We're going to get started on our next session. We have John Mengucci here, President and CEO of CACI. So thanks, John, for coming. I think this is the first time I've gotten to sit down with you and do this.
That's great. Thanks for having us.
Yeah. So, I wanted to start, you know, high level. What's on everyone's mind is, you know, the 2024 budget, given that we're now in almost March of 2024. We don't have a 2024 budget. There's this possibility of sequestration that's sitting out there. How do you think this is going to play out? And let's, you know, if we do actually have sequestration, what would that mean for you guys?
Yeah, it's the $10,000 question, right, that we continue to get. You would think as we got closer to the next year, we'd be better off at it. Look, I think where we sit now, there's a better chance than not that we'll see the appropriations bills come out. I think a full-year CR is probably just as equal as an option. I don't see the sequestration route. I think we're better than that. I think the indications that we're getting is that we'll either have a full-year CR or we'll have bills there. But in the event, the majority of different options are more than covered by the current guide we have today.
Mm-hmm.
But at the end of the day, we're a company that is deep into the national security space and the government modernization spaces. So, you know, when I hear if we go under sequestration, if we cut these and that budgets more, we're very resilient to where the budget sits today. We're a sustainable business in just about any government funding model. So we don't have the end item prediction, but very, very confident that whatever does happen the rest of the year, we will continue to deliver.
So along those lines, you're, you know, your portfolio, you're lumped in with all these other government services companies, right ? But, you know, your portfolio, at least to me, appears a bit different than your peers. So could you talk about your exposure today to kind of DoD versus civil, and then specifically, you know, your exposure today now to the modernization budget versus your, you know, historical exposure to the O&M side of things?
Yeah. So, if you look at where we sit today, we're an 80% DoD and Intel customer and 20% civil. Do we watch that mix? No, because we really look at national security space, and we look at the government modernization space. We look at both expertise and delivering technology as well. We differentiate because we're not focused on if Fed civil budget goes down by 3%-4% and DoD goes up by 3%, what does that mean to us? What it will always mean is that we're in very narrow, deep funding streams. So it's a strategically based company, strategy of the place where we come from. We do market strategies. We review those twice each year. We look for gaps. And then we go out there, and we have a long-term bid model that I know we're going to talk.
Yeah.
talk through, but it's really how we run the business and how we think about it that really makes whether the federal civilian budget goes up or the DoD goes down. You know, at the end of the day, it's in the trillions of dollars overall budget. You know, when the topline DoD budget goes from $800 billion to $780 billion, what happens? Most likely, we continue to have the exact year that we wanted to have, right? We're in very important areas, but we're not in these high-production platform programs where if somebody cuts six of something that was going to deliver 20, that's a material delta. For us, it's just not.
Along those lines, can you talk about how you've adjusted your strategy around bidding over the last couple of years and the results, you know, that have been produced on the back of that?
Yeah. So we've a couple of strategies. One is bid less, win more. But more recently, it's really around focused on bids that drive a value creation model, which is based on free cash flow per share. Okay? And because with that, we have multiple levers that we're able to watch, we're able to manage to. Predictable organic revenue growth is one function of how we want to bid. Efficient cost and capital usage is another, opportunistic and flexible growth, and then margins, right? So when we're putting this bid model in place, it's really looking at what type of jobs do we go after? Are they in our capability space? Are they going to generate a reasonable return today and for the out years? And is it an area that we have a better-than-average chance of winning future bids in?
We bid what's core to us. We look for margins across the entire portfolio, and that combination to us drives better free cash flow per share growth, and we've, you know, upped our free cash flow per share growth twice during the fiscal year 2024.
Mm-hmm.
