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spk00: ladies and gentlemen thank you for standing by welcome to the caci international physical 2022 fourth quarter and full year earnings and physical 2023 guidance 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 would like to turn the conference call over to Dan Lechberg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.
spk09: Well, thank you, and good morning, everyone. I'm Dan Lechberg, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning. We are providing presentation slides, so let's move to slide number two. There will be statements in this call that do not address historical facts, 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 Noguchi, President and Chief Executive Officer of CACI International. John.
spk05: Thanks, Dan, and good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 22 results. as well as our fiscal 23 guidance. With me this morning is Tom Mutren, our Chief Financial Officer. Slide four, please. In July, CACI celebrated our 60th year of business. I'd like to start this morning's call with a quick moment of reflection on this milestone. Back in 1962, our two founders started CACI with modest means, a park bench, and a telephone booth for an office. What they lacked in resources, they made up for in ingenuity, confidence, and shared tenacity. That spirit survives today and is foundational to our culture. Today, we generate more than $6 billion of revenue and support some of the most critical missions that keep our nation and the world safe. Our founders would be astonished and proud of what CACI has become, especially the positive impact we've had on countless customers employees, families, communities, and shareholders over the last six decades. We are all truly honored to carry on this legacy started over 60 years ago. So, on to our results. Slide five, please. Last night, we released our fourth quarter and full year results for fiscal year 2022. Our results were in line with our expectations. For the full year, we delivered revenue growth of 3%, adjusted EBITDA margins of 10.3%, and strong free cash flow of nearly $700 million. And we also won $7.1 billion of contract awards, of which nearly 60% is new business to CACI. That represents a 1.1 times book to build for the year with a good mix of re-compete wins to support our base and new awards to drive future growth. Slide six, please. Turning to the external environment, as we look out over the next several years, prospects are positive. Demand is strong, and there continues to be bipartisan support for national security priorities. A favorable government fiscal year 23 budget is currently moving through Congress with higher spending in defense, the intelligence community, and homeland security, and in particular, in key addressable areas like digital solutions, enterprise IT, and C4ISR cyber and space. This strong backdrop gives us confidence in our ability to drive long-term growth and margin expansion, robust cash flow, and additional shareholder value. Slide seven, please. We continue to invest ahead of need in differentiated expertise and technology to address key priorities that will drive long-term customer demand and spending. Let me give you some examples. Within digital solutions, we are modernizing applications and consolidating disparate systems across the federal government to drive efficiency, improve data accessibility, and enhance cybersecurity posture. As an industry leader in agile software development scale, including executing two of the federal government's largest agile programs, we are seeing increasing customer interest and pipeline opportunities to leverage agile software development, DevSecOps, and open architectures to enable digital application modernization. In enterprise IT, network modernization is the key trend. Agencies need to improve cyber defense, support an increasingly dispersed workforce, and consolidate and modernize legacy networks for efficiency. In addition, real-time multi-domain integrated data and communications won't be available for efforts like JASC2 without modern network infrastructure. To address these challenges, we bring deep capabilities and fast performance. And we are making investments in new technologies, like commercial solutions for classified, or CSFC, to enable access to classified networks from commercial devices from anywhere in the world. Broad modernization of both digital solutions and enterprise IT across the federal government will drive healthy spending for the foreseeable future and is an area CECI is well positioned with both capabilities and past performance. Turning to C4ISR and cyber, the electromagnetic spectrum remains critical for intelligence collection and modern warfare. For more than a decade, we have invested to address critical priorities in the electromagnetic spectrum, including signals intelligence, electronic warfare, counter UAS, and secure communications. For example, we provide software-defined capabilities to detect signals used by our adversaries, determine their location, and degrade, deceive, or deny their use, as well as protect our own use of the spectrum. In the context of the global threat environment and near-care adversaries, These are even more critical and are gaining traction with customers recognizing the necessity. Lastly, in the increasingly important space domain, we are leaning forward to position CECI in areas where we see the opportunity for decade-long technology-driven growth. In photonics, we're very excited about our continued progress in optical communications in both the higher-volume LEO market and the more bespoke geo- and interplanetary markets. Our photonics capabilities have been successfully demonstrated in space, not just in a lab, and continue to generate interest and opportunities for government customers and space platform providers. In fact, we recently made our first production delivery of optical communication systems to one of our OEM partners. We also remain on track to put an upgradable software-defined Assured Precision Navigation and Timing, or APNT, payload into low Earth orbit early next year. This payload will demonstrate a unique technology, qualify its capabilities in space, and prove an alternative to the existing vulnerable GPS systems, a vulnerability that needs to be addressed. Slide eight, please. As you all know, a number of years ago, we embarked on our purposeful strategy to create a different company within our market. We made significant investments in both expertise and technology to try to differentiate and ultimately increase the quality of our revenue. As we stand here today, our EBITDA margins are more than 200 basis points higher than they were earlier in this journey. We delivered sustained, durable, long-term margin expansion over those years. And even with this success, we remain committed to continue long-term margin expansion. Revenue, growth, plus margin expansion compounded by effective capital deployment, drives our leading free cash flow per share growth, and ultimately shareholder value. With that in mind, I'll turn to our fiscal 23 guidance. We expect revenue growth of between 4.5% and 7.5%, and just an EBITDA margin in the mid to high 10% range. In addition, we expect to continue generating healthy cash flow, and Tom will provide additional details on all elements of our guidance shortly. To wrap things up, we remain committed to our stated performance goals of long-term growth and margin expansion. CACI will continue to assess the head of customer need to drive future growth and differentiation. As we've discussed many times before, our goal is to drive free cash flow per share, and our commitment remains consistent to utilize CACI's strong cash flow in a flexible and opportunistic manner to deliver the greatest long-term shareholder value. With that, I'll turn the call over to Tom.
