CACI International Inc

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Q1 FY20 earnings 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. If you should need any assistance during this call, please press star zero and someone will help you. At this time, I'd like to turn the conference call over to Dan Lechberg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Well, thank you, Allison, and good morning, everyone. I'm Dan Lechberg, Senior Vice President of Investor Relations for CACI International, and I thank you for joining us this morning. We are providing presentation slides, so let's move to slide number two, please. 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 three, please. To open our discussion this morning, here's John Migucci, President and Chief Executive Officer of CACI International. John.

Thanks, Dan, and good morning, everyone. Thank you for joining us to discuss our fiscal year 2020 first quarter results. With me this morning are Tom Mutrin, our Chief Financial Officer, and Greg Bradford, President of CACI Limited, who's joining us from the UK. Slide four, please. Last night, we released our first quarter results for fiscal 2020, and I am very pleased with our performance. We delivered strong financial performance across all measures, strong revenue growth and profitability, and robust cash flow. We also won $4 billion of contract awards with approximately 60% of that representing new business for CACI. These results are an excellent start to our fiscal 2020. In addition, we continue to invest for future growth, leveraging our distinctive M&A program. We recently closed on three acquisitions that enhance our capabilities for our mission customers. I'll provide more background on these acquisitions shortly. As a result of these acquisitions, we are raising our guidance for fiscal year 2020 which Tom will discuss in more detail. Slide five, please. I'd like to take a moment to remind you of the way we talk about our business, which we introduced at our recent Investor Day. When we talk about what CACI does, you will hear four words, enterprise, mission, expertise, and technology. We serve two types of customers, enterprise and mission. For enterprise customers, we provide expertise and technology that enable the internal operations of an agency. Examples of that are IT infrastructure, financial, HR, and supply chain systems, and support to agencies in the clearance process. This provides for $130 billion of our addressable market and is consistently growing. For mission customers, we provide expertise and technology that directly enable the execution of an agency's primary function or mission. Examples of those are solutions in domain areas, such as space, C4ISR, cyber, and electronic warfare, driving a $90 billion adjustable market and growing at a more rapid pace. I encourage you to review our Investor Day presentations on our website in the Investor Relations section to better appreciate the more fulsome discussion that we shared in mid-September. Slide six, please. We are seeing healthy demand trends across both the enterprise and mission areas of our adjustable market that will drive both organic revenue growth and margin expansion. A few examples of recent awards are a nearly five-year, $385 million enterprise technology contract to support the U.S. Navy's My Navy Human Resources transformation. Based on our strong past performance on the SLMR program for the United States Army, Ips Army, CACI will consolidate hundreds of legacy applications and deliver an interoperable solution to improve HR services and transform how the Navy recruits, trains, and manages personnel. We also won a five-year, $443 million mission expertise contract to assist the U.S. Army in countering emerging commercial-based threats, including unmanned aircraft systems and IEDs. This re-compete win also included expanded scope that doubles the size of the opportunity, highlighting our differentiated expertise and record of performance with this customer and their mission. In addition, we won a five-year, $438 million mission technology contract to support the United States Air Force Research Laboratory with the multi-domain integration of geospatial and signals intelligence and operations across air, space, and cyberspace. This is largely new work to CACI, which has since led to additional awards with this same customer. Slide seven, please. You've heard us previously discuss the three pillars of our strategy, win new business, drive operational excellence, and deploy capital for growth. Our record contract awards demonstrate our success in winning new business, and our strong financial performance is indicative of driving operational excellence. We also continue to deploy capital to drive future growth through our distinctive M&A program, which remains our top priority for capital development. capital deployment. We continue to pursue high-quality, innovative companies that fill capability gaps and drive further differentiation in our customers' most critical investment areas. As I mentioned earlier, we closed on three acquisitions over the last week, Next Century, Lindustry Shielding, and Deep3. Next Century is a mission technology company that delivers advanced geospatial mapping and predictive analytics, data fusion, and machine learning to the intelligence community and the Department of Defense. This acquisition provides additional growth to our strong business base of high-value technology offerings. Lindustry Sealing is a mission technology company that delivers hardened systems to protect equipment from electromagnetic interference, a key growth aspect of a large single award IDIQ that we were awarded late last fiscal year. Indeed3 is a mission expertise company that provides applications development, data analytics, digital transformation, and cybersecurity. This acquisition is part of our UK operations and supports UK national security and defense customers, a growth area for both our domestic and our UK operations. While on the topic of acquisitions, I'm extremely pleased with the performance of both LGS and Mastodon, as they both not only are driving the top and bottom line growth we expected, but are investing ahead of customer needs to ensure we have the next generation technology offerings our customers desire. In addition to our M&A program, we continue to invest organically in our capabilities and technology assets, including key priority areas like signals intelligence, electronic warfare, cyber, and communications, as well as business development. As I mentioned last quarter, throughout fiscal year 2020, we plan to invest at levels higher than previous years in internal R&D and business development. In addition, our strong contract wins are driving slightly higher capital spending to support that growth. Our first quarter results include increased investments in those areas, consistent with our strategy to invest ahead of customer demand. Slide eight, please. Turning to the market environment, we remain encouraged by demand trends. From a budget standpoint, the two-year agreement signed back in August provides healthy spending levels for our customers in both government fiscal 20 and 21, particularly in areas aligned to CACI capabilities. Government fiscal year 2020 started under continuing resolution which is in effect through November 21st and could extend longer. As you know, we start virtually every year under a CR, and as in the past, we did not expect this to have an impact on our business. And given our record backlog and strong contract awards, we remain confident in our ability to deliver on our financial commitments. In closing, our first quarter results were a great start to the year, with increased organic growth, strong profitability, robust cash flow, and record contract awards. In addition, we are deploying our capital for accretive acquisitions that continue to position CACI for future growth. We continue to execute our strategy and remain confident in our ability to deliver growth, margin expansion, and shareholder value. With that, I'll turn the call over to Tom.

