tactics. On our US Navy Spectral program, we are working with our customer to modify and enhance what will be delivered when, made possible by our open architecture and software approach, which allows for contemplated changes and requirements. And we are beginning discussions with the Navy in an effort to consider reusing elements of Spectral as a baseline for other systems, because that’s one way to provide fleet-wide capability upgrades when and wherever required to keep pace with rapidly changing adversaries and technologies.

In addition, we are building out our ability to deliver our technology to Five Eyes countries, select NATO countries and other allies. We have already made deliveries to several of these countries. In fact, during the quarter, we received our first order from the Canadian government, for our software-defined, man-portable Counter-UAS technology called BEAM. We are also providing our software-defined SIGINT technology being mounted on OEM UAVs to assist in signal collection missions. On the IT modernization front, last quarter, we discussed how our capabilities are addressing increasing demand for network modernization. In addition, we are also winning and delivering on other IT modernization requirements. For example, this quarter, we won our recompete of IT work supporting both EUCOM and AFRICOM, enabling our customers’ missions as they respond to an ever-increasing list of critical world events.

IT modernization using our Agile software development and DevSecOps capabilities also recently held the US Marine Corps to achieve the first-ever clean financial audit for a branch of the military. This highly visible achievement adds to our strong record of past performance and enhances our ability to pursue additional modernization opportunities across the US government. Slide 8, please. Second, we’re continuing to enhance the long-term visibility of CACI’s business through disciplined bidding on larger, longer duration opportunities. As I mentioned, we had yet another fantastic quarter for awards and I’m very pleased with our business development organization’s performance. Our $3.5 billion of awards in the quarter had a healthy mix of recompetes.

And in several cases, we were able to expand those contracts. On the IT work I mentioned earlier, this supports both EUCOM and AFRICOM. We not only won our week for our recompete, we nearly doubled the size of that contract to well over $1 billion. Successes like this drove our third quarter backlog to a record $28.6 billion, representing nearly four years of annualized revenue. The weighted-average duration of awards that we booked into backlog remains well above five-years on a year-to-date basis. We continue to have a robust pipeline of new opportunities that allows us to be discriminating in the work we pursue. These wins in the delivery duration metrics provide visibility not only to support current year growth, but future year growth as well.

Slide 9, please. Finally, we continue to invest ahead of need and deploy capital in a flexible and opportunistic manner. I previously mentioned our Agile software development and software-defined capabilities in the Electromagnetic Spectrum, two examples that illustrate investing ahead of need as well as our organic investments in our Photonics business to name just a few. You also may have seen, we’ve made a few smaller acquisitions this year, both in the UK and here in the US as our M&A pipeline continues to expand. During the third quarter, we closed the acquisition of Quadrint, a provider of digital application modernization primarily for the intelligence community. Quadrint brings specific customer relationships and past performance in the IC that are additive to our business.

Consistent with our M&A strategy, the acquisition is accretive in year one. Slide 10, please. Overall, I am very pleased with our strong performance. We are seeing an accelerating growth as the larger awards we’ve won over the past few years continue to ramp. And we see on-contract growth in our existing portfolio. As a result, we are raising our full-year guidance and Jeff will share the details with you shortly. In summary, we continue to successfully execute our strategy, our investments ahead of need, differentiated capabilities, strong execution and exceptional business development, position CACI to drive topline growth, strong margins and increasing free cash flow per share. With that, I’ll turn the call over to Jeff.

Jeffrey MacLauchlan: Thank you, John, and good morning, everyone. Please turn to Slide 11. In the third quarter, we generated record revenue of over $1.9 billion, representing 11.1% growth, of which 10.2% was organic. The balance was generated by the three acquisitions we’ve made over the past 12 months. Third quarter EBITDA margin of 11.3% represents a sequential increase of 200 basis points, which is in-line with our expectations and what we have communicated to you throughout the year. Adjusted diluted earnings per share of $5.74 were 17% higher than a year ago. Greater operating income, along with a lower share count, more than offset a higher income tax provision and higher interest expense. Third quarter operating cash flow, excluding our accounts receivable purchase facility was $114 million, reflecting strong profitability and cash collections.

We reported Days Sales Outstanding, DSO of 50 days as we continue to efficiently manage working capital. Free cash flow of $102 million for the quarter represents good sequential and year-over-year increases. Slide 12, please. The healthy long-term cash-flow characteristics of our business, our modest leverage of two times net debt to trailing 12-months EBITDA and our access to capital provide us with significant optionality. As John mentioned, we made an acquisition in the third quarter and we remain well positioned to deploy capital in a flexible and opportunistic manner to drive long-term growth in free cash flow per share and shareholder value. Slide 13, please. We’re pleased to again raise our fiscal ’24 guidance as a result of our strong business performance.

