Earnings Call Transcript - CACI Q4 2024

Operator, Operator

Thank you all for joining us. Welcome to the CACI International Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. This call is being recorded, and currently, all lines are set to listen-only mode. We will provide an opportunity for questions later, along with instructions. Now, I would like to hand the call over to George Price, Senior Vice President of Investor Relations. Please proceed, George.

George Price, Senior Vice President of Investor Relations

Thanks, Rochelle, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI. Thank you for joining us this morning. We are providing presentation slides, so let's move to slide 2. 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 our company's SEC filings. Our Safe Harbor statement is included in the 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 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 Chief Executive Officer

Thanks, George, and good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 2024 results, as well as our fiscal 2025 guidance. With me this morning is Jeff MacLauchlan, our Chief Financial Officer. Slide 4, please. CACI delivered strong results in the fourth quarter, closing out an exceptional year by delivering 20% revenue growth during the quarter. For the full year, we delivered revenue growth of 14%, coming in ahead of our guidance, which we increased several times during the year. We delivered EBITDA of nearly $800 million with an underlying EBITDA margin of 10.7%, consistent with our guidance. We also generated free cash flow of over $380 million and free cash flow per share of $17, the latter, an increase of 41% from last year. And we won over $14 billion of contract awards, the highest in company history, which represents a 1.9 times book-to-bill for the year. Nearly 60% of that award value is renewed business to CACI, and we continue to perform very well in our leagues. Slide 5, please. The outstanding results we delivered in fiscal 2024 are a testament to our successful execution of a consistent, well-defined and market-aligned strategy. A key enabler of our performance is business development. As you can see, our BD change performance has been exceptional. Our fourth quarter awards alone were $5.4 billion, representing a book-to-bill of 2.7 times. These awards add to an already impressive list of wins we have discussed in recent quarters. In fact, we have won seven awards of $1 billion or more in the past two years, which supports our ability to drive long-term growth as these programs ramp over multiple years. Our strategy of investing ahead of need, bidding less and winning more, focusing on larger and longer-term duration opportunities and proactively shaping those opportunities enabled CACI to win significant new work in fiscal 2024. In addition, our focus on superior execution, which is foundational to the culture and always the top priority, further supports our growth through sole-source extensions and expanded re-competes. We are in the right markets, delivering high-value differentiated capabilities and executing at a superior level, all of which support our ability to grow free cash flow per share and deliver value to our customers and shareholders. Slide 6, please. Let me highlight a few of our fourth-quarter awards that bring the successful execution of our strategy into focus. First, we won the eight-year, $2 billion NASA Consolidated Applications and Platform Services Award, known as NCAPS. CACI will deploy an Agilent-scale delivery model to standardize and centralize software development for more than 200 systems across NASA, enhancing quality, efficiency and speed of delivery. These are critical outcomes for our customers, and we invested ahead of need years ago to develop industry-leading Agilent software capabilities, identify and shape the right opportunities to show our customers they are as possible. With the NCAPS win, CACI is now executing the three largest Agile programs in the US government, and we see a healthy pipeline of additional opportunities where these capabilities will continue to be a differentiator. Second, CACI was awarded a $100 million contract by the US Army to provide signals intelligence and electronic worker systems for the Terrestrial Layer System Manpack program of record. Our Manpack systems enable dismounted soldiers to conduct signals detection, direction finding and electronic attack while on the move, supporting the Army's multi-domain operations and helping to dominate the electromagnetic spectrum. As we have discussed before, this is an increasingly critical domain and one where the US is still in the early stages of modernization and investment. This award also highlights the progression of a customer moving from purchase order awards to acquisition of our technology via a program of record that will contain larger volumes than a single award. This provides for a more consistent award basis and enhances the visibility of our business. Lastly, I'd like to highlight two new expertise awards that illustrate our deep domain and technical knowledge, our industry-leading talent, and the opportunity to inform our technology. We won a six-year, $239 million task order to provide intelligence analysis and operational support to the US Army commands in Europe and Africa. Every day, we see the headlines of how the US and its allies face increasing national security challenges across these regions, which is driving enduring requirements and resilient funding. CACI is uniquely positioned to assist the Army in anticipating and responding to these fast-evolving and complex threats. We also won a 10-year contract worth up to $450 million to provide operations and technical support to the Joint Navigation Warfare Center, part of the US Space Force that focuses on positioning, navigation and timing, or PNT, for the US and our allies. PNT capabilities are a critical national security priority and an area where we have invested ahead of need in both technology and talent. This new work with the Space Force provides opportunities for future expansion as well as the potential to inform our technology investments over time. Slide 7, please. Turning to the macro environment, we continue to see healthy demand and a strong pipeline of opportunities. Customer demand continues to be driven by the elevated global threat environment, the evolving capabilities of our adversaries, and the rapid pace of technology change with a significant need for modernization across government. CACI's expertise in technology is intentionally aligned with enduring and well-funded national security priorities, including the electromagnetic spectrum and counter-UAS, application and network modernization, cloud migration, cyber, and intelligence analysis. And this is true, not just for the United States, but also for our allies. From a budget perspective, government fiscal year 2024 was supportive of CACI programs. We believe government fiscal year 2025 will be no different. We are monitoring the GFY 2025 budget process and overall, the budget is shaping up in line with our expectations. Like most years, we expect the coming year will begin with a continuing resolution. And as I've said, this typically does not have a material impact on our business, and we are very comfortable with the funding levels we see at this time. Slide 8, please. Looking back on fiscal 2024, I'm very pleased with the execution of our strategy, our exceptional contract awards and our strong operational and financial performance. Combined with the constructive macro environment, this provides a great foundation for CACI as we enter the new year. With that in mind, in fiscal 2025, we expect free cash flow per share growth of 11%, revenue growth of 6% to 8.5% on an underlying basis, which excludes the nonrecurring $200 million of materials last year and EBITDA margin in the high 10% range. Jeff will provide additional details on this guidance shortly. Our FY 2025 outlook is consistent with our value creation model, which is focused on driving long-term growth and free cash flow per share. In fact, I want to share that we are making changes to both our long-term incentive plan and our short-term annual bonus plan. Going forward, half of CACI's granted long-term incentive shares will be performance stock units tied to a three-year free cash flow target. Additionally, we have added a cash collection component to our short-term bonus plan. The result is that we're focused and incentivized on delivering value for our shareholders. That is our commitment. And I look forward to updating you all through our progress throughout the year. 