That really is based on things we did a couple of years ago, which really set our backlog in motion, which is to make sure we have, you know, high-end work that we're out there bidding on new, and then being able to recompete for work. Our recompete rates are above 90%. So we have very little, you know, risk that things that are in our backlog today that they're going to come out, you know, 3, 4, 5 years from now. On the bid less, win more, it really is what it says. If you're really confident on what you can win and you can shape the customer towards the outcome that we want them to have, and we've invested ahead of customer need, then we've really set the table up in a quote-unquote "unfair manner," which is what we enjoy, right?
Anybody who's out there marketing, making sure we're investing ahead of customer need, get the customer to desire us, and then bid on those things where we have that type of situation. Bidding on RFPs that come out because we need to get award value and revenue up is not our model. So it's a very strategic bid process.
In terms of the, you know, the pivot that you made focusing more on tech, where today do you kind of go head-to-head with, you know, with the primes?
Yeah. I think, when I put this out there a number of years back, I think we had a quad chart.
Yeah.
And I had.
I had that pinned up on my wall.
On the mission tech side.
Yeah.
You know, I sort of just I put every, you know, aerospace and defense prime out there, right? That got a lot of attention.
Yeah.
Which is what I wanted. Look, at the end of the day, we they are competitive mates, right? We compete against them in certain areas, and we partner. So the model for CACI we put in place the last 7 years, which gets back to how we have transformed the business to adding a technology component to what was a pure government services play, 80% expertise, 20% tech. It, it, it truly is a model where if a platform needs a software-based mission package, I wanted that work coming to us. And we have driven our business from an 80/20 expertise to tech to about 45%-55%. So to me, that macro model's working. But the same people that are in those aerospace defense companies that we have shaped ourselves to win work competing against them, I, I can name all five that we actually deliver through.
So it is that, you know, you're a competitor one day and you're a partner the next. We enjoy that position because software solutions is what we can do better than everybody else at scale. We understand agile very, very well. And we're not a company that is focused on building platforms today, which is an extremely important job that this nation needs. I just believe that as the threats in the world move forward, they were going to be quicker to have to react to, which means software versus hardware, and then how quickly can we produce software, and how agile can we be to take customer changes on board. And that model today is proven to be extremely efficient.
Both the primes enjoy that model because if they had our mission package on their platform, we're able to change what that system does much more rapidly than others. It drives a really nice growth rate for us and drives, you know, much better, better, margins than we had previously achieved.
In terms of the growth rate of tech versus expertise, we went through this period where tech, you know, massively outgrew, became a big much bigger portion of the portfolio. But I think recently, particularly when I strip out the, you know, kind of pass-through that you've had recently, the tech, tech growth has slowed. I mean, is there anything to be is it just what, I guess, what's going on there, and should we expect the tech growth? I mean, you're forecasting a strong second half. Should we expect the tech relative to expertise growth to kind of reaccelerate?
Yeah. It's, you know, we've spent a lot of time talking about how do we discuss our business so that people can model it better, and we're sort of close to the same page, right? Whenever I see a quarter that expertise has outperformed tech, I actually congratulate the expertise folks, right? You know, I want both to grow at double-digit. It really, purely, David, is a mix of bids that have been awarded, you know, the things we may have bid on the last six to nine months, where we are in different performance stages.
Mm-hmm.
are so many variables to that. You know, what I want to make absolutely certain is that we are always growing above a mid-single-digit level, frankly. And whether that comes from expertise or tech, I'm happy on both fronts, right? It is true. There are times and, you know, we had another run last year, 3 large programs that we won, right? 2 were in the tech space. 1 is in the expertise space. Tech was growing, you know, great. So if we looked at the growth on awards and we looked at the growth on, you know, revenue, there's some time delta there. So no, look, any day that both are growing and they're both growing above single-digit or mid-single-digit, then, you know, things are fine here. And we will have a strong second half.
So you touched on this, you know, tech margins are higher than kind of the run rate average. So you've had this big expansion in tech revenue. Your margins have improved, but I would have thought maybe they might have even improved more given how much higher you've talked about tech margins are relative to expertise. So talking about the margin, you know, I guess the margin opportunity that might still be there for, I mean, this portfolio, I would think at this point would actually lend itself to higher margins than where you are today.