spk03: Thank you, Johnny, and good morning, everyone. Please turn to slide number nine. Our fourth quarter results with increased revenue and strong cash flow were solid, although continued to reflect the slower funding and other short-term headwinds we previously spoke about. We generated revenue of $1.6 billion in the quarter, representing overall growth of 5% in approximately 2% organic growth. Fourth quarter adjusted EBITDA margin was 9.6%, impacted by delays in mission technology sales. Adjusted income was $107 million for the quarter, and we realized a lower than expected tax rate driven by certain state tax benefits. Slide 10, please. Fiscal year 22 represents another year of top line growth, healthy margins, and strong cash flow. For the year, we generated just over $6.2 billion of revenue, representing 3% total growth in positive organic growth. The adjusted EBITDA margin of 10.3% were slightly below our point estimate of 10.5% due primarily to fluctuations in mission technology sales. Adjusted net income in FY22 was $422 million. As a reminder, in fiscal year 21, we realized a large one-time increase in net income from a tax method change, which impacts the year-over-year net income comparisons. Next slide, please. Fourth quarter operating cash flow excluding our accounts receivable purchase facility was $152 million, reflecting continued healthy profitability in cash collections. Free cash flow was $117 million for the quarter. For the full year, we generated operating cash flow of $770 million, excluding our AR purchase facility, in free cash flow of $695 million. The year-over-year increase for both was primarily driven by the realization of $190 million of cash benefit from the tax method change we previously discussed. This was partially offset by the deferred payroll taxes under the CARES Act. In FY21, we realized the benefit of $52 million. In FY22, we had a $47 million outflow. And we had been expecting an additional $40 million tax refund into the fourth quarter associated with the method change, but that payment is still pending. We ended the year with net debt to trailing 12-month adjusted EBITDA margins of 2.5 times, similar to our leverage at the start of the year, even after acquiring four companies for a total purchase consideration of $600 million. Given our strong cash flow profile, modest leverage, and access to capital, we continue to have significant optionality to deploy capital in a flexible and opportunistic manner to drive long-term shareholder value. Slide 12, please. Now let's turn to our fiscal year 23 guidance. As is our practice, we undertake a bottoms-up, program-by-program forecast, hide our expectations for new business by specific opportunity, and track risk and opportunities. We incorporate known market dynamics and external conditions as we finalize the plan and develop guidance ranges. For fiscal year 23, we expect revenue to grow between 4.5% and 7.5%, with growth in both expertise and technology. Around $180 million of inorganic revenue is included in the guidance range. We expect adjusted net income to be between $420 and $440 million, inclusive of $56 million of after-tax intangible amortization expense. Adjusted EBITDA margin is expected to be in the mid-to-high 10% range. We are providing this range to reflect the dynamics of our business. Slide 13, please. To assist with modeling, here are some of our key planning assumptions. Indirect cost and salary expense are expected to increase around 6.5% driven by fringe on direct labor in the recent acquisitions, which have a more commercial-type cost structure. Remaining expenses are increasing at a modest 1%, reflecting our continued efforts to drive operational efficiency. Depreciation and amortization are expected to be approximately $150 million, Net interest expense should be around $61 million, up from $42 million in FY22 due to higher interest rates. About 50% of our debt is fixed, so while we have some exposure to increasing interest rates, it is tempered. We are expecting a full-year effective tax rate of 23.5%, up from 19% in FY22, which benefited from additional R&D and state tax credits. and we expect typical quarterly sequential increases in revenue and profitability through the year, but I will remind you that certain factors can scoop quarterly trends, such as the timing of material purchases and delivery of higher margin technology. Slide 14, please. In FY23, we are expecting operating cash flow, excluding our AR facility, to be at least $495 million, and capital expenditures to be approximately $80 million. resulting in free cash flow at least $415 million. A few other items to note regarding FY23 cash flow. We will make the final payment of $47 million in the second quarter to repay deferred payroll taxes under the CARES Act, but that will not result in any year-over-year variance since we made a similar payment last year. We expect to receive the $40 million tax refund for the method change that we did not receive in fiscal year 22. We expect incremental cash payments of $65 million as part of the method change we adopted in FY21. We expect a net use of cash of approximately $60 million, driven by increased net income more than offset by increases in working capital as the company grows. And we are assuming the repeal or deferral of Section 174 of the tax code relating to R&D expense. If this does not occur, our operating cash flow would be around $95 million lower. Slide 15, please. Turning to our forward indicators, prospects remain strong. For fiscal year 23, we expect 83% of our revenue to come from existing programs, 11% from re-competes, and around 6% for new business. We have $12 billion of submitted bids under evaluation, over 80% of which is for new business to CACI. and we expect to submit another $17 billion over the next two quarters, with over 90% of that for new business. In summary, we expect solid financial performance in FY23, with healthy growth, margin expansion, and strong cash flow. With that, I will turn the call back over to John.
spk05: Thank you, Tom. Let's please go to slide 16. I'm pleased that CACI was able to again deliver growth healthy margins and strong cash flow and free cash flow per share in fiscal 22. In addition, with strong awards, robust backlog and pipeline, and investments in differentiated technology, well aligned with national security priorities, we have positioned CECI for strong financial performance in fiscal 23 and beyond. As is always the case, we achieved our success because of our employees' talent, innovation, and commitment to customer missions, our company, and each other. I'm extremely proud of the CACI team for what you do for this company and our nation each and every day. I'm also very proud that you voted CACI a top workplace for the eighth consecutive year. Thank you all. Before we open the call for questions, I'd like to mention the release of our inaugural Corporate Responsibility Report, which we issued yesterday on our corporate website. outlines information that is important to us as a company and our many stakeholders, and includes topics that are impactful from an environmental, social, and governance perspective. We're proud of our heritage, and we are delighted to highlight our many accomplishments in the communities where we live and work. We look forward to an ongoing dialogue around the positive impacts we have made and the stewardship we intend to continue to demonstrate in the future. With that, Nadia, let's open the call for questions.
spk00: Thank you. If you would like to ask a question today, please press star followed by one on your telephone keypads. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Please note, we will take one question and one follow-up. Our first question today comes from Bert Subin of Steeple. Bert, please go ahead. Your line is open.
spk12: Hey, good morning. Morning, Bert. So John, you talked a little bit about mission technology. You know, that's been something that's come up a little bit in recent quarters. Can you just say, you know, why are mission technology sales delayed and what do you think leads them to pick up? I imagine this is a big portion of whether you guys end the year at 10.9 or 10.4% EBITDA margins. So just curious if you have any visibility on the sales or the process for RFPs there.
spk05: Yeah, sure. Hey, thank you very much for that question. Look, that's all folded into how we set up guidance for this year. And one of the visible changes that we have made is, you know, talking about EBITDA margin, you know, mid to high tens. And you've actually hit right on that reason. You know, it does not take a large dollar value award to disrupt our EBITDA margins by even 10 basis points. You know, to your specific questions, there's a bunch of mission tech and other material purchases that have pushed into our fiscal year 23, and there's some that did not. But our guidance does address both of those different cases. You know, what we're most focused on is that we've been on this long-term, drive to really establish a different looking company that would depend on both expertise and on tech technology for us to not only talk about bottom line growth, but also top line growth as well. You know, so I don't have a very specific as to, you know, the, you know, two to three awards that had gotten delayed and do they come forward or do they go away? You know, what we are confident is that our FY23 guidance does a good job of putting lower and upper ends around our guidance that's focused on the issue that you correctly brought up on the low end. We'll have lower recovery, some of those mission tech and those material buys. And on the upper end, we're going to cover all of those that slipped out of our fiscal year 2022. So all in all, we are We are proud of the way we came out of fiscal year 22 as an overall year, a measure of looking forward to continue this multi-year growth pattern on our bottom line EBITDA margins, very much driven by our entire technology portfolio, not just mission tech, but on our enterprise tech as well.
