CACI International Inc (CACI) 2004 Q1 法說會逐字稿

Please stand by. Good day, everyone, and welcome to the CACI International first quarter fiscal year 2004 earnings conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Dave Dragics. Please go ahead.

Thank you, Susan, and good morning, everyone. I am Dave Dragics, Vice President of Investor Relations of CACI International. We're very pleased that you are able too participate with us today. For those of you who are with us for the first time either by telephone or via the Internet, we welcome you to this call. As it has been our custom on these calls, we are including exhibits with our presentation. We believe they'll be helpful in reviewing our financial results and trends in the discussion of our operations, and as we progress this morning we'll make every effort to keep all of you on the same page as we are.

So let's go on to the first exhibit. As you know, yesterday after the market closed, we released our first fiscal quarter year 2004 results and we hope most of you have had the opportunity to review our announcement and the results, and they are summarized on this exhibit. Moving to the next exhibit, before we begin our discussion this morning, I would like to make our customary but very important statement regarding CACI's written and oral disclosures and commentary, and there will be statements in this call that do not address historical fact and as such do represent forward-looking statements under current law. These statements are subject to important factors that could cause actual results to differ materially from the statements made today. And the primary factors that could cause actual results to differ materially from those anticipated are listed at the bottom of last evening's earnings release, as well as in our Securities and Exchange Commission filings. And our full Safe Harbor statement is on this slide and should be incorporated as part of any transcript of this call. So let's turn to the next exhibit, and to open up our discussion this morning, here is Jack London, Chairman, President and CEO of CACI International.

Thank you, Dave and good morning, ladies and gentlemen. First let me welcome many of you who are new to CACI to our call this morning. We certainly appreciate your interest and invite to you join us on future calls. We're glad you're on the line. Today reporting record first quarter results for fiscal year 2004. CACI's performance continues the record of strong financial results we achieved in fiscal year '03 and brings us one step closer to surpassing our goal of $1 billion in annual revenue by the end of fiscal year '04 and, in fact, well ahead of our original June 2005 schedule, the one we established back five years ago in our five-year plan, starting in fiscal year 2000. In our first quarter we received over $625 million in contract awards.

We saw 25% growth in revenue from last year, and Steve Waechter and Ken Johnson will provide you with some of the specific details, but I'm pleased to say that CACI's first quarter profitability is the highest it's ever been and we expect to continue at these levels. This quarter we saw significant growth in our systems integration and knowledge management work, helping customers to meet critical needs in government transformation and defense, intelligence, and homeland security. CACI engineering services continued to be in high demand and our managed network services business continues to ensure the transmission and safety of vital defense-related information. Our intelligence business is also showing substantial growth, with increased revenue in our C4ISR business, including the award of two major contracts in this area.

In September, we won a new $154.7 million contract with the United States Army's Intelligence and Security Command, or known as INSCOM, to provide IT services needed for battlefield and intelligence gathering. Just a few days ago we announced the award of a $132 million contract with the United States Army's Night Vision and Electronic Sensors Directory to help develop night vision and electronic sensor technology, forefronts of today's combat scenarios. In addition, we announced other awards in the quarter amounting to $128 million, and most of that coming from the intelligence community. All told, that amounts to almost $400 million of new business within the intelligence community arena since the beginning of our fiscal year back on 1 July.

Moreover, with last week's announcement of the closing of the acquisition of C-Cubed, CACI's ties to the intelligence community have deepened. C-Cubed specializes in C4ISR services for clients in the defense, federal civilian, and intelligence communities. This is the latest achievement in our very successful mergers and acquisitions program and a steady performance scenario over the last decade. Our M&A activities have served us well, expanding our business base and bringing us a variety of new and interesting customers and capabilities.

In short, this record first quarter performance shows that CACI is ever vigilent in meeting the needs of our nation, our clients, our shareholders, and our employees. Now let's move to the next exhibit. With me today to discuss our operating results in more detail and to join me in answering your questions are Ken Johnson, President of CACI's U.S. operations, and Steve Waechter, our Chief Financial Officer. Greg Bradford, President of CACI Limited in the United Kingdom, is also on the line and ready to answer any questions you may have with about our United Kingdom operations. As is our customs on these calls, we'll discuss three principle items. First, Steve Waechter will discuss our financial results. Second, Johnson, second, Ken Johnson will then discuss our domestic operations and their outlook. Finally, I'm going to have some closing comments. After that, we'll open up the call to your questions. The first item on our agenda is our financial results, and so here is Steve Waechter, our CFO, to discuss them. So, Steve, over to you.

Thank you, Jack, and good morning, everyone. If you turn to the exhibit numbered page 6, I will proceed from there. Last evening we reported record first quarter FY ‘04 revenue and earnings. Revenue for the first quarter increased 25% to $235.7 million, versus $188 million a year ago. Net income was $13 million or 44 cents per diluted share, up 38% over last year's $9.4 million or 32 cents per diluted share. As was the case in the fourth quarter of our fiscal year '03 we had strong operating leverage this quarter with the growth rate of net income increasing more than our revenue growth rate.

Let me give you more detail on some of these results. If you turn to exhibit number 7, our federal government business grew 27.5% during the first quarter and represented 93% of our total revenue. The internal growth of our federal business was over 12%. For all of CACI, internal growth was 11%, well within the 10-12% range we forecast in our August guidance. As we have previously reported, our United Kingdom operations contributed little to the strong growth in our domestic operations. Our UK operations, which account for only approximately 4% of CACI's total revenue, continue to be impacted by the lower demand for commercial IT services. Due to this, our operations there reported $9.3 million of revenue in the quarter, down approximately 9.5% from last year. And they generated a slight profit in the quarter. Looking ahead to the second quarter and beyond, we anticipate improving performance levels in the U.K.

