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spk06: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Fiscal 2023 Second Quarter Conference Call. Today's call is being recorded. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions and instructions will be given at that time. 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.
spk07: 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 those. 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 Mangucci, President and Chief Executive Officer of CACI International. John.
spk02: Thanks, Dan, and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal year 23 results. With me this morning is Jeff McLaughlin, our Chief Financial Officer. Slide four, please. Last night, we released our second quarter results, and I'm very pleased with our performance. We grew revenue 11% with growth in both expertise and technology. Profitability was healthy with an adjusted EBITDA margin of 10.2%. And we had another strong quarter of contract awards, winning about $3.5 billion, which represents a book to bill of 2.1 times for the quarter, and 1.5 times on a trailing 12-month basis. About 70% of our contract awards were for new business to CACI, and we had strong performance on our re-competes as well. Overall, our execution in the second quarter and first half sets us up well to achieve our fiscal year guidance. Jeff will provide additional financial details shortly. Slide five, please. Turning to the external environment, market and demand trends remain very constructive for CACI's business. On December 29th, the President signed the Omnibus Appropriations Bill, funding the government through September 2023. Budgets in general saw healthy increases, including defense spending, which increased about 10 percent from last year. Below the top line numbers, we see healthy spending trends across both expertise and technology in key areas of focus for CACI. including C4ISR, cyber, digital solutions, enterprise IT, and mission support. CACI's commitment to invest ahead of need drives differentiation and positions us extremely well to deliver innovation to our customers and value to our shareholders. Slide six, please. Let me update you on a key recent award. Last quarter, we announced the award of the Air Force Enterprise IT as a Service Contract or ITAS, demonstrating our leading position in IT modernization. This enterprise technology award was protested, and the Air Force subsequently undertook corrective action. Late December, we were notified by the Air Force that, after corrective action, the award to CACI was reaffirmed. We're very pleased by our customer's decision. Not surprisingly, that decision was protested again, and now sits with GAO for resolution. Our team is ready to go, and we look forward to beginning this important work for the Air Force, which we expect will be a positive driver of growth in fiscal 24. This award is a great example of our strategy to bid less and win more, focus on larger contracts, and leverage our leading position in enterprise IT modernization. Turning to second quarter awards, CACI won a sizable mission expertise contract to provide network and exploitation analysis in support of foreign intelligence and cybersecurity missions. As you know, our work and mission expertise engages highly skilled employees who apply their technical and domain knowledge to support critical and complex agency missions. The work on this program will incorporate CCI's deep, longstanding capabilities in both intelligence analysis and cyber. We won this competitive award and displaced the incumbent by leveraging our superior ability to understand, and execute the mission, thanks to our industry-leading talent. This award was also protested, and the customer is currently taking corrective action. In the space domain, we continue to see strong demand trends, and our photonics business continues to grow and scale. As we have discussed before, we supply both government customers and defense primes with our photonics technology. In the second quarter, we received additional follow-on orders from a defense prime. Our industry-leading photonics technology addresses the requirements of spacecraft operating at all ranges of space, low Earth, medium Earth, in geospatial area orbits, and beyond. CCI's optical communications technology is the only U.S.-based offering operating in space today that meets DoD and intelligence customers' stringent security and performance requirements. When we continue to invest in this technology to maintain our leading position as we see increasing demand for secure, high-bandwidth communications across all domains. I also want to highlight our strong re-compete performance. In particular, our re-compete wins of our best-grown investigation work for DCSA and important cyber-related work for the intelligence community. Our re-compete successes are driven by strong execution and the value we bring to customers. All of these awards, new business and re-competes, are for high-value, enduring work that addresses critical priorities for our customers and supports our ability to deliver long-term growth, margin expansion, strong cash flow, and shareholder value. Slide seven, please. As we have discussed before, we are committed to a flexible and opportunistic capital deployment strategy that includes internal investments, M&A, share repurchases, and other capital deployment options based on business and market dynamics. This morning, we announced that our Board of Directors has authorized a $750 million share repurchase program, of which $250 million is expected to be executed imminently as an accelerated share repurchase. With moderate leverage, ample borrowing capacity, and confidence in generating strong future cash flow, we're in a good position to deploy capital to drive additional shareholder value. We're pleased with our performance, and we remain confident in our long-term prospects. We are successfully executing our strategy, making the right investments, hiring and retaining top talent, winning new work, managing the business efficiently, and leveraging our strong cash flow to deliver shareholder value. With that, I'll turn the call over to John.