spk12: Thanks for that, John. And maybe just to follow up on that, it seems like, you know, I've been trying to sort of delineate between your exposure set, which you highlighted, you know, a handful of items, cyber, C4S, ISR, enterprise tech. A lot of these things are, you know, seemingly growing a lot. And then we have budgets, which at least for the DOD started at 4% for 23 and are clearly moving higher based on sort of what we're seeing in the process. Yeah, your organic growth for FY23 is sort of low to mid single digits, which We put it a little below that level. How should we think about, you know, why that's the case? And does that lead to a more significant ramp up perhaps in the second half of the year in FY24?
spk05: Yeah, I'll answer the first part of that. I'll let Tom talk about how our, you know, quarter to quarter looks like. Look, our guidance is as it has in other years. It reflects a lot of different assumptions and different scenarios. in terms of how a multitude of those factors play out. If I were to look back at FY22, some of the things that we knew about coming in was that there was going to be a 100% Afghanistan withdrawal. Things that we were still questioning, hey, is COVID in or out? How does the government go in and out of COVID? Is the CR going to be short or long term? Clearly, nobody anticipated a, you know, peaceful country invasion by the Russians. uh that was not anticipated look at the only the uh omni omni cron and we looked at the contracting officer challenge and how does the government move between counter counterterrorism uh as well as near-care threats in the middle of a government fiscal year you know those were all items that some of those we actually saw coming in and and trying to provide guidance around other ones that not as we look at fiscal year 23 we're looking at supply chain covered funding, which is something that we didn't expect to, you know, we wouldn't sit here using some of your numbers and we've got a growing defense budget, but for some reason unknown to many of us on all of the reasons why we're not seeing funding come out to the level that, you know, the FY 22 budget grew. So we still have concerns as to how the KO shortage is going to play out as you look to FY 2023 challenge. You know, so we're looking at a number of factors, you know, the labor market and inflation as well. So there's so many variables that are out there that I'd love to be able to say if it was only for a $12 million mission type order, we'd be a much better, you know, stable business. We are a very stable business. We continue to grow. We finished 2022 within our stated range. And we, you know, more than plan on completing FY23 within our guidance range. having to balance a lot of those different areas that I earlier spoke on. Tom?
spk03: Yeah, and, Bert, I think you talked about, you know, kind of momentum going into FY24, you know, in terms of growth. Right now, we're obviously hyper-focused on FY23. You know, I will say that we expect, you know, kind of sequential increase That's what we're expecting today. There are some fluctuations, as we mentioned, vis-a-vis either pass-through materials, which are high revenue, low margin, or some of the mission tech sales. And so there may be some variations associated with that. As a result of that, we're guiding for a full year in a trend, better to look at the company on a trailing 12-month basis. So I think we're positioned well this year, and we'll see the momentum going into FY24.
spk12: Thank you, John. Thank you, Tom. Thanks, sir.
spk00: Thank you. Our next question comes from Peter Arman of Baird. Peter, please go ahead. Your line is open.
spk04: Yeah, thanks. Good morning, John and Tom. Hey, John. Regarding the budgets and just looking at just maybe the Intel market specifically for 23, it looks like the budgets are going to be up high single digits, and that's roughly maybe 30% of your revenue. So how quickly should we think about that converting? And then just maybe related to that, regarding the funding delays, what maybe changes the pace of activity there? Thanks.
spk05: Yeah, Peter. So I guess, you know, first off, budgets in general, world's a really dangerous place, and it's nice that we continue to see bipartisan support for national security spending. You know, I do think that Ukraine is a wake-up call, but I believe that China and other near peers, as well as lingering counter-terrorism, are still going to be out there. We like the overall budget lay down. It's much more constructive today than it is in the past. I'm talking about purely on budget versus funding, clearly. But we like the increased defense funding, the $54 billion Ukraine budget, it really doesn't involve CACI at this time, but as non-kinetic technology becomes more and more required, we will be in those discussions. We started to have some late fiscal year 22 discussions around some of our capabilities, and I would assume that those would continue to go forward in FY2023. Look, clearly, 30% of our revenue is roughly being within the intelligence community. We've got a wide range of advanced cyber and in-town analytical technology as well as expertise. We like what those budget numbers look like. It's why we have spent the last seven to eight years positioning so that we can be talking about our addressable market and how we address our intelligence community needs. We're also pretty excited about the increase in spending within DHS and across the government as it impacts IT modernization space domain. So what we've sort of set the stage for is we have an outstanding budget, right? What we have to work our way through is how is that going to be funded? How is that funding going to be released? So, you know, whether it's in the intelligence community, where we've seen about a 30 to 35% reduction in contracting officers. You know, we attended a conference last week, about 30% of the DOD contracting officers Have moved on from just fiscal year 22.
spk03: So I think there's other factors beyond budget We're going to have to continue to watch and we think we said the right the right prudent prudent guidance for that Tom Yeah, and uh, you know Peter on the last call, you know, we cited some Funding being lower than the prior year and that was one of the reasons for Trying downward in the last call, you know since then in the last four months we've seen a pickup And we are close to closing the gap. Funded backlog at the end of June was down around 3% versus, you know, the prior year. So, you know, a decline, but not as, you know, severe as we saw at the end of the third quarter. We're monitoring this carefully. You know, as John mentioned, there are some issues, kind of well-known, the government contracting offices being short-staffed. We are comfortable that we'll have sufficient funding to perform within our guidance range. We're controlling what we're controlling, monitoring it carefully, and kind of making sure that we do have the funding to execute kind of within the guidance.
spk04: Appreciate the caller. I'll jump back in the queue. Thanks.
spk03: Thanks, Peter.
spk00: Thank you. Our next question comes from Robert Spingarn of Malleus Research. Robert, please go ahead. Your line is open.
spk11: Hi. Good morning. Morning, Rob. Tom, I wanted to, this touches on what Burt was asking about. I wanted to ask a math question, if I could, about the FY22 sales and the technology, the mission technology sales that got pushed to the right. Is our math correct that these higher margin sales that went to the right were about $22 million and the EBITDA associated with that was about $15 million?
spk03: Yeah. Yeah, so to be clear, you know, kind of, Rob, we didn't say specifically they were pushed to the right. We said they did not materialize. And so some of them, you know, could have been pushed to the right. Some of them, there was changing kind of government, you know, priorities. And so, you know, kind of a mixed bag. I would not take a one-for-one movement from the fourth quarter, you know, to the first quarter.