Moving to exhibit number 8, let's take a look at some of our key metrics, most of which were included in the expanded financial exhibits in our press release. This was a very profitable quarter for us. Our operating margin was 8.7%, compared to 7.8% in the first quarter of last year. As we indicated in our release, the growth in our operating margin was driven primarily by lower indirect costs and selling expenses, combined with the synergies we are receiving from the acquisitions we made during fiscal year '03. Our operating cash flow for the quarter was $7.3 million, compared with $8 million in the year-earlier quarter. We anticipate operating cash flow in a range between $70 million and $80 million for the full fiscal year. Looking at a few other metrics, about 88% of our revenue this past quarter was earned as a prime contractor. As for the quarter, 62% of our revenue came from time and materials work, 19% from cost plus work, and 19% from fixed price work, which is essentially the same as last year.

Moving to the next exhibit, No. 9, days sales outstanding at September 30 were 80 days, compared with 74 days a year ago. The increase in days outstanding was driven by the timing of revenue and particularly strong ODC revenue late in the quarter, as well as receivable from one of our earlier acquisitions. This exhibit also shows our cash and marketable securities and debt at September 30th. The next exhibit, No. 10, is our guidance for revenue, net income and diluted shares for the second quarter and the full fiscal year 2004. This guidance includes expected results from our acquisition of C-Cubed, which we closed last week. As can be seen on this exhibit, we estimate that our revenue for the quarter will range between $250 million and $260 million, an increase of 22-27% over the second quarter of fiscal year '03. As for the next quarter, we expect operating margins to be in the 8.4-8.6% range. This compares favorably to last year's 8.2%. We anticipate that our net income will range between $13.2 million and $13.8 million, 25-30% higher than a year ago. We expect diluted earnings per share to be between 44 and 46 cents, up 22-28% over the year earlier period. We believe that our internal growth in the second quarter will be in the range of 10-12%, and finally we estimate that that diluted weighted shares for the second quarter will be between 29 -- will be approximately $29.9 million. For the full year we now estimate that our revenue will be between $1,020,000,000 and $1,050,000,000, which is 21-25% above fiscal year '03.

We anticipate that net income for the year will range between $54.9 million and $56.7 million, a 23-27% range higher than the $44.7 million we reported for fiscal year '03. Diluted earnings per share will range between $1.83 to $1.89, which represents an increase of 20-24% over the $1.52 reported in our last fiscal year. As you can see, this guidance compares favorably with our targeted overall annual growth rate of 20%, achieved through a combination of both organic and acquired growth. Even though Dave mentioned the Safe Harbor statement at the beginning of this call, I want to again state that these projections are forward-looking, and that listeners on the call and the readers of the transcript should be advised that our actual results may differ materially from the statements we are making today. That completes the financial overview at this point. Let me turn it over to Ken Johnson, who will cover our domestic operations. Ken?

Thanks Steve, and good morning everybody. Let's go to exhibit number 11, please. This morning I'd like to briefly review some of the key operational highlights of the first quarter, and then concentrate on what we see ahead for our domestic operations, in light of the significant number and size of contract awards that we received during the quarter. As we mode noted in the release and as Jack mentioned we were awarded over $625 million in business last quarter, the overwhelming majority of which reflects new business for CACI. A significant part of the growth of our revenue from federal customers during the first quarter came from the increasing levels of work we are performing for our national security clientele, for both the national and military intelligence customers. Almost one quarter of our revenue last quarter was from this customer set.

Well over half of the $31 million increase in our DOD revenue came from higher levels of business from our military intelligence customers, from work we are doing for both the service and air areas of the United States Navy, and from continuing strong demand for the C4ISR work for the United States army's Communications and Electronic Command, or CECOM. Growth in our federal civilian revenue was driven by higher levels of business from our national intelligence customers as well as work for the Department of Justice, the Department of Veterans Affairs, and several unnamed agencies. In addition to being selected as an awardee on several new large contracts, there was also a significant level of funding activity on current contracts as we exited the government's fiscal year.

Moving to the next exhibit, here is a recap of the revenue we generated from our federal, commercial, and state and local customers through our service or lines of business offerings. These percentages are approximate, as they have been in past. Systems integration work, which as you know includes the UK operation, now represents more than 50% of our revenue. Engineering service remains in the 20-22% range, while managed network services now represents 15-20% of our revenue. And knowledge management continues to be approximately 10%.

We have moved to the next exhibit. Let’s take a look at our pipeline of qualified opportunities. When we spoke with you two months ago, we were looking at about $4.8 billion of business in our pipeline. That number has grown modestly to about $5 billion today. More important for us and our shareholders is the fact that we are able to move much of the proposal activity we talked about in our August call into the W or win column. At the time of our August call, I mentioned that we had about $1.2 billion in proposals outstanding being evaluated. We are very pleased to tell you that of that amount, we were successful in winning about $625 million of mostly new business. Additionally, since that conference call, we have submitted approximately a quarter of a billion dollars in new proposals. The $625 million plus in awards we announced in our release stands as one of our best quarters ever for new contract awards. In the coming weeks, we will provide you with more information on these awards and the work involved, depending, of course, upon our customer's approval to do so. For the time being, we can tell that you while a majority of these awards are in direct support of DOD customers, new work has also been secured in the federal civilian and intelligence sectors. Some of the work has already begun. The balance of it will hopefully start during this quarter and is reflected in the guidance that Steve reviewed.

These new awards underscore another point we made in our August call, the growth of CACI's employee base. When we last spoke to you, I indicated that we had added approximately 200 people during the first six weeks of the quarter. For the entire quarter we hired over 350 full-time people to meet the increased levels of work we are experiencing in both our core operations and from that of acquisitions. As was the case in August, a vast majority of these people are revenue-producing employees. And because of the new awards, we will have to hire many more people over the next several quarters as well. CACI has increased in size to almost 6,900 people as a result of the growth of our operations and the acquisitions we have made. One year ago that figure was approximately 5,700. So as you would expect, we are very pleased about our first quarter and current pace of operations. More importantly, we are extremely excited about the new work that we have secured and will be starting over the next few weeks. That work is focused on meeting the needs of our customers in the key areas of national security and transforming the way our customers operate and deliver their services. The coming quarters will be very exciting ones for our domestic operations here at CACI. Jack, that concludes my remarks.