spk09: Thank you, John, and good morning, everyone. Please turn to slide eight. As John mentioned, we're pleased with our second quarter results. generated revenue of $1.6 billion in the quarter, representing year-over-year growth of 11%, including organic growth of 6.2%. Expertise revenue grew 8% and technology grew 14%, which is well aligned with our view of the year. Adjusted EBITDA margin was 10.2% in the second quarter and 10.4% for the first half of the year. Our strong first half performance is on track with our full year guidance. Second quarter adjusted diluted earnings per share were $4.28, reflecting the higher interest expense we discussed last quarter, partially offset by our higher operating profit. Slide nine, please. Second quarter operating cash flow, excluding our accounts receivable purchase facility, was $22 million. This result reflects $93 million of unusual tax items we have previously discussed. namely the final repayment of $47 million of the deferred payroll taxes under the CARES Act and a $46 million payment related to Section 174 of the Tax Cuts and Jobs Act of 2017. We have previously disclosed the full-year impact of $95 million from Section 174. This quarter's payment represents the half-year effect on our quarterly tax payments. Cash flow also reflects the timing of ramping revenue recognized later in the second quarter and its attendant working capital. We ended the quarter with net debt to trailing 12 months adjusted EBITDA at 2.2 times. As we have previously discussed, the strong cash flow characteristics of our business, modest leverage, and access to capital provide significant optionality to deploy capital in support of future growth and shareholder value. To that end, we announced earlier this morning that our Board of Directors has authorized a $750 million share repurchase program. As John mentioned, we're in the final stages of deploying an initial $250 million of that authorization as an ASR. We expect to finalize and execute the ASR promptly and we'll provide you with additional details when we execute that repurchase agreement. Beyond the ASR, we expect to deploy the remainder of the $750 million authorization in a manner based on business and market dynamics over time. This approach to capital deployment is a refinement of our strategy to be flexible and opportunistic in the management of our capital structure. We are now even better positioned to respond with agility to changing market conditions and investment alternatives. Slide 10, please. We are reaffirming our fiscal year 23 guidance with the exception of free cash flow, which we are updating to include tax payments under section 174. Let me also be clear that our guidance does not yet reflect any share repurchases under the authorization we announced this morning. We continue to expect revenue growth of between 4.5% and 7.5% with growth in both expertise and technology. As a reminder, all of our recent acquisitions have now anniversaried, and so future growth in these areas will be organic. We continue to expect our full-year adjusted EBITDA margin to be in the mid-high 10% range, and we are reaffirming our prior adjusted net income and adjusted EPS guidance. We are updating our fiscal year 23 cash flow guidance solely to reflect the previously disclosed $95 million cash tax payments Section 174, given no changes have been enacted. Lastly, I want to reiterate that our guidance does not reflect any share repurchases under the $750 million authorization we just announced. We expect to provide more information after we finalize the details of the $250 million ASR. Slide 11, please. Turning to our forward indicators, CACI's prospects remain strong. We won $3.5 billion of contract awards during the quarter, driving our backlog growth of 10% compared to last year. Second quarter backlog includes roughly $1.5 billion from our intelligence customer mission expertise award, as well as roughly $1.2 billion from our DCSA background investigation recompete win. These reported amounts reflect current customer requirements. For fiscal 23, we now expect 95% of our revenue to come from existing programs, with the remaining 5% split evenly between re-competes and new awards. We have $6.6 billion of submitted bids under evaluation, approximately 65% of which is for new business CACI. This is down from the first quarter primarily as a result of our strong second quarter contract awards. And we expect to submit another $15 billion in bids over the next two quarters, with over 75% of that being new business CACI. In summary, we're very pleased with our results, which demonstrate the successful execution of our strategy. Our team continues to perform well, and we remain confident in our ability to generate long-term growth and shareholder value. And with that, I'll turn the call back over to John. Thank you, Jeff.
spk02: Let's go to slide 12, please. In closing, the second quarter and fiscal first half keep us well on track to deliver our full-year guidance. I'm pleased with our continued growth, profitability, cash flow, and contract awards. Looking forward, we remain committed to delivering long-term growth and margin expansion while compounding those per share over the long term. As is always the case, our success is driven by our employees' talent, innovation, and commitment. To everyone on the CACI team, I'm extremely proud of what you do each and every day for our company and for our nation. And to our shareholders, I thank you for your continued support for CACI. With that, Emily, let's open the call for questions.