Thank you, John, and good morning, everyone. Please turn to slide number nine. Our first quarter revenue was $1.4 billion, 17% greater than last year, with 5.6% organic growth. Organic growth in the quarter was a bit higher than expected, driven by around $20 million of low margin pass-through material purchases, which occurred earlier than anticipated. Net income for the quarter was $68 million, consistent with our expectations in our annual plan, but lower than last year. Recall that in the first quarter of last year, we realized a one-time pre-tax profit benefit of $12 million associated with product sales occurring earlier in the year than expected. In addition, the effective tax rate in the first quarter of last year was a low 13% as a result of the tax benefits associated with stock vesting versus this quarter's effective tax rate of about 18.5%. Normalizing for these factors, we realized modest first quarter 2020 net income growth consistent with expectations. The LGS and Mastodon acquisitions continued to perform well financially in line with our expectations, generating approximately $18 million of adjusted EBITDA in the first quarter. Slide 10, please. We continue to generate strong cash flow with $115 million of operating cash flow in the first quarter, excluding our AR purchase facility. It increased at 38% over last year. Day sales outstanding, excluding the facility, was a low 59 days, or 53 days, including the benefit of the facility. We ended the first quarter with net debt to trailing 12-month adjusted EBITDA at 3.0 times. including the $105 million of incremental debt to finance the three acquisitions John discussed, pro forma net debt to trailing 12-month adjusted IPDOT is expected to be around 3.3 times at the end of December, leaving ample debt capacity to fund additional acquisitions. Slide 11, please. We are raising our Fiscal 20 guidance to incorporate these recent acquisitions. Cumulatively, we expect them to add around $50 million to our fiscal 20 revenue and $3 million to net income, and we have increased our guidance accordingly. All three acquisitions fit well from a strategic perspective and are expected to grow in the double digits, deliver adjusted IPDOT margins in the mid-teens, and produce positive present values. In aggregate, we paid a bit less than 8.5 times next month's EBITDA for these companies. Given the acquisitions, our improvement to DSO in our strong cash flow performance in the first quarter, we are raising our fiscal 20 guidance for cash flow from operations by $20 million to be at least $420 million. At the same time, we expect higher capital spending due to investments in facilities to support growth from new business wins. We now expect fiscal 20 CapEx to be between $70 and $75 million. To help with your modeling, let me give you some color on the second quarter of fiscal 20. In aggregate, we expect the three recent acquisitions to contribute around $10 million to second quarter revenue, but are not material to net income when considering the partial quarter in associated transaction costs. We expect second quarter net income to be consistent with levels a year ago. The positive impact of the LGS and Mastodon acquisition and organic growth are offset by the expected decline in profitability of one large recompete that moved from time and materials at very favorable rates to cost plus during the quarter. This was fully expected and included in our initial FY20 plan and our guidance. Slide 12, please. Our forward indicators remain healthy. As John mentioned, first quarter was a record for contract awards, coming in at $4 billion in contributing to a book-to-bill of 2.3 times on a 12-month basis. This continued to drive backlog growth, now at a record $19.5 billion, up close to 50% year-over-year. We also had better visibility into fiscal 20 than we discussed on the fourth quarter 2019 earnings column. At the midpoint of the guidance, we now expect 94% of our revenue will come from existing contracts, 4% from re-compete, and 2% from new business. Our pipeline metrics remain strong with submitted bid pending award at $7.5 billion, with over 80% of that for new business at CACI. And we expect to submit another $13.6 billion worth of bids during the remainder of the December and March quarter, with over 70% of that for new businesses to see ACI. Let me note that these pipeline metrics now exclude estimated values for multiple award IDIQ contracts. This is consistent with our practice of booking zero value for MAIQs upon contract award and will be our practice going forward. With that, I'll turn the call back over to John.