Okay. Thank you. Thank you, Steve, and Ken for those updates, most informative. So we've completed another quite successful quarter and record earnings, increased profitability and business growth. CACI's materially enhanced its position as a major provider of IT and technology services to the defense, national security, and U.S. government market sectors. Today, we see new threats as ever-emerging in the flow and in the world around us. On the other hand, our nation has proven its agility time and again in anticipating and defeating those attacks on our freedoms. Technologies in support of our national defense and intelligence efforts will always be a top priority. And perhaps even more so in the world we have around us today. CACI's core offerings are aligned and focused into these national priority arenas. And frankly, we're proud to provide innovative, in-demand solutions for the systems integration, knowledge management, engineering and logistics, managed network services and intelligence communities and technologies we serve. We're also proud of our steady and continued record performance.

CACI has delivered top financial results quarter after quarter, year after year. At CACI, we like to say we are ever-vigilant in support of our customers, our shareholders, and our employees and staff. We embrace the spirit of integrity and ethics in all we do and we continue to deliver on our legacy that we like to say quality client service and best value. So thank you very much. Now at this point we're ready to open up our discussion for questions that callers may have, so, Susan, I'll turn the process back over to you for your first question if you have the phone open.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us, and we will take one question and one follow-up question from each of you. If you would like to ask more questions, you will have to requeue again. Once again, please press star 1 on your touchtone telephone is to ask a question, and we'll take our first question from Cindy Shaw with SoundView Bank.

Congratulations on a great quarter. I wanted to ask you, I know about half your operations were in areas that were affected by Hurricane Isabel. Can you give as you sense for what kind of impact that had on the quarter, if you were able that make it all up by September 30th, and if not, if any of that will be spilling over into the December quarter.

That's a good question, Cindy, and thank you. We have had a bit of an effect from it. For some of the details I'll ask the Steve to address it. We’ve got a pretty good handle on it.

Cindy, we did in the quarter somewhere between $1 million to $2 million of revenue that we hope will pick up here in the remainder of the year, but our Richmond operations got hit, that whole area down in the Virginia Beach, Norfolk area got hit kind of hard, and then D.C. was out a little bit, but overall not overly significant. And again I think we'll be able to pick it up here in the next quarter or two.

Great. Thank you.

And now we'll move on to Chris Penny with Friedman, Billings and Ramsey.

Thank you, good morning.

Good morning, Chris.

Question for you on your pipeline of opportunities. Can you talk about the mix of contracts that you're seeing there in terms of your systems integration, engineering services? Anything that's coming out that's probably accelerating greater that might lead to higher, better pricing or more margin improvement above your expectations going out?

Yes, Chris, I'd like to say that we have seen a significant pipeline of opportunities, and some of these bids, ass you might imagine, have a mixture of some of these line offerings in them, but I'd like to ask Ken to focus maybe and amplify the response.

Yes. Chris, the way I'd answer the question, is there is no material change from what we've reported in the past, and I actually don't have the percentages. We see the preponderance of the activity for the things that we're following and investing time and money in coming out of integration and the networking stuff. I would tell you the thing that's going to drive margin more than the line of business offering is where we see it coming from particular customers, and we see a fairly healthy amount of activity coming out of the intelligence community, and we historically have been able to do a little bit better from a profitability standpoint there. And we also -- there are a number of big opportunities that are being acquired through the competitive bidding process. Several of those will wind up serving in a subcontracting role, and as we had indicated in the past, on past calls as you guys that follow this space know, you tend to make a little bit more money when you're a subcontractor than a prime contractor. So it's those kinds of things that I actually think are going to be a little bit of an accelerator or the driver on profitability, Chris.

Okay. And then my follow-up, can you give us a little bit of insight into the civilian budgets and what you see as opportunities there for your fiscal year '04 and then maybe following beyond that? Thank you.

Sure. I'd like to simply say that generally speaking, we've been watching it very carefully. I think there is a strong drive in those areas that pertain to the businesses that we see as national priorities and for where we have the company positioned at the moment. But, Ken, you might want to focus again in a couple of important areas that we're looking at.

Sure. I think the two primary, Jack, obviously and Chris, are we continue to spend a fair amount of time and attention and people resources on the Department of Justice activity, both inside the litigation support world and outside the litigation support world, and, as you would expect, as the Department of Homeland Security continues to mature, we don't want to give the impression that we're front running DHS, but over some period of time here as the year unfolds and as the '05 budget manifests itself we continue to look at some of those, as Jack pointed out, those things that are much more of a national interest, whether it's a visit program or whether it's a spirit program or some of the large opportunities that we believe will have a place for us in them on a going-forward basis out of DHS. And then not unimportant, but on a relative scale less important, are the opportunities that we see out of some of the tangential civilian sectors, which as you know are not as critical to us given the contractor base of operations that we currently support.

And we'll take our next question from Laura Lederman with William Blair.

Yes, good morning, very nice quarter. Can you talk about the pipeline of potential acquisitions, how robust that looks, and also what's going on in pricing in that market. And separately, can you talk a little bit about the ability to get people you're hiring now aggressively and is that the limiting factor to growth in terms of trying to get a hold of the right people? Thank you.

We have essentially two questions there. The first focuses on our M&A program, the other in terms of staffing and recruiting. Let me just mention that I've been looking at the M&A program for I guess 15 years or so now, and it comes a little bit in waves. I see right now a continuing consolidation activity. There seems to be plenty of opportunities out there for the kinds of businesses we're interested in, where we have a pretty broad criteria in terms of our selection and most of the value fits that we see out there, I think are going to continue to merge, so we're active in the market. I think the pricing factors are going to be fairly consistent. I don't see them shifting dramatically one way or the other. Perhaps larger, large-scale transactions you may see something, but the market space we've been working in highly successfully, I don't see any particular radical changes, but Steve works this as our chief, leading this activity, so I'd like to talk to that a bit and we'll get back to the personnel side.