Yeah. I mean, 1, it gets back to mix, right? 2, it's, it's a long-term margin journey, right? 3, it, it gets back to mix again, right? Look, to us, free cash flow per share gets driven by top and bottom, okay? The fact that we were a high 7s, low 8 EBITDA margin business, and we're pushing 11, at least in the high 10s. You know, long-term, when I've said that over a long number of years, is also sort of bookended by, "I still want to make investments in this business," right? So it's got to be natural bottom-line growth margin that is sustainable. The fact that we may hit 11.2, and, and drift to 10.9, and then go up to wherever there is is an interesting fact that people have to watch quarter to quarter. I'm sort of looking at long-term.
If I look back five years, we were at eights, and now we're near, you know, high tens. It really comes down to no unnatural acts. I don't want to short-arm investments, right? So if we look at our space-based business that we just brought on board less than two years back, we were very, very clear that that was going to be an acquisition that, quote-unquote, "I know it's a horrendous word," was diluted when we bought it, right? But it's going to take investment dollars.
Mm-hmm.
The fact that that might take us from going from 10.8 to 10.9, and we sort of stay at 10.8 or dip to 10.7, I'm perfectly fine with that, right? Because long-term has to be long-term. I'm not looking at that quarter point. I'm not looking at next year's point. It's really building up a very strong, survivable, sustainable tech business. And right now, given that we're in some pretty high-end, very high-tech, unique space-based assets, I want to make sure I'm investing in that to the level that we absolutely can make certain we can deliver these terminals because the growth rate of what we have to deliver is going to be extremely large, and I don't want to have recurring, you know, issues, issues there. So again, that starts in the second half of our year, right?
So we're sort of in the, you know, Optical Communication Terminal. We're sort of in inning 7 and 8 on the investment side, and we're in, you know, inning 2 of actual growth. So things like that will, you know, hold us. We're not looking to be a, you know, low 10% margin business if it was 5 years ago.
Yeah.
I'd be happy saying that I'm on stage at this conference talking about, you know, we're only in the high tens, so.
Yeah. So you touched on it here and there a little bit, the space business. Maybe dumb it down for us and.
Yeah.
What do you guys—I mean, I think I understand what optical terminals, but what do you do? How do you play in the space? How do you play in the whole, you know, proliferation of small satellites and, you know?
Yeah. So satellites have to talk to other satellites. Satellites have to talk to the ground, okay? Lasers, we all know what lasers are. It's light, okay? How do I embed data in light? And if I can wind fiber optics tighter than anybody else can, can wrap it with a great software-defined baseline on those terminals, I can connect light to light, which means I can send data between satellites in a highly protected, much higher protected way than just simple RF, okay? You can disrupt RF. You can jam RF. It's really tough in space. You know, 22,000 miles in the year going 20,000 miles an hour, take a piece of glass and get it right at the perfect spot, okay? So we build the terminals. We build optical terminals that allow these satellites to talk.
So fundamental to an optically driven satellite constellation is you've got to have things that are beaming light out that gets data from one point to the other. Ours are deployed. They're operational, and they're tested. So then you say, "How many other vendors are there out there?" Count them on less than the number of fingers I have on one hand, okay? We are the only Optical Communication Terminal that is connected completely to a complete link in space. We're the first one to meet every interoperability standard of a SDA. And the other type of terminals we build are sending information from the distance of Mars to Miami and Miami Beach, 19 million miles.
So to be able to connect light, it's so much about the algorithms and the software that go into how do I take a satellite that's doing this and another one doing that, and how do I sync these beams of light that never lose connection to send data? One, extremely technically challenging. Check, okay? Two, we're working on producibility now, and that's why this, this large burst of investment is how do we get the producibility issues out of that, okay? And then three, the fact that we are the only one in space and that we're the only one out there that has connected, you know, our primes tell us we are light-years ahead of where our competition is. And we're the only US-built, designed, and manufactured supplier as well.