Thank you, Tom. Let's go to slide 13. In closing, I'm very pleased with our first quarter performance and start to the fiscal year. The CACI team continues to successfully execute on every element of our strategy. We are delivering increasing organic growth by winning significant new business. We are delivering healthy profitability by driving operational excellence. And we are positioning this company for continued growth by deploying capital for strategic acquisitions that are accretive and enhance our capabilities. Our performance gives me great confidence in our ability to deliver on our commitments in fiscal year 20 and beyond. None of this happens without the talent, innovation, and commitment of our employees. I am incredibly proud of the exquisite expertise and technology we deliver to our enterprise and mission customers, and I thank all of you for that. With that, Allison, let's open the call up for questions.

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. As a courtesy, we please ask that you limit yourself to one question and a single follow-up. If you have further questions, you may re-enter the question queue. We will pause momentarily to assemble our roster. Our first question today will come from Gavin Parsons of Goldman Sachs. Please go ahead.

Hey, good morning, everyone.

Good morning, Gavin.

Guys, bookings have been really strong, so what do you need to do to make sure that converts into faster revenue growth? I mean, do you need to make sure that you can hire, expand footprint, or is that more on the customer to exercise and fund those ceilings?

Yeah, Gavin, thanks. Yes, it's very true that we're coming off another quarter. Actually, it's our fifth quarter of consistently higher award levels. You know, there's a few items here. One is, and probably most importantly, is for us to manage the ramp-up periods of both the expertise and the technology jobs that we have been winning. You know, whereas we're extremely pleased with the record contract awards, the ramp-up times do vary by different programs. I thought I'd take just a moment to walk through that, because like all of us, we've had tremendous awards and are really trying to be more predictive of when that revenue shows up. On the expertise side, most times, if those are takeaway programs, we'll pick up the incumbent employees, and that does support a quicker wrap-up period, but then transition timelines vary, somewhere in the one to three month range. If we look at our technology programs, we need time for our facility build-outs, lab and other material purchases, and really building out program infrastructure. So those ramp-up times can be anywhere between three and six months. So once we've received the award, we're very focused on how quickly can we ramp up. Hiring, clearly one element of it. But, you know, we are traditionally looking at all the job requisitions For jobs that we have submitted, all of our job requisitions are submitted when we submit our bid. So our fine recruiting team is out there looking for candidates prior to award. So it's really a combination of what type of business we've just won, managing the ramp-up period, and then making certain we have the right talent.

Okay, that's great. And then just on the higher R&D spend, IR&D spend, I think in the past you've mentioned that customers are willing to pay more for technologically differentiated IR&D. So can you talk about whether or not you see that as having a higher IRR than it has in the past? And if you could talk about the customer attitude towards retaining IP, that'd be great.

Yeah. So, yes, we are clearly spending more in IR&D and bid and bid proposal money. And a new element with the acquisition – I shouldn't say new, but a stronger element – of our investment strategy is independent R&D spending. And I'm going to sort of talk about this in some of the different quadrants that we support from our investor day. We're going to continue to invest in our enterprise tech, areas such as cloud migration, agile software development, visualization tools that are really second to none. And I say that only because that's what our customer comments on. It's clear that Diette and her team have really moved more intelligence applications to the C2S AWS cloud than the next five companies combined. So we're going to continue to invest in anything agile as well as in our distinctive visualization tools. We continue to invest in signals intel, electronic warfare, communications, cyber, things that you've heard me talk about in the past. Now, specifically on the independent R&D and intellectual property, those are really driven by LGS and Mastodon. Their business models really, as you mentioned, rely on independent R&D where we're designing and creating technology-based intellectual property. We've had a great track record, frankly, for those technologies and those investments that are focused on intellectual property. We like to do those ahead of customer need. We actually do that by being well-informed by our customers and us keeping a very good eye on where this marketplace is headed. Truly, we've had great success in turning the intellectual property into additional awards. One of those areas are multi-use devices where a customer can download software and that can do the mission that that customer needs. So all in all, really focused investments, customers very supportive of this model, and in some of our preliminary meetings have been asking for us to continue to invest more there because they can see future needs that will take great use of our intellectual property.

And, Gavin, let me add a couple things, if I could. LGS in particular has done a masterful job in the past of ensuring that they own the intellectual property. They have exclusive rights to a variety of technologies, a number of patents, and so that becomes an asset of CCI, which is very positive. And you mentioned the internal rates of return in the IR&D. a bit of it kind of in the science, trying to forecast the profitability of these types of investments, but there is very robust processes, kind of business cases before the company commits money to IR&D, trying to kind of rack and stack and prioritize different opportunities, all with the goal of what is the sales and revenue opportunities for these particular projects, not science projects, but very much tied to very, well-defined opportunities.

And our next question today will come from John Raviv of Citi. Please go ahead.

Hey, thanks, everyone, and good morning. On the CapEx, can you guys give us a little more on where it's being spent? You know, is it fair to say that FY20 is tracking to your highest capital intensity as a percentage of sales? in history. So what's a long-term capex in the percent of sales? And historically below 1%. We've talked about 1% maybe going forward. This year it's 1.3%. Starts a long-winded question, not to nitpick over 30 basis points here and there, but could we expect it to actually go higher as you win more and as this sort of, you know, your movement within that framework shifts around a bit?