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 9. As John mentioned, we are very pleased with both our fourth quarter and fiscal year 2024 performance. Not only is it continued strong performance, but it's very much in line with what we've communicated to you throughout fiscal year 2024. In the fourth quarter, we generated revenue of $2 billion, representing nearly 20% year-over-year growth with 19% of that being organic. The balance was generated by the four acquisitions we've made over the past 12 months. EBITDA margin was 11.5% in the quarter, consistent with our expectations and a 60 basis point increase year-over-year. Fourth quarter adjusted diluted earnings per share of $6.61 were 25% higher than a year ago. Greater operating income and a lower share count more than offset a higher income tax provision. Operating cash flow for the fourth quarter reflects strong profitability and record days sales outstanding or DSO of 46 days as we continue to manage improvements in working capital. Free cash flow of $135 million for the quarter represents good sequential and year-over-year increases. Slide 10, please. Turning to full year results. We delivered significant top line growth, strong margins and good cash flow. In fiscal year 2024, we generated $7.7 billion of revenue, representing over 14% total growth just under 14% organic growth. This performance was well ahead of our initial expectations. You may recall that when we provided our initial FY 2024 guidance last year, we discussed a number of factors that could drive results toward the upper end of that guidance. We outperformed on most of these factors, in particular, stronger win rates on new work, faster ramp-up of our awards and successfully defending our recompetes. Underlying EBITDA margin of 10.7% for the year was in line with our guidance, which as a reminder excludes the impact of non-recurring $200 million of no margin material revenue recognized in the first half of FY 2024. Fiscal year 2024 adjusted diluted earnings per share were $21.05, up 12% from the prior year, despite both a $21 million increase in interest expense and a tax rate that was 250 basis points higher. Delivering 12% year-over-year growth despite these headwinds underscores our robust operating execution. Operating cash flow for fiscal 2024 also reflects strong profitability and cash collections that drove free cash flow of $384 million, which represents a 36% year-over-year increase. We did not receive the $40 million tax refund related to prior year tax method changes that we discussed with you last quarter and was in our fiscal 2024 guidance. The IRS has accepted our treatment of the method change, and we now expect to receive the refund in fiscal year 2025. Slide 11, please. The healthy long-term cash flow characteristics of our business are modest leverage of 1.8 times net debt to trailing 12 months EBITDA and our access to capital provides us with significant optionality. We remain well positioned to deploy capital in a flexible and opportunistic manner to drive long-term growth in free cash flow per share and shareholder value. Slide 12, please. Now I'll provide some additional details on our fiscal year 2025 guidance. As is our practice, we undertake a bottoms-up program-by-program forecast, plus our expectations for new business by specific opportunity. For fiscal year 2025, we expect revenue between $7.9 billion and $8.1 billion, which, as John mentioned, represents growth between 6% and 8.5% on an underlying basis. EBITDA margin is expected to be in the high 10% range. We expect adjusted net income to be between $505 million to $525 million which translates into adjusted diluted earnings per share of between $22.44 and $23.33 and does not contemplate any share repurchases or acquisitions that might occur during the year. And finally, we expect free cash flow of at least $425 million, which equates to free cash flow per share of about $18.89 and growth of approximately 11% from last year, based on our full diluted share count assumption of 22.5 million shares. This free cash flow guidance reflects the influence of three factors: slightly higher DSO compared to our current record level, inventory growth associated with ramping technology programs, and cash usage associated with Q4 accounts payable volume following that quarter's strong revenue growth. Additional details of our guidance have been included in our presentation to assist you with your modeling. I would note that we again expect higher profitability in the second half of the year versus the first half. In particular, we expect Q1 fiscal 2025 EBITDA margin to be consistent with the first quarter of last year on an underlying basis, which was 10%. Similarly, we expect a steeper ramp of free cash flow during the year, and I will remind you that a period of factors can skew quarterly trends such as the timing of material purchases and higher-margin technology deliveries. Slide 13, please. Turning to our forward indicators, our prospects continue to be strong. As John mentioned, fiscal year 2024 awards were over $14 billion with a healthy mix of new work and recompetes. Our trailing 12-month book-to-bill ratio of 1.9 times reflects excellent performance in the marketplace. Our backlog of $32 billion increased 22% from a year ago and represents full years of annual revenue. The weighted average duration of awards that went into backlog in FY 2024 was nearly six years. The longer weighted average duration equates to less revenue contributed in any one year, but together, these metrics provide good visibility into the long-term strength and cash generation potential of our business. As we enter fiscal year 2025, we expect approximately 84% of our revenue to come from existing programs, with approximately 10% for recompetes and 6% from new business. This is consistent with how we started FY 2024 as well. We continue to have a healthy pipeline of new opportunities. We have $9 billion of bids under evaluation over 90% of which are for new business to CACI. We expect to submit another $14 billion of bids over the next two quarters with about 80% of that for new business. In summary, we delivered outstanding fourth quarter and fiscal year 2024 results. As we look to fiscal 2025, we expect another year of good performance with healthy growth in free cash flow, driven by good top line growth and strong margins. We are winning and executing high-value enduring work that supports increased free cash flow per share, long-term growth and additional shareholder value. And with that, I'll turn the call back over to John.