spk06: Thank you. We will now begin the question and answer session. If you have a question, please press start followed by one on your telephone keypads now. Please limit yourself to one question and one follow-up question only. We will take a brief pause to allow questions to come into the queue. The first question today comes from Robert Springlein with Milius Research. Please go ahead, Robert.
spk08: Hey, good morning. Morning, Rob. Nice numbers. Nice numbers, and congrats on your reauthorization in ASR. John, I don't know if this question is for you or Jeff, but Jeff just talked about the opportunity set that's out there in the pipeline. What kind of book to build should we anticipate after a strong first half here in the second half, especially with this budget rising?
spk02: Yeah, Rob, thanks. Look, we're extremely happy with the book to build that we posted. We've also been able to boost the trailing 12 months number, I think, to 1.5 times. You know, $13, $15 billion of additional bids in the pipeline. I like our new business win rates. Very proud of our A-compete rates that, you know, year over year continually to stay above a 90% capture rate. You know, what I'll use as evidence of us continuing to execute, I guess I would say, memory management, right, around how we do business development. We've been on a long-term path of, you know, this bid less and win more and, you know, drive duration of programs in our pipeline longer and longer, because to me, at the end of the day, I want predictable long-term growth. So we've got some nice bids in the pipeline. I like the way that the ITAS Air Force Award is trending. I'm very proud of the team for an extremely well-laid-out, competitive, incumbent takeaway in the intelligence community. And on the DCSA award, you know, that is a driver of both revenue and margins. And that comes not only with some recompete volume, it also comes with some new business volume as our government customer reduce the number of people providing that service from three folks to two. So, you know, I would tell you, to me on the new business front, everything is in position. You know, we don't get to win them all. But, you know, we are very focused on making sure we're bidding the right work. And the right work, you know, involves looking at top and bottom line growth, right? We've got to sort of keep this mix up, whether it's expertise or tech. You know, growth in both of those segments, you know, as I've always said, people tell me all the time you must be happy with that high, you know, tech segment growth because it exceeds where the expertise one is. And I consistently say, I want both of them to grow. And I think we're sort of getting ourselves to that point.
spk08: You know, just in that vein, do you see equal budget support for defense hardware and services, especially now that you're involved?
spk02: Yeah, Rob, look, I think that, you know, at least the 23 budget, first of all, it's constructive that it was passed without a long-term CR. It does support very key areas of where CACI is focused. You know, if I look forward, you know, I don't want to look too much further than electronic warfare, SIGINT, and cyber, and sort of where those three areas go. We're beginning to become a heavier player in the space domain. You know, I think those are decade-long budget growth areas. So, you know, we've gotten ourselves strategically, not by accident, into those, you know, deeper river, longer flowing streams of funding. And that makes us a very different company going forward. You know, a lot of small left and right turns that is really, I believe, positioned us well so that just about any budget environment, you know, we're a national security company and the world's a dangerous place. And I'm very pleased so far with the budget.
spk08: And I apologize. I don't want to overstay, but I want to ask Jeff for a clarification. You know, John, you talk about technology versus expertise, and technology mixes up in the first half, yet the margins for the first half are going to be lower than the second half. So, Jeff, if you could just explain that dynamic and what changes in H2.
spk09: Sure, Rob. You know, the mix operates in two dimensions, and I think oftentimes people kind of hear fixed price and they think higher margin and they hear cost plus and they think lower margin, and that's really not always the case. We have plenty of higher margin cost type work, and we have some important fixed price work that's also slightly lower margin, reflecting a lot of real business factors. there are some lower margin fixed price sales in the second quarter that you see reflected in that mix.
spk06: Our next question today comes from Peter Arment with Baird. Please go ahead, Peter.
spk12: Yes, good morning, John and Jeff. Hey, John, maybe just a touch base, first a clarification just – Is there a deadline date on the GAO, you know, when we'd see a resolution on the Air Force contract? And then just as a second question, photonics obviously has been a huge focus for you, and awards continue to pick up. You know, how does the runway look regarding scale? I know you just mentioned space is going to continue to be big.