Yeah, John, thanks. You know, questions like... you know, CapEx spending. It's actually a nice high class of issue for us to talk about. You know, first off, we did factor into our guidance a level of CapEx. But, you know, we often have startup costs of some form with our new contracts. This is something that we routinely manage. We actually look at each and every program, and we perform a bottoms-up basis on But then with some of our wins, since we win those jobs, our customers make changes to things like work locations, the amount of space, and possibly some of the facility plans we had based around those wins. When we see another award being awarded closely to that, we may make a different facility buying decision that allows us to buy one facility so we can house multiple programs in it. I'd also tell you that as the mix of expertise and technology programs change, The level of investment in things like test facilities and labs and those types will also drive additional CapEx as well. I'll let Tom talk a little bit more about the financial side of it.

Yeah, so in terms of where we spend the capital, kind of number one is facilities, kind of John mentioned. Second, internal IT, the infrastructure to support our 22,000 employees. And then probably the third element is kind of laboratories, testing equipment, you know, to support some of the IR&D efforts. It's somewhat analogous to working capital. Growing companies need more working capital to sustain that growth. And as companies shrink, they can free up working capital, you know, very similar to, you know, capital spending. You know, as companies grow, they'll need more, you know, CapEx to support that growth. In the extremely unlikely scenario that we never grew anymore beyond this year, we would need very little capital spending. So it's somewhat of a leading indicator in our business. And I will also underscore that. The expense associated with the capital spending, which is kind of, you know, proposed into depreciation, et cetera, are allowable expenses, and they're recaptured in our kind of rate structure. So, you know, that's part of, you know, our kind of bid process to have, you know, CACI-owned facilities where employees will do work on behalf of the government.

Okay, thank you. And then just as a follow-up on You know, margin down a bit here year over year. You're talking about flat net income in the second quarter. Can you give us a sense of the cadence to get to that 10.3% margin for the year versus 9.3% this quarter? We know it's sort of back-end loaded, but just give us a sense of the moving pieces there. Thank you.

Yeah, so for the first quarter on a year-over-year basis, we had some goodness in the last first quarter, so that made it tough comparable. But in terms of absolute value, LGF contributed to the positive margin in the quarter. The $20 million of pass-throughs were kind of negative to kind of margin performance. And I did mention a large contract transitioning from going to time in material at very attractive rates to cost plus. That transition kind of dovetailed the first and second quarter, so that was a little bit negative headwind associated with that. Based on our analysis, once we do those adjustments, Core CACI kind of margins were, you know, flat to slowly up, you know, in the, you know, first quarter. And we expect the base business to continue to perform. And as we add LGS, you know, in Macedon into the mix, we will, you know, kind of throughout the year, you know, in particular the third and fourth quarter, you know, see some healthy kind of margins to support that 10.3% guidance that we provided.

Yeah, I might also add, John, that if I look at our first quarter, I believe it sets us up very well for having a fine year. We provide yearly guidance, and I would tell you that our progress thus far is in line with that guidance. It's sort of playing out as we expected. We've got two other items here when we look at these year-over-year, quarter-to-quarter measures. One is that the mix of our business continues to change. As we get more into the mission tech side of our business, as I mentioned, those ramp-up times are very different than our traditional expertise programs. So overall, I'm very pleased with where we're at and we're really looking forward to a strong second half, which is very much in line with the guidance that we provided.

Our next question today will come from Matt Sharp of Morgan Stanley. Please go ahead.

Morning, gentlemen. Morning, Matt. Just wanted to touch on LGS and Mastodon performance here for a moment. Obviously, given bad times, choppy nature of deliveries there, revs and profitability can jump around somewhat, and I think we saw that. last quarter, so maybe if you could provide some color on how those acquisitions have tracked through 1Q and whether or not they're on plan to date would be helpful.

Yeah, Matt, thanks. I mean, as Tom mentioned during his prepared remarks, financially both are performing just as expected. You did mention there's going to be choppiness in some of their product deliveries, but, you know, thus far going as is planned. You know, I'd also share a little bit of color on just how that integration is going. You know, since March, the CACI team, LGS, and Macedon teams really have been collaborating to come up with the best solutions for our customers' SIGINT, CyberEW, and communications need. I'm very happy to report that those three groups have had very material customer meetings. and verbal and financial support to procure software-defined solutions. So the reason why we bought those two companies and integrated them with what we're doing in the communications area was to make sure that we had products slightly ahead of need. So the collaboration is going very, very well. In the limited time, maybe March was not that far back. And, I mean, overall, you know, when we look at the significant margin expansion, I think it was about 100 BIPs that we were expecting from both companies, we are nicely on track.

Got it. Thanks. And then I also wanted to touch on – international opportunities here. Obviously, back in the summer, I think you guys acquired Mood Enterprises and now Deep Three. It seems as though at least the UK is a growing interest to the company. How are you thinking about international business opportunity and what you might do going forward to build it out if it is an interest?