We’re raising our revenue guidance to between $7.5 billion and $7.6 billion. This represents growth of 11.9% to 13.4% for the year with the organic component being 11.3% to 12.8%. We are also affirming our underlying EBITDA margin expectations in the high 10% range, where we now expect to be about 10.7% for FY’24. Recall that this margin guidance excludes the previously discussed $200 million of material sales in the first half of the year, which equates to approximately 30 basis points of impact to the full-year margin. As a result of our stronger revenue outlook, we’re narrowing and increasing our FY’24 adjusted net income guidance accordingly to be between $455 million and $465 million, with an intended increase in adjusted earnings per share to between $20.13 per share and $20.58 per share.

And finally, we’re maintaining our free cash flow guidance of at least $420 million. You will recall this assumes receipt of a $40 million tax refund related to prior year tax method changes. The IRS has accepted our treatment of the method change, though timing of the payment is entirely up to the IRS. In addition, our free cash flow outlook now assumes about $80 million in capital expenditures, down slightly from our prior expectation as we’re able to realize efficiencies in our capital spending. This is largely offset by slightly higher working capital usage from the higher revenue we expect through the end of the fiscal year. Please note that additional details of our updated guidance have been included in our presentation to assist you with your modeling.

Slide 14, please. Turning to our forward indicators, our prospects continue to be strong. Our trailing 12 months book-to-bill ratio of 1.5 times reflects strong performance in the marketplace. Our record backlog of $29 billion increased over 13% from the year ago and represents just under four years of annual revenue. These metrics provide good long-term visibility into the strength of our business. For fiscal year ’24, we now expect approximately 98% of our revenue to come from existing programs with approximately 1% each from recompetes in new business. Progress on these metrics reflects our successful 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 70% of which are for new business to CACI.

We expect to submit another $15 billion in bids over the next two quarters with 90% of them for new business. Our ability to increase both of these metrics from last quarter, even while delivering a 1.8 times book-to-bill ratio reflects the healthy demand, successful strategic positioning, differentiating capabilities and disciplined bidding we have discussed. In summary, we delivered outstanding third quarter results. We continue to see good momentum in our business, and as a result are raising our full-year guidance for the third time this year. We are winning and executing high-value enduring work that supports long-term growth, increased free cash flow per share and additional shareholder value. And 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 very pleased with our strong third quarter performance and our ability to again raise full-year revenue and earnings guidance. At the start of this fiscal year and over the past several quarters, we have outlined our expectations of how and why our financial results would progress through the year. We discussed the fact that many of our larger technology awards would take time to ramp, and the timing of investments in deliveries would drive higher margins in the second half versus the first half. The stronger growth and increased profitability we’ve reported are entirely consistent with those expectations. We continue to successfully execute our strategy.

It is a thoughtful and intentional strategy of focusing on current key enduring priorities, investing ahead of need, developing differentiated capabilities and then deploying capital in a flexible and opportunistic manner. And it is a strategy that is driving higher visibility, long-term growth, increasing free cash flow per share and shareholder value. As is always the case, CACI’s success is driven by our employees’ talent, innovative spirit and commitment to customers’ missions and to each other. I’m immensely proud to lead such a capable and dedicated group of people. To everyone on the CACI team, thank you for what you do each and every day for our Company and our nation. And to our shareholders, I want to thank you for your continued support of CACI.

With that, Dennis, let’s open the call for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question is from the line of Robert Spingarn with Melius Research. Please go ahead.

See also 11 Best Fast Food Stocks To Buy According to Analysts and 25 Countries with Highest Gun Ownership in 2024.

Q&A Session

Robert Spingarn: Hey, good morning.

John Mengucci: Good morning, Robert.

Robert Spingarn: Very nice quarter, John and Jeff. And Jeff, I’ve got a question for you and then a follow-up for John. But Jeff, these margins in the quarter were quite strong and the implied margin for the fourth quarter as well. And while I know you aren’t yet ready to talk about fiscal ’25, for our modeling perspective, should we think of this underlying 10.7% margin as a good jumping off point? Or should we, you know, be thinking about something in the lower 11% range like you did in the third fiscal quarter?

Jeffrey MacLauchlan: Well, you’re right. We’re not ready to talk about ’25. I think it’s really probably more prudent to think about the year as a whole. We talk about the fact that we manage and guide to the year, the profile this year was such that we thought it was meaningful enough to give you some kind of first half, second half insight. But we really manage the business on an annual basis and I would encourage you to think about it that way.