Laura, Jack’s right. The market remains very active at any time. I think we're looking at six to eight different types of opportunities. Pricing has remained kind of a 6 to 8 times trailing EBITDA range in some of the things we've been looking at. There have been thing higher, clearly with an intel bent. We have seen some properties that have gone at a much higher premium. But we think we can be successful in delivering acquisitions that make a lot of sense for what we're trying to do here.

In terms of the people side of the thing, of course, always a challenge to get high-quality folks, and that is our focus at all times. We have a whole wide range of different skill sets we're looking for at any one time. Certainly the intel community gives us a little more challenge from time to time. And a little more rare, a little more higher demand right now, but Ken keeps a good handle on this. Why don't you amplify some of the ways that we're looking at it now, Ken, and shed some light for these folks.

Sure. Laura, the one thing that we do here, I wouldn't look at it as a limiting factor. For us that would be a bit of maybe a half-empty perspective. It's clearly on the critical path to our growth. There is no doubt about it, but as you can see from the staff that we've added to the enterprise here over the course of the first 90, 100 days of this fiscal year, we think we've got our arms around it. We do a lot of advertising. We do a tremendous amount of interviewing. We do even more screening. There is an awful lot of people in this space looking for work. We enjoy the luxury today of not having to compete against the commercial IT companies in any real meaningful way. The same holds true for the telecom sector of what we do. So while it's on the critical path, it's not a significant delimiter. We think we've got our arms around it quite nicely. And in many cases, if we're for the fortunate enough to win a contract away from another contractor, we find that we're very successful in converting the existing employee base to CACI employees, so we think we've got our arms around the issue, Laura.

Laura, I'd just add one further thing, I think is relevant here, and, again, I know he watches this quite carefully, and that is that there’s a significant number of people who come to CACI based on referrals from our onboard staff, and what I like to think of and how to characterize it is that that's because CACI is truly, I think, one of the better places for people to work and our employees onboard today feel very comfortable and quite enthusiastic about our outreach to their colleagues in the industry with the idea of inviting them to join CACI as well, so we've had a very successful track record at doing that and that I'm sure reflects on the overall work we do in terms of employee opportunity and cultural enhancement.

We'll now hear from Joseph Vafi with Jeffries and Company.

Good morning and good results. By question had on do with the backlog number in the quarter. I'm sorry, the bookings number in the quarter. Clearly, a very strong quarter. Could you provide a little color for us, maybe in a little more detail in the amount of business, one, in the quarter that was new versus renewal; and then secondly if you could provide some color on whether this very strong bookings number was at all affected by the continuing budget resolutions of last year and kind of basically a compressed fiscal year award cycle ending in September or if -- as well as what might have been just a better budget momentum this year which might carry into next year. Thanks.

I will just say there is probably a bit of flavoring of all those factors that you mentioned in how things turn out, but there might be, Ken might be able to give you a little better parsing on how some of that wound up in particular for our first quarter. Ken, maybe you can jump on that for us.

Sure. Joe, good question. Of the $625 million Jack actually identified, he articulated just over $400 million of that, that we've advertised. Obviously, some of that we haven't advertised yet, although it's work we secured and just haven't gotten the go ahead from a customer to make an announcement, and hopefully in next 30 days you will hear more about that. But of that $625 million, roughly $100 million, a little, maybe a little more, it might be a little less than $100 million, but I think it's a little over $100 million is work that replaces current work that we have. The remaining $500 million of that is our brand new customers and brand new work. The examples that I would use is the [ENSCOM] work, the night vision work, those two large contracts that Jack identified are both brand new contracts. Of the $128 million that we announced that's a grouping of a bunch of new contracts and new task orders, that's all new with the exception of about -- I want to tell you $30 million or $40 million inside there, Joe, so of the $414 million that we've advertised, 10% of it is follow-on work.

Now, on to the second part of question, I think I understood it properly. Was this a manifestation of last year's CR and just a bubble? Absolutely correct. We have been indicating that since -- I think since the April call. We reinforced in it August. There haven't been a lot of decisions. The budget was very slow. And even though the authorization and appropriations bills for defense were passed in a timely manner last year, because of the prioritization of the war effort, a lot of the opportunities just didn't turn into RFPs in as timely a fashion as we expected or hoped. Well, we told you how busy we were during the end of our third quarter and throughout our fourth quarter of last fiscal year, and we were fortunate the government not only made really smart decisions and selected us but did so in a very timely fashion and made many of those awards before the end of the fiscal year.

Okay. That's helpful. And then just a quick follow-up on that, you know, given such a big bookings number in the quarter, any color on how that business at an aggregate level is going to ramp into the revenue over the next four to six quarters, I guess?

We'll, we've been obviously looking at this, but Ken, I think you've put some time in recently analyzing. Maybe you can share some color for Joe on this.

Sure. We've built some of that into our guidance, but as you would expect because of the newness of the contracts and you folks are -- each and every one of you are sage enough to know that the staffing issues are something we have to get our arms around. First and foremost, we have on get ourselves – they make us an award, they write us a letter, they congratulate us and then we have to go through the process of seeing whether or not an unsuccessful offer elects to protest an award, and sometimes in the case of an incumbent, you can almost always count on that because it allows them to generate revenue over a little bit longer period of time, so I believe that you're already seeing some of it in the guidance. We typically do our back half planning sometime between today, as we speak, and get it all done by probably the first week in December, so I'm hopeful that we'll have a real granular answer for you during our January conference call, Joe, but we're working on that right now to get a sense as to how quickly we can staff, how quickly we can get requirements issued on some of these contracts, and we'll have a much better look at the back half of the year over the course of the next month, month and a half.