John Mengucci, President and Chief Executive Officer

Thank you, Jeff. Let's go to Slide 14, please. In summary, we had a fantastic fiscal 2024 in a volatile and rapidly changing world, CACI delivered expertise and technology that made a difference to our customers. We also delivered on our commitments to our shareholders. We won a significant amount of high-value new work, delivered with excellence on our programs, and successfully defended our recompetes. We continue to invest ahead of need in both our capabilities and our talent. Our performance builds an increasingly strong foundation for growth in fiscal 2025 and beyond. We are further demonstrating alignment with our shareholders by focusing incentive compensation on free cash flow generation. The business we have built over the last 10 years is well positioned to deliver long-term growth and free cash flow per share and increasing value for our shareholders. We've built a leading business development team, and they are winning in the marketplace, capturing larger, longer duration awards. We've driven significant improvements in margin in DSO, with a continued focus on execution, working capital management. Our leverage of 1.8 times will allow us to deploy significant capital and we have a meaningful benefit for our business and our shareholders over the long-term. And trust me, we're not done yet. Finally, as is always the case, our company's success is driven by our employees' talent, innovation and commitment enabled by our culture of integrity and ethics. So each and every CACI employee, thank you. I could not be prouder of what you've done to contribute to our company and to our nation. To shareholders, I thank you for your continued support of CACI. With that, Rachel, let's open the call for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Bert Subin of Stifel. Your line is open.

Bert Subin, Analyst

Hey. Good morning, John and Jeff.

John Mengucci, President and Chief Executive Officer

Good morning.

Bert Subin, Analyst

Great quarter. I mean, pretty impressive to see almost 20% organic growth, so pretty unusual for this industry. As we think about FY 2025, I mean, you've won a ton of work in FY 2024 and some of that has come in as recently as this week to into FY 2025. Can you just give us a little bit of color on how you're thinking about the ramp-up for new work in 2025? And then maybe how you're going about ensuring execution is not going to be an issue, obviously a lot of labor to be added just to go after the awards you've won? So I'm just curious how you're thinking about those two things.

John Mengucci, President and Chief Executive Officer

Yes, thanks. Let's discuss the ramp-up, beginning with how we exited 2024, as it informs our path to 2025. Our three major program wins contributing to revenue growth in 2024 were FocusedFox, which accounted for around 90% of our growth, along with EITaaS and Spectral, which exceeded our initial expectations and added to that growth. Additionally, contract growth from our other programs was slightly positive relative to the ones we are winding down, contributing to the overall growth in 2024. As we look into fiscal 2025, FocusedFox will mostly contribute from the base with modest incremental growth, while EITaaS and Spectral are expected to show more substantial growth, especially as Spectral enters its LRIP phase around the third quarter, which will require higher working capital. We have previously highlighted the varying ramp times for converting awards to revenue between expertise and technology programs, and this should serve as a useful example in our discussions about ramping. In fiscal 2025, we expect several technology programs to ramp up to a total slightly over the ramp value of FocusedFox in 2024. This is noteworthy because technology programs can take five to eight years to ramp, and having multiple technology wins among our $8 billion in awards that ramp similarly to FocusedFox illustrates the differences between expertise and technology ramps. Technology jobs contribute positively to various other areas but won’t immediately impact the base, which is what leads to continued growth, as seen with EITaaS and Spectral. To conclude the ramp discussion, it's worth noting that some of the $8 billion in awards involve software-driven technologies, such as the DLS job, which will necessitate a higher percentage of working capital. Supporting the maturation of our products will enable longer-term free cash flow per share growth, and the timing of this growth will be important. If the timing accelerates, we can reach our targets as we did in 2024. However, if some awards come in lighter or later in the year, that will also affect our ramp. You also inquired about execution, which is an important concern. Our organization understands that as we grow, we must maintain consistency in our processes to ensure reliable delivery. We have a strong history of operational excellence ingrained in our company culture. Every bid includes consideration of how we will execute the work, influencing our pricing and terms for large expertise and technology jobs. Regarding staffing, we recently began fiscal year 2025 with our top leaders in an off-site meeting where our HR team discussed talent sourcing, highlighting the need for skill-based hiring in addition to degrees. We are confident in our execution capabilities, although the key question is how these developments will unfold.

