Earnings Call Transcript - CACI Q2 2023

Operator, Operator

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 Leckburg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Dan Leckburg, Senior Vice President of Investor Relations

Well thank you, and good morning everyone. I’m Dan Leckburg, 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 No. 2. 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 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 discussions 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 3 please. To open our discussion this morning, here’s John Mengucci, President and Chief Executive Officer of CACI International. John?

John Mengucci, President and CEO

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 MacLauchlan, our Chief Financial Officer. Slide 4, 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 5, please. Turning to the external environment, market and demand trends remain very constructive for CACI’s business. On December 29, 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% 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 6, 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 EITaaS, 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 were 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 cyber security missions. As you know, our work in 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 CACI’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 in 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 in all ranges of space - low earth, medium earth, and geostationary orbits and beyond. CACI’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, and 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 private 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 7, 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 our summary 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. In summary, 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 Jeff.

Jeff MacLauchlan, Chief Financial Officer

Thank you John, and good morning everyone. Please turn to Slide 8. As John mentioned, we’re pleased with our second quarter results. We 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 9, 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 are 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 will 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 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 to 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 payment related to 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 re-compete 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 to 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 to 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. With that, I’ll turn the call back over to John.

John Mengucci, President and CEO

Thank you, Jeff. 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 returns with a flexible and opportunistic capital deployment strategy. All this is driven by a commitment to grow free cash flow 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 of CACI. With that, Emily, let’s open the call for questions.

Operator, Operator

The first question today comes from Robert Spingarn with Melius Research. Please go ahead, Robert.

Robert Spingarn, Analyst

Hey, good morning.

John Mengucci, President and CEO

Morning Rob.

Robert Spingarn, Analyst

Nice numbers, and congrats on your reauthorization and 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 and the pipeline. What kind of book to bill should we anticipate after a strong first half, you know, here in the second half, especially with this budget rising?

John Mengucci, President and CEO

Yes Rob, thanks. We’re very pleased with the book to bill ratio we achieved. We've also increased the trailing twelve months number to approximately 1.55 times. Additionally, we have about $13 to $15 billion worth of bids in the pipeline. I’m proud of our new business win rates and our re-compete rates, which remain above 90% year-over-year. As evidence of our ongoing execution, I would highlight our memory management in business development. We’ve consistently focused on bidding less while winning more and extending the duration of our programs in the pipeline. My goal is to ensure predictable, long-term growth. We have some promising bids ahead, and I’m encouraged by the progress of the EITaaS Air Force award. I am also proud of our team for successfully taking over a competitive incumbent in the intelligence community. The DCSA award will drive both revenue and margins, as it includes not only some re-compete volume but also new business volume due to our government customer reducing their service providers from three to two. Regarding new business, we are well positioned. While we won't win every bid, we are committed to targeting the right work that supports both top and bottom line growth. It’s essential to diversify our mix, whether through expertise or technology. I’ve often heard that our high-tech segment is growing faster than our expertise segment, and I want both to thrive. I believe we’re making progress toward that goal.

Robert Spingarn, Analyst

In that vein, do you see equal budget support for defense hardware and services, especially now that you’re in both?

John Mengucci, President and CEO

Yes Rob, I think the 2023 budget is constructive because it was passed without a long-term continuing resolution. It supports key areas where CACI is focused. Looking ahead, I prefer to concentrate on electronic warfare, cyber, and the direction these areas are heading. We are increasingly becoming a significant player in the space domain. These areas are expected to see budget growth over the next decade, and we have strategically positioned ourselves to tap into these more substantial and stable funding streams, making us a different company moving forward. The various adjustments we’ve made have positioned us well for any budget environment. As a national security company in a dangerous world, I’m pleased with the budgets we’ve seen so far.

Robert Spingarn, Analyst

And I apologize, I don’t want to overstate it, but I want to ask Jeff for a clarification. You know, John, you talk about technology versus expertise, and technology mix is 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 of what changes in H2.

Jeff MacLauchlan, Chief Financial Officer

Sure Rob. 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, risk and whatnot. It’s still good work for us but it doesn’t necessarily have the same margin. There are some lower margin fixed price sales in the second quarter that you see reflected in that mix.

Operator, Operator

Our next question today comes from Peter Arment with Baird. Please go ahead, Peter.