Joe, I'd like to footnote that, too, by saying that just following what Ken was indicating is a number of these opportunities here that we were, frankly, on the take-away side from the competition, so we feel very good about it, but there will be some feathering in and transition considerations that Ken carefully identified for you. Next question, please.

Moving on to John Mahoney with Raymond James.

Hi, guys. Congratulations on the great quarter and the bookings number, obviously.

Thank you, John.

I want to get a sense on the impact to margins from several different kind of cross trends. You just mentioned just a second ago that you won -- some of these contract awards were take-aways. I was just curious about what the -- if you had to be a little bit sharp on your pencil on those. And secondly, you mentioned that you're going to be -- possibly being a -- or I think Steve did about the – going to be winning more business or you're bidding on some business, large projects as a subcontractor. And that higher margin. I would have thought that as you guys crest $1 billion in revenue you’re going to be -- your role as a prime contractor is going to increase. So can you just talk about those issues and the impact of margins from those two issues?

Yes, John. I can give you -- I'd be delighted to respond. I think in the first instance, let's reflect quite carefully that there is a considerable emphasis on price competition in this industry sector. I don't care whether you're on the take-away side or the incumbent side. In fact, there is a lot of stress on incumbents from just the issue of trying to be price competitive vis-a-vis the attack of the new guy. So I don't think you're going to see necessarily an indicator one way or the other on margins just because of a take away or an incumbency situation per se. In fact, I can quite take some time and argue both sides that of equation. I won't do it here.

The other thing in times of prime subrelationships, we still have a very healthy mix of prime opportunities I think, and I'll ask Ken to speak to this in a moment, but I think he was referring to some near-term issues regarding subrelationships, but not our overall trend. Our overall trend is to sustain a high percentage of our prime contractor relationships. In fact, quite clearly that is a dominant business base of CACI. I'm not sure of the number, somewhere around 89-90%, somewhere around that neighborhood. We could get back to you on that number. So we have sustained by design a high content of primary relationships. But I think maybe Ken, you might want to talk to this in a second. But as a subcontractor, there are times occasionally where, because of the opportunity to perhaps spend less money on the bid side, that the overall situation turns out a little better. So -- and I'm told, by the way, splice a piece of information in here, our prime rate right now is 88% of our project activity, contract activity is 88% prime. So, we’re still way the dominant lion share of our leadership positions and direct customer relationships, which is our preferred modus operandi, but Ken, please amplify that piece about where we stand on short-term subrelationships [inaudible].

Sure will. John, disappointing [inaudible]. There are a number of opportunities that we're currently pursuing. The decisions have been made either based on contract vehicle or based on the overall size of the program that they just -- they don't conform to a prime contractor opportunity. Jack is absolutely correct. The emphasis has been in the past and as you can see from the 88% number that supports it, and it will continue in the future. We're attempting as best we can to prime opportunities, and that continues to be the driver in the marketing strategy; however, there are deals and we're faced with a couple here over the short course that we find ourselves in a -- we think in an important subcontractor role, but nonetheless in a subcontractor role, and so that's the only point that I was attempting to make.

John, I'd like to -- part of the -- I think thrust of your question and that is the margin potentials and Steve, of course, keeps a good eye on the margin aspect of these things, so I'd like to ask him to amplify a bit beyond the strategic aspects that Ken and I have talked about.

I think, John, just to follow up, the guidance we're giving is in between 8.4 to 8.6 kind of EBIT margins for the year. We feel very comfortable with that and there are a lot of factors you well know that can change and drive that. Your prime subcontract relationships, what types of contracts you're on, et cetera. We feel very comfortable with those numbers that we're giving, which is a big increase over where we were last year as you can look just this quarter. A lot driven by, again, the type of work we're doing, the acquisitions we did last year had very, very nice margins on them, and all that is factored into some of the improvements that we're seeing as we go forward here.

Our profit margins overall are driven very much by our strategy with regard to our acquisition business, and frankly, as we as a company begin to grow, I don't think that we have unnecessarily proportionate increases in our infrastructure costs, so we're looking at both sides, managing this thing from both directions, not only from the contractor form of side but the internal infrastructure – the operating infrastructure -- and frankly we're always looking for productivity enhancements through the automation of certain processes within the organization or business reengineering for our activities inside the company, and we have an active program underway right now as we point toward being what I'll call a tier one company in raising our sights past the $1 billion annual revenue rate. Next question, please.

We'll take our next question from David Garrity with American Technology Research.

Yes, hi, good morning. Sort of staying with the margin theme, can you give us any sense in terms of the mix of business that you've got now as you're moving more toward intelligence as to what may be a longer term potential for operating profit margin expansion might be? And then I've got a follow-up with respect to head count.

Yeah, I could I think give it, David, a little feel for it. I think it's already been mentioned that the thrust of the intelligence side, to focus on that for a second, tends to have, as Ken mentioned, a bit better, tends to have but not always, a bit better margin opportunity. Quite frankly because of high demand in the expertise in and the value-added quality of considerations that are necessary in that particular mark sector. But I'm willing to ask Steve to talk a little bit overall on the margin aspect of the different lines of business.

I think to answer your question, David, the current year, the guidance we've given -- we feel very comfortable, as I’ve said before, with that range. As we look out to the future, is there room for improvement on that? You know, I think we feel very confident that as we continue on grow in some of the intelligence areas and some of the other contracts that we have and some of the wins, again, that the team brought home this quarter, there is opportunity to increase the margins going forward. Don't want on get into establishing targets too far out for us, but clearly at 8.4 to 8.6 this year with some upside as we look forward to next year.