Bert Subin, Analyst

That's very helpful, John. For my follow-up for Jeff, the balance sheet is in extremely good shape. On a trailing 12-month basis, it's at 1.8, and even lower on a forward basis. Can you help us understand how you're approaching the uses of the balance sheet? Can you confirm that this is not included in your guidance? How are you thinking about that as we look towards FY 2025?

Jeff MacLauchlan, Chief Financial Officer

Thank you for that, Bert. Yes, our guidance assumes no share buybacks or acquisitions, but we do expect to engage in at least some of those activities. We've discussed this previously. Our main strategy is to remain flexible and opportunistic. We closely monitor potential acquisition targets and consistently assess these opportunities. John may want to provide further insights on targets and evaluations. Essentially, this is the result of a disciplined and thorough analytical process. That aspect is scientific. The more nuanced part involves aligning our perspective on the available pipeline with the pace at which opportunities may arise. I will allow John to elaborate on acquisition targets, but this framework is consistent with our previous approach.

John Mengucci, President and Chief Executive Officer

Yes. We frequently receive inquiries about how the M&A market operates. As a company that actively pursues acquisitions, we aim to address long-term needs by collaborating with other businesses. The M&A market appears to be improving, and we see potential targets that can help us meet our long-term strategic goals. Some of these targets may be in the lithium spectrum, while others could relate to cloud and AI technologies, as well as fields like C4ISR and cyber security. I acknowledge that electronic warfare is increasingly intertwined with cyber, AI, and machine learning. As Jeff has already pointed out, we are disciplined in our acquisition approach. Our focus is not on purchasing revenue but rather on acquiring capabilities and customer relationships, which lay the groundwork for discussions about past acquisitions and their benefits over the years. We will ensure that our acquisitions are balanced with prudent leverage and, as Jeff mentioned, maintain close scrutiny on stock valuation to optimize our capital deployment strategies in both the short and long term. Thank you, Bert, for your questions.

Operator, Operator

Your next question comes from the line of Cai von Rumohr with TD Cowen. Your line is open.

Cai von Rumohr, Analyst

Yes, thank you very much. The book-to-bill ratio is impressive. John, what percentage of your sales this year comes from recompetes, given that 40% of your bookings were recompetes? Additionally, you mentioned the relative growth of technology and expertise. What growth rates should we anticipate for each if you meet your sales goals? Thank you.

John Mengucci, President and Chief Executive Officer

Yes, thank you, Cai. Last year, 40% of our awards were recompetes, and 10% of our revenue for 2025 is contingent upon winning in 2025. In 2024, we exceeded 90% in maintaining what we believe should remain ours, which turned out to be successful. Regarding future expectations, I seem to have lost track of the question.

Cai von Rumohr, Analyst

The question was about the relative growth rate this year between technology and expertise.

John Mengucci, President and Chief Executive Officer

Yes. If we consider the revenue side, Cai, and how 2025 plays out, a larger percentage of our new business wins occurred in technology. However, as I mentioned earlier, those will ramp up more slowly compared to our expertise wins, similar to the way 2024 ramped up. We experienced a significant and rapid ramp with the large Intel program in 2024, and the expertise wins in 2025 will follow a comparable trajectory. We are effectively staffing our teams. On the technology front, we have several new wins that will also ramp up slowly, much like what we observed in 2024. What I would like to emphasize is how we approach our guidance. We need to consider various factors related to how our customers respond and how the market behaves. When we evaluate guidance regarding the ramp of these new programs and any slower ramping, we always look at win rates to determine if they are lower or higher than our initial assumptions. For example, in 2024, we positioned our guidance in the middle, and most outcomes aligned with our expectations. I believe funding will remain secure, although the speed at which customers issue RFPs is another important factor. Additionally, 6% of our revenue in 2025 will come from new wins, which will necessitate prompt decision-making from customers. Rapid decisions could lead to a more favorable alignment with our goals. Therefore, we anticipate that 2025 will mirror the dynamics of 2024, especially considering it is an election year. There is much to discuss regarding budgets, but I am optimistic about our position.

Cai von Rumohr, Analyst

Great. And maybe give us an update on where we are with Photonics. I guess a big focus last year was on completing your investment, and this was going to be the harvest period, where are we in that?

John Mengucci, President and Chief Executive Officer

Yes, Cai. In previous calls, I mentioned that we were in the later stages of investments in the early stages of delivery. Most of our investments are now complete, which has allowed us to achieve a reliable design for our Photonic Optical terminals. We will continue to make investments in improving production capacity, which will require ongoing capital expenditures and working capital as we progress. I'm very satisfied with our current position. We delivered mid-teens terminals during fiscal year 2024, and we aim to deliver six to eight times that volume in fiscal year 2025. This increase will help us move up the delivery curve while we consider additional bids and opportunities for Photonics. Photonics is similar to the TLS Manpack, and we anticipate progressing towards larger-scale production likely in the third quarter. These production-oriented programs align with Jeff's earlier comments about our use of working capital. It's now clear that the growth in our business is not purely dependent on our working capital, but as we discuss how these programs scale, it's important to note that they require very little capital and expenditures for our expertise programs, while we expect significantly more as we focus on technology, which will drive greater growth. Thanks, Cai.

Operator, Operator

Your next question comes from the line of Peter Arment of Baird. Your line is open.

