CACI International Inc

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the CACI International Quarter 2 Fiscal Year 20 Earnings Conference Call. Today's call is being recorded. At this time, all lines are in listen-only mode. Later, we will announce the opportunity for questions and instructions will be given at that time. If you should need assistance during this call, please press star, then zero, and someone will help you. At this time, I would like to turn the conference over to Dan Leckberg. Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thank you, Chuck. 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 is John Mangucci, 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 second quarter results. With me this morning are Tom Utrecht, our Chief Financial Officer, and Greg Bradford, President of CACI Limited, who's joining us from the UK. Let's move to slide four, please. Last night, we released our second quarter results for fiscal 2020, and I'm very pleased with our performance. CACI, again, delivered strong financial results across the board, significant revenue and profitability growth, accelerating organic growth, and robust cash flow. We also won $2.7 billion of contract awards with approximately 60% of that value representing new business for CACI. These results round out a great first half to our fiscal 2020. At the beginning of the fiscal year, we guided to accelerating organic revenue growth and margin expansion. Today, we are raising revenue and net income guidance to reflect further organic acceleration with ongoing margin expansion. Slide five, please. We continue to see healthy demand trends across our adjustable market, supporting both revenue growth and margin expansion. Let me illustrate this demand with awards from this quarter. First, CECI won a five-year, $1.1 billion enterprise and mission technology contract to modernize a customer's business and mission applications portfolio, including extensive cloud migration. This is one of the government's largest agile software development programs, which we won by leveraging our unique past performance and the award-winning innovative capabilities of our Agile Solutions Factory. CACI now delivers on two of the federal government's largest Agile development programs. On the mission technology side, CACI won a $475 million sole source contract with an intelligence community customer to enable their critical national security missions. We won this opportunity by offering new, unique intelligence and communications technologies, leveraging the R&D field innovation of LGS. This contract represents new and reconfigured work for CACI. Slide six, please. These awards are just a few examples of the high value contracts we are consistently adding to our backlog. These are larger, longer duration and enduring drivers of organic growth and margin expansion. In fact, today the contracts we're winning have a weighted average contract duration that is 1.5 years longer than those we won over the past three years. This results in a dependable revenue base and allows us to focus items such as BNP investment on additional growth rather than simply maintaining our book of business via re-competes. Many of these contracts are also more complex technology development efforts that initially ramp slowly but provide the high-quality, long-term growth we are focused on delivering. What we are now seeing is something we have discussed the past several quarters. As we successfully deliver on these contracts and enter higher volume phases, we are driving accelerating organic growth. In fact, we now expect fiscal 2020 organic growth of at least 7%, up materially from just six months ago when we guided to about 5.5%. Slide seven, please. Turning to the market environment, we continue to be very encouraged by what we see. The two-year budget agreement signed back in August was followed by the passage of government fiscal 20 appropriations bills in late December, funding the government at levels about 4% higher than government fiscal 19. More important to us than the absolute budget levels are the multi-year investment plans of our customers. When we map CCI's capabilities against these priorities, we see tremendous opportunity across our $220 billion decibel market. Within our enterprise business, customers are modernizing IT infrastructure and business applications. In our mission business, customers are investing heavily in signals intelligence, electronic warfare, cyber, communications, and space. Our alignment to these critical areas enable our ability to take market share and gives us confidence in our future growth. Slide eight, please. To ensure CACI remains ready to address our customers' emerging needs, we continue to invest for future growth. We're developing differentiated technologies ahead of customer demand through our research and development program. When we win on differentiation, we deliver more value to our customers and our shareholders. Our business development and operations organizations are developing solutions in pursuit of the right growth opportunities, testing technologies with our customers, We're winning opportunities that will provide long-term sustainable growth. And we're consistently investing in our leadership and our people. We're adding strategic leaders, like retired General Mike Nagata, who will establish a strategic advisory group of industry and customer experts to ensure CACI remains ahead of market trends. And on the broader people side, we continue to offer highly competitive benefits, including training, certifications, and work-life balance, to name just a few. This continues to attract and retain the industry's best talent. In closing, I'm very pleased with our second quarter performance. We remain committed to our successful strategy that has served us so well. Win new business, deliver operational excellence, and deploy capital to support future growth. Relentless focus across the organization on this strategy drives growth and margin expansion, which generates increasing levels of cash flow. We then deploy that cash to add strategic capabilities in customers' critical investment areas. This combination of organic and acquired growth has successfully compounded cash generation and shareholder value over the long term. We remain very confident looking forward. With that, I'll turn the call over to Tom.