spk02: Yeah, Peter, thanks. Let me try to unpack that. First off, on the Air Force contract, look, we're very, very pleased, as my As my prepared remarks mentioned, the protesters were unsuccessful. We were successful at holding on to that award. We have a lot of confidence in the Air Force, you know, seeing this through with us. We're ready to go. We are, you know, very well staffed and, you know, already have had, you know, discussions with our customers. So we would expect this ought to be wrapped up in the April timeframe, Peter. Will not and is not planned to be a large contributor of revenue in FY23, but we clearly would expect as we get things ramped up and started up to see this deliver in FY24. On the space front, where we are with our optical compounds business, look, we're I'm very happy with where we're at. I've been very transparent. Picking up the photonics business of LGS and combining that with the SA photonics business really is the best example of putting, I guess, peanut butter with chocolate. I really like what that's going to deliver to us. We're going to continue to invest in it, so you all are going to continue to see us investing in that area. That's a good decade-long, nice growth business for us at better than average margins. I think we're on the right path to get onto that on-ramp at the right time. We're really working on expanding already into future-related markets that are going to include some airborne systems, potted and non- and then really working on pulling the synergies together between our LGS and our SA Photonics business. Peter, you had one other question on that, and I didn't catch it. Air Force contract space.
spk09: I think I remembered Air Force contract space. Okay.
spk06: Thanks, Peter.
spk13: Thanks.
spk06: Our next question comes from Matt Akers with Wells Fargo. Please go ahead, Matt.
spk10: Yeah. Hey, good morning. Thanks for the question. I wanted to ask about, you know, kind of capital structure and your target leverage. You've been running, you know, kind of two, three times the last several years, but interest rates, you know, were very low. Did that change at all, given where rates are now? And do you think about the mix of kind of variable rate debt and differently now?
spk02: Yeah, Matt, I'll start off and I'll turn it over to Jeff. For a long, long time, we've been talking about, you know, we are comfortable, you know, and everything up to a four and a half range, maybe temporarily getting a little bit higher than that to do something that was very transformational. You know, what I like about where we are now, you know, leverage somewhere in the low twos, but I want to tie it to opportunistic and flexible. You know, if we deploy... full $750 million of the combined ASR and open market repurchase, that's going to still leave us around three times. And it really leaves us considerable capacity for other options. And to me, that's the kind of flexibility and optionality we were looking for. So, Jeff?
spk09: We're in a really nice spot here to operate the company in the near term in kind of the mid twos, which gives us a good chance to, you know, mid twos to three, gives us a good chance to have plenty of options as we approach either, you know, organic investment or acquisitions. We really are in a nice spot with lots of options, which is just exactly where we'd like to be.
spk10: Got it. Thanks. And then if I could do one more, I guess, you know, on M&A, it's been slower than you sort of have done historically. Could you talk to us about, you know, what are sort of the hurdle, you know, rates you're looking at and where are some of those deals falling short? Is it just valuation or, you know, just not the right assets out there that are the right fit for Kaki?
spk09: Yeah, there are a few observations we'd make here. The The pipeline is not necessarily any smaller. I think we're starting to see some valuation rethinking as the market sort of adjusts to the current circumstances. I imagine a lot of that is interest rate driven, or some amount of it is interest rate driven. But we remain very active lookers. And we're going to continue our practice of being very thoughtful and deliberate and strategic. And, you know, when the right, that's the other part of this optionality, right? When the right opportunity presents itself and the right fit and the right time, we're, you know, we're poised to move with some speed.
spk06: Our next question comes from Bert Subin with Stiefel. Please go ahead, Bert.
spk11: Hey, good morning. Thanks for the question. So just to follow up on the earlier question, if I think about it maybe on a near-term basis, the DOD's O&M budget is expected to grow high single digits. RD&T is expected to grow even faster than that. But your organic guidance is still for low to mid-single digits in fiscal 23. Even if we factor out your Army exposure, at least from our seat, it would seem like higher budgets and easing labor would yield more opportunity just relative to what your view was last summer. Is there a reason that's not the case?
spk02: Yeah, Bert, thanks. Look, let me start off with saying that we're really happy with our first half performance. I mean, 5% organic, 10.4% adjusted EBITDA margin. So I like how that sets us up well going forward. You know, we've said in the past, We've got a large growing addressable market, so there's plenty of opportunities for a $6.5 billion CECI. I like the strong awards that Rob highlighted earlier. We've got a nice pipeline. Back on guidance, look, it reflects a lot of different assumptions and scenarios in terms of how a multitude of factors are going to play out. That's why we provided a range at the beginning of the year You know, to put a little color on what goes on here when we look at, you know, do we hold our guidance? You know, what if we had a strong first half? Do we, you know, narrow guidance? Do we raise it? We mentioned things like new award timing, facility and customer access, COVID exposures, you know, and the FY23 budget is positive. Those are all trending more positive than what we would have seen, you know, back in the July-August timeframe. You know, cost of labor, contract expansions, sort of little unchanged to negative, you know, a little bit of pressure on margins if you look at continually to retain current employees and hire new ones. And then the whole contract officer resources, those are about the same. So we've got some things that move us closer to the right goalposts, and there's some things that keep us you know, somewhere along the left one. So we're just trying to balance risk and ops and, you know, we could probably throw in some of the, you know, 2024 comms commentary and does that blow back on to 23? You know, so we're very comfortable with the guidance that we have out there. We're very strong and well positioned to land within that guidance and, you know, we'll be able to potentially
spk11: Okay, that's super helpful. Maybe just as a follow-up to that, you know, if we look at that guidance, it implies a pretty healthy step up in the second half, you know, from 428 in earnings and 2Q to something north of 450 per quarter, I guess, based on the cadence in the back half. Can you just walk us through what changes? And to your comments there on 24, are you starting to contemplate anything like a potential government shutdown or hearing anything like that? Just any commentary around what steps up in the back half and what those risks are.