In some respects, the profitability looks and reflects on the contract vehicle type. As you may be aware, some of you at least in the cost plus reimbursable area, the profit margin opportunities are not as meaningful because discretionary cost management is not, is really not in the hands of management like it is on the time and materials and some of the other kinds of contracts, so we're very sensitive to the type of contract vehicle that's being offered out and then how we play our margins and how we bid our cost structure, so there is -- a complexity here, but what I like to do is think in terms of an overall goal, and then we manage the pieces and parts as we parse our way through this thing to hit the overall operating rates that Steve has indicated for us. So that's generally our strategy. We work the details with the idea of trying to continue to enhance margins, and I think we're going to be able to do that just as we grow.

Do you think over a three-to-five-year time frame that a 10% operating margin is achievable?

I think if you go back and you look where we were, say, three or five years ago, we've added probably 200 basis points to our margin, and I would certainly hope and anticipate that we could continue that trend over the next three to five years. So the answer to your question is I'm hopeful that we can get there.

I might add I'm more emphatically targeted to achieving that through productivity enhancements, through the use of streamlined business processes within, inside CACI and what I'll call infrastructure areas that I think I can effect some cost reduction, so the answer is yes, that we're definitely going to be targeting to enhance margins over the next three to five years.

Moving to on Bill Loomis with Legg Mason.

Hi. Thanks, and great quarter, guys. Two questions. One, first of all, on the bookings, I know you said most of it was DOD, can you just give a more precise range breakdown between DOD and civilian of the $625 million and the, also the internal growth rates for each of these segments in the quarter? And then the second thing is on the proposals, if you if you had $1.2 billion out in June, you won $625 million, you submitted $250 million more, how much of that other was awarded, that other people won? I'm just trying to figure out what the total bids outstanding is right now.

Let me just say that, Bill, and good morning, that I, of course, mentioned that I think I put $154 million out for genesis. That's certainly ENSCOM, I talked to a $132 million with the night vision. I talk to the national security arena. There's sometimes a little bit of a mix as to whether we consider that civil. But for the national security side, certainly those are all defense. I'll just tell you that the lion's share of this, without having a clinical number here in front of me, certainly the lion's share of this is defense, intelligence, national security-related work, which is, as you well know, is how we have positioned the company to take advantage of these advancing and high-priority national policy arenas. We're going to work national policy emphasis, and we're going to continue to do that, and even in our acquisitions I think you've noted have been focused more sharply in that area. The second -- I'm flipped on the second part of your question, Bill.

I had actually two of them. One, the internal growth for defense and internal growth for civilian in the quarter, and then also on the -- what the total bids outstanding, you have $1.2 billion last quarter.

Fine. I think Ken, if you could handle the margin question, and I'm sure Ken can give you a feel for the total. It is -- the bid number is dynamic. It's not static is my first response, so whatever we had in August is going to be a changing set of numbers no matter what we do, but the margin rates if you would, please, Steve.

I think the internal growth rates for DOD was about 12.1% in the quarter, and the federal civilian was 12.6%. Overall the company -- total federal business was at 12.3% internal growth rate, and the company as I indicated earlier was 11%.

Is that what you had in mind, Bill? Does that help?

Ken, I think the follow-up -- sorry, Bill. Go ahead.

The answer to the bid backlog question, Bill, goes about like this. We secured about $625 million. It's a little north of $625 million of that $1.2 billion. We were on the short end on about $310 million worth of awards, and we submitted $250 million new. So right now as we sit here today, not counting proposals that are in preparation, our bid backlog is about a half a billion dollars, Bill. That's that quarter of a billion dollars in new submissions that we made in the residual of the win $625 million, lose $310 million, subtract it from roughly $1.2 billion. So we're right around a half a billion dollars in proposals outstanding.

We’ll now hear from Mark Jordan with AG Edwards.

Good morning, gentlemen. You threw out the number of current employees of 6900. Does that include C-Cubed or not? And secondly, relative to C-Cubed, could you give an idea as to the cost of that acquisition and what cash resources you have subsequent to completing that acquisition that's available for other M&A activity?

Maybe we'll start on the C-Cubed side of it first. Let me just say that we are continuing to look at the market space, as I've indicated before. Our valuation pricing ranges for these kinds of properties, with these kinds of configurations, they're fine companies, and the multiples in there that we typically are looking at are 6 to 8 times EBITDA. Usually somewhere up around 8%, 80% or perhaps in some cases 100% of the revenue. It depends a little bit on the projection; depends on exactly their cost efficiencies and the customer relationship. So I think you will find that the valuations that we're involved right now with are very typical of those we've been involved with or [inaudible] anyway for the last year or so. And we've got a few details to wind up on this particular package before we announce, of course, there will be the details in our queue coming up but if there is anything, Steve, you want to add to this, please do.

Mark, two points. In that 6900 people number there is about 400 people that we have acquired with C-Cubed. The price, as Jack indicated, the six to eight times range of trailing 12 is probably right, depends on how you count the nickels and dimes. The cash at the end of the quarter was $96 million. We will pay and have paid out some moneys in that range. We don't want to give the price out at this point in time. There are some other factors such minimum net asset values that have to be determined and that will be done over the next 60 days. There's some escrow money, there’s some earn out money, there’s a 338H10 election which also needs to be factored into how you look at the valuation range, but again six to eight times we think is, depending on how you count all those nickels and dimes, as to whether they're successful in achieving all that or not, it is in that range. Plenty of cash remaining for additional acquisitions.

We have a bit of financial and accounting homework to do to put the numbers out and I'm reluctant to get ahead of ourselves, but rest assured, I think the thrust of your question probably is valuation profiles, and I think this transaction was quite consistent with the value. It's a fine company. We're very delighted with having these folks join us. We had an indoctrination briefing meeting yesterday that I thought was very successful, and had I think they're delighted to be a part of our enterprise and become CACI people as of last week.

Second question, if I may, in the U.K. you shrank a little bit year-over-year, and I think you said you were modestly profitable. Is there a concern there that you might have a scale issue that if that business continues to shrink at some level, that that could turn permanently unprofitable or do you have concerns in that area?