Thank you, Don, and good morning, everyone. Please turn to slide number nine. Our second quarter revenue was $1.4 billion, 18% greater than last year, with 8.1% organic growth. Organic growth accelerated from the first quarter as our new business awards ramped up and existing programs continued to deliver. Net income for the quarter was $79.2 million, up 15.5% from a year ago. This is higher than the expectations we had last quarter as we were able to drive higher operating profit in a lower effective tax rate. Slide 10, please. We continue to generate strong cash flow with $134 million of operating cash flow in the second quarter. Day sales outstanding was 51 days, down from 73 days last year. One major driver of the reduction is lower accounts receivable as a result of the AR purchase facility, or MARFA, which we put in place in January 2019. In addition, we have continued to drive efficiencies in our billing and collection processes. We ended the second quarter with net debt to trailing 12-month adjusted EBITDA at 3.0 times. This provides ample debt capacity to undertake additional acquisitions to add high-value strategic capabilities. Slide 11, please. We are raising our fiscal year 2020 guidance to reflect strong operating performance as well as expectations for a lower tax rate. We now expect organic growth to be at least 7% in fiscal year 20, up from 5.5% when we provided FY20 initial guidance. driven by our strong contract awards and our program performance. As a reminder, for organic growth purposes, Mastodon anniversaries at the end of January and LGS at the end of February. Our guidance assumes an effective tax rate of approximately 22%, down from our original expectations of 23%. Drivers of this include increased benefits associated with investing in equity grants, given strong stock price performance, as well as higher tax credits. We continue to expect fiscal year 20 adjusted EBITDA margin to be around 10.3%. And we are increasing our operating cash flow guidance to be at least $430 million, excluding any impact of the MARPA facility. Slide 12, please. Our forward indicators remain healthy. As John mentioned, we again had strong contract awards in the second quarter, coming in at $2.7 billion, more than double the level we achieved last year. On a 12-month basis, this increased our book-to-bill to 2.4 times and drove record backlog of $20 billion, up 61% versus last year. Our pipeline metrics remain healthy and have still moved levels we reported last quarter. Submitted bids pending awards are $8 billion, with over 70% of that for new business to CACI. And we expect to submit another $13.4 billion worth of bids during the March and June quarters, with over 70% of that for new business to CACI. Finally, at the midpoint of our revised guidance, we now expect 97% of our revenue will come from existing contracts, 2% from re-competes and 1% from new business. With that, I'll turn the call back over to John.

Thank you, Tom, and let's go to slide 13. The strength of our performance through the first half of this fiscal year positions us to deliver continued growth, margin expansion, and shareholder value over the long term. None of this happens without the talent, innovation, and commitment of our employees. I'm incredibly proud of the expertise and technology we deliver and to our enterprise and mission customers, and I thank you all for what you do each and every day to make CACI a great company. Great companies rely on their culture to define the right way to conduct business and their people to embrace that culture as a success factor. Our culture of good character and innovation is foundational to our success. Fortune Magazine's recent listing of CACI as the world's most admired company And as a top 10 information technology services company worldwide, recognizes that our culture drives our success. With that, Chuck, let's open the call for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. And if you have further questions, you may re-enter the question queue. At this time, we'll pause momentarily to assemble our roster. And our first question will come from Gavin Parsons of Goldman Sachs. Please go ahead.

Hey, good morning, gentlemen.

Good morning, Gavin.

So this is a pretty high-class problem to have, but, I mean, you've won a ton. At what point do you say – you know, we've won enough in the backlog to drive, say, you know, mid to high single-digit growth for a few years now. We want to slow down on winning and just make sure we can execute on what we have or, you know, that they're not mutually exclusive.

Yeah, Gavin, thanks. Yeah, I guess clearly we don't plan on slowing down. You know, we actually started as many of you on the call know, with a very specific strategy several years back, and that was to focus on growing both top and bottom line. And we made quite a substantial commitment that we'll never sacrifice margin to get the kind of growth that you're now seeing today. And that's really foundational to us because it's the belief that growing profit and cash flow over time is the best way to generate shareholder value. And some of that was going to be organic, and some of that was going to be through acquisitions. We've been talking for quite some time now around when does the organic growth show up and how does it – at what point does it equal some of your peers and then at what time does it surpass it? You know, if we look at FY20, I'm really pleased and confident of the organic growth potential because we've consistently won larger and longer-term business in the areas where customers are going to spend real dollars. We've been able to maintain rates over the last three years. So we're not pushing cost of our investments onto our customers. We're just managing a very strong cost basis. When we do that, when we win larger, longer duration, we actually generate this, what we're calling a BMP efficiency, which means that if I'm winning longer duration, larger awards, then as I get a couple years out, I'm spending far less to maintain the book of business, and I'm plowing more money into continuing to win. So coming back to your, you know, when do we slow down and just focus on execution, our actually three-part strategy, the first two parts, win new business, which the team's done an outstanding job. The BD machine is working extremely well. And then second, deliver. And our – team has done an outstanding job on delivering, because as you all know, once we get the awards, we don't gain margin unless we're generating revenue. And so across the board, we're very happy and don't really see any end in sight.

That makes a lot of sense. Tom, on the free cash flow conversion, I think guidance implies about 110%. That's down a good amount from the last few years, and I appreciate you're going a lot faster, but... Can you just help walk the bridge over the next few years? What does free cash conversion look like? And can you improve that even if you continue to grow at a similar rate to this year? Thanks.

Yeah, thank you. One of the things I'll note in the last year or so is we've had higher capital spending than we had previously. And so that obviously impacts the numbers that you articulated. That capital spending is a direct result of the inflation. investments that we're making in the wins that we're having uh you fall in a couple buckets you know as we win work oftentimes our workers provide sdci locations uh oftentimes we need new facilities some of those have skip space which is expensive facilities uh some of the spaces we have have customized laboratories and uh relatively expensive test and assembly equipment uh you know internal capex internal so that's driving some of that conversion Other than that, it's kind of relatively straightforward walk down from net income to operating cash flow. We have a good number of non-cash items, depreciation, stock compensation expense, and general amortizations. So we expect the levels that you articulated to be somewhat consistent going forward with that level of cap-ass.