spk09: Yeah, I think maybe I'll start that off and then let John address the second part of your question. The mix phenomenon that I alluded to a few minutes ago, a few questions ago, extends really nicely And we see a growing fixed price content, but we see some of that margin mix that I alluded to earlier changing in a way that's favorable to margin. You can see a little bit of that if you look at our cash usage and a little bit of inventory growth. You can see sort of the front end of that starting to happen. prepared remarks, I referred to that when I talked about ramping revenue at the end of the second quarter and that attended working capital growth. So we're starting to see the front end of exactly what we expected to see in the second half. Again, at the risk of repeating myself, it's really lining up nicely with right where we
spk02: year 2024. Look, we're hearing the same, I guess I'll choose my word wisely, I'll call it commentary. I've been asked noise, rhetoric, but look, there's always a lot of noise and there's always a lot of headlines. We're a 60-year-old company. We've been through many environments, administrations, budget cycles. We've heard a lot of commentary and In all fairness, on one side, you have legitimate concerns about the government's deficit and debt situations, and therefore talk about budget cuts in government fiscal year 24. On the other side, there remains significant bipartisan support to fund defense and national security, just given the geopolitical environment and threats. So if there's a war in Europe, there's near-earth threats like China, Cyber is the great equalizer, whether that's Iran or North Korea. A decade plus ago, we were at war in Afghanistan. Very germane to us. We operate in the skies, the electromagnetic spectrum, and all domains pretty much unencumbered. That's most likely not going to be the case in any type of nuclear conflict. We're relying much more heavily on space, and that domain is now contested. If I had to write the pluses and the minuses, but we're going to continue to monitor it. But to some extent, I'm a guy and we're a company that we're going to work on things that we can influence for now. We're going to focus on running the business, delivering long-term growth and shareholder value. What we know is national security is extremely important and they have a lot of critical needs. We know our expertise in technology can address many of those needs. You know, we're a strategically based company. Strategy is, you know, where we come from. We're not in these high-growing, very important markets by accident. So, you know, I like the fact we have a full government fiscal year 23 budget. This supports where we want to head, and, you know, we're going to continue to focus on long-term strategy that delivers consistent value no matter what that, you know, commentary happens to be. But thank you, Bert, for that question. Thank you.
spk06: Our next question comes from Seth Seifman with JP Morgan. Seth, please go ahead.
spk04: Thanks very much and good morning. So I guess I think it was a few quarters ago, maybe it was around the middle of 2022 when there was some of the slowness in government funding. I think you talked a little bit, John, about being unsure kind of in terms of figuring out what might be delayed versus what might be lost. And I wonder if kind of, you know, maybe six months on or so, if you've gotten a better sense of that, and particularly maybe on the product side, since it seemed like that was an area where, you know, maybe there was some more, you know, dislocation in terms of what was expected.
spk02: Yeah, Seth, thanks. Yeah, so I'll start off. As Jeff mentioned, the year's playing out as we expected, and some of the mission tech work that we have out there is clearly planned to deliver during the back half of the year. Look, back to where we were, and you're absolutely right, second half of fiscal year 22, we were looking at funding slowdown and dips and the like. And look, some has come back. And some has and will come back in a slightly different, different form. So the update to that is, you know, while funding was the original issue and while the customers struggled through funding, some of the threats and requirements changed. You know, it's requiring enhanced capabilities versus what we all may have delivered just about a year ago now. You know, now for us, software defined everything. What that means for us is we're working on software modernization. the end of our fiscal year and that does drive a stronger bottom line um you know it's um it's something that we continue to watch uh but it but it does you know unnaturally uh set play into this concept of soccer defying low size weight and power multi-mission tech that can really take on different different needs um you know if we look at what's going on in the ukraine You know, there's a lot of UAS activity there, and even those requirements continue to change as the pace of battle changes. So the fact that, you know, we don't have to push all those mission tech sales out through the end of the year is a great kudo to our, you know, our earlier acquisitions and that they were very software defined. So we'll be able to get back on track very confident in that, and we'll need that, of course. So, thank you for that.