Yeah, Matt, thanks. So upon taking this role, one of my focus areas was to look at our UK footprint and, you know, take their attractive margins, their customer relationships, and both expertise and technology capabilities, and how do we expand that? And as you mentioned, over the last year or so, as recently as yesterday, we did Mood, we did Purple Secure, and now Deep3, all mission expertise companies that provide technical and domain knowledge To us, the world's a very dangerous place. U.S. continues to work with its ITAR partners out there, many of whom get support from across our company, both in the enterprise technology area and especially in the mission tech area. So in the future, it's safe to say that we'll use our U.K. business as a beachhead of sorts from where we can deliver and support mission technology to those countries. that are buying and are looking to buy our products, as well as establish ourselves to facilitate direct sales to the UK government. Today, what we sell goes to other primes. The fact that we have a large, a material well-established 30-plus year business there with great customer relationships, knows how to do business in the UK, really sets, especially Mastodon up very, very well to be delivering their SIGINT and their EW products directly into that marketplace.

Our next question will come from Matt Akers of Barclays. Please go ahead.

Hey, good morning, everybody. Good morning. I want to ask, so the deal that you just announced, could you talk a little bit about the process how you reached those deals. It looks like the valuation was pretty reasonable. Were there any other kind of bidders? And how do you sort of think about your ability to continue to find assets at reasonable prices even when some of the other deals we've seen in the space have kind of gotten more expensive over time?

Thanks, Matt. As part of our market-based strategy, we look at where we have strengths and where we have white space in either a technology or a customer or a geographic or other kind of space. And the operations organization business development team keep a running list of where that white space exists and what type of acquisition targets would fill in those particular white spaces. For two of the domestic acquisitions, they were sole sourced. We knew the company. We've had conversations with one company for over two years kind of in dialogue about potential opportunities for us to acquire them. The other one was more recent, but it was a six- to 12-month process to have those kind of discussions. And, you know, we – convinced them, I think rightly so, that we would be a very good home for their companies. From a cultural fit, treating their employees appropriately, a very consistent culture, kind of mission, values associated with those. And we were able to negotiate a price which was fair from their perspective and fair from our perspective. Deep 3 acquisition was a process, a competitive process brought to market in the UK. And we did appropriate due diligence trying to understand the capabilities of it. And through this process, we were the successful bidder. Yeah, we were happy with the financial of the acquisitions. good growth in margin characteristics, and we purchase them at what we consider an attractive price. That's probably enough said for that.

Great, thanks. And then maybe I missed it, but what are you saying for interest expense in your guidance now?

We did not kind of change it, but the acquisition is $100 million worth of incremental capital at 3.5% on an annualized basis will deliver or produce $3.5 million of additional interest expense. For a full year, this is a part year or so with a couple million dollars of interest expense. That being said, these kind of rates appear to continue to come down. And so that should offset – the lower rate should offset some of that incremental debt.

Our next question today will come from Sheila Kiyaglu of Jefferies. Please go ahead. Hi. Good morning, everyone.

Thanks so much for the time. I was wondering, can we maybe following up on John's question regarding the profitability bridge, is there any way, Tom, I know you gave a ton of color, you know, the pass-through business is maybe 20 bips of an impact in Q1. How do we think about the recompete? And then year over year, can we just, is there any way you could bridge the moving pieces, the headwinds, and maybe the benefits from the change in, you know, focus to more mission technology and how that benefits mix?

So, Sheila, I'll start my remarks with we provide full-year guidance, and we run our business on a kind of 12-month basis. Although good portions of our business are relatively steady and there's not a lot of change from period to period, there are aspects of it which would create some fluctuations. I highlighted a few product sales last year, material pass-throughs kind of this year and the like. In terms of the overall bridge, when we provided our initial guidance, we spoke about the contributions of the acquisitions, new business that needs to be won this year, new business which we won last year which was being executed in 2020, as well as fall off in the business because of natural program kind of life cycles. And that provided that kind of revenue bridge. Generally, that's unchanged, but for the three acquisitions, which we just spoke about, in terms of profitability, two things are occurring. One is we're adding LGF and Mastodon, and we spoke about the margin characteristics and revenue characteristics of those acquisitions. And core CACI, you know, the bigger piece of the business, you know, should be experiencing, you know, impact growth margins consistent with the goals we previously articulated that tend to, you know, 30 basis points. And so that's the full year. Within every quarter, we're going to see those, you know, fluctuations. I did mention one contract which was generating high levels of profitability at T&M rates to support a key government customer. We were successful for the recompete, a good piece of work along established relationships. The customer decided to structure that as a cost plus, and so that had some headwinds a little bit in the first quarter and a little bit in the second quarter, I wanted to highlight that for you because it did add or subtract a few basis points in EBITDA margin. That was consistent with the guidance. We knew we were occurring, that was going to occur. And as we get into the back half of the year, we will have the appropriate offsets in terms of organic growth and improvement in other aspects of our kind of business.