Thank you.

And our next question will come from Edward Casso of Wells Fargo. Please go ahead.

Good morning. Congratulations. Can you talk back in your history here and give us a sense on the upcoming election cycle, how that may impact award decisions both before and after, and whether it's a you know, maintain the current administration or change to the other party? And then maybe weave into that your commentary around extended duration and does that help you here over the hump? Thank you.

Yeah, thanks, Ed. So, look, we've been in business for 57 years in county, and I'd like to say we fared well under various administrations. They clearly have differing priorities. We can debate whether this year's field has even more divergent sets, but we won't do that here. Part of why we see growth coming and continuing, regardless whether there's an R or a D leading the nation, is we've got a well-balanced portfolio of business. And if we look at Our enterprise and our mission customers and the numerous capabilities that we have, I mean, we've got some pretty strong expertise and technology offerings. So if we talk this discussion around mission business and our enterprise business, on the mission side, I mean, we're well aligned to critical defense and national security areas. You've always heard us say the world's a very dangerous place. and the defense budgets have historically been a highly bipartisan part of the federal government budget, so we believe that we're well covered there. On the enterprise side, you know, every time we move social funding and different programs around, both the Fed civil and the defense side are always looking to modernize and updating their systems and making more technological advances infrastructure investments, and that really drives long-term cost savings. So we believe that our business is less susceptible than maybe some pure services business because, as you mentioned, to weave in the kind of work that we do, a much larger portion of our portfolio today, maybe going back five years, is more of technology in nature, and it's with high-end mission customers, and those are very immune customers. to Monday afternoon budget cuts. So at the end of the day, great power competition continues to be a focus. And some of the capabilities that we have to go fight those and also counterterrorism missions, at least in the EW era, has eroded. And our strategy has always been to position this company to where the government's going to spend their budget dollars less. And at the end of the day, The election is the election. It is Congress that actually votes on and allocates and spends the budgets which are out there. So we're looking forward to who gets reelected or who fills that role and believe that we're that kind of business that will continue to grow regardless.

Thanks. The other question is around you had sort of an uptick in cost-plus work here. Can you give us a sense what's in the pipeline? Is this sort of a short-term phenomena, or is there more cost-plus in your future, and what the implications, therefore, are on margins? Thank you.

Yeah, so that's one of those things that as a leadership team, we're always watching. But when you see minor movements in cost plus versus fixed price and time and material, when we did the LGSI acquisition, a large portion of their work is cost plus. So when we brought that acquisition in, that would have driven the percentage of cost plus work up. The rest of the minor movements there is really on mix. There's different awards that are out there winning. If we looked at the pipeline, At a macro level, Ed, the more technology work that we're winning, more of that as our products business begins to spin up will be for a fixed price. And the expertise work is sort of a split, sort of 50-50. So we like that mix. And, of course, contract type is only one dial or knob that we have to be driving margins. So we'll continue to watch that, but there should be nothing inferred that we're winning more cost plus worth, therefore margins are going to go the wrong direction.

Great, thank you.

Yeah, thanks, Ed.

Our next question will come from Seth Seifman of J.P. Morgan. Please go ahead.

Hey, good morning. This is actually Ben on for Seth.

Morning, Ben.

I was hoping you could add a little more color on the upside in organic growth. You know, is this something that is broad-based across the portfolio? Is this something stemming from, you know, either the mission or the enterprise or one of the four quadrants that you had laid out the investor day?

Yeah, thanks. You know, if we look at our organic growth, it truly is a function of a multi-year plan that now you're all starting to see the benefits of generating awards that are longer in duration and that are much larger in dollar value. I think we were at 2.8% when we came out of last year. We got it to 5.5%. We're at 7%. What you're starting to see is, based on the mix of business, which is the other part of your question, when the mix of business is more towards the technology side, those are longer-term programs that have a longer-term ramp-up. So you'll start to see that growth later, possibly three, six, nine months after award. And for the more expertise jobs that we win where we're delivering talent, those have a much quicker ramp up. Across the four quadrants, if I were to put it in that quadrant speak, expertise starts up quicker and holds a sustained level of revenue. And on the technology side, those programs are going to start up slower and then deliver their growth. The combination of that and the multi-year nature of book-to-bills programs far, far beyond one and a half and two. I think we're at 2.4 now on a trailing 12 months. The mix of that work really is driving future organic growth. And the more we continue to win, back to Gavin's question, we have no intention of sort of slowing this train down. At the end of the day, broad growth across both our enterprise and our mission businesses.

And I'll add one comment. There's Also growth potential, which we're seeing on existing work. You know, a large number of basic business and we have a strong kind of program management discipline whereby we do everything in our power to provide more value on existing programs, fill open positions quicker on labor-based types of activities, and look at scope on existing work. And so that's another source of organic growth going forward.

Got it. Thanks. And I guess, you know, maybe piggybacking a little bit on Gavin's question, but, you know, on the M&A front, you know, this is, you know, pretty, you know, the focus of your strategy here. You know, with organic growth being so strong this year, you know, and you're at three times leverage, like, you know, we've seen a number of deals in this space at pretty lofty multiples. Is there any, you know, can you comment on maybe, you know, your willingness to go out and pursue more M&A with elevated deals in the space, or would you be willing to, you know, build a little cash and get the leverage, you know, maybe down a little bit or, you know, closer to two times?