Peter Arment, Analyst

Yes, good morning John and Jeff. John, maybe just to touch base, first a clarification. Is there a deadline date on the GAO when we’d see a resolution on the Air Force contract? Then just as a second question, photonics obviously has been a huge focus for you and the war tech continued to pick up. How does the runway look regarding scale? I know you just mentioned space is going to continue to be big.

John Mengucci, President and CEO

Yes, Peter, thanks. Let me clarify that. First, regarding the Air Force contract, we are very pleased, as I mentioned earlier. The protesters were unsuccessful, and we successfully retained that award. We have a lot of confidence that the Air Force will support us. We're prepared to proceed and have already engaged in discussions with our customer, so we expect this to be finalized around April. It is not anticipated to significantly contribute to revenue in FY23, but we do expect it to ramp up and deliver in FY24. On the space side, I'm very satisfied with our optical communications business. I've been open about our progress. Acquiring the photonics business of LGS and integrating it with the SA Photonics business exemplifies our capability synergy. I am excited about what this will yield. We will continue to invest in this area, which presents a solid growth opportunity for the next decade with better than average margins. We believe we are on the right track and are actively expanding into future markets, including various airborne systems, and are working to harness the synergies between LGS and our SA Photonics business. You had another question on this, but I didn't catch it.

Jeff MacLauchlan, Chief Financial Officer

I remembered Air Force contract and space.

John Mengucci, President and CEO

Okay. Thanks Peter.

Peter Arment, Analyst

Thanks.

Operator, Operator

Our next question comes from Matt Akers from Wells Fargo. Please go ahead, Matt.

Matt Akers, Analyst

Yes, good morning. Thanks for the question. I wanted to ask about capital structure and your target leverage. You’ve been running kind of two, three times the last several years, but interest rates were very low. Does that change at all given where rates are now, and do you think about the mix of variable rate debt any differently now?

John Mengucci, President and CEO

Yes Matt, I’ll start off and I’ll turn over to Jeff. For a long time, we’ve been talking about we are comfortable in everything up to a 4.5 range, maybe temporarily getting a little bit higher than that to do something that was very transformational. What I like about where we are now, leverage somewhere in the low 2s, but I want to tie it to opportunistic and flexible. If we deploy the 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. To me, that’s the kind of flexibility and optionality we were looking for. Jeff?

Jeff MacLauchlan, Chief Financial Officer

Yes, I want to add to what John mentioned. You may be tired of hearing the terms flexible and opportunistic, but that really captures our situation. We are in a favorable position to manage the company for the near term in the mid-2s range, which provides us with good opportunities for either organic investments or acquisitions. We have many options available, and that's exactly where we want to be.

Matt Akers, Analyst

Got it, thanks. Then if I could do one more, I guess on M&A, it’s been slower than you sort of have done historically. Could you talk about what are sort of the hurdle rates you’re looking at and where are some of those deals falling short, is it just valuation or just not the right assets out there that are the right fit for CACI?

John Mengucci, President and CEO

We have a few observations to share. The pipeline isn't necessarily smaller. We're beginning to see some adjustments in valuation as the market adapts to the current situation. I believe much of this is influenced by interest rates. We remain very proactive in our search and will continue to be thoughtful, deliberate, and strategic. When the right opportunity arises that aligns with our goals and timing, we are ready to act swiftly.

Operator, Operator

Our next question comes from Bert Subin with Stifel. Please go ahead, Bert.

Bert Subin, Analyst

Hey, good morning. Thanks for the questions. Just to follow up on an earlier question, if I think about it maybe on a near-term basis, the DoD’s L&M budget is expected to grow high single digits, RD&C 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?

John Mengucci, President and CEO

Yes 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 well going forward. We’ve said in the past, we’ve got a large, growing addressable market, so there’s plenty of opportunity for a $6.5 billion CACI. 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, and that’s why we provided a range at the beginning of the year. To put a little color on what goes on here when we look at do we hold our guidance, we had a strong first half, do we narrow guidance, do we raise it. We mentioned things like new award timing, facility and customer access, COVID exposures, and the FY23 budget is positive. Those are all trending more positive than what we would have seen back in the July-August time frame. Cost of labor, contract expansions, sort of a little unchanged to negative, a little bit of pressure on margins if you look at continuing 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 goalpost and there are some things that keep us somewhere along the left one, so we’re just trying to balance risk and opportunities. We could probably throw in some of the 2024 communications commentary and does that blow back onto ’23, 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 we’ll be able to potentially make different moves and different commentary when we get to the end of our third quarter.