Okay, thank you for the color. And just as a follow-up maybe on the contracts that you expect to win, I think you said 94%, which seems a relative high. How do you think about the 2% that's only from new awards? How big is the pipeline? What kind of opportunities are you guys looking at? Thank you.

Yes, Sheila, I think we're at 94%. Currently both 4% rate compete and 2% win. So, yes, coming off a first quarter that was very, very strong, we're confident on closing both the 4% and the 2% gap. For the mix, a relatively high percentage of new business, That has its own challenges as very little of that work is new, so those are all takeaways. So I would say that the mix is what we would like to see coming out of the first quarter. You know, should we have – well, I guess I'll just leave it at, you know, we'll see how the awards go in the second quarter and also look at what that ramp-up pattern is to determine what our guidance looks like going forward.

Our next question will come from Kai Von Remor of Cohen. Please go ahead.

Yes, thanks so much. I've been joining a little bit late, so excuse me if this has been asked. But everyone in the space has complained about, you know, some pushouts and some protests. And pretty much everyone who has reported has reported terrifically strong September quarter bookings, you guys especially. What does all of this mean for the fourth quarter? I mean, are we looking at, because of the stretch outs, are we looking at particularly strong fourth quarter or, you know, or not so strong? Give us some color on that if you could, please.

Yeah, sure, Kai. You know, I have to tell you, we've looked at all those types of measures at least over the last five to six quarters. And, you know, we, CACI, we haven't seen any different trend We attribute our strong book-to-bill numbers around making sure that we're staying close to our customers, that we make sure we actually understand where they're going to go. About five to ten years back, we got involved in electromagnetic spectrum and where we believe the government was going to spend their funds. And lo and behold, we find ourselves with very well-funded programs that and programs out there that we as a larger company can go out there and bid. You know, we consistently look for, you know, end-of-the-year flushes. We did not see that. We've been hearing about multiple protests and how those have changed. Frankly, only one very immaterial and less than $30 million or $4 billion was actually protested. So, I mean, what it pretends for us is, We're in the right places. We're actually bidding less and winning more. We're in a $220 or so billion addressable market. So we would attribute our awards successes around being very judicious and very focused on what we're out there bidding rather than trends or the federal government having a well-versed contract force or having funding in place. We just frankly have not seen those issues.

And last one, given your super bookings, has the backlog, the length of the backlog, the average duration changed at all?

Yeah, Kai, thanks. Absolutely. So, you know, as we've been focused on, you know, winning larger what I think we've always called stickier programs, those things that are closer to the flagpole where we can differentiate based on technology and our intellectual property and our capabilities that allows us to pursue a different class of programs, let's say. And many of those are larger and they're also longer term because many of them are technology programs versus programs we would classify as expertise ones. So as we've won some of these $800, $900 million jobs, those are not $110 million three-year programs. Those are multi-year programs where we're delivering a solution to our end-item customer. And that's what we've been focused on. It's taken us a while to sort of take the next step in CACI's long-term history, but we find ourselves well-positioned at winning those. So if you look at our backlog, yes, it's going to be a longer-term one. And what we like about what we're starting to see, Kai, is that compounding growth of winning more of these multi-year technology programs. When we get beyond that three- to six-month ramp-up, that really allows us to focus on greater organic growth as we go forward.

Our next question will come from Toby Sommer of SunTrust. Please go ahead.

Thanks. Could you talk about the ongoing opportunity for you to push into kind of higher margin recurring services? And I ask in the context of the announcement you had recently with BlackBerry, which I found quite interesting. Thank you.

Yeah, sure. So, you know, still within that mission tech area, we have been – looking at not only internal investments and acquisitions, but that third leg of how we fill a gap is around partnerships. So with some strategic hires and understanding what other parts of the federal government needed, one of those was secure communications. Some of those day-to-day, everyday voice and text communications going on across the federal government, A lot of that we've believed for quite a long time, and our government customers are coming to that, which is how do we do a better job of not only securing the emails that are sent around the federal government, but how do we secure text and voice? We looked at that problem about two years back, again, ahead of need. and found a great partner in BlackBerry. John Chen and his team there have been outstanding partners. We've actually come up with a win-win solution for not only both of us but to our federal government customer. What's unique is we can offer it as a service, either in a customer's infrastructure or cloud or within ours. And it starts to get us into those perpetual revenue streams, right, where we're delivering a software solution that sits on an already issued government smartphone and allows us to drive revenue and earnings growth on a monthly basis. We've got a couple of pilots going on now. We like that type of model, and I would expect you would see us doing more of that in the future. Thank you very much.

Bye.

And our next question today will come from Seth Seifman of J.P. Morgan. Please go ahead.

Thanks very much, and good morning. Glad to join the call.

Thanks, Seth.

John, I wonder if I could maybe ask Kai's question, second question, a little bit different way. You know, back when the backlog, total backlog was around $11 billion, you know, that seemed to support a business with, you know, almost four and a half, billion dollars to sales. How should we think about the sales level that a business with $20 billion of backlog can support?