Yeah, thanks. So I'll start, and I'll let Tom talk some of the round of leverage levels. Look, M&A is always going to be a key priority for capital deployment, you know, just beyond organic growth. And the way we look at M&A and how it grows us is we're a strategy-based company. So strategy is a place where we come from. We consistently look at any gaps that we have or any new areas of white space where we have no capability in, but we believe that the government's going to spend materially over the next one, three, five, seven, nine years. So, you know, we did a couple acquisitions in the March timeframe. We just came off of doing three others. You know, still have dry powder. But where we come from on the M&A side, whether they're large transformational ones or smaller ones, the acquisition's got to provide long-term strategic value. It has to fill capability gaps or it has to come with customer relationships that we absolutely need for long-term growth, and then it needs to create shareholder value. You mentioned something around multiples. Yeah, they are somewhat elevated perhaps. You know, what we're looking at, and we look at an awful lot of books that come in here, but we also look to build relationships with companies that aren't looking to be sold today, but over time working with us, enjoy and get delighted in the fact that when they get integrated inside of CECI, the majority of them see additional growth and additional opportunities for their employees. We're watching some of these multiple numbers. Again, that's sort of a number that comes along after the deal is done. To our shareholders out there, we've been very prudent and very focused and disciplined buyers of other properties. And again, it has to drive fundamental long-term growth of this company.

Yeah, and I'll comment on both the leverage and the elevated multiples that you referenced. When we look at acquisitions, we base our decisions Once we establish it's strategic and it's the right company, on a present value analysis. And so the value of an enterprise is future cash flow is discounted back. We spend a lot of time trying to accurately forecast future cash flows. It's kind of no easy task. but companies which are expected to grow materially are going to command higher prices than companies which have anemic cash flow growth, just kind of mathematically. So to a certain extent, you get what you pay for in acquisitions. And oftentimes, we would be willing to pay higher multiples simply because the company does have materially higher growth potential, which we've identified. In terms of leverage, 3.0 times today, we're comfortable with that. In the absence of acquisitions, we will be levered. But there's no set target to deliver. Everything else being equal, given today's debt capital markets, we would prefer borrowing money at relatively inexpensive rates and investing in the business for long-term success via acquisitions. So it is not a constraint for us, and we're trying to kind of utilize leverage effectively to allow us to kind of grow shareholder value.

Got it. Thank you. Thanks.

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

Yeah, yeah. Good morning, everybody. John, I want to ask the M&A question a little bit differently, if I can. It was about two years ago that you guys put in a bid for CSRA that would have involved a lot of stock, and your stock has almost doubled since then. you've been able to find other transactions over that period that seem to be working for you in a smaller-ish transaction. I'm just wondering if that experience influences the way that you look at larger scale M&A, if it influences the way you think about using your stock. Do you want to keep doing smaller type transactions or are you agnostic as to size? Thank you.

Joe, thanks. I think we're We're very – we are focused on small niche ones. We're focused on acquisitions that have capabilities and customer relationships that can fill a single gap, and we're focused on some what we've been calling transformational ones that really the way I see the word transformational is just an asset which fills multiple gaps with one transaction. Okay. I'm probably not going to go down the SRA path, and we have our own views on that one. We did believe and we still believe that that acquisition would have helped both companies, and we believe that we would have recognized the value that we had talked about, but unfortunately we can't win them all. There are a lot of companies out there today There are folks out there paying very high multiples, as the last question mentioned. But at the end of the day, we're going to be a disciplined spender of our cash and make certain that we're getting the best value that we absolutely can. So it's not transformational versus small. It's really, does an asset out there have a capability that we can use? Now, at the end of the day, We've now become a company that's investing far more internally to generate our own intellectual property. So the way I look at acquisitions, we have a gap. I would much rather invest if we see that gap early enough and I can meet the timeline that our customer needs that kind of solution. I'd much rather spend our R&D funds on intellectual property. On those cases where we didn't see that coming, and we do find gaps, we'll go out there. So I'm sort of indifferent towards small versus large. When we don't have something, we don't have an edict to do a certain dollar value worth of acquisitions each year, so it really is strategically based. I will tell you that LGS has filled a lot of gaps on the intellectual property and some of the knowledge that they have. If we look at communications at 5G and the like, So I'm very, very open to all the kind of companies which are out there, and we'll continue to build upon a long history of doing successful M&As. Tom, anything you want to add?

I'll add just one follow-on comment. The ultimate kind of decision, should we buy a company or not, is will it drive long-term shareholder value? we'll see HCI stock perform better with the acquisition than without the acquisition, and that's how we measure kind of long-term initial value at the end of the day. And then, as consistent with my previous comments, focus on future operating cash flow is associated with the acquisition. And then once we establish a strategic fit, if it's economic, how do we ultimately consummate the transaction? And as acquisitions gets larger, we would have to rely not only on debt financing, but on using our equity capital as a form of consideration. And we're very, you know, cognizant of the higher cost of capital for equity. And, you know, that goes into our, you know, calculus determining what the appropriate, you know, purchase consideration may be.