spk04: Great. Great. Thanks. And then maybe as a follow-up for either of you, and I know you guys aren't responsible for all the stuff that we analysts throw into our models, but if I look at the consensus for next year, it looks like people are thinking about kind of a 10.9 percent EBITDA margin, something close to 11 percent. Do you think that maybe there's still some anchoring around with the idea of ever-expanding margins and stuff that might be where things in this environment that we're in now, this operating environment, where things might take a little longer to deliver on that or be a little bit tougher and maybe expectations need to be a little bit more in check for now?
spk02: Yeah, I think what I'll What I'll say to that is we're 186 days into our year. We've got another 180-something days left. We're going to focus on making sure we button up FY23 to our guidance and to a level that our shareholders have come to enjoy. Look, on the margin side, long-term is what I would stress to everybody on the call.
spk00: We were 8%-ish.
spk02: mid to high tens, you know, and then where that cap is. The way we see it internally is, look, we are getting into higher and higher, greater and greater funding streams. It's how we move from eight to mid to high tens, frankly, right? It's really strategically taking a look at the focus of business we have and not resting on where we've been but looking at where the trend lines are going to be and the fact that there was going to be greater spend in some areas that we had no involvement So, you know, four or five years ago, six years ago, getting ourselves involved more into the national security side, getting us more into space, you know, gives us much better chances at continually to drive margins than we would have been with our, you know, let's say fiscal year seven, 17 portfolio. So, you know, I'm going to shy away from, you know, crystal balling up by 24. I really want to focus on this year and finish strong. you know, get the share buyback executed, look for, you know, places where we still think we're not highly valued enough and take some opportunistics, stabs it, taking some additional shares out and really trying to position as well for our guidance call that comes along in August of 23. So thanks. Thanks so much, Seth.
spk06: Our next question comes from Mariana Perez Mora with Bank of America. Please go ahead.
spk01: Good morning.
spk02: Good morning, Mariana.
spk01: So my first question is a follow-up on the commentary, the political commentary about next year's resolution of probability about that. Have you seen any impact in your customer behavior from this increased uncertainty? Have you seen that commentary actually impacting award environment, spending environment?
spk02: Yeah, Mariana, thank you. Well, look, nothing around FY24, right? I think right now, as I shared earlier, from where I sit, a public company, CEO, national security space, it's sort of an unbalanced scale between, you know, I like what this nation is going You know, if you look at FY20-23, look, we have a fully approved, signed off, and appropriated government fiscal year 2023 budget. So with our customers, there's much more certainty. In my senior level meetings, there's much more certainty around how they're going to, you know, push funding out. We still have this contracting officer thing, and everybody in the federal government sees that, and they're all working that. That's going to take some time to get, you know, fully corrected. But, you know, I see a much more positive environment with a customer set that we're supporting. You know, everything we're doing in the EW, CIGIT, and cyber and how that begins to converge, what we're doing in commercial solutions for Classify with our ID tech acquisition where we're seeing in space, But those are all highly funded areas that are absolute must-dos within where we head. And on the IT modernization side, you know, we've won some nice-sized contracts there. We have to get through some of this protest period. But, yeah, I have not picked up any concerns, Mariana, around funding. You know, where are we going, FY24? We're all going to have to watch. I hear the same things you all hear. You know, could we have a, you know, full-year CR perhaps? But, you know, we're in some pretty important areas that I believe will still continue to receive the right percent funding.
spk01: Thank you. And then you mentioned these recent wins. You have recently won significantly large multi-billion dollar wins. How is your appetite to pursue those kind of like larger contracts? Like in the pipeline of submitted bids or the bids that you expect to submit in the near term? How much of that is multi-billion dollar contracts?