Bert Subin, Analyst

Okay, that’s super helpful. Maybe just as a follow-up to that, if we look at that guidance, it implies a pretty healthy step up in the second half from 428 in earnings in 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 are you hearing anything like that? Just any commentary around what steps up in the back half and what those risks are.

Jeff MacLauchlan, Chief Financial Officer

Yes, 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 into your question here about the back half. 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. In my prepared remarks, I referred to that when I talked about ramping revenue at the end of the second quarter and that attendant 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 expected to be at this point in the year.

John Mengucci, President and CEO

Jeff, thank you. Bert, you mentioned government fiscal year 2024. We’re hearing similar commentary. There's always a lot of noise and headlines surrounding this. As a 60-year-old company, we've navigated various environments, administrations, and budget cycles, and have encountered a significant amount of political discourse over time. On one hand, there are valid concerns regarding the government’s deficit and debt, leading to discussions about budget cuts for fiscal year 2024. Conversely, there is substantial bipartisan support for funding defense and national security, especially due to the current geopolitical threats. There's an ongoing war in Europe and near-peer threats from countries like China, which has made strides in some areas. Cybersecurity continues to level the playing field with threats from nations like Iran and North Korea. With the context of the past decade, when we were involved in the war in Afghanistan, it’s relevant to us as we operate in the air and electromagnetic spectrum, which might not remain unchallenged in near-peer conflicts. We depend increasingly on space, a domain that is now contested. If I were to weigh the advantages and disadvantages, we will keep an eye on developments but our focus will remain on what we can control. We intend to prioritize operating the business, achieving long-term growth, and enhancing shareholder value. We know that national security is crucial and there are significant needs to be met. Our expertise and technology can address many of those needs. As a strategy-driven company, our presence in these vital markets is by design. I appreciate that we have a full government fiscal year 2023 budget that aligns with our direction, and we will maintain our commitment to a long-term strategy that consistently delivers value, regardless of the surrounding commentary. Thank you, Bert, for your question.

Operator, Operator

Our next question comes from Seth Seifman with JP Morgan. Seth, please go ahead.

Seth Seifman, Analyst

Thanks very much, and good morning. 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, and 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. I wonder if 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 maybe there was some more dislocation in terms of what was expected.

John Mengucci, President and CEO

Yes, thanks. I’ll start off, as Jeff mentioned, the year is 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. Back to where we were, and you’re absolutely right, the second half of fiscal year ’22, we were looking at a funding slowdown in dips and the like, and look - some has come back and some has and will come back in a slightly different form, so the update to that is while funding was the original issue and while the customers struggled through funding, some of the threats and the requirements changed. It’s requiring an enhanced capability versus what we all may have delivered just about a year ago until now. Now for us, what that means for us is we’re working on software modifications to our hardware solutions, and we can deliver those items that haven’t yet come back by the end of our fiscal year and that does drive a stronger bottom line. It’s something that we continue to watch, but it does play into this concept of software-defined, low size weight and power multi-mission tech that can really take on different needs. If we look at what’s going on in Ukraine, there is a lot of UAS activity there, and even those requirements continue to change as the pace of battle changes, so the fact that we don’t have to push all those mission tech sales out through the end of the year is a great kudos to our earlier acquisitions and that they were very software-defined. We’ll be able to get back on track - I’m very confident in that, and we’ll need that, of course, for us to close on our fiscal year ’23. Thank you for that.

Seth Seifman, Analyst

Thank you for that. As a follow-up, I understand you may not be responsible for the various factors we analysts include in our models. Looking ahead to next year, it seems consensus estimates suggest an EBITDA margin of around 10.9%, close to 11%. Do you believe there is still some attachment to the idea of continuously rising margins? Considering the current operating environment, it may take longer to achieve those expectations, and it could be beneficial to adjust expectations a bit for now.

John Mengucci, President and CEO

Yes, I think 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. We were an 8%-ish EBITDA margin business six, seven years back. It’s great to be having the discussions of mid to high 10s 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 8 to mid to high 10s, frankly, right? It’s really strategically taking a look at the book 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 have no involvement. Four, five years ago, six years ago, getting ourselves more into the national security side, getting us more into space gives us much better chances at continuing to drive margins than we would have been with our, let’s say fiscal year ’17 portfolio. So I’m going to shy away from crystal balling FY24. I really want to focus on this year and finish strong, get the share buyback executed, look for places where we still think we’re not highly valued enough, and going to take some opportunistic stabs at taking some additional shares out and really trying to position us well for our guidance call that comes along August of ’23. Thanks so much, Seth.