Yes, thank you for that perspective. Do the capabilities or the gaps that you had hoped CSRA would fill, do those still exist? Do you still want to fill those? And, Tom, if you could just remind us what leverage you're comfortable getting to kind of at the high end with a transaction. Thank you.

Well, I'll start that. We've said in the past, getting to four and a half times leverage is something that we would be comfortable doing, kind of recognizing that we'd be able to deliver relatively quickly given strong free cash flow performance. And so in your mind, I would think of kind of four and a half-ish times maximum leverage, maybe 10 or 20 basis points thereafter. But generally, that's where we would feel comfortable.

Yeah, Joe, and on your other question, trying to shake CSRA away, you know, at the end of the day, we were looking at doing some things in the managed services area. And in the past three years since that deal has been finished, we have come up with those capabilities. We're out there winning managed services jobs. So we have filled that gap. If you look at where we are on the software development front, we were sort of in that $50 to $100 million award range. Now we're at the five-year $1.2 billion doing Agile. We're actually performing on two of the largest Agile software programs out there and did all that without having closed on the acquisition. So I'd say that we've, quote, unquote, healed nicely. and we're out there seeing growth in the areas that we'd like to grow in, so thanks.

Yeah, thank you very much.

You bet, thank you.

Our next question will come from Scott Forbes of Jefferies. Please go ahead.

Hey, good morning, guys. I mean, it looks like you guys have a bit of a margin ramp in the second half, and I'm just wondering if there's anything to call out there in terms of product mix, efficiencies, or any one-time items? Thanks.

Yeah, so we're guiding to 10.3% EBITDA margins for the full year. One can do the first half calculation. It implies that the back half is higher than that. Nothing particular to call out. Like awards, sometimes margin performance is lumpy between quarters. If you go back over the past several quarters, you'll see that we fluctuate in some of that timing of product deliveries, which are a higher margin. Sometimes there's award or incentive fees, which are unique to a particular quarter, or other singular events which are driving that, some expense items. So I would not call out any specific items driving that. Underlying across the portfolio, we're seeing positive momentum and driving higher margins both on existing work and on the new work that's ramping up that John kind of mentioned. And probably lastly, as we get larger, we're able to take our indirect costs and spread it over a broader base, and that's productive to margins as well.

Thanks. And then, I mean, the protest environment seems to have picked up recently. Are you guys seeing any challenges coming from that or any delay of new opportunities? Yes.

Yeah, thanks. No challenges. There's always an ambient level of protest going on out there. Today, we actually have two awards that were awarded to us that have been protested. There was one back from the fourth quarter last fiscal year, one this quarter. But, you know, nothing that gets us pause. And I think our A track record on sustaining awards to CCI has been quite amazing over the last few years. I would expect these outcomes to be no different. Thanks, guys. You bet. Thank you.

Our next question will come from John Raviv of Citi. Please go ahead.

Morning, guys. This is Colin Canfield. I'm for John Raviv. Morning. Following up on the protest environment, kind of talking, shifting to the bid environment, can you talk a little bit to the competitiveness of bids and how 12 to 18 months on your competitors scaling up has impacted both the competitive bids and then also kind of the margins that flow through for the more traditional services work?

Yeah, sure. We're still looking at 60 to 70% win rates on new business. So I like the odds of when I'm spending money to take market share, seven out of 10 times we're successful. So I like those odds and I'll continue to invest when the odds favor me to that level. As for margins, if we look at our expertise work versus our technology work, sort of getting back to our two by two quadrant, it's true there's far more competitors on the expertise side, and that does have an impact on the margins and also the risk factors that go along with delivering talent has a slightly different risk model. You know, we are looking to continue to grow the expertise elements of our business, even though those may be at a slightly lower margin. If we look at the technology side, we're looking to accelerate growth within that parts of our part of our business because at the end of the day, those higher margins are going to be what we use to drive bottom line growth. So margins that we're seeing out there, clearly when we differentiate based on the technology and the way we're going to solve a customer's problem and our customer's buy-on value, which is the kind of work that we're looking for, and we're continually going after larger contracts versus smaller ones, which also narrowed the bidding, the number of potential bidders down, and we lay on the table our intellectual property in ways that we can deliver faster than everyone else, that drives a best value decision. That also gives us a great reason to ask for higher margin because we're investing ahead of customer need. At the end of the day, every time we differentiate on the technology and the people of this business, we find customers wanting more of CACI versus others. And when they want more of us than everybody else, we win longer jobs that come with a higher margin that over time continues to drive bottom line growth. Got it.

Thanks for the comment. And just following up on that, if we think about the timing of that transition, right, and say, for example, if you look at LGS and the fixed price transition that's going on there, can you just talk a little bit about how the timing of that transition happens in fixed price, and then maybe within the context of the aspirational mid-teens margin.

Yeah, thanks. Thanks, Colin. You know, the way we look at it is probably not by contract type, but it's more by the kind of work that we've done out there and have been winning. Now, we have augmented all of our awards press releases with whether it's expertise or a technology program because we are trying to provide more information that allows you all to sort of model where our top and our bottom line growths are out there going. On the technology programs, which I think is closest, Colin, to relating to some of the LGS and Mastodon firm fixed price work, you know, those technology programs take time for facility build-outs. We've got to put labs in place. We've got additional material purchases. And we're also working on finalizing the requirements with our customer. And that's usually a three- to six-month delay, quote unquote, delay in seeing material revenue from those awards. So the more technology work that we win, the better margins there are, but it has a longer protracted ramp-up period. So if you looked at our backlog growing, you look at the kind of work we've won the last six to nine months, what you're seeing now are those technology programs we won, whether they're LGS or they're core CACI, we won those in the fourth quarter of last year. and those are now starting to generate higher levels of revenue and then margin growth. Got it. Appreciate it, Colin. Thanks, Colin.