So if you can imagine all the information that goes satellite to satellite, satellite to ground, we want that on something that's that we own. We own the software baseline too. We own the entire building materials too. So that's it in a nutshell. But the level of investment, of course, that we've had through the first half is why we're setting ourselves up for a nice second half. The second half that I enjoy talking about because when you when you have it down and that's what your full-year plan was, it's not as frightening.
So I wanted to touch on, you mentioned the three big awards. So EITaaS, Spectral, and then the Intel award. All, yeah, you know, very large. Where are each of these? Maybe if you can take them one by one, where are they relative to kind of your expectation for the ramp? When will they each kind of hit their run rate, and what kind of margins do each, you know, obviously, without being specific, but what kind of margins do these programs carry?
Extremely great margins first.
All three?
Oh, yeah. Yeah, yeah. Second, we can debate what extremely great is, but all right. So EITaaS first, technology program.
Mm-hmm.
Taking all of the information technology support across the entire Air Force, all bases, every single place there is an airman. How do we build updated networks, help desk, and the like across the entire Air Force? Job is ramping up faster than we had originally assumed. It's based on two things. One, a great ramp-up of people and the investment ahead of customer need to make sure that we had things we could deploy sooner than what we originally planned on. And a drive of the United States Air Force to get networks and get everything that is IT across the Air Force in a much more cohesive bundle, okay? $5.7 billion job. Over 10 years, our backlog has $2 billion in it today.
So plenty of room to go grow and burn the backlog down and also grow another $3 billion-$4 billion worth of effort there. So tremendous win. Great competitors. We won. Second, a large Intel networking cyber analyst job. Won it with a technically superior proposal, and the customer's getting technically superior results. That job was staffed very, very quickly. That is an expertise job. So, you know, find me 1,200-1,400 people that have this kind of skill set and go deploy globally, and make certain that the intelligence agency that we are supporting doesn't lose a beat. That has ramped up sooner than we originally planned. Respectful margins. So we're, you know, good there. It's a secure job.
Mm-hmm.
Then last is Spectral. Spectral really ties into this move from expertise to tech. It also greatly describes investment ahead of customer need. So the fact that we've been in the electromagnetic spectrum, the Electronic Warfare in the signal collection business for a rather long time, how do we take the acquisitions and the know-how and the software prowess, and how do we show the customer almost 3 years before the bid came out, "Here's the art of the possible on Navy-based ships below the deck plate. You got thousands of hundreds of antennas on each ship. How do you take that information down? How do you process it? And how do you bring things like machine learning and AI in to sort of say, 'That signal is this item. It belongs to this country. Here's its abilities. Here's how you can electronically defeat, defeat that'?
Today, that is a number of people on a ship doing sneaker net, taking information from one. You found this. Where is it? That's another source. Take all that and put that together. The job has ramped up faster than we expected when the job was awarded. But I'll also tell you, world's a dangerous place. So whether it's the Red Sea and the Houthi, whether it's, you know, drone overflies, whether it's what's unfortunately happened recently in Syria, it is a world where signals and the enemy change their tactics daily, if not hourly. So Spectral is taking everything that can possibly happen to a naval ship, and how do you better protect it, and how do you ensure that things don't fly over, and how do you, you know, how do you ensure that it can continue to do its mission?
So you would imagine, given where we are now, we're in the design phase today. We are looking at a number of changes to that baseline. Think additions, not subtractions. And looking at what does the new Spectral look like as we go forward. So I like what the team's done. I like the speed to fleet, how quickly we'll be able to deliver. And without sharing too much, we're looking at how do we take the schedule and compress it, frankly? How do we get some capability out there sooner rather than more later? The fact that it's software set up and it's software enabled means we're able to take those changes on sooner. So all three programs ramping up ahead of plan, which is what's driven continuous top-line enhancements to bids.