Well, Mark, always, I have been at this business as CEO since 1984 and I don't know a year or month that I didn't have concerns about something. Clearly, the profile of activity over the last year or so in our United K business has been a concern. I have a very high confidence in Mr. Bradford as the executive that has run that operation and his ability to operate in a dynamic, commercially-based environment. I think we've taken the proper steps. We've made some staffing changes. We have done some personnel reductions. We repositioned the business. We are not at a critical mass issue right now or critical, I guess critical mass problem. We have enough business base to sustain our sales. On the other hand, to your question, should it become that kind of an issue, obviously we would be prompt in taking a different kind of perspective. Right now I've been -- just came back in August with some extensive meetings in the U.K., looking at the design plans for the back half of this calendar year and into the first part, so I think we were doing quite well in putting our plans together. We do have a new executive, as I've indicated. But I think more than that maybe I'd like to turn it to Greg right now. Greg Bradford is online, I believe. Are you there, Greg?

I'm here, Jack, yes.

You might like to address a bit sort of your overall perspectives. We had a bit of a setback in the economy over there in our line of business in the telecommunications area but we're making some shifts out of that. Greg, why don't you add a few pieces of color for our listeners?

I will, Mark. It has been a tough year, too, in the U.K. in the commercial IT services market. The marketplace here is very much what has been experienced in the U.S., basically it's a fall-off in demand from commercial clients for IT services and systems. Our revenue has come down during this period, but proudly, we've been able to maintain our profit margins in the, certainly the 9-11% area. This first quarter has been our most disappointing quarter. Our revenue dropped, and as a result, our profit margins came way down. We took it as an opportunity, though, to restructure our business. We have reorganized it. We've downsized it. We've recruited a senior executive to help lead us, so I'm pretty confident that this quarter will be the lowest point in our profitability. In quarter 2, we'll see that move up probably more than the 6% pretax range, and then I expect by quarter 3 that we'll be back producing our historically good margin.

Quarter 2 being the one ending here December 30.

Correct.

Thank you, Mark. Did you have a follow-up on that?

We'll take our next question from Tim Quillen with Stephens.

Good morning, a couple quick questions. One, just following up on the margins, I know in your fiscal fourth quarter there was some one-time high margin revenue that boosted operating margin. I was wondering if there is anything one-time in nature in this quarter and why exactly there would be a sequential operating margin decrease for the rest of the year.

I'd like to ask Steve, the Chief Financial Officer, to respond on that one if you would, please.

As we indicated last quarter's conference call, at fourth quarter we did have a one-time unusual on a fixed price contract that did bump it up a little bit. As I have been saying, the 8.4-8.6% range we feel comfortable with as we go forward, which should represent sequential increases year-over-year as we look at each quarter going forward, so is there anything unusual? Nothing really unusual in this quarter. Kind of more business as usual.

Okay. Fair enough. And then just the second question I had is on the increased military operational tempo and the operations in Iraq and Afghanistan. How much of that do you see as a potential distraction for bid and proposal activity in fiscal '04 and how much of a benefit is it in terms of new projects that you might have supporting soldiers on the battlefield?

Let me just give a, kind of an overall picture. Then I will ask Ken to give some detail. I think that I don't see it as a distraction. I see it as a national priority emphasis area for which CACI has developed a rapid response capability across whatever geography is involved. Afghanistan, Bosnia, Kosovo, Iraq, any part of the world, actually, Korea, for example. I just came back from Korea on a visit to Japan as well as Vietnam, so I'm out there trying to get a good feel for the tempo of these things. On the other hand, the transformation side of the United States government with emphasis in the DOD area I think is going to continue. I think you're going to see both areas a national priority. The war on terrorism and the transformation of the infrastructure to configure it in a responsive way to deal with the new asymmetric warfare going on globally, as I indicated in my opening remarks, but I think Ken is very close to the operational side of it and the people we deal with and our customers, so I'd like to ask you to amplify it a bit here, Ken, so that people have a good view of how we're viewing our market space.

I can't add anything at all to the notion of the distraction, Jack, it's clearly not a distraction. Basically, these are customer requirements like many other customer requirements, and we respond as quickly and as completely as we possibly can. On the op tempo side of the question, while we haven't quantified it, per se, it clearly is having a consequential benefit to this staffing growth that we have talked to you about in the last two conference calls. We, on behalf our customers, are deploying people into theaters of operation to augment the uniform force and to do the things that they’ve deigned that they require support from contractors. And Jack mentioned each and every one of the theaters of operation where there is a requirement and where we have the capability to provide that level of service and help our uniformed service in this increased op tempo environment. We have been pretty quick to respond, and as a result of that, as you would expect, the customer tends to go to somebody who is answering the mail for them. And we have over the course of the last four or five months been answering the mail quite nicely. So we believe certainly short to mid-term we're going to continue to see that happening. Longer term, it's clearly above my operational pay grade, what's going to go on overseas but short to mid-term I think you're going to continue seeing the op tempo that we're experiencing today.

Moving on, we'll now hear from Julie Santoriello with Morgan Stanley.

Hello, Julie.

Good morning, hi. Why don’t you just drill down a bit more on the cost side. I was impressed by SG&A expenses staying flat in the quarter despite the growth sequentially and year-over-year, so I want to ask you about that and how you see those expenses shaping up and also on the gross margin line, if you could talk about the decline there.

I'd like to just say that cost management is a continuing focus of our senior management activity. In term of the details and factors and so on, I'm going to ask Steve to respond to that for you.

Julie, with regard to your first question, on the SG&A side of the house, it was flat quarter over quarter, largely because we didn't bring a lot of people on when we did the PTG acquisition on the G&A side of the house. So we were able to pretty much bring the revenues on and what have you. Although I do think as we go forward you're going to see that go up as we deal with our infrastructure to deal with the bigger company, so you should see some sequential growth in that SG&A number in terms of absolute dollars. As a percent to revenues, it ought to remain fairly constant. With regard to the -- your gross profit question, we did have a little bit additional ODC, other direct costs, flow through this quarter, probably about $5 million or $6 million higher than the previous quarter. So [inaudible] as the impact driving the gross margins down, as you know.