Peter Arment, Analyst

Thanks. Good morning, John, Jeff, George. John, I want to highlight everyone's impressive results, including the $14 billion in contract awards. When we consider the pipeline of upcoming bids, your charts indicate that there’s $14 billion worth of bids expected in the next two quarters, which could account for 80% of the new business. How should we think about your contract structure mix—whether it’s cost-plus, fixed price, or however you’d like to describe it in terms of technology? Looking at this pipeline, do you foresee any changes in that mix, or is it largely similar to what you've experienced with past awards?

John Mengucci, President and Chief Executive Officer

Yes, Peter, every time I hear $14 billion, it sets a record, and it's truly impressive. I want to emphasize that awards can be unpredictable. While I'm not generally one to focus on records, I must admit this is an impressive result. To put this into context, I’d like to discuss how we arrived here. It's crucial to understand that our current position is intentional and not accidental. Our role is to maintain growth in all our endeavors. These recent achievements come from our hard work and commitment to our long-term strategy, which is reflected in our consistent year-over-year performance, showcasing a business that's deliberate rather than opportunistic. Years ago, we acquired a company to address concerns around the drone threat and the evolving needs in that space. We may have invested a bit prematurely, but that’s the advantage of our merger and acquisition strategy: we're focused on sustainable funding avenues. Today, we’re in a position to discuss notable growth and impressive free cash flow per share, which is a product of our strategic planning. We aim to identify opportunities at the intersection of customer needs and software solutions in response to emerging threats. Our repeatable business development process is yielding quality opportunities. As we assess our contract mix, we anticipate a tendency towards more technology-driven projects than those focused solely on expertise, though the latter is still important to us. We've secured exceptional contracts, but these tend to be more selective. Many expertise-based contracts primarily fall into time and material or cost-plus categories, as customers often have a clear idea of the support they need, although that can change frequently. In terms of technology programs, many contracts will be a blend of cost-plus and fixed-price models. The advantage of our software solutions allows us to complete initial designs under a cost-plus structure, then transition to a fixed-price production model. When a significant portion of production relies on software, it minimizes risk, enabling rapid adjustments. A notable example is our experience with a request for proposal four years ago, where customer threats evolved, yet our selection was reaffirmed as we adapted through software enhancements, maintaining our original production schedule. I expect our contract mix will continue to shift, leaning toward a predominance of cost-plus opportunities, but we’ll also maintain a robust delivery model that justifies higher margins due to our investment in customer support.

Operator, Operator

The next question comes from the line of Mariana Perez Mora with Bank of America.

Unidentified Analyst, Analyst

This is Sumit on for Mariana. I guess just double topping on those submitted bid pipeline and what you're expecting to submit in the next two quarters? How should we be thinking about the win rate on those new opportunities? And then also kind of a breakdown, are those new opportunities or like new opportunities? Or takeaway contracts?

John Mengucci, President and Chief Executive Officer

Got you. I would expect that the pipeline will unfold similarly to last year. I'd love to predict win rates, but if I could, I would probably be in a different business. However, I believe we are taking the right approach. We are focusing on bidding for projects that align with our strengths, staying within the market we serve. Many factors influence win rates, and timing plays a significant role. We have $5.7 billion in rewards for the fourth quarter; if our timing were off by two weeks, we might have seen $2 billion less then and shifted $2 billion into the first quarter. What is essential when we share these numbers is not just the figures themselves but the quality of the opportunities we pursue. We are not achieving strong win rates by chance; it results from excellent teamwork and a client-focused approach, ensuring that our bids are high-quality. I feel hopeful about our chances of winning more often than not. We have done careful analysis on our potential win rates to inform our current guidance. If win rates improve in 2024 as we anticipate, we will likely reach the upper end of our guidance. Conversely, if they do not meet expectations or are delayed, we may end up closer to the lower end. Our focus remains on maintaining a high-quality mix that includes more technology and expertise, all while aiming for margins at or above our current levels.

Jeff MacLauchlan, Chief Financial Officer

The second part of that question about the new content, the $9 billion under evaluation, about 90% of that is due to us. The $14 billion we expect to bid in the first half of FY 2025, 80% of that is due to us.

Unidentified Analyst, Analyst

And then for those new contracts, what kind of gives you the confidence that CACI can win market share for any of those that are maybe a takeaway contract where there's a different incumbent now? Kind of what gives you that confidence?

John Mengucci, President and Chief Executive Officer

Yes, it goes back to the recipe we put in place a number of years ago, and we continue to build on we're going to be involved in programs where we've spent a number of years shaping what we believe are the possible for a customer. So a typical capture for us starts two to three years prior when the RFP comes out. A great example is our NCAP job, right? So we're very, very well steeped in agile software development and how we deliver and how we can rapidly update what our customer needs. So that was foundational on the MPF job. The second piece was spending three years with the customer. How do you like the value that's being delivered to you today by whoever your current delivery is, if they say they're not extremely happy and that they like to take this somewhere else? And we sit with them and show them are the possible and then based on that, we'll invest ahead of customer need and we'll put investments in place to make certain that that customer gets a comfort with working with us. That's over 1,000 days before the RFP comes out. And if we're to that point that we pretty have a pretty good idea of how the customer operates, the type of contract vehicle that works for them and us, the level of budget that they have to plan for and then if you wrap that the sort of frosting is putting the right key personnel in place, that is recipe for a spectrum win and a large intel customer enterprise expertise. And it was the recipe that brought $2 billion multiyear capital work to us. So we have some history here that doesn't always, always work, but it gives us the confidence that we're spending pressure has been in proposal dollars on growing the business versus playing a lot of time rewinning stuff that's already in our revenue. Thanks for the question.