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

Hey, good morning, guys. Thanks for the question. I want to talk about working capital, and you guys talked about kind of the strong collection of the quarter, how much more kind of runway is there to go there and how should we think about where that could kind of go in the long run?

Yeah, so we've been doing a very good job of focusing on timely cash collections, kind of driving kind of lower DSO. there's opportunities for continuous improvement. Getting the invoices out the door quicker, working closely with the government paying agents to make sure bills are paid promptly, on time, making sure invoicing is done accurately. We have several programs which have fairly complicated invoicing requirements which take time for us to ensure that the invoice is 100% accurate, and if it's not, oftentimes they get rejected. Going upstream, We're working with various contracting organizations to kind of rethink some of those invoicing requirements. Is it really necessary for the government to have that level of detail in backup university support invoices? In often cases, in our belief, the answer is no, and we're having those dialogues to try to kind of change the nature of those requirements. in payment terms to facilitate some quicker payment processes. And so there is some opportunities to continue to drive lower DSL.

Got it. Thanks. And then I guess, could you maybe comment just on how LGS and Mastodon are doing? You talked about, I think, at the start of the year, kind of a ramp up as we go through the year on those two new acquisitions. So just kind of an update on how that's going.

Yeah, thanks, Matt. Look, overall, extremely pleased with their performance. And as a proof point, last quarter I was talking about the beginnings of having some customer meetings where they would bring some of our core CCI technology. And we had folks from both Macedon and LGS in those meetings. And now we're one quarter, a quarter later. And we've been getting great response and support by those customers. on a couple of facts. One, the fact that we continue to invest ahead of knees and then also being very easy to work with so they can consolidate requirements that they may have done with three or four other vendors and sort of sit with us and say, if you can take technology from LGS and this device from Mastodon and some of your core technology, we see a much better future for us in how we want to address some of our mission needs. So the reason why we bought both of those to continue to provide us a great library of technology on that front is going well. Financially, they're both doing well in line with our long-term expectations, with an understanding that some of the product nature of their deliveries can result in quarter-to-quarter lumpiness, be it in deliveries or in margin, as Tom mentioned earlier. But, again, we're running the business on an annual basis, so over that period we expect any lumpiness will smooth itself out. And then on the awards front, the one award that I mentioned during my prepared remarks, that was a rather large LGS award that is going to support our intelligence customers. So whether it's what we're delivering and the customer's take-up rate, on what they see from CACI moving forward, given the fact we have LGS and Mastodon, I would check that as a positive. Financially, over the long term, I would check that box as being very successful in their ability to come into this company, be fully integrated, and under their leadership team, win a $475 million sole source job is sort of a nice punctuation point to how well those two assets are out there doing. Great.

Thank you.

You bet. Thanks.

Our next question will come from Josh Sullivan of Benchmark Company. Please go ahead.

Good morning. Good morning, Josh. In light of the acquisitions you just talked about there, can you also talk about a strategy to push out into some smaller tech hubs regionally? Any metrics on headcount growth in these areas? It looks like Mastodon, I think there's some reports, might be quadrupling headcount. Any metrics you can give us on that front?

Yeah, sure. We have mentioned a lot around something we started I mean, probably five or six years back now, which was trying to leverage more of a dispersed workforce to get some of our technology programs and software development done. It's going extremely well. Actually, our Macedon folks up in Rochester have doubled the number of employees. I mean, I'd like to hear that it had quadrupled. Maybe you have information, Josh, on what you're sharing yet. But I'm very excited. Because it's this model that, you know, when we look at the background clearance processing, we look at the competition for talent in the Northern Virginia area, you know, the more technology programs we win, the less important it is that we do work outside of our customers' front gates. So we can move that work to many, many locations in the Rochester area, in the Sarasota area, Denver, Colorado Springs, Tampa, some really Florham Park areas. Some really great talent there, and folks love the technology that we're delivering. They like the mission, and when we can check those two boxes, the fact that they can report to work where they want to live and raise a family works out really well for us. So we've got the infrastructure in place, and as we do more and more acquisitions, they have beachhead and also university relationships help us as well. So the more dispersed our technology workforce is, the better relationships that we are able to obtain and allows us to hire even quicker.

Got it. And I appreciate that. And then just on the longer term duration, you know, you're seeing with the contracts, do you think that's unique to CACI or is that, you know, a broader reality of the defense contracting in general on the DIT side?