spk11: Tom, I guess I shouldn't have phrased it that way, but you know, sales that didn't materialize or move or whatever, the math still applies. You know, the $22 million and the $15 million. What I'm getting at is the margins.
spk03: Yeah, okay, yeah. So it was, you know, kind of margin impactful. You know, John mentioned the kind of leverage associated with some of the kind of mission, you know, technology sales. You know, our EBITDA, approximately $700 million. In some of the mission technology sales, high margins, are going to generate, you know, $5, you know, $10, $15 million of kind of contribution. And so one or two sales is shifting or disappearing or reoccurring, you know, it is impactful on margins. But I think your arithmetic is generally, you know, correct. We were guiding to 10.5% infidel margins. You know, it became less than that. And, you know, that's really what the numbers are.
spk11: Okay. It just highlights the fact that some of this mission technology work is very profitable. That's really where I'm going with this.
spk03: Absolutely. In fact, we spoke about that in the past when we spoke about the ABT and Mastodon acquisitions. Some of the margins, the EBITDA margins of these companies were 35%, 45% kind of EBITDA margin range, and so quite profitable. And so material impact on any one particular month or quarter.
spk11: So just as a follow-up, and this one's for John, sticking with this discussion on mission technology versus expertise, so to speak, you and Leidos and a number of the peers are all going in this direction. What is the optimal mix of these two types of business, and how do you compare the growth? For example, in the guide for 23, What is the contemplated growth for these two areas?
spk05: Yeah, Rob, I guess at a macro level, you know, optimal to me, and I have been very transparent on this, you know, there are quarters where, you know, we get asked, you know, your technology part of your business grew at 10% and, you know, your expertise shrunk by three. You know, we must be elated. No, I'm never elated, right? I'd love both to be growing at, you know, 10%. Look, I don't think there's an optimal dial, Rob. When we set this course a number of years back, you know, we're a $2.5 billion revenue company, and we're at 8.8% margins. And how do we, you know, look at where the government budgets are going to go next? And how do we position this company for the next 60 years of growth? What we knew it wasn't was getting involved in, you know, low-rate shootouts, for selling expertise to an enterprise customer where there's thousands of, you know, folks out there, when Better Buying Power 2.0 took away past performance, right? So, you know, anything that's going to soon be a commodity is nowhere where CSA wanted to be. So we embarked on how do we get involved in another part of this market that is, one, stickier, two, you know, maybe at times not perfectly predictable, But over the long term, we're going to grow a much better looking company and a much more differentiated company going forward. I can't tell you what the Lionel strategy or the Booz Allen strategy, you know, frankly, with all due respect, I don't watch what that strategy is. I can impact ours. And ours is about making sure we have the right mix of expertise and technology so that expertise is informing the technology that we can create, differentiate on, and get a leg up. of maybe some of the major primes or other people we're looking at more non-kinetic type solutions and making certain that our technology can be used to drive expertise work where we're no longer dependent on solely finding people at a specific labor rate. You know, we don't adjust EBITDA for number of people sitting on the bench and number of people that we wish could have been employed. We want to have a very, very clean quarterly report. and settle all that you know optimally uh 50 50 works for us you know i would love to have a little more um push towards technology than expertise you know some of these companies we we bought a mirror four years back uh you know that's pretty early in that in that overall you know nine inning game of being able to uh you know move this company forward so it's why when i see know in 2017 we went from 88 to 85 uh you know and then the final year we were greater than that the long-term trend line we're trying to generate here is where we are you know driving a higher quality uh of earnings business and by doing that over a long period of time we'll be a much better solid company Because whether it's top line growth or bottom line growth, or whether we buy shares back or we buy outstanding companies, we're going to drive free cash flow per share. And that's what we're absolutely focused on. So there are some years, a 10.5 is going to be a 10.3. There's some years a 10.7 is going to be a 10.9. But overall trend line, over a number of years, we positioned this company in a much better position, which is why we enjoy, to Peter's question, a great defense spending. we've got a very strong defense business a very you know strong in intel business and we're willing to put that business up against anybody else's and over over time we're going to continue to grow both top and the bottom yeah yeah go ahead no well i was going to say tom to john was just in the current environment is there any way to characterize the relative growth in those two areas even if we're just looking at a snapshot of now
spk03: Yeah, so in our FY23 guidance, we're assuming that both technology and expertise grow, with technology growing at a higher rate, but they're both positive growth. And so there's a kind of variation there if you assume expertise is growing kind of 1% or 2%, and to get to the guidance range, technology has to grow kind of greater than that. Two other observations. One is, as we said in the past, technology margins are on average higher than expertise margins, and so that continues to hold. And I will say from our acquisition strategy, it's more likely than not further acquisitions would be in technology. Not exclusively, we'll look at all opportunities, but that over time would tend to increase technology at a faster rate.
spk11: Okay. Makes sense. Thank you both. Thanks, Rob.
spk00: Thank you. And our next question comes from Gavin Parsons of Goldman Sachs. Gavin, please go ahead. Your line is open.
spk10: Hey, good morning.
spk05: Good morning, Gavin.
spk10: Guys, I just wanted to go through the cash flow bridge and maybe try to understand kind of normalized cash flow a little bit better. So maybe if you could give us a little bit more detail on the methodology change. But I think that looks like, you know, the 40 and the 65 almost offset each other this year. If we add back the 50 CARES reversal and then maybe the 25 from that net methodology change, is that about the normalized cash flow starting point, or how should we think about that?
spk03: Yeah. So, Gavin, there's a few numbers that you're quoting here. The CARES Act reversal, we had an outflow in both 22 and 23. repaying that deferred payroll tax of $47 million. And so on a year-over-year basis, that's a wash. So that really doesn't go into the bridge. The method change was a tax planning strategy we embarked upon in FY21, at the FY21, generating approximately $60 million benefit to CCI. That benefit was going to be realized over four years. such that in the first year, we would have a cash outflow, a very large inflow in the second year, which is our FY22, and then some outflows in the third and fourth year, FY23 and 24. And so that, adjusting for that, you'll see that kind of walk down bridge on slide, you know, 14 in terms of the, you know, in the cash flow. The last piece, you know, deals with, you know, combination of kind of working capital in other. As the company gets kind of more profitable, we should be generating more operating cash flow, which is the case. But that's being offset this year by some expected increases in working capital. Let me give you some color on that. Kind of generally speaking, larger companies, when you're growing, consume working capital. And so we're seeing some of that impact. Inventory, as we deliver more mission technology products we are increasing our inventory levels on a year-over-year basis. And in some cases, we're planning to buy ahead of need, you know, critical components, you know, supply chain related, you know, protecting against inflation. So that's another use of working capital. And payments, people who look at our balance sheet will notice that we had an increase in payables, you know, at the end of June versus last year. So we expect to have an abnormal outflow of payments kind of get to a more normalized AP level. That's dealing with some cash tax payments and some other kind of vendor payables. And lastly, kind of DSO. We ended the year at DSO with 55 days. We got as low as 52 days at the end of our first quarter. So right now we're assuming DSO should be somewhat flat for FY23. We've seen some delays in payment offices. There's discussion about short staffing in various government agencies, and the payment offices are part of that. So although we are planning flat DSO, we'll do everything in our power to drive that lower and hopefully be able to kind of minimize some of that impact of higher working capital.