spk02: Yeah, look, you know, we've been on a long-term strategy here of, you know, bidding larger jobs. And, you know, for a company like ours, we have to contrast that against winning a lot of work that, you know, gets a nice revenue pop, doesn't do much with margins. And if you find yourself in that situation, in that gray area where you're bidding programs with tighter and tighter rates, the reward for that, trust me, is you get to re-compete on that work even sooner. So it's why we've been very strategically focused on duration of contracts in our backlog, which is now around four, four and a half years. Yes, it does mean that awards are lumpy. It does mean that there's a much larger price on winning. some of those larger ones, because you're not chasing these really small ones that can sort of fill that in. I think we've got the right, I think we have the knob dialed right, Mariana, in that we're out there winning some nice C-cord wins, but we're also winning these multi-billion dollar ones that frankly provide a nice floor and a nice base so that we can be, you know, again, quote, unquote, more predictable long-term growth. So, yeah, we have the appetite for it. We've got an outstanding business development team and outstanding sales support team. We've been building it over the last decade. So we're going to stay with that strategy because once you win something like that, not only do you deliver the long-term tech tail, but then you get into the O&M of those programs, and that moves us into really nicely positioned expertise work. So thank you for those questions.
spk06: Our next question comes from Sheila Kayuglu with Jefferies. Please go ahead, Sheila.
spk00: Hey, good morning, guys, and thank you. Just one more comment. I feel like you have a good setup with longer-term contracts, but on your organic growth in the first half, you performed pretty well, up 5% organically, and just the full-year guidance implies some slowdown. So maybe can you talk about that a little bit more? You touched on it. And then specifically, I know your contract wins are being held up, including ETAS, but Can you talk about what your assumptions are around ETAS, CSCA, and the ICWIN? What sort of assumptions do you have for those starting to ramp?
spk02: Yeah, sure. I would say on the organic front, yeah, look, I'm very happy we had 11% overall growth and 6% in the second quarter. And, you know, your numbers are, as they always are, spot on, you know, 5% organic growth for the first half. Look, that is, That is really playing out because of previous larger awards that we've been able to book, get to the protest period, and then every one of these larger tech jobs has a slightly different ramp-up plan. So those are starting to all get into alignment. On top of that, the mission technology work, we've been very transparent on that. Rarely, Sheila, does that make it deeply into our backlog. We're usually getting an award. It's a 30- to 60-day recycling cycle. So we sort of get that award, and that immediately goes to revenue and then better profits. I know Jeff touched on that looking towards our second half. So I like the book of business we have today, and I'll sort of move forward to the ones that we just won. Look, we're extremely pleased. with what we have won there. They are two really nice jobs that, you know, those and a few others are going to set us up well. You know, look, on the award side, you've always heard me say awards are lumpy, right? You'll never see me post any kind of headline, you know, record award quarter because I fear coming to you all showing you that the quarter after that, you know, we're slightly left. So, look, awards are always going to be lumpy. But we do continue to win new work and execute against our large and growing backlog. On the ITAS, look, I think we'll know in the April timeframe. I don't like to go to my crystal, crystal ball. But I see more upside than downside to that decision. Sheila, I really see that being, you know, the next step up. for us as we look at how we're going to solve for FY24 or organic growth. The other cyber-related IC award, and for everybody out there, we're going to continually call it that because it is a very sensitive program. On behalf of our customer set, we're not going to just discuss the program name or our direct customer. I can tell you that that is in the protest period. We're waiting. for the customer to take corrective action. You know, we're hopeful we may hear something before this month is out. But, you know, as I mentioned on the Air Force job, when we go to these large awards, we're always planning a 90- to 120-day protest period so we know when we can count on revenue from that job so we don't, you know, peak too early. So I do like what we've done there. Those were really strong strategic wins. We had the right best value solution in both cases. You know, we continually shake these awards from two, three, four years before, you know, anybody else sees them. And again, we're leading with investment ahead of customer need. Both of these awards will benefit. We'll talk more about it after we get to the protest period. The investing ahead of contract award is showing these customers the art of the possible. Okay, here's where the threats are going to go. Do you want a more technological solution? it really takes the risk of having to find 2,000, 3,000 cleared folks. How can we bring technology more in to sort of lower their risk? So all in all, I like how 24 is setting up, and I do believe that we'll find our way through these projects.
spk06: Our next question comes from Toby Summer with Chura Securities. Please go ahead, Toby.
spk13: Thank you. You mentioned your addressable market increasing substantially. How does the spending growth that the company can tap into compare and perhaps differ from the headline rates of growth of this year's budget?
spk02: Yeah. I think we've called that growth between 22 and 27, somewhere in the 30% range. Overall budgets in 23, some are going to grow faster in any given year, but the work that we've done says this is at least a 30% growth market all through 27. What I like is we have a total adjustable market of $260 billion, and we're a $6.5 billion company. measure it is if we hadn't done the acquisitions, if we hadn't been strategically focused, if we hadn't gotten ourselves into these funding streams, if we had done no acquisitions at all, you know, there are some in this marketplace that don't do any, you know, then we would not have positioned ourselves well and, you know, we've been able to drive additional shareholder value. So, look, strategy is a place where we come from. We're not here by accident. $260 billion addressable market is almost two times what it was in 2012. So, you know, I can tell you from a macro level, budgets are holding up well enough for us to continue to grow. And we like what the future of future holds.