Yeah, I probably can't speak for everyone else within our sector, but what I can tell you is, and it's the same thing I talk to my team about weekly, we're in a $220 billion addressable market. We want to drive top and bottom line growth, and we want to be driving shareholder value. So the real thing that we changed in this company was just the discipline and the focus that it takes to to go shape the right deals that make sense for our customer set and for our shareholders. So, you know, there's always been larger dollar value jobs. I tend to enjoy those more than re-winning work I won last year and next year, because every time I'm spending investment dollars to re-win what I already have, that's just taking up capital. I'd much rather plow that money into new technologies and new offerings to go gather new market share. I don't know if it's a trend in the sector. It's been a trend for us in the fact that we're focused on longer duration, larger jobs. With everybody's patience, we're actually starting to see how that actually pays off. Back to Gavin's first question, this is a train we're not going to get off of. This model works. $5.5 billion company, $220 billion addressable market. There's plenty of things we know how to do well, and we can be very selective as to how we want to go after new business pursuits.

And I would say, and I don't have the broad statistics across kind of the industry, but I'm pretty confident saying the longer duration is a function of the size of the awards and the differentiated capabilities within those awards. And those are two of the tenets of our business development that we put in place multiple years ago, and we're seeing the fruits of that.

Great. Appreciate it. Thank you. Thanks, Josh.

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

Hey, good morning. This is Jasper Bibb on for Toby. So from our view, it seems that agency customers have increasingly looked to wrap cyber intelligence capabilities into a single contract award. So I was hoping you could comment on that dynamic and how that might impact CACI.

Yeah, sure. So, I mean, there's multiple customers that are out there, and we actually assist customers in taking multiple contractual vehicles and collapsing those into one. One, it takes less contracting power from our customers to freeze them up to work on other items and also gives our customer someone who's going to ensure that what they're looking to have delivered gets delivered. So if you look at our intelligence community customers, they are combining various contracts. We support that move. We also support helping those customers move work from an expertise type contractual arrangement to more of a technology one, and from a cost plus buying talent to a fixed price delivering outcomes, we've become a very good company at delivering technology that gives a customer the outcome that they're looking for. So we have seen that. DHS is doing some of that work as well. Josh, they're out there combining contracts. One of the largest awards that we've had over the last five years was our FSDE contract with DITRA, where the customer combined 11 or 13 different contracts. What that does for us is allows us to have a one-on-one relationship with that customer to help them drive productivity levels higher than they would have gotten with 11 different contractors out there. It also drives, as Tom mentioned earlier, some great on-contract growth, that as our customer sees gaps in within what they're out there buying that allows us to bring more folks on board and drive our organic growth.

Thanks. And then I think we touched on LGS and Mastodon, but can you provide an update on the smaller acquisitions from last quarter?

Yeah, so we did a few kind of next century industries in deep three. They're all performing kind of well. Next century was the largest one. The other two were relatively small but important capabilities, and everything's on track for those three acquisitions to deliver what we said they were going to deliver for fiscal year 20. Appreciate the detail.

Thanks, Josh. Our next question will come from Kai Von Remore of Cohen and Company. Please go ahead.

Hey, good morning, guys. This is Dan Flick on for Kai. Hey, Dan. So just a few points on the Agile task order from this quarter. So is it fair to assume that the ramp on that looks like you described tech should look? Earlier in the call, Was the full $1.1 billion included in backlog this quarter? And should we continue to expect agile contracts of this scale moving forward? It sounds like this was one of the larger ones that we've seen. Thanks.

Yeah, sure. So, yes, it is in our backlog at the $1.1 billion level. The ramp for this is very similar here. to both our expertise and our mission technology programs. It's probably a three- to six-month ramp, which means we'll see some revenue assisting us in the third quarter, a little more in the fourth, but we'll see clearly a more material ramp as we get into the first two quarters of next year, and then from that point and beyond. There's just about a $225 million ceiling contract each and every year. I think the other part of the question is... the nature of Agile software contracts in these sites? Boy, I hope so. We're actually shaping customers. We have quite an extensive investment we made about four years back in Ashburn, Virginia, It's our Agile Solutions factory, where if you picture delivering a hardware product, it's picturing a factory line. We have the same type of building layout and functional lay down for us to develop software as well. Customers can see it. They can feel it. They can touch it. They can witness the much better metrics that are being done out there. And like any production line, once you refine it and you're delivering 99 and two nines error-free software, That drives a lot of attention. So what you're seeing is customers taking multiple software development applications and work that they need, and they are consolidating those and buying those from one specific contractor. And we're enthused and very pleased and very happy that we are performing on two of the government's largest, and we would expect that trend to continue. Great. Thanks. You bet.

Our next question will come from Louis DePalma of William Blair. Please go ahead.

Good morning, John and team. Good morning. What has been your secret sauce that has enabled you to move upmarket and win these larger billion-dollar deals? Is it a function of how you have always been strong at software development and these large software development programs didn't previously exist? These mostly aren't takeaway wins, right?

Correct. So, you know, part of it is focus three to four years back as to what gaps do we have and how do we fill those. And then once we have those gaps filled, our business development and our line leadership team do an outstanding job of shaping customers. And so what we mean by shaping isn't directing customers what they buy and how they buy. What it really is is them being able to come to a CACI location or through numerous meetings, showing the customers the art of the possible. So not just telling what we have today, but here's the augmentation of the investments we're willing to make to help you get your mission solved. So a lot of it is an intentional investment and intentional meetings that really drive the customer to not just buy what they believe they need, but actually buy the outcome. When a customer buys an outcome that they've seen from us, we're able to differentiate. We've been using that term a lot during this call because it truly matters. If we can differentiate on the technology side and deliver faster, better, cheaper, then my customers aren't so focused on did I make 8% in a cost plus model or 12% in a fixed price model. They're actually focused on getting something that they absolutely need. So this didn't start overnight. We looked at some larger transformational acquisitions a few years back. to give us this capability sooner. Those didn't go the way we wanted them to. But, you know, we then go to the next arrow in our quiver, which is let's internally invest, and those investments are out there paying off. So we'd like to believe that the trend of our customers is going to be buying more of these larger-scale jobs. But at the end of the day, we've built and we make our own successes, and the more we stay disciplined and focused on How we win larger, more profitable business, the better off we'll be. As I mentioned earlier, this train isn't going to stop anytime soon.