Operator, Operator

Our next question comes from Mariana Perez Mora with Bank of America. Please go ahead.

Mariana Perez Mora, Analyst

Good morning.

John Mengucci, President and CEO

Morning Mariana.

Mariana Perez Mora, Analyst

For my first question, it’s a follow-up on the commentary, the political commentary about next year, continuing resolution, implications about that. Have you seen any impact in your customer behavior from this increased uncertainty? Have you seen that commentary actually impacting the award environment, spending environment?

John Mengucci, President and CEO

Thank you, Mariana. Currently, I cannot discuss FY24 specifics. However, from my perspective as a public company CEO in the national security sector, the situation feels somewhat imbalanced. I am optimistic about the future plans of this country and believe there is a higher likelihood of supportive FY24 budgets. In contrast, for FY23, we have a fully approved budget, providing us with greater certainty in our dealings with customers. My senior-level discussions reflect increased certainty regarding funding movements. While there are still challenges with contracting processes that will take time to resolve, the overall environment with our customer base is more positive. Our initiatives in electronic warfare, cyber, and our ID tech acquisition are strong focus areas and are well-funded. We have also secured significant contracts in IT modernization. Although there may be some protests to handle, I have not sensed any funding concerns. As for FY24, we will need to monitor developments closely. Like you, I have heard potential scenarios like a full-year continuing resolution, but we are engaged in critical areas and I believe we will continue to receive necessary funding.

Mariana Perez Mora, Analyst

Thank you, and then you mentioned these recent wins. You have recently won significantly large multi-billion dollar wins. Has your appetite to pursue those 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?

John Mengucci, President and CEO

We have been pursuing a long-term strategy focused on securing larger contracts. For a company like ours, this approach contrasts with winning numerous smaller projects that might provide a quick revenue boost but don’t significantly impact margins. If you find yourself competing for contracts with decreasing rates, the result is often the need to re-bid on that work sooner. That’s why we’ve been strategically focused on the duration of contracts in our backlog, which is currently about four to four and a half years. While this means that contract awards can be uneven and that winning larger projects carries a higher cost, it also allows us to avoid chasing small contracts that don’t add much value. We believe we have the right strategy in place, as we are winning substantial contracts, including multi-billion dollar ones that create a solid foundation for long-term growth. Our business development and sales support teams are exceptional, and we’ve been strengthening them over the past decade. Therefore, we will continue with this strategy, as winning these significant contracts not only delivers long-term technological benefits but also positions us well for specialized work. Thank you for your questions.

Operator, Operator

Our next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead, Sheila.

Sheila Kahyaoglu, Analyst

Hey, good morning guys, and thank you. John, just on those comments, I feel like you have a good set-up 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. Then specifically, I know your contract wins are being held up, including EITaaS, but can you talk about what your assumptions are around EITaaS, DFCA and the IC win? What sort of assumptions do you have for those starting to ramp?

John Mengucci, President and CEO

I'm pleased to report that we achieved 11% overall growth, with 6% growth in the second quarter, and you've accurately noted 5% organic growth for the first half. This positive trend is largely due to significant prior awards that we were able to secure and navigate through the protest phase. Each of these major tech projects has a unique ramp-up plan, and things are beginning to align. Additionally, our work in mission technology has been very transparent. Typically, we receive awards with a 30 to 60-day delivery cycle, so these awards quickly convert to revenue, leading to better profits, as Jeff mentioned regarding our outlook for the second half. I feel confident about our current business portfolio and our recent wins, which include two substantial projects that will position us well. As I've said before, our awards tend to vary, and I prefer not to announce record award quarters for fear of showing a decline in the following quarter. While awards will always fluctuate, we consistently secure new ones and are effectively managing our large and expanding backlog. Regarding EITaaS, we expect more clarity by April. While I can't predict with certainty, I believe there’s more potential upside than downside to that decision and see it as a crucial step for our organic growth in FY24. For the cyber-related IC award, out of respect for our clients, we won’t disclose specifics about the program or customer. This award is currently in the protest period, and we're awaiting corrective action from the customer. We hope to receive updates before the end of this month. Whenever we pursue large awards, we anticipate a 90 to 120-day protest period to avoid premature revenue expectations. Overall, I’m satisfied with our strategic wins, which showcased our best-value solutions. We begin shaping these awards two to four years ahead of others and often invest before customer needs arise. These strategic investments allow customers to see what’s possible and help minimize risks associated with staffing cleared personnel. Overall, I'm optimistic about how 2024 is shaping up, and I believe we will navigate our way through these protests successfully.