Robert Spingarn: Well, let me try with this then, Jeff. At the very least, in the fixed price portion of your business, which I think is around 30%, I don’t know if the backlog is at 30% as well, but does the roll-off of any stale pricing in that fixed price business at least give you some natural lift? And then, John, I have one for you.

Jeffrey MacLauchlan: Well, I think the premise of your question might be a little off. I don’t think you can necessarily equate fixed price with high margins and cost type with low margins. We’ve talked before about the fact that we have some very good margins on some very high value-added kind of cost type work. So I think you ought to — I’m going to go back to what I said a few minutes ago. I would encourage you to think about the business kind of in total.

John Mengucci: Hey, Rob. This is John.

Robert Spingarn: What I was going to say, I’m sorry, John. Go ahead.

John Mengucci: No, go ahead, Rob.

Robert Spingarn: Jeff, what I was getting at was inflation. And so, not so much whether margins and cost plus are higher or lower than fixed price, but just that the fixed price for a lot of companies in the backlog was priced pre-inflation, and as that rolls off, you can reprice at better rates. And does that provide some natural lift?

Jeffrey MacLauchlan: Yeah, I see. Inflation is not really a major factor for us. A lot, particularly in the fixed price work, a great deal of it is kind of quicker turn task orders. And we really maintain fairly current view of our cost structure as we’re pricing those. So that’s not really a big driver for us as it may be for others.

John Mengucci: Yeah, Rob, on our software-based technology deliveries, a lot of those come in and go out in the same quarter, right? So, we’re constantly repricing some of that software-based tech. So, we’re always keeping up with things like supply chain issues, right? And we were spending a lot of time talking about that as well as any type of inflationary cost. But we’re always able to reprice those items in that part of our portfolio. Our larger technology programs that are fixed price, even over a three-year to five-year range, labor, we’re very — we’re probably industry-leading at making sure we can get talent with the right skills, at the right price, and being able to manage that, and also bringing the efficiency. So, on those longer-term technology builds, we’re constantly bringing in efficiencies.

And since most are software-based, right, we’re able to look for better and faster and cheaper ways to develop software, which then allow us to deliver the planned margin.

Robert Spingarn: Okay. And then, John, just real quickly, the one I had for you, you know, you did the two acquisitions, one was in the UK. You’ve had a presence in the UK all along. But are you looking to increase your international exposure or was that just strictly a technology-driven acquisition?

John Mengucci: Strictly a technology-driven. I will tell you that, as I alluded to in my opening comment, on our software-based technology side, we are looking at building ourselves out more broadly in the international front. You know, we’re probably in the second or third inning there, really looking at most NATO countries, our Five Eye countries you already delivered to today. Canada was the last one that we added to that list. So we’re going to continue to expand our reach of our software-based technology into the international market. You know, one, it allows us to drive our addressable market for those, for that technology. And then, second, it is where the, you know, largest threat is. And we’ll I’m sure, we’ll talk more about that during the rest of the call. So, Rob, thanks for your question.

Robert Spingarn: Great. Thanks for the color.

Operator: Your next question is from the line of Bert Subin with Stifel. Please go ahead.

Bert Subin: Hey, good morning. Thank you for the question.

John Mengucci: Hi, Bert.

Jeffrey MacLauchlan: Good morning.

Bert Subin: Hey, Jeff, John. So, maybe just, you know, sticking with the margin theme, you saw a nice step up, you know, going from, you know, just from the first half to the third quarter, and I think part of that was investment-related. Can you just walk us through what specific photonics-related investments moderated in the quarter to help push margins higher? And what’s your general view on the lumpiness of margins on a go-forward basis? Do you think the cadence throughout the year will start looking flatter or would you expect variability to remain on the back of, you know, tech sales timing?

Jeffrey MacLauchlan: Yeah, we’ve talked about this photonics investments in the past. We have several programs where we’re, you know, sort of transitioning into the — into, you know, more robust volume, and some of the investments associated with that have come to an end as we’ve talked about the last couple of quarters. I think we will always have some variability in quarters based on our commitments to invest ahead of need. Those are always going to be prioritized and they’ll lead to some lumpiness I expect in margin. John, do you want to add too?

John Mengucci: Yeah, sure. Bert, look, on our software technology sales, right, of which photonics is a part of all of our Counter-UAS systems, all of our SIGINT collection systems, everything that we do in the EW, electromagnetic spectrum area, you know, and I started off with one of Rob’s questions, you know, those are — those have a highly variable sales cycle, right? Most are not really being driven by long-term backlog. They are sort of book-in-turn work. So, you know, I believe we will, for a long time, look at, you know, ups and downs on quarterly margins, which is why we’re really focused on the four-year margins. So, why is that? It is that way because we are the company in the sector that actually does deliver technology.