Do they all get to kind of full, you know, kind of run rate levels next year?
Yeah. So the expertise jobs in our market get to run rates quickly because it's staffing.
Yeah.
And then they'll creep up over time as we can enhance scope. The two technology jobs start up at a little slower level. And then once you've built that kit, got the design done, tested that, now you're deploying that, mod to 1,000 ships or, you know, 200 ground stations, then those sort of ramp up. And margin sort of follows with that as well, right? So the way these programs are set up, we're going to reserve margin in the event that we find unknown unknowns, right, that we have to work through. So the margin profile on expertise jobs follows exactly as your revenue does. But on the technology jobs, based on whether it's cost-plus or fixed price and the like, margin is going to more than likely trail what the revenue growth rate.
So looking at our backlog, great visibility in long-term predictable growth, better than where we were 5, 6, 7 years back, you know, ever-increasing margins over the long term. But at the end of the day, free cash flow for sure. They both drive that.
I'll get to that in a minute. But I wanted to ask you about, you sounded a more positive tone on M&A, the environment, on this most recent call. So what has changed there? How does your M&A pipeline look, maybe compared to the last year or two?
Yeah. So we're a highly acquisitive company. We've done around 90 acquisitions, discriminating, but the last couple of years, there were assets that were out there for sale, but valuations were not anywhere near what we were willing to pay for them. It's almost as if there's some companies that realize interest rates are higher, right, and valuations across the business are slightly coming down, and they're looking for something at an extremely high premium. So it just didn't meet our whole investment model.
Mm-hmm.
but it also didn't tickle enough of, "If we had this capability as part of us, could we take one plus one and generate three, right? Could we?" Because that's what we do our acquisitions for. We look for gaps in capabilities or customer relationships, and we go fill those gaps. And it's really based on time. If it's a capability and we have time to create that, where I own all the intellectual property, we're going to invest internally. We're going to generate that. I don't need to find an acquisition for that. If we need a technology and the market is coming up upon us and somebody has 100% of that technology done, or in the case of SA Photonics Optical Communication Terminal, they had 60 or 70% of it done.
I believe that if we took that with an earlier acquisition, put that together, we could hit the market exactly as it started to grow. So valuations is one measure that have gotten better. But again, opportunistic and capital deployment strategy, right, is one that is really based around at times we're going to do share buybacks and at times we're going to do an M&A. So what I wanted to keep putting out there is because M&A because we're talking about an M&A again, you know, I get again, your previous speaker, right, we get a lot of opinions as to whether we should buy back shares or, you know, M&A is the ultimate long-term growth model, right? And along the way, as we see valuations of our stock lower than what we would like, we will buy it, okay?
It doesn't matter if it's $200 a share or in the $360 range, right? If our belief is the stock is going to continue to climb, fundamentally, there's no bad time to buy it back.
Yep.
Okay? But it's just really short-term versus the long-term.
So you've talked a lot about Free Cash Flow per Share being your focus, which I appreciate. Your Free Cash Flow per Share has bounced around a fair amount the last couple of years. I mean, a lot of it's been on tax, but, you know, some of it gets lost on, you know, we forgot one year you had a tax hit, one year you had a tax gain. So what is the, you know, normalizing, I guess, for tax and whatever happens with Section 174? What's the outlook? I mean, do you have a target in mind for Free Cash Flow per Share growth? Where do you think, you know, how you think you can grow Free Cash Flow per Share?
Yeah. I think you started off with, you know, some of those things. One great lesson in business is timing, right? We started talking about free cash flow per share. Then we did a, you know, tax rate adjustment. We had 174 come in. And, you know, as soon as we wanted you all to point to something that was extremely positive, we started to move it all over the place, right? So I think we've got enough information out there now. Look, from a goal, it really starts with bids, right? Sitting down with our business development team, talking about, "Here's what free cash flow per share means. Here's what top and bottom line growth mean," which then really gets us focused again. It refocuses us on the front end of the business, which is two years in advance.