spk10: Okay, so if I strip out anything abnormal this year, and it doesn't sound like working cap falls in that category, approximately what is free cash flow or a conversion ratio?
spk03: Well, so the free cash flow, so $495 million of operating cash flow, which I think is on a more kind of normalized basis, less $80 million of CapEx gives you $415 million of free cash flow. And I think that's a pretty – I guess I could add a few of those payroll tax deferral issues in it to come up with a, quote, normalized level. And then the conversion is simply dividing that by net income.
spk10: Got it. Okay, thanks. And then maybe just on the long-term growth outlook, I wanted to ask if you updated your kind of rolling forward view of the addressable market growth rate and thoughts on to what extent you could outgrow that.
spk05: Yeah, sure. Sure, Gavin. Look, when we look at the addressable market, you know, five-year CAGR, it's about 4.5%. This year, unlike any other year, frankly, we've been reviewing the addressable market and really had to look at some of those factors that are now here that haven't been there in the past, things like inflation, you know, what the impact of the Ukraine budget was going to be on us, at least in our fiscal year 23, not over the five-year period. uh, you know, customer con, tracking officer constraints, and some of the things we've already spoken on. Uh, you know, we actually see our addressable market pretty much, uh, where we've repainted at, uh, when we were coming out of FY22. Uh, you know, it's, it's north of $240, $40 billion. Uh, and the way I see it at the macro level, you know, $6 billion company with a $240 billion, uh, addressable market, you know, growing at about six per, 6% in 23, that sort of feels right. Um,
spk10: Okay. Thank you very much.
spk06: Yeah. Thanks, Kevin.
spk00: Thank you. And our next question goes to Matt Akers of Wells Fargo. Matt, please go ahead. Your line is open.
spk15: Hi. Thank you. Good morning. I wonder if you could talk on kind of capital deployment and especially kind of share repurchases in general. You know, if you go back to when you guys did the ASR a little over a year ago, I think it was, it sounded like That could maybe be a bigger part of capital deployment. Is that still the right way to think about it, or are you more kind of focused on M&A at this point?
spk05: Yeah, Matt. Thanks, John. Look, we are still on that path, right? As we mentioned during fiscal year 2022, we were about 50-50 as to how we deployed capital between four M&As we did and our ASR. You know, that's over the last 12 to 18 months. We're sitting here at a leverage around two and a half times. And, you know, we're going to continue to assess those type of gaps that we want to fill quickly, as well as looking at, you know, valuations of our stock and, you know, many other factors that go into us deciding to do an ASR. Both of those receive the equivalent amount of discussions, frankly. And you should expect to see us be very flexible as we continue during fiscal year 2023 as this year plays out. And there's a lot of things that are known that we can control. There's a lot of other unknown items. And part of that is the status of what our M&A pipeline looks like, and to the extent that we need to fill additional gaps. So I would say that we are right, you know, we are still there. We're going to monitor all our options, and we're going to deploy capital in 23 that does the best job of driving free cash flow per share.
spk15: Okay, great. And then I guess just one more, kind of at a high level. I mean, there's been a lot of delays and You've talked about some of the procurement delays and stuff with COVID and budget issues over the last couple of years. You know, to what extent is there like a catch up? Like, is there a sort of pent up demand that maybe, you know, once we sort of normalize things to grow kind of above that long term market growth or to what extent is that work is sort of kind of a lost opportunity at this point?
spk05: Yeah, Matt, thanks for that question, because that's really at the through through today right this is this is so much about what we can control and what we can't control and we can look at budgets and we can you know if we only looked at the budgets and not look at funding every other year up to 2023 that was a simple thing the budgets went up that's great we didn't talk about 30% of contract acting officers things we cannot control the level of funding or the priority order when you have 30% less employees Where's that priority sit? It doesn't mean that not everything is a priority. It would have been in the budget if it wasn't. So, you know, when, Matt, when things normalize back to we have a budget, we pretty much are a wide sector who understands how to play within that CR world, unless we get a complete anomaly like we had in FY2022. You know, we're all pretty competent to understand how to balance what our expectations are there. Look, what we're doing, we're going to focus on continuing to run our business. We're going to focus on operational efficiencies. We're going to continue to invest in the right areas. Tomorrow afternoon at 3.30, space is not going to be a priority, whether those funding awards come out in July or whether they come out next January. So our job of being a major company within the space is to make certain that we are positioned in the right markets. So we're not positioned in markets that are going away. We're actually positioned in markets that over the long term are going to continue to grow. So I'd love to tell you that all those things that we can't control are going to get resolved when we get to October 1st, the next government fiscal year. Chances are they are. And a lot of those very fluid areas are what goes into our guidance that we have for fiscal year 23. Yes, mission technology plays higher On our margins, every dollar revenue plays heavy on our top-line growth, and our job is to be, you know, to as prudent as we can be, make certain that we're putting that right range in place that, you know, shows you what the volatility is, but also the fact that we're in a growing marketplace where a customer pays on time. There are a lot of concerns that we do not have. So, you know, I like the hand we have. I like the strategy we have that we've been playing over the next number of years. And the fact that we got through fiscal year 22 showing top line growth, driving free cash, cash flow, we're in the right areas. We just need a few things to get straightened out. Thanks for that question, Matt.
spk15: Yes, that's great. Thank you.
spk00: Thank you. Our next question comes from Seth Seifman of JP Morgan. Seth, please go ahead. Your line is open.
spk13: Thanks very much, and good morning. Just to follow up a little bit on that question, and you talked about some of the mission technology work this year. Perhaps some of it has slipped out, which is something that we see kind of across the sector, and some of it just may not materialize. With regard to the stuff that just may not materialize, how do we think about how that happens, whether there are any implications for your market share, what gives you the confidence that It actually is going to materialize in the future, given the plans to build up working capital and kind of buy ahead of need going into fiscal 23.