Yeah, I guess first is you should see us to continue to grow. The easy answer. We watch the backlog number. We look at the funded backlog number. We're also keeping an absolute eagle's eye on making sure that we continue to be disciplined in what we chase. As Tom mentioned earlier, we've had a great first quarter. We've gotten a lot of questions on second quarter and all. What we're really focused on is where does our year end? We are confident. If you look at our book of business today, it is of longer duration. What that says about revenue growth and therefore earnings growth over time is we should consistently want to see that going up and to the right. We have been talking about growing this business, not only top line, because there's a lot of organic growth chatter out there. That's just not for us. We actually believe that we build better shareholder value when we're being very discriminant on what we're out there chasing and the things that we're out there chasing and shaping. need to not only provide top-line growth, but also provide additional capabilities that grow our addressable market. At the end of the day, grow better, show us better margins. What's exciting about using your numbers, if you compare where we were maybe two years ago to where we are now, our backlog is greater. We are a larger company. We are consuming backlog at a much more rapid, rapid pace. And, you know, all I can tell you is that we are extremely focused on bottom line as much as we are top, as well as cash cash flow, because that additional cash flow funds additional acquisitions that not only fills gaps, but every time we fill a gap out there, it grows our addressable market and allows us to differentiate it even more.

Great. Thanks. And maybe as a follow-up, how close are you to kind of – a disclosure level for product sales and filing?

Yeah. So, you know, we've been spending a bunch of time talking about that. And, you know, when we talked about it at our industry day, we did provide this new framework around enterprise and mission expertise and technology. You know, to be very, very transparent, we just rolled this framework out. We're still making sure that the definitions that we have for these areas, because the one thing that we strive to do with what we think is a very simple way to talk about our business is make certain that the receivers of our updated messaging believe that it's simple. Now, having said all of that, at Investor Day, We did provide the current mix of business, and we also provided information, if I remember, on bids submitted and to be submitted. I believe we did that in each of the four areas. What we've done since then, if you've noticed, is in our press releases, we've continued to share that level of information. So every award that we have out there, we put dollar value. We also talk about whether that's mission or enterprise expertise and whether it's mission or enterprise tech. Okay. You know, what I'll tell you is that Tom and I and the IR team will continue to assess providing more information. Maybe that's by those four quadrants. Maybe it's by customer type, be it enterprise and mission. So a long way to say we're still in the early stages. We know you all would like more and more information. We're trying to be as transparent as we believe we can now. I think I also mentioned there to instrument our internal systems. is another step along this process. But very much appreciate your question there.

Our next question will come from Joseph DiNardi of FIFO. Please go ahead.

Yeah, good morning. Tom, so the book to bill a little over two times trillion, 12 months. Given what you said about the pipeline and expectations for bid activity, if you win what you think you'll win, what does that imply for for kind of a book to bill for FY20. I guess this is your opportunity to say that book to bill should moderate if that's the case. If that's not the case, that's good too. Just interested in your thoughts. Thanks.

Oh, man. What an interesting question. So we do have a good amount of, you know, kind of bids outstanding, kind of bids to be submitted. You know, last year, kind of, you know, 2019, $10.3 billion of awards. Our capture rate, the percentage of revenue that we won was 70%. So just a... you know, a very high level for us, you know, certainly higher than any number that we had before. And is that repeatable? You know, I'm not sure. So if we repeat those very high, you know, overall burden rates, yeah, we'll continue with this. But it's hard for me to speculate as to what the total amount of awards will be for the full year. So I'm going to refrain from trying to go down that particular path.

Okay. Joe, I'll also add in there, you know, you'll never hear me talk about awards without saying the word lumpy, right? You know, every time somebody goes through some of these streaks, you know, all it would take is for us to do $3.9 billion next quarter. Unfortunately, Tom and I will spend most of the quarter asking what happened. It's a mix. The way I see it is that we had a great FY19. We had the FY20 first quarter that we expected, plus or minus a couple points. Timing is going to play a factor as well, not so much based on budget and you know, these end-of-the-year flushes that I continually hear of. It's really more about when our customers are ready to release. So, you know, we're going to continue to watch the mix and all. So I would tell you we will expect respectable bookings throughout this year.

Fair enough. And then it does sound like you guys are giving some thought in terms of how to help the market understand how to think about kind of the bookings and the backlog as the duration changes a little bit. So can you guys just disclose or help tell us kind of what the maybe the weighted average duration of your bookings in the quarter was or kind of what the duration of your backlog is at this point? It seems like that would be something that's kind of fairly straightforward to calculate. Thank you.

Yes, Joe. John, you previously answered the question that we believe the duration is increasing because it is. Some of the larger words are five, seven, eight years, which is driving higher duration. Let us kind of reflect on providing that specific level of fidelity in the duration, and that may be a helpful metric, so kind of duly noted. Thank you.

And our next question today will come from Robert Spingarn of Credit Suisse. Please go ahead.