spk13: Thanks. Is there anything you or the industry can do to affect change in terms of the chronic and burdensome protests that kind of plague the industry and procurement environment? Just wondering if you see the possibility for change.
spk02: Yeah, you know, Toby, I've been in this market a long time. This is almost 40 years now. Look, the federal government provides the protest path for, you know, and I will say for good reason, right? You know, there's days we're happy for that process and there's days we're not, right? It depends on whether I'm on the left side versus the right. So, look... It would be more helpful to us, clearly, if we could come to you all that we win this job in the next five days. We're going to see pops in revenue and in margins, but it's just not the market we're in. So the best we can do, as you've heard me say many times, is we control what we can control and we work on. That is, when we win jobs like ITAS and it gets announced in our first quarter, we pretty much have to recognize that it may be early fourth quarter. stay stable right but on the flip side of that doing business with the federal government they're a well-paying customer right I'm not I'm not worried about whether you know 40 million people click on this app you know that we know what national security needs are we can be much more she should be focused and I would say the protest process is just something we have to work to work through we have to be reasonable on it and At the end of the day, you all and our shareholders have been extremely patient that these things eventually work themselves out, and we all get to move forward. Thanks, Toby.
spk06: Our next question comes from Louis DePalma with William Blair. Please go ahead, Louis.
spk03: Good morning, John, Jeff, Dan, and George.
spk02: Good morning, Louis. How are you doing?
spk03: Great. As a follow-up, John, to your reply to Seth's question, Ukraine has employed a wide range of systems to counter UAS and loitering munitions. Are SkyTracker orders expected to ramp in the future as you developed the software modifications that you referenced?
spk02: Yeah, let's talk a little bit about what I don't have to warn everybody there that what we all see is about an eighth of what's actually going on there. Look, we are very deep in kind of UAS and EW, as many of you know. And there's going to be a lot of technology capabilities that are going to be relevant and are already relevant in the Ukraine fight. There's also avenues for some of our intel analysts, our training and operational support, and our logistics folks, individual expertise issues. Look, I think issues in the Ukraine are going to be there for quite a long time. All the supplementals are, you know, rightly laid in as to your money. But on the other side of that, Louie, is, you know, the federal government makes a decision as to what we can export. We're hearing and seeing what you're all hearing and seeing, you know, allies around the globe, They're all talking about expanding their defense budgets. Just as much as looking at what's going on in the Ukraine, we're already delivering some of our technology to the Five Eyes countries. We're going to look across our Eastern European allies. They're increasingly interested in our counter-UAS methods and systems, as you mentioned, far beyond the SkyTracker line. As they increase defense spending, You know, we're going to be involved in those discussions. We're already out there understanding what their requirements are. It's still too early to discuss specifics, but, look, it's another potential market for us. Every time we can do things to grow our total addressable market, better returns, you know, come up in the future. So, yes, our Sky Trekker line, our Corian line, some of our Beam and Beast systems that are more man-packed level solutions that do counter UAS up to and including moving from kinetic mitigation versus non-kinetic is what we're looking at next. So I think we've got a long potential growth line there.
spk03: Great. And it appears as though your work with the Air Force's Enterprise IT as a Service program is close to moving forward you said potentially April are you also in contention potentially for the wave two and the wave three associated with that program you obviously won wave one but there's two other ones that are probably big and does having wave one put you at an advantage to winning either of the other two
spk02: Yeah, Louie, thanks. You know, I'm going to stick to our long tried and true practice of not counting on things that aren't awarded. Yes, Wave 2 is the network builder of that. You know, I think, you know, we were very well positioned on Wave 1, and, you know, we'll have to see how that plays out.
spk06: Those are all the questions we have for today, so I'll turn the call back to John Mangucci for closing remarks.
spk02: Thanks, Emily, and thank you for your help on today's call. We'd really like to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you will have follow-on questions, so Jeff McLaughlin, Dan Leckberg, and George Price are all available after today's call. Please stay healthy, and all my best to you and your families. Emily, that concludes our call, and thank you all, and have a great day.
spk06: Thank you everyone for joining us today. This concludes our call. You may now disconnect your lines.
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