Operator, Operator

Your next question comes from the line of Robert Spingarn with Melius Research. Your line is now open.

Scott Mikus, Analyst

This is Scott Mikus on for Rob Spingarn.

John Mengucci, President and Chief Executive Officer

Hi, Scott.

Scott Mikus, Analyst

John, I wanted to ask you a question. So Spectral was a big award for you guys that we normally would have expected to get to the large traditional defense primes, but you leverage software to deliver a solution there. And Northrop and RTX actually joined your team on that. So I was just wondering if you could elaborate on other opportunities where you think your software capabilities can be a differentiator to win larger programs that typically would go to the prime?

John Mengucci, President and Chief Executive Officer

Yes, the prime companies are exceptional and have created impressive platforms, which we should appreciate. However, we believe we can provide a mission-focused approach that enables customers to respond to threats quickly. This agility is a stronger value proposition for our clients, especially given the competitive pricing landscape. In our software initiatives, we've partnered with Northrop and their talented team, which enhances our delivery capabilities, as they have expertise that complements ours. Our strategy involves leading with software and agility, and collaborating with partners that can fill in the gaps we have, to offer customers an outstanding experience and results. For example, we have a customer managing around 200 different systems and applications that require continuous updates across NASA. This approach applies to counter UAS threats as well, where we process threats and signals similarly. While there are many companies focused on lower-level drones, we are addressing more advanced, complex drones operated by state actors that frequently change their tactics. There is significant work to be done in the counter UAS domain. We also look at integrating technologies like Spectral and ITAs into our offerings. Once customers recognize that a software-based solution is more suitable for their needs today, the opportunities will be abundant. Our focus is on selecting the right opportunities with customers willing to adapt their purchasing processes. The Army's transition to a program of record for advanced electromagnetic spectrum technology is a significant advancement and shouldn't be overlooked by investors and analysts. Additionally, the U.S. Navy's decision to choose CACI, a software-centric company while bringing along traditional vendors, indicates that the market is ready to make such purchases.

Scott Mikus, Analyst

Thanks. I’ll stick with one question.

John Mengucci, President and Chief Executive Officer

All right. Thanks so much.

Operator, Operator

Your next question comes from the line of Matthew Akers with Wells Fargo. Your line is open.

Matthew Akers, Analyst

Hey guys, good morning. Thanks for the question. I wanted to ask about free cash flow conversion. I think in the past, CACI has been kind of well-above 100%. So you guys a little bit this year makes sense to some of the working capital. But I guess do we get back to that 100%? Or is there something different about some of this technology work that maybe a little bit more working capital intensive?

John Mengucci, President and Chief Executive Officer

Thanks for the question, Matt. You should continue in the longer term or even medium-term to think about us as a 100% net income conversion. We happen to have an influence of factors here in the ramp of new programs as well as finishing up a couple of years of nonrecurring items that are kind of anomalous. And we're working through a phase of our cash profile. But steady state over time here over the next year or two, we fully expect to be back in that sort of range, and that's the way you ought to model us in the longer term.

Matthew Akers, Analyst

Got it. Thanks. That's helpful. And then I guess one more, just the O&M outlays data, I think a lot of us look at every month, be pretty weak lately. Is there any kind of signs you're seeing from your customer that would explain it? Or any way you can help us understand the difference between that data and what seems to be pretty good growth for you guys.

Jeff MacLauchlan, Chief Financial Officer

Yeah. Look, a couple of things there. One is when we have an extended CR as we had while we're income with fiscal year 2024, what traditionally happens is that, that spend at no greater than last year's spending rate. That really bottles up O&M spending early in the year. So you're going to see customers in more O&M towards the end of the year as they get to the end of September, and that's something that we're watching. We're a big modernization through sustainment companies as well in those O&M dollars that could bring some additional growth. So it's both of those things. It's nothing that's extraordinary. But what you'll see is that O&M dollars to be placed is going to be larger, the longer you see ACR go forward. So similar to other CR years, but a nice trend also allows customers to allocate funds to go after more urgent needs. And I would put out there that in my lifetime, I've never seen a time when there's so many urgent needs across numerous Quebec Commander theaters, where some of that end of the year all may make it place towards defending some of those threats. Thanks, Matt.

Operator, Operator

Your next question comes from the line of Tobey Sommer with Truist Securities. Please ask your question.

Jack Wilson, Analyst

Yes. Hi. Good morning. This is Jack Wilson on for Tobey. If we could maybe just double click on sort of what you're seeing in terms of recruiting for top tech and expertise talent? And if you've seen any sort of change in your retention or attrition in the past couple of months?