Good morning. Good morning, Rob. Hi, guys. So I wanted to go back to where Seth was and just ask you about integrating these technology-focused or more product-focused acquisitions, how that differs from integration of an expertise-type domain or an expertise acquisition. And, you know, just from a strategic perspective, how does it differ? And then perhaps from a cost or integration expense perspective.

Yeah, Rob, thanks. So if we focus on the mission technology area, clearly that would describe, long before we had these terms, where we would put 6.3, where we would put parts of L3-NSS, where we'd put Macedon, and LGS and two of the smaller ones that we announced today. You know, to get to the integration, I actually look at it in a few different ways. You know, one is how do we all write on the same systems? And I would tell you whether it's an expertise company or a mission acquisition, we all benefit from being on the same systems. We have had some acquisitions where the acquired party comes in and, You know, their finances are on one system and their human capital information is on another. And, frankly, that's a distraction when we go forward together. So first and foremost, we look at systems. Beyond that, the next area is how do we bring new employees in? And there's really no difference between expertise and the technology in it, bringing technology companies in. The third area is what type of company are they? And I have to tell you that as we do more mission technology companies, we like to bring those companies – we like to connect them but not fully integrate them. You know, what makes a mission technology company great is the kind of creative culture and how those people within that acquired asset work together. So although we may put them in the same umbrella – We're really looking for those companies to come in and keep their unique and innovative kind of ways. LGS, perfect example. So Kevin Kelly was the CEO of that company. Kevin came in. The majority of LGS today looks just like what LGS looked like. The difference is, is along the way, Kevin Kelly picked up another $1.2 billion of our money. which are things that sort of look more like mission tech. So, you know, we're very, very careful. And, frankly, we've done 79 acquisitions now, if I'm right. We get to say that we're very experienced at it. And the one thing we pride ourselves on is driving and increasing their value that they had the day that they came in. and not, I hate to use the word destroy because that's too draconian, but not take away from the value that they bring. So the integration, two of those three areas look exactly alike. But as we look at larger perhaps technology companies, you know, we're going to make some very good decisions with the incoming management team, which is what we always do as to how best to position them inside of CACI.

Okay, and then the only other thing I wanted to ask, just with the Big Jedi Award that just happened, is there any opportunity for CACI to play as a contractor, or do you have any existing partnerships, for example, with Microsoft that might benefit you there?

Yeah, thanks. So, yeah, we've had a long-standing relationship with AWS. We have an almost equally long relationship with the Microsoft folks, Whether we're talking about the AWS cloud or we're talking about Azure, those are great commodity cloud-based infrastructure slash frameworks that both DOD and the intelligence community and federal civilian agencies need out there. We have more folks trained on the AWS cloud than most. One of my answers earlier, Just to put a sort of exclamation point on it, we've been involved in the AWS cloud for quite a long time. The intelligence community's cloud is called C2S. And by our customer's measure, not by us, CACI has moved more applications to the cloud than the next five government providers combined. So, you know, we enjoy a great past performance record. Our customers know that as well. We have people trained in both Azure, which will now be the DoD Cloud standard, as well as AWS. We'll continue to work well with them. Both outstanding companies. Both provide outstanding products. And we enjoy that integrator's position, which means that we will continue to be the market leader in moving government applications to the cloud.

Again, if you would like to ask a question... Please press star then one. Our next question is a follow-up from John Raviv of Citi. Please go ahead.

Hey, thanks guys for the follow-up. Just quickly here back on the CapEx. So just is there, I mean, you know, CACI has grown before and I think CapEx is lower. So just thinking here, you know, is there a chance for the 1.3% to stick around for longer?

Yeah, I think so. The other factor, you know, kind of driving the CapEx is the some higher capital X with the kind of mission technology focus. You know, LGS in particular came with a materially higher cap excess percentage of revenue than legacy CACI. you know, very expensive kind of test equipment laboratories, you know, to allow them to stay ahead of customer demand in terms of some of their, you know, capabilities. A lot of our work is classified when we get facilities. We have space associated with it. So it's a little too early to make longer-term plans. you know, forecasts of what CapEx will be as a percentage of revenue for 2021 and beyond. But, you know, suffice it to say, to reiterate, you know, as we grow, we will require more CapEx, which is, in our mind, a very good problem to have.

Sure, sure. Thank you.

You bet.

Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to John Mangucci for any closing remarks.

Well, thanks, Allison, and thank you for your help on today's call. We would like to thank everybody who dialed in or listened to the webcast for their participation. We know that many of you will have follow-up questions. Tom Utrecht, Dan Leckberg, and George Price are available after today's call. Now, to those Washington Nationals fans out there, congratulations on winning your first World Series championship. For those of you who are local to the Washington area, I trust that you enjoyed our commercials. They really celebrated the stay in the fight theme, which is what we as a company do each and every day to protect this great nation of ours. So with that, this concludes our call. Thank you and have a very good day.

Ladies and gentlemen, the conference is now concluded, and we thank you for attending today's presentation. You may now disconnect your lines.