spk05: Yeah, thanks. So at a macro level, the strategy of this company is to derive revenue from both expertise and from technology, both in the enterprise side as well as the mission side. That strategy is playing out extremely well. We have enjoyed a well-positioned top-line growth where the quality of that revenue has continued to improve over the last seven to eight years. We've had a lot of things that have come in in the last eight years and things that have not. But normalized net-net, we're in the right places as a federal government spend. We're in C4SR. We're in AI. We're in cyber. Thirty percent of our annual revenue is in the intelligence sector. community that continues to be a priority for national security and what we deliver to them. Cyber continues to be well funded. We have come out of other areas that have not been as well funded or that have been commoditized. So over the last 10 number of years, we're on this journey to reposition this company. And all I can tell you is it is a long-term model. We are a much better position company than we have been in the past. There are going to be awards that, you know, come in and do not come in. We talked about awards being lumpy. You know, at the end of the day, this guy for us at a 6% midpoint top line growth, albeit some is acquired and some is organic. Even the acquired revenue needs to have funding come in. We need to win awards and the like. And we believe we have the right prudent guidance, which is our job sitting here today. to make certain that we're able to provide the right prudent guidance that allows you all to determine where this company goes in this upcoming ESCO year.
spk13: Great. Thanks. Thank you. And then, just as a follow-up, you know, we see the effort at the Department of Justice to block the Booz Allen acquisition of EverWatch. I don't really expect you to comment on their M&A. But, you know, it's not an isolated incident in terms of what we see from the Justice Department and the FTC and this administration with regard to the approach to M&A. Does that enter into your thinking at all about, you know, your M&A strategy?
spk05: Yeah, thanks. Look, short answer is no. Look, ours is still, from the way I see it, it's a large competitive relatively fragmented market. government small business programs are constantly enabling new business creation. So at the level of acquisitions that we're looking for, no. There's no different path that we're going to take on an M&A front. Over the number of years, 30 to 40 years, we're a strategy-based company. Strategy is looking for gaps, and some of those we've learned to fill through internal investments or through partner partnerships. But no, there isn't anything on that question specifically, Seth, that's going to change how we handle our M&A program. Thank you for that.
spk13: Great. Thanks very much.
spk00: Thank you. Our next question comes from Sheila Kayagloo of Jefferies. Sheila, please go ahead. Your line is open.
spk01: Hey, um, good morning guys. Um, John, maybe another big picture one for you as you continue to shift the strategy and move towards technology and mission. Um, how are you doing that with your bid pipeline? Like, you know, are you deciding to bid on certain contracts? Are you hiring people that focus on that more? Can you expand upon your strategy? I know it's been ongoing for several years, but, um, you know how, how you're continuing to focus on it into fiscal 23.
spk05: yeah sheila thanks terrific terrific question look um you know what i would tell you is uh historically we were part of what i would now call more commoditized work uh today you're seeing the evolution in our business approach you know to tech and expertise where expertise is informing tech you know longer term what we expect is us to further differentiate ourselves within the overall federal market. So on a tactical level, as we have re-compete bids come up in what we've historically had, predominantly in our expertise area, we are taking really hard looks at those. Every dollar of investment is a dollar of investment that we want to make certain that we are making the absolute best call there. There have been some businesses, and I have shared this, there have been some specific programs, if not customer sets, that it just didn't make business sense and national security sense, frankly, for us to bid on work that 18 months from now we'd have the honor of bidding it again to generate lower margins. So, yes, that has taken a historical longer-term hit, on our top line growth number. But I will make that decision 100 times out of 100, because at the end of the day, we need to continue to position this company away from that work. And what I think the largest travesty would be that if we got ourselves, we have to at least grow at this amount top line so we hang on to some of that work. Because what it does to the organization becomes very distracting. So, you know, we are going to make some of these calls right in the right year, and some of them, they're not going to be as right. You know, they're not major bets, but they're a series of smaller bets. So over time, what we're looking to do is sort of turn this ship to a, you know, day where we're not talking about number of people we've hired and, you know, what our direct labor is and what our, you know, pass-through material bids are. So, you know, they're all very judicious decisions. And over time, you've already seen the results of those decisions, right? We have driven top-line growth to a level that we're comfortable with. Would we love to have it greater? Absolutely so. But those margins, right, that don't go away, we like the –
spk03: job that we have done there. Tom? Yeah, and the other kind of enabler with some of the increased technologies is some of the R&D activities we've been doing, investing a significant amount of money ahead of need to make sure we have the right kind of technologies to sell to customers. We've hired a number of people both in our you know, technology area or business development area who have a lot of expertise, understanding the market, client executives, kind of making those investments to propel, you know, that particular growth. And so those are enablers to kind of get us there, partners with some, you know, top-notch, you know, technology companies as well. So they all go into the mix. We'll always to go after more technology content in bids and be successful winning those.
spk01: No, that helps. Thank you both. And then, Tom, maybe one more follow-up for you in terms of slide 14. It's been hyped up a lot, but do we think about working capital as a continued usage going forward for the business, or is it just a fiscal 23 anomaly given supply chain shortages?
spk03: Yeah, I think, you know, good question. Perhaps a bit of anomaly in FY23. What we saw, you know, over the last several years is working capital being a source of operating cash flow. You know, our DSO four years ago was 65 days. Now it's down to, you know, 55, 10 days. And so that was a, you know, adding to operating cash flow. We're getting to a level where it's going to be hard to make material improvements to cut a DSO. You know, some inventory pressures – growing companies require working capital. So we'll try to keep working capital somewhat neutral, kind of going forward, vis-a-vis operating cash flow 23, 24, 25. But this year, there is a bit of a headwind, and we're going to do all we can to kind of minimize that headwind.
spk00: Okay, great. Thank you.
spk03: Thanks, Shirley.
spk00: Thank you. Our next question comes from Toby Sommer of Truist Securities. Toby, please go ahead. Your line is open.
spk02: Thank you. Could you give us some commentary on particularly the optical part of your business in space? Maybe talk about the competitive positioning, any kind of lead you have in having a viable commercial product or not. And then maybe in the context of that, describe what success looks like from your perspective three or four years out.