I'll add to that. John, in your prepared remarks, you talked about having a company with good character and culture. It really starts with that. It starts with a strong vision of where we want to go. Everyone's rowing in the same direction. And then you get the people, processes, and technology. So some very highly talented and motivated people throughout the organization with some consistent processes, which gives us confidence that we have the right building blocks in place for that success.

Okay. And on this topic of differentiation via M&A versus internal investment, you guys are obviously one of the leading providers of signals intelligence. and electronic warfare sensors. Two other sensor providers over the past several years, Raytheon and FLIR acquired drone platforms to vertically integrate their sensor capabilities and Leidos recently acquired a key position in Gremlins. Do you feel that you need to own or internally develop a drone platform in order to further expand your signals intelligence capabilities?

Yeah, thanks, Louie. You know, we are very careful and very focused on where we see the market going. We've been very vocal around, is our intention to be a platform provider? You know, that's another step. Right now it's a step too far. We think that there are companies out there that build outstanding platforms. They know how to bend metal in some of the larger space and defense companies. One that I am an alumni of, do an outstanding job there. But we're really looking at the mission packages part of where all these platforms go. If we look at the outlook, at the outcomes and the capabilities that our customers need, it's not so much they need more platforms. What they need is an ability to have a single way of to find a new signal out on the battlefield and have that reverse engineered in a manner that we can not only detect it, but we can understand how to mitigate around that signal or communicate through it. So we believe that the far longer term, larger dollars are in the technology packages that ride on those platforms. So when a new signal comes up, I don't need a new drone capability. What I need is a new algorithm in a shared manner, and both our DoD and our Intel customers are really looking for shared work from multiple vendors that can help them address these needs. So we believe in the signals intelligence, electronic warfare, RF spectrum world that changes so dynamically so that a digital footprint is not going to be solved with better and faster and more elegant platforms. It's going to be solved with processing power that are on those platforms and the algorithms and the ability and the amazing people we have within this company. Of course, the ACI that we picked up with LGS and with Mastodon are some of the nation's leading folks on understanding signals and how quickly can we turn around a solution to a signal that's giving our warfighter issues. We actually believe that's where the sweet spot is and that's where we'll stay parked for some time. And so the ability to build a platform to us is not where the end of the day greatest growth is coming from.

Thanks for the call.

Yeah, thanks, Lou.

Our next question is a follow-up question from Joseph Dinardi of Stiefel. Please go ahead.

Thanks very much. Tom, I think this is a question you get asked from time to time, but there's a narrative out there that the top-line defense budget growth is slowing, and that should translate into slower growth for your business. It doesn't seem like that number, the top line number, really factors much into how you view your addressable market. So as you look at your markets as a whole the next few years, do you see trends slowing or not?

Yeah, so we mentioned a $220 billion addressable market. It's very kind of robust. The areas that we're focused on, kind of mission capabilities, enterprise capabilities, are swim lanes which have faster currents. I'm probably mixing my metaphors here, which are kind of sweet spots. And given that, we do not see the foreseeable federal defense budget or civilian budget to be an impediment for us to realize our goals of increasing the organic revenue and increasing margins simultaneously. We feel we're very well positioned providing services and technology in a dangerous world. Our technology solutions that John just alluded to play a key role in those areas. Thank you.

Again, if you have a question, please press star, then 1. Our next question is also a follow-up from Gavin Parsons of Goldman Sachs. Please go ahead.

Hey, thanks for squeezing me in. Just a quick one to follow up on Matt's question earlier. What percent of your current outstanding kind of submitted bids include some form of LGS capability, and where do you think that'll be a year from now?

Thanks. Yeah, Gavin, I don't have that number up on the tip of my tongue. What I will tell you is that clearly, It's involved in less today. It'll be involved in more tomorrow. I'm sure you didn't ask a follow-up question to get that kind of genius response. But, you know, LGS came with a really nice book of business. They continue to perform on those. I think over the coming quarters, as we see our customers build requirements, they're really pulling on the strengths of core CCI technology, the Mastodon devices, and the intelligence algorithms that LGS provides, that they will be part and parcel to a larger percentage of our awards out there. To the extent that we're looking at signals intel, electronic warfare, anything in the electronic domain, I would expect to see both LGS and Mastodon play more prominent roles. Thanks again.

This concludes our question and answer session. I would like to turn the conference back over to John Mingucci for any closing remarks. Please go ahead.

Well, thanks, Chuck, and thank you for your help on today's call. We would like to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you will have follow-up questions, and Tom Utrecht, Dan Leckberg, and George Price are available to take your call after today's call. This concludes our call. Thank you, and everyone have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.