Caci International Inc (CACI) Q2 2020 Earnings Call Transcript

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

Thank you, Chuck. Good morning, everyone. I am Dan Leckburg, Senior Vice President of Investor Relations for CACI International and I thank you for joining us this morning. We are providing presentation slides, so let’s move to slide number two, please. There will be statements in this call that do not address historical fact and as such constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night’s press release and are described in the company’s SEC filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let’s turn to slide three, please. To open our discussion this morning, here is John Mengucci, President and Chief Executive Officer of CACI International. John?

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

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

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

Thank you. And our first question will come from Gavin Parsons of Goldman Sachs. Please go ahead.

Hey. Good morning, gentlemen. So this is a pretty high-class problem to have, but you have won a ton. At what point do you say we have won enough in the backlog to drive, say, mid- to high single-digit growth for a few years and we should slow down on winning and just make sure we can execute on what we have? Or are winning and executing not mutually exclusive?

Yeah. Gavin, thanks. Clearly, we don’t plan on slowing down. We actually started, as many of you on the call know, with a very specific strategy several years back and it was to focus on growing both top and bottom line. And we made a substantial commitment that we will never sacrifice margin to get the kind of growth that you are now seeing today. That’s foundational to us because we believe growing profit and cash flow over time is the best way to generate shareholder value. Some of that was going to be organic and some through acquisitions. We have been talking for quite some time now about when to see organic growth show up and how does it compare to peers. If we look at FY'20, I am really pleased and confident of the organic growth potential because we have consistently won larger and longer-term business in the areas where customers are going to spend real dollars. We have been able to maintain rates over the last three years. So we are not pushing the cost of our investments on to our customers. We are managing a very strong cost basis. When we win larger, longer-duration awards, we actually generate what we call a B&P efficiency, which means that if I am winning longer-duration, larger awards, then after a couple of years I am spending far less to maintain the book of business and I am plowing more money into continuing to win. So coming back to your question about when do we slow down and just focus on execution: our strategy has three parts. The first two parts are win new business, which the team has done an outstanding job at—the BD machine is working extremely well—and then deliver, and our team has done an outstanding job on delivering, because as you all know, once we get the awards, we don’t gain margin unless we are generating revenue. Across the board, we are very happy and don’t really see any end in sight.

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

Yeah. Thanks, Gavin. One thing I will note is we have had higher capital spending than previously and that impacts the numbers you articulated. The capital spending is a direct result of the investments we are making in the wins we are having. I will break that into a couple of buckets. As we win work often that work is provided at CACI locations; often we need a new facility. Some of those have specialized space, which is expensive facilities; some of the spaces we have have customized laboratories and relatively expensive test and assembly equipment—internal CapEx. So that’s driving some of the conversion. Other than that, the walk from net income to operating cash flow is relatively straightforward. We have a good number of non-cash items: depreciation, stock compensation expense, intangible amortizations. So we expect the levels you articulated to be somewhat consistent going forward with that level of CapEx.

Thank you.

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

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

Yeah. Thanks, Ed. We have been in business for 57 years and we have fared well under various administrations; they clearly have different priorities. Part of why we see growth continuing regardless of which party is in the White House is we have a well-balanced portfolio of business. If we look at our enterprise and mission customers and our capabilities, we have strong expertise and technology offerings. On the mission side, we are aligned to critical defense and national security areas. The world continues to be a dangerous place and defense budgets historically have been a highly bipartisan part of the federal government budget. So we believe we are well covered there. On the enterprise side, every time governmental programs move, agencies are looking to modernize and update their systems, which drives long-term cost savings. Our business is less susceptible than some pure services businesses because a much larger portion of our portfolio today is technology in nature and with high-end mission customers—those are very immune to short-term budget cuts. Great power competition continues to be a focus and the capabilities we have to address that and counter terrorism missions remain priorities. Our strategy has been to position the company where the government will spend dollars. Congress ultimately votes on and allocates budgets, and regardless of the election outcome, we believe our business will continue to grow.

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

Ed, that’s something we watch. When you see movements in cost-plus versus fixed-price and time-and-materials, some of that comes from acquisitions. When we did the LGS acquisition, a large portion of their work was cost-plus; bringing that acquisition in drove the percentage of cost-plus work up. Other minor movements are really on mix—different awards we are winning. Looking at the pipeline at a macro level, the more technology work we win, the more of that will be fixed-price as our products business spins up. Expertise work is split roughly 50-50. We like that mix. Contract type is only one knob to drive margins; we continue to watch it, but there should be nothing inferred that winning more cost-plus work will cause margins to go the wrong direction.

Great. Thank you.

Yeah. Thanks, Ed.