What are the discussions we're having with customers around budget, around capabilities we're able to deliver? What does it mean for us around pricing? You know, it's, it's that relook to make sure that two years in advance because that's when we start to shape the customer's mind, when they eventually give our RFPs, and then we go out there and, and bid. It's the only way in our marketplace to not get caught in, in buying on price, okay? CACI, stop buying on price, selling on, on, on price 7-8 years back. It's not the ultimate differentiator. It's the last one you have left.
Yeah.
Adjusting net income to free cash flow conversion of 100% is sort of what we're looking forward to.
Mm-hmm.
And it's not trying to get people's eyes off of either measure. It's just as a business leader, I want both, right? I want predictable organic growth rate, and I want respectable margins that I don't have to differentiate from. And with those two, if I can grow this business reliably to our investors greater than its single digit at a high tens or even greater than margin, we can all do the same exact model, okay? And we'll use share buybacks, and we'll do M&As. And that's sort of on the financial side of this business. That's how we want to grow it. So that's our focus.
Yeah. Sounds like there's more of a focus, though, you know, throughout the organization on generating free cash flow than the share.
Yeah. If Jeff MacLauchlan was here, he would tell you, you know, day sales outstanding. You know, ARs, we were at 64 days. You know, a few years back, we're at 47 days. I'll be happy when I'm getting money ahead of when I do the work, right? So when I hear people say, "Hey, boss, we got to 50," oh, we're going to do better. We're never going to do better. Right now, we're at 47. So where's the end? There's a lot of different models, right? We can get ourselves to a position where on the tech, technology business, we're actually taking in money ahead of.
Forward.
Thoroughly, right? So we can forward front, you know, front end cash flow. So there's many more directions we have left.
Yeah. Okay. Can we pull up the, I don't know if you've seen this slide. Well, you might have seen with the last one, the audience response system, please. Let's see it right down here.
Okay. Or not.
We had this problem with one earlier. It's not coming up yet.
This is the Do You Love the Stock?
Yeah.
The Unapproved Stock.
Here we go.
Here we go.
Do you own the stock? And then if you keep coming back, there will be a, you know, you'll have a history. And then we look at.
see whether.
Yeah. I mean, we've had some.
Whether I should stay here or whether we did. Somebody should leave us out.
We've had some companies coming to this for many, many years. We have a long.
Yeah.
It was interrupted, obviously, with the pandemic.
Yeah.
We didn't do this in person. But we actually only missed one year in person.
That's great. So a lot of potential investors here, which is great. We got some open slots the rest of the day. So, please, come up. So great.
Next question, please.
Free Cash Flow per Share. Gotta love that.
I think that's, I mean, there are a lot of things that you can focus on, but that seems pretty simple.
The ultimate value generator, right?
It's I mean, you haven't been talking about that outwardly that long, that that's kind of your target.
No.
Yeah. Okay. Next question, please.
Always a good day when number 2 is 2.0.
Yeah.
Yeah. We actually haven't, right? We've been talking about the different elements, right? We had to get margins in line.
Yeah.
We had to put a business development focus where you're not bidding on everything. When you start to teach the entire organization that you can really drive growth.
Because there are some of your peers who I won't name that trade at a much higher valuation than you but don't.
Yeah. What is that?
Their free cash flow margin is.
Yeah.
The same.
Right.
Okay. Next question, please.
The ultimate question. This flexible and opportunistic capital deployment strategy is perfect for us.
Yeah.
You know, we're just looking at what gives shareholders the best value. Boltowns, great. Large, interesting. I think we're right down on.
Yeah.
All items 1, 1, 2, and 3. We see the world the same exact way.
Yeah. All right. John, we're, that's it for time. Appreciate you coming.
Great. Thanks so much, David. Appreciate it.
Thank you.