Operator, Operator

Our next question comes from Tobey Summer with Truist Securities. Please go ahead, Tobey.

Tobey Summer, Analyst

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?

John Mengucci, President and CEO

Yes, so if I remember right, Tobey, there’s been talk about it’s a 10% growth budget. We could throw inflation in that, then we have to take out things that we don’t do. We’re always looking at that five-year CAGR budget, and 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 that this is at least a 30% growth market all through ’27. You know, what I like is we have a total addressable market of $260 billion, and we’re a $6.5 billion company. That total addressable market, how I 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, then we would have not have positioned ourselves well and been able to drive initial shareholder value. Look, strategy is a place where we come from, we’re not here by accident. A $260 billion addressable market is almost two times what it was in 2012, so all 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 holds.

Tobey Summer, Analyst

Thanks. Is there anything you or the industry can do to effect 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.

John Mengucci, President and CEO

I've been in this market for nearly 40 years now, and the federal government offers a protest process for good reasons. Some days we appreciate it, and other days we do not, depending on the circumstances. It would certainly be beneficial if we could announce a new job win and immediately see increases in revenue and margins, but that’s not how this market operates. As I’ve mentioned before, we can only focus on what we can control. For example, when we win contracts like EITaaS, we often have to wait until early next year to recognize the revenue, assuming other factors remain stable. On the positive side, working with the federal government means we’re dealing with a reliable customer. I'm not concerned about the number of people using an app; we understand the needs regarding national security and can focus our strategy accordingly. The protest process is something we need to navigate, and we must handle it reasonably. Ultimately, I ask for your patience and understanding as these situations are resolved and we are able to make progress together. Thank you.

Operator, Operator

Our next question comes from Louie DiPalma with William Blair. Please go ahead, Louie.

Louie DiPalma, Analyst

Good morning John, Jeff, Dan and George.

John Mengucci, President and CEO

Good morning Louie.

Louie DiPalma, Analyst

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 develop the software modifications that you referenced?

John Mengucci, President and CEO

Yes, let’s discuss what we’re observing in Ukraine. It’s important to note that what we see is only a fraction of the actual situation. We are heavily invested in counter-UAS and electronic warfare, and various technological capabilities are proving relevant in the conflict. There are also opportunities for our intelligence analysts, training and operations support, and logistics teams, especially regarding munitions expertise. The challenges in Ukraine are likely to persist for an extended period. While there are discussions about funding, it’s essential to recognize that the federal government will decide what we can export. Globally, our allies are increasing their defense budgets with a focus on the situation in Ukraine. We are already supplying some technology to the Five Eyes countries and are engaging with our Eastern European allies who are interested in our counter-UAS strategies, beyond just the SkyTracker line. As their defense spending rises, we will participate in those discussions and are currently assessing their needs. Although it's early to share specific details, this represents another potential market for us. Expanding our addressable market can lead to better returns in the future. We are also looking at our SkyTracker line, Korean line, and other solutions aimed at counter-UAS, exploring options from kinetic to non-kinetic mitigation strategies, which indicates significant growth potential ahead.

Louie DiPalma, Analyst

Great. 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 2 and the Wave 3 associated with that program? You obviously won Wave 1, but there’s two other ones that are probably big, and does having Wave 1 put you at an advantage to winning either of the other two?

John Mengucci, President and CEO

Yes Louie, thanks. I’m going to stick to our long tried and true practice of not commenting on things that aren’t awarded. Yes, Wave 2 is the network build of that. I think we were very well positioned on Wave 1 and we’ll have to see how that plays out.

Operator, Operator

Those are all the questions we have for today, so I’ll turn the call back to John Mengucci for closing remarks.

John Mengucci, President and CEO

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 MacLauchlan, Dan Leckburg, 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. Thank you all and have a great day.

Operator, Operator

Thank you everyone for joining us today. This concludes our call. You may now disconnect your lines.