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

Hey. Good morning. This is Ben on for Seth. I was hoping you could add a little more color on the upside in organic growth. Is this broad-based across the portfolio or is it stemming from either the mission or enterprise or one of the four quadrants you laid out at Investor Day?

Thanks. If you look at our organic growth, it's truly a function of a multi-year plan. You're starting to see the benefits of awards that are longer in duration and much larger in dollar value. When we were at 2.8% coming out of last year, we guided to 5.5% and now 7%. The growth is based on mix. Technology-side programs are longer-term with slower initial ramp, so you may see the growth three, six, nine months after award. Expertise jobs that deliver talent ramp up quickly. Across the four quadrants, expertise ramps faster and holds a sustained revenue level; technology starts slower and then delivers growth. The mix of business we are winning, and our book-to-bill well above one, is driving future organic growth. We will not slow the BD machine; we intend to grow broadly across both enterprise and mission businesses.

I'll add one comment. There is also growth potential from existing work. We have a large base of business and strong program management discipline whereby we provide more value on existing programs, fill open positions quicker on labor-based activities and look at scope increases on existing work. That's another source of organic growth going forward.

Got it. Thanks. And on the M&A front, with organic growth so strong this year and you're at 3x leverage, we've seen deals in this space at lofty multiples. Can you comment on your willingness to pursue more M&A with elevated multiples or would you prefer to build cash and reduce leverage closer to 2x?

M&A remains a key priority for capital deployment alongside organic growth. We are strategy-driven: we look for acquisitions that fill capability gaps or add customer relationships that we need for long-term growth and that create shareholder value. Multiples are somewhat elevated at times; we review many opportunities and also build relationships with companies that aren't for sale today. We've been disciplined and focused buyers and will continue to be. LGS filled many gaps, especially on communications and signal processing. We're open to both smaller and larger deals as long as they are strategic and create long-term value.

From a financial perspective, when we evaluate acquisitions, we base decisions on present value analysis of future cash flows. Companies expected to grow materially will command higher prices; often you get what you paid for. Regarding leverage, 3.0 times today is comfortable. In the absence of acquisitions, we will delever, but there's no strict target. Given today’s debt capital markets, we would prefer borrowing at relatively inexpensive rates and investing via acquisitions if those investments drive long-term shareholder value. So leverage isn't a constraint for us.

Got it. Thank you.

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

Hey. Good morning, everybody. John, about two years ago you put in a bid for CSRA that would have involved a lot of stock and your stock has almost doubled since then. You've been able to find other transactions over that period that seem to be working for you in smaller transactions. Does that experience influence how you look at larger-scale M&A or using stock? Do you want to keep doing smaller transactions or are you agnostic as to size? Thank you.

Joe, we focus on niche small ones, acquisitions that provide capability or customer relationships to fill gaps, and transformational ones that fill multiple gaps at once. I'm unlikely to pursue the exact CSRA path again, but we are disciplined in spending cash and focused on strategic value. We have become a company investing more internally to generate IP. If we can invest and hit timelines, we prefer internal R&D; otherwise, we'll acquire. We're agnostic on size as long as the acquisition is strategic and drives long-term shareholder value. LGS filled many gaps in intelligence and communications and Mastodon and LGS have contributed meaningfully.

The ultimate acquisition decision is whether it will drive long-term shareholder value. We measure that by whether our stock performs better with the acquisition than without it, and we focus on future operating cash flows associated with the acquisition. Once strategic and economic, we determine the right financing mix, which may include equity that has a higher cost of capital.

Do the capabilities or the gaps you hoped CSRA would fill still exist and do you still want to fill those? And Tom, what leverage are you comfortable getting to at the high end with a transaction?

Well, I will start on that. We have said in the past that getting to roughly 4.5 times leverage is something we would be comfortable doing—recognizing we could delever relatively quickly given strong free cash flow performance. So think of about 4.5x as a maximum, maybe plus or minus a few basis points.

On the CSRA gaps, we were looking at managed services capabilities. Over the past three years since that deal, we've built up those capabilities organically and via acquisitions and are now winning managed services work. On software development, we were previously in the $50 million to $100 million award range; now we're executing on a five-year roughly $1.2 billion Agile contract. We have been able to grow in those areas without that specific acquisition. We have healed nicely and are seeing growth in the areas we wanted.

Yeah. Thank you very much.

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

Hey. Good morning, guys. It looks like you have a bit of a margin ramp in the second half. Anything to call out in terms of product mix, efficiencies or one-time items? Thanks.

We are guiding to 10.3% EBITDA margin for the full year. If you back into the first half, the back half is higher. Nothing specific to call out—margins can be lumpy between quarters. Over time we're seeing positive momentum in driving higher margins both on existing work and on new work that’s ramping up. Also, as we get larger we can spread indirect costs over a broader base, which is beneficial to margins.