spk05: Yeah, Toby, thanks. Look, we're really happy, frankly, where we are in the photonics and the laser communications area. As I mentioned in my prepared remarks, we have production units in space, and we're involved in several missions, you know, many that we can't talk about here. And I, Toby, I look at our market in two different areas. The first step into optical communications was with our LGS acquisition. Very bespoke. Think about geo and interplanetary communications. We have laser terminals on satellites, and we'll be heading to the moon as part of the Artemis mission. We also have units transmitting on airborne assets for very specialized missions that have been going on. in a timeline measured in years. On the higher volume, where we started talking about proliferated LEOs, you know, we are still building manufacturing scale, and we believe we have the right capabilities in place to produce high volume, small form factor devices. Part of the thesis on picking up SA photonics was to take some of the exquisite technology you know, read algorithms that we have on our bespoke solutions and sort of give those to the, you know, to the high volume small form factor device world so that we make sure that we can close links in a much more assured manner without adding additional costs. We've already have production units in space. We have connected links. We've been transferring data at, you know, rates of around one gig. for second, if not higher. We've got some great programs in both DARPA and the SDA. So, you know, our photonics business to us is real. It's very tangible. It's operating in multiple domains, both in space and in air. You know, what denotes success? Success through FY23 is making the requisite investments that we talked about when we bought them last December, that meaning SA Photonics. to make sure that we are positioning them as best as we can to make sure that they're ready to take on not only the defense proliferated, you know, LEO market through other satellite primes, but also in the commercial side. You know, this is going to be one of those markets that I mentioned. You know, we're looking at an FY24. We really see material revenues. And based on the successes we've had in some of the earlier testing and getting down to some of those price points that are very much of a challenge for us to take a large, you know, read millions of dollars for spoke solution and get them to hundreds of K, you know, high volume. I like where we are on that path. So successes that in 24, we start talking about the increased revenue that we see. from that market, and we should see additional movement of our bottom line numbers as volumes go north. So hopefully that gives you a pretty good cover of where we think.
spk02: It certainly does. From a capital deployment standpoint, could you just comment what higher interest rates mean to you? You're at two and a half times Are you less aggressive in share repurchase and acquisitions as a result of the interest rate environment and your variable exposure there?
spk03: Yeah, so last year in FY22, LIBOR averaged around 35 basis points. Today, it's 2.4%, so we've seen an increase, 2%-ish, let's say. In the grand scheme, that's not material. Share repurchases will still be driving incremental free cash flow per share, albeit at slower levels. We'll have to repay some kind of interest expense, but it's not going to have a material impact similar to buying or borrowing additional debt to fund acquisitions, whether we're borrowing at 2.5% or 4.5%, that should not materially impact our decisions to make those investments.
spk02: And I can assume that you have embedded in your guidance continued rise in LIBOR, at least for the next several months?
spk03: Yeah, absolutely. What we have embedded in the guidance is an expectation that LIBOR will get to approximately 3.5% in June of 2023. So, you know, we shall say that seemed to me a kind of middle-of-the-road path somewhat consistent with various economic forecasts and yield curves and forward curves and the like. So we'll see how we do.
spk02: Thank you very much.
spk03: Yep, thanks.
spk00: Thank you. Our next question comes from Colin Canfield of Barclays. Colin, please go ahead. Your line is open.
spk06: Hey, thanks for getting me in. Can we talk a little bit about potential growth and even impact on TSA, the TSA impact contract, and what you're assuming with respect to the guidance?
spk05: Yeah, Colin, you know, that job is under protest. We have some amount of revenue in our FY2023 plan.
spk06: and uh pretty much all we're going to say until we see what the government's outcome is but uh you know the way we have it laid out laid out now we believe that uh we have that program sufficiently covering our fy 23 guidance got it got it and then maybe if you can talk a little bit about the multi-year margin environment um is 11 still possible considering the level of underbidding that we're seeing on both the expertise and technology end i think on the expertise and we saw tsa impact bid was kind of 1% to 2% margin below your implied bid. And then on the technology side, a lot of the FCA constellation bids are coming in at kind of low to no margin. So you mentioned in your feedback kind of the exquisite optical length pricing needing to come down. So maybe you can talk about that margin framework versus your 11% visibility.
spk05: Yeah, look, we're on a continued path to grow top and bottom line. I don't think 11% is a magic number. I just think that right now, given what our FY23 guide looks like, we believe that 10.5 to 10.9 or so is a prudent guide as we start this fiscal year off. It is not dependent on any one specific item. Yes, it is true that there's some expertise work that is continually bidding bid down. That's predominantly why seven years ago, and be part of a, you know, commoditized business. The last seven years has proved that we've done a pretty darn good, exquisite job of moving away from the commodity world, given that our margins have gone from 8.8 to, you know, 10.7 or so, if you take the midpoint of this year's guide. There's been some ups and downs based on winning programs, losing programs, making some, you know, decisions that worked, making some decisions that didn't. But, you know, you sort of can't erase the fact that we're a much different looking company. And as markets like optical comms over the next decade continue to proliferate, you know, nothing brings pricing down better than volume. We also do believe that we've got a head start on that because we do have products out in space. We understand what some of those correction items are. And we've got a long history, longer than, you know, where we've been tracking you know, what we're doing on the higher value work of understanding the dynamics of space, which is why we are on a number of, you know, prime satellite builders teams throughout the SDA and in the DARPA world. And I would never on a call like this talk about margins that those are at because we have targeted margins that are going to drive, you know, a decade worth of growth, just not third quarter of FY23.
spk06: Got it. Thanks, Colin. Yeah, thanks, Colin.
spk00: Thank you. And our next question comes from Mariana Perez Mora of Bank of America. Mariana, please go ahead. Your line is open.
spk08: Good morning, everyone. So my question is to follow up on M&A. You already mentioned that you want to do good morning. That's going to be biased towards technology. However, we have heard that space technology, for example, is getting quite pricey. Could you please give us some color around your M&A pipeline and the M&A environment?
spk05: Yeah, sure. Um, look, it's, uh, what we've, we've seen is our pipeline is sort of flattened, you know, off of 2021 levels over the past six months. Uh, there are some, uh, opportunities that are available out there. Yeah. I wouldn't characterize the market as robust, but the way we go about strategically picking where we want to go, it doesn't always have to be robust. There's have to be quality assets out there, you know, at the right price with the right cultural mix. that allows us to continue to build out either our expertise or our technology portfolio. We're going to continue, as Tom mentioned, we're going to continue to focus on SIGINT and EW and cyber and AI and analytics and anything that helps us do a more cost-effective IT modernization. And also our strategy does consider areas that would be additive to our customer presence. and our past performance. So those are also areas that an acquisition could potentially position us differently within a current customer set, but a different PEO that we believe will be very, very crucial to continue to drive us in our top line and bottom line growth. Look, PEs are very active. There's a lot of startups out there, just to provide a little more color on what we see. You know, some of the valuation expectations, as you mentioned, do remain high. That's in general, and we're not going to, you know, compromise our well-founded 20-year discipline as we bring those M&As in. So, you know, is it a frothy market? No. Does it have to be? No. Are we going to continue to be very, very select? You know, yes. And is the fact that, you know, recent government aversion around M&As, is that going to play a, you know, major factor in us deciding? continuing to grow this company in a manner, you know, absolutely not. So does that provide some additional color?