And when you deliver technology, it’s not the same as, you know, delivering pure expertise, where your rollout and your margins are quite predictable quarter-to-quarter. And as the volume of technology is at a 55-45, you know, match to expertise, it does bring some variability to, you know, quarter-to-quarter endpoints. So, we will talk a lot about that, Bert, as we present our ’25 guidance, but I think it’s a very important thing to recognize. So, you know, it will not be uncommon for us to talk about, you know, beat, beat, miss, beat on margins because that’s just how that more volatile, but very positive higher margin work comes in. The second thing that I want to say on that is, look, margins are a really important part of our value creation model.

So, it actually has our intention. It’s what we’ve been focused on, but long-term it’s going to be our focus. You know, Jeff talked about the photonics investments that have now ramped down. We’re not going to short-arm investments that drive future growth, but we’re not going to do unnatural acts to achieve you know a) quarter-to-quarter point margin. We love free cash flow per share because it brings in margin, it also brings in food and value creating capital deployment. It brings in investing ahead of need. It also brings in, you know, longer-term view and a long-term approach to organic growth. So all of those things go into this, you know, soup. And what we would like to see come out over the long-term, which is what we have experienced is more visibility on the organic growth side, and then ever-increasing margins, but it’s not going to be year-over-year.

So, hopefully that provides some additional color.

Bert Subin: That does. I guess just as a follow-up, if we think about some of the tech items, I mean, you’ve had a lot of recent success on the contract front, you know, really across these. And I’m just curious if you had to, you know, rank photonics, the — you know, Counter-UAS, EW, SIGINT, and network security, all areas where you’ve had recent contract success, just as growth drivers over the next couple of years, you know, how would you do that? You don’t have to specifically rank them, but like what’s at the top of that list?

John Mengucci: Yeah, sure. Look, on the software-based technology work, that has been something we’ve been investing in over the years. It is a highly volatile market, which you should read as a positive, right? Folks who look to do us harm change their tactics on an hourly basis. And the only way you can keep up with those threats is to make certain that your signals and your EW, electromagnetic spectrum technology stays up with that. We have proven that if you look at all of the issues that are out in today’s press about drone strikes, all of that technology that we have fits exactly on top of those threats where drones are launched in 24, 48 hours, you know, tactics, technology, and procedures are changed, and the government, our customers, and NATO allies as well need technology that can quickly adapt.

Photonics for, you know, we’re going to hit volume there as we get through 2025 and into 2026. You know, we’ll always have investments there as we work on being able to work on producibility. But overall, you know, I hate to rank one over the other, except to say photonics will hit a more compact volume sooner, but the high volume over a number of products that we have within this company are going to continue to drive technology topline and bottom line growth.

Bert Subin: Thanks, John.

John Mengucci: Thanks, Bert.

Operator: Your next question is from the line of Jan Engelbrecht with Baird. Please go ahead.

Jan-Frans Engelbrecht: Hi. Good morning, John, Jeff, and George. I just wanted to talk about capital deployment. I know you’ve done some recent deals, and you’ve got plenty of headroom available on the current share repurchase program. So just how should we think about that? And obviously, the M&A pipeline is more attractive right now, but you also have a higher priority in terms of growing free cash flow per share over time.

Jeffrey MacLauchlan: Yeah. Thanks for the question. We, the observation you make about the M&A pipeline in reference to our comments is correct. There are, we see some expanding opportunity lists. Even though we did not buy back shares in the quarter, I would remind you that since the second quarter of last year, we’ve repurchased 1.3 million shares. So we have bought in about 6% of our outstanding shares in the last four or five quarters. So even though we didn’t buy any shares in the quarter, and we are continuing to evaluate both opportunities, we’re very attentive to share repurchases.

John Mengucci: Yeah, John, and at a macro level, look, we’re flexible and opportunistic, right? And that’s going to be based on the dynamics that we see. We’re going to evaluate a range of factors, we’re going to look at some of the things that you mentioned. We’re looking at our M&A pipeline, we’re looking at stock price, we’re looking at valuation, leverage, interest rate, many, many things. All options are always on the table. You heard we did a few smaller acquisitions that we have completed. The other thing I’d mention is that timing of the future M&A candidates is a consideration in our capital deployment assessment as well, right? So, it’s not always when we’re in leverage of X, we have Y number of different companies we’d like to make a future growth part of CECI.

So there are a lot of moving pieces. Bottom line, we believe that either of those capital deployment actions are going to benefit shareholders in the near and in the long-term, which is why we’re focused on free cash flow per share and really appreciate the question.