Thanks. The protest environment seems to have picked up recently—any challenges or delays from protests?

We see an ambient level of protests. Today we actually have two awards that were tested in protest—one from last fiscal fourth quarter and one this quarter. Nothing gives us pause; our track record on sustaining awards has been strong and I expect similar outcomes.

Thanks, guys.

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

Good morning, guys. This is Colin Canfield for Jon Raviv. Following up on the protest environment and shifting to the bid environment: can you talk about the competitiveness of bids and how competitors scaling up over the last 12-18 months has impacted both competitiveness and margins for traditional services work?

We are still seeing 60% to 70% win rates on new business. That’s a good odds profile—we invest when the odds favor us. On margins, expertise work has more competitors and that can impact margins; expertise work also has a different risk model. We continue to grow expertise even if margins are slightly lower. On the technology side, we aim to accelerate growth because those are higher-margin opportunities. When we differentiate based on technology and show customers clear value, they buy on value. Differentiation narrows the field of bidders for larger contracts and allows us to ask for higher margin because we invest ahead of customer need. When customers want more of CACI versus others, we win longer jobs with higher margin that drive bottom-line growth.

Got it. And on timing of that transition—looking at LGS and fixed-price transitions—how does the timing of that transition happen and how should we think about the path to the aspirational mid-teens margin?

I would look less at contract type and more at the kind of work. We’ve been augmenting awards with whether they are expertise or technology to help modeling. Technology programs—similar to some LGS and Mastodon-type fixed-price work—take time for facility build-outs, labs, material purchases and finalizing requirements with customers. Typically, there's a three- to six-month delay before seeing significant revenue. So as more technology work ramps, you'll see higher margins, but with a longer ramp. Our backlog growth and the mix of work won in the last six to nine months are now starting to generate higher levels of revenue and margin growth.

Got it. I appreciate the color.

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

Hey. Good morning, guys. I wanted to ask about working capital—you talked about strong collections in the quarter. How much more runway is there to improve DSO and how should we think about where that could go in the long run?

We have been focusing on timely cash collections and driving lower DSO. There are opportunities for continuous improvement: getting invoices out quicker, working closely with government paying agents, and ensuring invoices are accurate to avoid rejections. Some programs have complicated invoicing requirements which take time to ensure 100% accuracy. Upstream, we are working with contracting organizations to rethink some invoicing requirements and payment terms to facilitate quicker payment processes. So there are opportunities to continue to drive lower DSO.

Got it. And can you comment on how LGS and Mastodon are doing? You talked about a ramp through the year on those acquisitions—any update?

Overall, I am extremely pleased with their performance and integration. We had customer meetings last quarter where we combined core CACI technology with Mastodon and LGS capabilities and the customer response was strong. They are easy to work with and customers see the benefit of consolidating requirements with CACI and using technology from LGS and devices from Mastodon alongside core CACI offerings. Financially both are performing in line with long-term expectations, recognizing product deliveries can cause quarter-to-quarter lumpiness. We are running the business on an annual basis and expect lumpiness to smooth out. Also—an LGS-related award this quarter will support intelligence customers. Overall, they are contributing to a positive trajectory.

Great. Thank you.

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

Hey. Good morning. In light of the acquisitions, can you talk about the strategy to expand into smaller tech hubs regionally? Any metrics on headcount growth in these areas—I've seen reports Mastodon might be quadrupling headcount—any metrics?

We started five or six years ago leveraging a dispersed workforce for technology programs and software development and it's going extremely well. Our Mastodon team in Rochester has doubled employees; some reports may indicate faster growth depending on timing, but we are seeing strong uptake. The model lets us address talent competition in Northern Virginia by moving work to locations like Rochester, Sarasota, Denver, Colorado Springs, Tampa and Florham Park—places with great talent. People like mission work and prefer to work where they live; that helps attract and hire quicker. We have infrastructure, beachheads from acquisitions, and university relationships to support dispersed technology teams.

Got it. Is the move to longer-duration contracts unique to CACI or broader across defense IT?

I can't speak for everyone, but for CACI it's a deliberate strategy: focus on larger, longer-duration, differentiated contracts where we can invest ahead of customer needs. That discipline allows us to allocate B&P dollars toward winning new business rather than continuously re-bidding old work. Whether it's a sector-wide trend, we focus on what we can control—winning larger, more profitable business. With a $220 billion addressable market, there's plenty of opportunity and we can be selective.

I don't have broad industry statistics, but the longer duration is a function of award size and differentiated capabilities—tenets of our business development efforts put in place multiple years ago and we're seeing the results.