spk08: Yes, perfect. And then probably a different one on FY23 guidance. I would like to understand where these conservatives come from. So you have a robust pipeline, 12 billion of submitted bids, additional 17 that you expect to submit soon, and with high content of new work. However, you're only expecting like 6% contribution to your growth from new work. So where is this conservatism coming from? Is it like the award environment? Is your win rate? Is the protest environment? Can you please give me some color on where is that coming from?
spk05: Sure. Mariana, thanks for that. Look, I would tell you that probably the best way to answer this, look at the low end of our guide, the high end of our guide, just talk about some of the you know, different variables. I'll start off with the majority of this guide, as it has every year, comes from a completely detailed bottoms up. And then at each level, we're looking at a lot of the things that we can control and then also these things that we can't or they're unknowns, right? It's the unknown unknowns that can really, you know, throw this guide off. You know, at the low end, we're looking at funding recovery being slow and uneven and And at the higher end, it improves completely, right? That the contracting officers and all the things that myself and other fellow CEOs don't understand and why funding has been so delayed, those resolve themselves. You know, we talked about timing of some of our tech awards in the mission tech world that we talked a lot about. You know, those... recover quickly, you know, all the way up to that they grow higher than what we would see. You know, one potential area is in the Ukraine, conflict is as that moves potentially from a little less on kinetic to more non-kinetic, is there room for counter UAS systems? Is there room for, you know, other things there? And then in the future, if that is the, you know, case, how do we drive that across the international? The pace of new awards in contract expansions, we've been talking about that has been, you know, materially delayed. If it ramps up slower, we'll be on the lower end of the guide. If, you know, we can see some things come in faster, you know, it's a big difference between bids to be submitted, bids to be adjudicated that run late, and then ramp up. There's a lot of different factors. And again, I'm going to restate, it's our job to do the right prudent examination of all these variables. to make certain that we are doing our absolute best to guide. KO resources are going to be another element. Wage inflation. We haven't talked at all on this call around inflation and what those potential impacts are, at least to FY23. Wage inflation is real. 60% of our business is cost plus. That means 40% of our business is not. And how we go about covering down on higher wage increases, which is the right long-term business prudent thing for us to do, but how do we handle that in a difference between 22 and 23? Is that a potential margin hit to us? Yes. Do we have that factored in our guidance? Absolutely so. And then there's a lot of things in the macroeconomic and geopolitical noise, for lack of a better term, that is going to continue to want to play with funding. You know, we do try to assess all of those items. You know, a 4.5 guide or 7.5% guide in the year that we're looking at, the kind of business that we're looking to go after, you know, we're comfortable with that guide because, again, our job is to make certain we're doing the absolute best that we can to sort of tell you where those, you know, narrow, deep holes are.
spk03: Tom? Yeah, and, Mariana, the other point to observe is while we have a healthy pipeline, And we expect to win a good amount of that activity. As John mentioned, it's going to ramp up over time in the light. The other factor is at any point in time, some of our work is coming to an end of useful life. And so we have a natural fall-off in revenue. We like to win 100% of our re-competes. Unfortunately, we don't. And so there is also a gap to fill. And so some of that new business win is going to kind of fill the gap of either some lost re-competes or natural program life cycle fall-offs. And so I think that piece will help you with your arithmetic.
spk08: Amazing. Great, Paula. Thank you.
spk05: Thanks, Myra. Thank you very, very much, Myra.
spk00: Thank you. Our next question comes from Josh Sullivan of the Benchmark Company. Josh, please go ahead. Your line is open.
spk14: Hey, good morning. Good morning, Josh. You mentioned counter UAS there. You guys were early to the game with SkyTracker, tactical environment in Ukraine, highlighting the threat. But can you talk about how that market's evolving, how you get to stay up front, a lot of increasing competition in the market, but And then just how big of an opportunity do you see that?
spk05: Yeah, Josh, thanks. Well, look, counter-UAS was one of the very first areas we talked about as we were moving more towards tech, and that all started with the acquisition of 63 Systems, actually. And we've been following some of the recent counter-UAS legislation which has been out there, which I truly applaud because it's It's really trying to zero in to who has the authorization, who has the right leadership for where Counter UAS goes. We do call ourselves a leader in Counter UAS. To share some information with you, Josh, we got a large operational footprint. Frankly, over 1,200 systems have been deployed globally, protecting some of the most critical federal assets. We have the largest library of signals of interest because we've got 20 years within this domain. And we have capabilities that go from tracking and geolocating all the way from Group 1, which are those smaller commercial UASs, up to the large nation state ones that are at Group 5. The draft legislation is a step in the right direction. We continually upgrade and modify many of those 1,200 systems. And if you look at the legislation as it's written, we're also looking at critical infrastructure owners. So think about power plants and water sources and the like. Those will now be potential adjustable markets as we go forward. So we do see, you know, increased volume there. as we continue to build out our over 1,200 systems that we have deployed globally.
spk14: Got it. Thank you for that detail. And then just to follow up on the photonics strategy as well, you know, as you work with that commercial pricing environment, is there any thought of offering a usage model or just to get more dynamic to penetrate the commercial opportunity?
spk05: Yeah, I mean, yeah, we are – Josh, we have a number of models that we're contemplating today. Some of those models will work, and frankly, some won't. But they're all going to be based on volume, right? We believe we have the right technical solution. We believe we have the right hardware and software solution. But at the end of the day, what gets you from X to half of X, to some of the earlier questions, is going to be volume. You know, we believe we have the right pricing model in place. We know we're not at the most exquisite price point. We're always going to protect margins as well. So I would tell you, in that nine-inning game, we're sort of at inning two. But what I wanted to make certain of is before we took a deep step into this marketplace, which is a decade-long market that's completely new to us, Picking up market share at a rate that we can achieve that makes sense for us and that we're partnered with the right folks is going to be how we're going to move forward on the commercial side. I can tell you on the more bespoke side, we've been doing this work for quite a long time.
spk00: Ladies and gentlemen, we've lost connection with our speaker line. Please stand by as I reconnect them.
spk04: Okay, folks, are we back live?
spk00: Yeah, you are back live.
spk09: Operator, this is the speaker line here with CECI, John Mangucci and Tom Mutren. We were at our last call, or our last question. Can you hear us?
spk00: Yes, we can hear you.
spk09: Okay, thank you. I'm going to turn the call back over to John Mangucci for a quick wrap-up to end the call.
spk05: Okay, well, thanks, Nadia, and thank you for your help on today's call. We'd like to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you have follow-up questions. Tom Utrecht, Dan Leckberg, and George Price are available after today's call. Please stay healthy, and all my best to you and your families. This concludes our call. Thank you, and have a good day.
spk00: Thank you, ladies and gentlemen. This concludes today's call. Thank you all for joining. You may now disconnect your lines.
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