John Mengucci, President and Chief Executive Officer

Thank you. Earlier this fiscal year, I mentioned our senior leadership offsite in July where we discussed the evolving workforce. While changes won't happen immediately, we are beginning to see developments. Our company focuses strategically on understanding the markets we serve and anticipating customer needs, which requires us to invest in the talent we need. Revenue generation depends on having the right talent. We're committed to hiring individuals whose skill sets will evolve over the next five years, as existing capabilities may not suffice. This necessitates a program that goes beyond just leadership training to include upgrading core skills. Employees who join us may have skills that will need to be updated significantly over time. The good news is that we have a strategic plan in place, supported by our HR department, to adapt our hiring practices and skill set programs. Changes to our internship program are also being made to ensure that even those who join us during college are equipped with relevant skills three years later. About half of our skilled workforce comes from referrals, and a quarter of job openings are filled internally. Employees can shift roles within the company and undergo necessary skill upgrades. I'm pleased to report that our retention rates are rising and attrition is decreasing, which is a result of strong leadership ensuring that employees feel valued. Winning significant awards and being recognized in key markets enhance our appeal as an employer, especially among younger talent. We're committed to a software-oriented approach, embracing change and the opportunities that come with it. Thank you.

Jack Wilson, Analyst

Yes. Thanks, guys. I will turn it over.

John Mengucci, President and Chief Executive Officer

Thanks.

Operator, Operator

Your next question comes from the line of David Strauss with Barclays. Your line is open.

David Strauss, Analyst

Thanks. Good morning.

John Mengucci, President and Chief Executive Officer

Hey, David.

David Strauss, Analyst

Just on the margin profile throughout the year. So last year, without the material purchases, you were around the 10% level in the first half and 11% plus in second half. It sounds like you're implying a similar profile this year. What explains that? Is that just volume? Or is there something else that explains that first half versus second half difference in margins?

John Mengucci, President and Chief Executive Officer

Yes. Thank you, David, for the question. Over the past few years, we have noticed a trend of achieving higher volume and higher margins in the second half of the year compared to the first half. This pattern is related to customer purchasing behaviors. It's not complicated; there are specific customers and certain technology solutions that align with these times of the year. It's simply a matter of customer buying behavior.

David Strauss, Analyst

And to clarify cash flow, Jeff, are you estimating around $100 million in working capital usage for the year? Also, is this the final year for the impact of Section 174? Lastly, regarding your book tax rate, it appears to be higher this year; what is causing that change? Thank you.

Jeff MacLauchlan, Chief Financial Officer

The working capital amounts are not something I will specify, but they are in that general range. The working capital is divided among the three areas I mentioned in my prepared remarks. Regarding the tax rate, from the midpoint of our guidance range, it has increased by about 160 basis points. This is due to a few factors, mainly a higher blended effective state tax rate because the income we generate is shifting more toward higher-rate jurisdictions. Additionally, we are now experiencing the full year effect of last year's increase in the UK statutory rate, whereas last year it was only for about seven months. As for Section 174, it is still continuing, although it is declining as per our previous guidance, and I estimate it will be about $20 million a year for two more years.

George Price, Senior Vice President of Investor Relations

Thanks, David. Thank you.

Operator, Operator

Your next question comes from the line of Seth Seifman with JPMorgan. Your line is open.

Rocco Barbero, Analyst

Good morning. This is Rocco on for Seth. Does CACI have any work directly or like second order related to Ukraine that could be at risk if the US cuts off funding? And if so, would you guys be able to size it?

John Mengucci, President and Chief Executive Officer

Yes, thank you. We have a small amount of revenue-related work in that area. I can't provide specific details beyond that. You are all aware of the technology we deliver, and I will leave you to draw your own conclusions. However, this is not a significant revenue source. There are other international clients exploring our offerings. In upcoming quarters, we will discuss our international strategy and how we are expanding in that area. But that's about all I can share for now.

Rocco Barbero, Analyst

Okay. Thank you. That's helpful. And then how is CACI progressing on integrating AI into the contract award and execution processes?

John Mengucci, President and Chief Executive Officer

Yes. We've got about 200 programs that have some version of AI in it. So as I mentioned asked. Look, we are on the mission side of many of our customers. Since we're on the mission side, we're on the data side of many of our customers. We're well versed from everything from visualization to computer vision to machine learning and all the other elemental partners around AI. It's sufficient to say that the fact we're software-based and on the highly technical side, and we actually deliver things that we like to call AI today versus advice on it. We've been pretty steep in it. A lot of it is in the intelligence community, so we don't talk about a lot. But you can only imagine, given where the world threats are today, the fact that we are present in every combat and command, the fact that we're responsible for protecting troops in defending this nation. This is a company that actually uses deliver AI, to the folks who are building and looking for mission technology to store and give an informational advantage. So we've been in AI for a really long time. We continue to manage it for an extremely long time, because everything we do at the mission level with our software-based technologies have demanded for decades that we understand how to do more with less and how to process more of our data faster.

Rocco Barbero, Analyst

Okay. Thanks. Very clear.

John Mengucci, President and Chief Executive Officer

Sure.

Operator, Operator

We'll take the final question from line of Sheila Kahyaoglu from Jefferies. Your line is open.

Sheila Kahyaoglu, Analyst

Thank you guys and great quarter. So, Jeff, maybe two questions for you guys. First on top line if that's okay. So John, on top line, you talked about the technology ramps as being a reason. The revenue growth is maybe slower and expertise ramps faster than the book-to-bill might suggest. Why is that? Can you just distinguish that is it constrained by the customer or just timing of that hiring, onboarding or material overseas, if you could just talk about that a little bit, please?