Good. Appreciate it. Thank you.

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

Hey. Good morning. From our view it seems agency customers increasingly look to wrap cyber and intelligence capabilities into a single contract award. Can you comment on that dynamic and how it might impact CACI?

We see customers consolidating multiple contractual vehicles into single awards. That reduces contracting overhead for customers and provides a one-stop integrator to ensure delivery. We support customers moving work from expertise-type arrangements to technology or outcome-based fixed-price models. We have experience helping customers consolidate—one of our large awards was a contract that combined 11 or 13 different contracts. That allows us to have a one-on-one relationship with the customer, drive productivity, and create opportunities for on-contract growth as customers identify additional needs.

Thanks. And can you provide an update on the smaller acquisitions from last quarter?

We closed several small acquisitions—Next Century, Linndustries and Deep3. Next Century was the largest of the three; the other two were relatively small but important capabilities. All are performing well and are on track to deliver what we expected for fiscal year '20.

Appreciate the detail.

Our next question will come from Cai Von Rumohr of Cowen and Company. Please go ahead.

Hey. Good morning, guys. On the Agile task order from this quarter: is it fair to assume the ramp you described is similar—a three- to six-month ramp—and was the full $1.1 billion included in backlog this quarter? Should we continue to expect Agile contracts of this scale moving forward? This seems one of the larger ones we've seen.

Yes, it is included in backlog at the $1.1 billion level. The ramp is similar: expect some revenue in the third quarter, more in the fourth, and a more material ramp into the first half of next year. The program is roughly $225 million per year on average. We expect more Agile-type contracts of this scale—customers are consolidating software development work, and our Agile solutions factory investment enables us to deliver high-quality software production-like outcomes. We are performing on two of the government's largest Agile programs and expect that trend to continue.

Great. Thanks.

Our next question will come from Louie DiPalma of William Blair. Please go ahead.

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

Part of it is focused investments three to four years ago to fill capability gaps and then intentionally shaping customers. Shaping means showing customers the art of the possible—not just selling what we have today but demonstrating augmentations we are willing to make to solve their mission. That intentional investment and engagement drives customers to buy outcomes. When a customer buys an outcome they've seen from us, we can differentiate. We've invested ahead of customer need and that differentiation allows us to win larger, longer-duration, higher-margin work. It didn't start overnight. We pursued some transformational acquisitions and also invested internally to develop intellectual property. The trend is deliberate and sustainable.

I'll add it starts with a strong culture and vision, talented motivated people, processes and technology. Those building blocks give us confidence in our ability to win and execute.

On differentiation via M&A versus internal investments: you're a leading provider of signals intelligence and electronic warfare sensors. Other providers have acquired drone platforms to vertically integrate sensors. Do you feel you need to own or develop a drone platform to expand your signals intelligence capabilities?

We are careful about where we see the market. Our intention is not necessarily to be a platform manufacturer. There are companies specializing in building platforms very well. We focus on the mission package—the payload, processing, algorithms and the ability to detect, analyze and mitigate signals. The larger long-term dollars are in the technology packages that go on platforms. We believe the sweet spot is processing power, algorithms and rapid turnaround on solutions to new signals, not necessarily owning the physical platform. That’s where our core CACI capabilities plus LGS and Mastodon strengths provide competitive advantage.

Thanks for the color.

Our next question is a follow-up question from Joseph DeNardi of Stifel. Please go ahead.

Thanks very much. Tom, there's a narrative that topline defense budget growth is slowing and that should slow growth for businesses like yours. Does that factor into how you view your addressable market over the next few years? Do you see trends slowing or not?

We mentioned a $220 billion addressable market. The areas we focus on—mission and enterprise capabilities—are faster-growing swim lanes. Given that, we do not see the foreseeable federal defense or civilian budgets impeding our goals of increasing organic revenue and margins simultaneously. We're well-positioned providing services and technology in a dangerous world; our technologies play key roles in those areas.

Thank you.

Our next question is also a follow-up from Gavin Parsons of Goldman Sachs. Please go ahead.

Hey. Thanks for squeezing me in. Quick follow-up on Matt’s question earlier: what percent of your current submitted bids include some form of LGS capability and where do you think that will be a year from now? Thanks.

Gavin, I don't have that percentage off the top of my head. Clearly, it's involved in less today and will be involved in more tomorrow as we integrate capabilities. LGS came with a solid book of business and continues to perform. Over coming quarters, as customers build requirements that pull on core CACI technology, Mastodon devices and LGS algorithms, those capabilities will be part of a larger percentage of our awards. For signals intelligence, electronic warfare and communications-related work I would expect both LGS and Mastodon to play more prominent roles.

Thanks, again.

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

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

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