John Mengucci, President and Chief Executive Officer

Certainly. Let’s start with the expertise aspect. At a high level, when we secure a significant program related to expertise, it typically involves existing work where a customer might be adding some extra scope. Fundamentally, having expertise means the customer is looking to acquire talent, which I often refer to as labor hours. This gives us an advantage because we can quickly transition personnel from a previously held contract to meet the new requirement. The customer expects this as well; in many agreements, we might have an eight-year expertise contract worth $1 billion that includes a 60-day startup period. Within that timeframe, we need to have 90% of the positions filled. That’s just how this operates. Now, if we consider a program like Spectral, which focuses on design and development through our DevOn technology and software creation, the process is different. Here, we are not solely focused on labor as we build up; rather, it’s about outcomes and deliverables. Thus, these programs, even with major prime contractors, tend to start more gradually. For instance, with a large fighter jet program, there’s often eight to ten years of design work before we see significant revenue growth. In summary, when we announce more victories related to technology in expertise jobs, that indicates a longer timeline before ramping up, which aligns with my earlier comments regarding the various programs that are technology wins and will gradually increase revenue at a pace similar to that of a large expertise contract.

Sheila Kahyaoglu, Analyst

No, that really is. And then maybe just to expand on that, considering the overarching question regarding industry profitability. Clearly, you are showing growth. The customer dynamics are shifting, as seen with the Army's acceptance of the software they purchase. Why isn't profitability in the industry improving despite the software offerings? How might you alter the way customers engage with you?

John Mengucci, President and Chief Executive Officer

Yes. Well, look, I think we've done a material job of giving the customer to buy it differently. Let me split here that may help. When we talk about software-based, there's still a hardware element to it, but it's software-based. So, when customers buy technology from us, they're looking at the ability to say, okay, so I bought the phone but I wanted to put different apps on it for a really long time. I'll use a commercial reference there. When we hear about the government try to buy software today, they buy licensed products, think commercial shrink-wrap software. It is a licensed model we frankly don't believe in the license model because that puts our customers in a really rough spot. And it makes juice margins for a couple of quarters. But we're serving a mission that is how do I buy something that's going to be enduring that we continue to modify. So, our software delivery and the fact that we've had a customer need, we deliver on a purchase order, those for all sort of three elements that allow us to drive margin. Look, we moved from an 8%-ish margin to the high 10%. We're still consistently focused on how do we drive both top and bottom-line growth, clearly free cash flow per share benefits from either and/or both of those. And that's what we're looking towards. So, look, I have to give our customers chops that they are working through how do they address today's threats more rapidly. And frankly, that gets yourself to an agile software model. And the fact that there's very few people who do it well, right, differentiation drives margin, right? It makes the ask heavier and then some of the terms that we're willing to accept. And the last lever is are we doing some of our software at a express manner? The answer is yes. We understand how to do it well. we're able to sell it in a study of different manners. So, I like how this company is set up for us to continue to drive bottom-line growth. Thanks Sheila.

Operator, Operator

Thank you. One more question came in from the line of Louie DiPalma with William Blair. Please ask your question.

Louie DiPalma, Analyst

John, Jeff, and George, good morning.

John Mengucci, President and Chief Executive Officer

Good morning.

Louie DiPalma, Analyst

And this is rehashing several bit earlier questions, but the awards in the book-to-bill this quarter were superlative and 70% of the awards were for new work. Are you assuming a slow ramp for the new work in terms of it taking several years to reach peak run rate? And also for the first year of the new work is the margin initially dilutive. And so should we expect for these sets of contracts, the revenue run rate will increase in year two and so will the margin?

John Mengucci, President and Chief Executive Officer

Yes, Louise. So let's see on the 70% new work, how does that ramp? As I mentioned earlier, the expertise work is going to ramp up quicker. There's a higher percentage of technology in our fourth quarter awards and our full year awards, as you mentioned. So that is going to ramp up slower. Based on the contract type, really tells you how the bottom line ramps, how offerability and EBIT is generated. On the technology programs that have firm fixed price elements to it, will be in an EAC model. And yes, we will hold back some of that profit dollars based on risk, and it's a well-defined process that's got back up as to which risk we still have to burn off. But on the other technology work that we have, I'll let Jeff make any of your comments. Profit is going to follow revenue, because it is cost plus, right, Jeff?

Jeff MacLauchlan, Chief Financial Officer

Yes, I would also like to clarify that it was 60% new, not 70%. I would like to reiterate John's comments about margins. The ramp is, as expected; we are being cautious with our early booking decisions, some development work, and generally the cost-related work. The margin is what it is right now.

Louie DiPalma, Analyst

Great. That’s it for me. Thanks everyone.

John Mengucci, President and Chief Executive Officer

Thanks, Louise.

Jeff MacLauchlan, Chief Financial Officer

Thank you.

Operator, Operator

Thank you. That concludes our Q&A session. I will now turn conference back over to John Mengucci for the closing remarks.

John Mengucci, President and Chief Executive Officer

Thanks, Rachel, and thank you, everyone, 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. Many of you are going to have follow-up questions. So Jeff McLaughlin, George Price and Jim Sullivan are available after today's call. Please stay healthy, and all my best to you and your families. Operator, this concludes our call. Thank you all, and have a fantastic day.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.