Okay. Thanks. If I can get a quick follow-up?

Please do.

Thanks. On the bookings number, the $625 million, great to see you reporting those numbers now.

Thank you.

I'm wondering, just because enough is never enough for us, if you guys would have the bookings growth in terms of year-over-year growth in bookings or sequential change in bookings.

We're, in terms of bookings and awards we are certainly on track, and believe me, we take a look at it literally every Monday. We have I think established a good trend line that is aggressive for the year. Ken, you might amplify that a little bit in terms of what you see as award profile as we go forward here.

I think we've got some guys in the room there that can bear these number out, but it think for the entire year last year, bookings was about $1.1 billion to $1.3 billion, somewhere just a little north of a billion dollars, so given that that's a first quarter number, and basically that number there largely reflects the portion of that $1.2 billion, there are a number of other bookings that would account -- that will add to that $625 million. Julie, we are well on our way, assuming we don't hit the wall here some --sometime between now and June 30th of '04, we are well on our way to surpassing what we did last year, and we're north of cautiously optimistic it will be a banner year.

We'll now move on to Cynthia Houlton with RBC Capital Markets.

Hello, Cynthia.

Hi. I guess I'm at two different firms. On the -- just a clarification on the revenue, I know you gave some data on what you consider kind of the intel national security area. Could you give us that on a -- could you just clarify what it was this quarter, what you are including, and then maybe an apples-to-apples what that was for the prior quarter and the year-ago quarter? I that’s an area that obviously everyone’s tracking, so I want to see if we can clarify those numbers a bit.

I'm going to ask Steve here in a second because we try to keep a handle on this. I must say to you that in terms of our operating lines of business, there is a bit of difficulty from time to time exactly how we classify certain aspects of the tasking in these areas, for example, system integration often supports the intelligence community. System integration activities are often involved in knowledge management. So this is not an area that we are able to render a tremendous precision but we try to keep a decent handle on it. Steve, maybe you can amplify and respond with more precision.

Yes. To Jack's point, we try to put together some internal business rules on what we call intel. As you know, it cuts across a lot of different areas and what have you. But the way we're looking at it, and again I'm not going to go into the details of who is included, but about $58 million in the quarter would have been what we call intel revenues, and that's up about 63% over last year.

And again we have the issue of working at national priority levels, national organizational levels versus the tactical field services side of our business directly with the armed forces, and I mean that the uniformed outfits. So, again, these are areas that we try to, in our best judgment, give some calibration to, but it’s not really a precise art here and I don't think it ever will be for the way we operate our business.

Let me throw something in here, too, Cynthia, and also to go back to Julie Santoriello's question about bookings versus awards. When we talk awards on our earnings release, we're talking about contract awards, that is not the total – what we would consider total bookings figure because that doesn't take into consideration task orders we've received on existing contracts and thing of that nature. So I don't want the interpretation of bookings and awards to get out of control. We're talking specifically about major contract awards here in the $625 million, which does not account for other things coming in on existing business, which a booking of a task order under a current schedule, that type of thing. So there is a difference there, and I want to make that clear.

And then maybe just as a follow-up, is that $58 million and the 62%, any kind of rough split on what was organic versus what was acquisition related? I know you’ve made some comments that the acquisitions you have done improved the intel position.

I don't have it broken that way. We break it out by contract, so a lot of them are classified and some of them were acquired, some of them were internal. I just don’t – I don't have that detail here.

And frankly, we have some areas where we cross-feed. We have work ongoing that becomes enjoined with other task areas, so it's just an ongoing customer service-oriented kind of business we run here, and we do the best we can to give some indication to our constituency as to how things are flowing.

Jack.

Yes.

This is Ken. I'd like to add one little thing there because it provides an opening to provide a little color.

Good.

Cindy, one of the things that we made sure that we illuminated a little bit on back in August, and I'd like to reinforce it now, that organic versus acquired growth, we have had a couple of acquisitions here in the recent past who have blessed us with substantive growth post acquisition. Now, we dutifully log that into the acquired growth, but as I pointed out at the time, I'd like to reinforce it, when we add 50 people or 100 people or in some cases several hundred people to an acquired company inside that first year, although it shows up as acquired growth, those people actually believe they're coming to work for CACI, so our general managers and our top management team and the leadership of this company, that's important growth irrelevant perspective of what box we put it in and not only that, but it's growth that will sustain for a long period of time. And I wouldn't want anybody to think of it as being riskier revenue because it's acquired growth versus organic growth because it's good, solid growth and I can assure you there that our customers are delighted with the support that we provide in that area of growth. Thanks, Jack.

I think that I'd just like to make a commentary, having seen these kinds of discussions over many years. It comes, I think, out of the -- a different sector of the economy having to do with same store, new store sales and organizations looking at a business from that perspective. Ladies and gentlemen, services business is not a same store, new store sales kind of an operation. We integrate the skill sets of highly competent people that can often offer suggestions for solutions in new contract areas with new clients, so it's much more of an integrated business. Quite frankly, we try to respond to the emphasis of organic versus acquired growth, but the truth and reality of the matter is that once people become part of our institution, as a CACI enterprise going forward, and we find much more instance of integrated activity rather than separate categorization. I'd just like to share that with you for a little bit of perspective on actually how the business really operates.

We'll take our next question from Tom Meagher with BB&T Capital Mortgage.

Hi, Tom.

How you doing this morning?

Good Morning, Tom.

Waited a long time to ask this question, Steve. Once again, my usual quarterly housekeeping item on the DOJ revenue.

It's about $25.4 million this quarter versus $22.4 million last year, which is up about 13%, 14%, and it's interesting to point out be Tom, it's about a third of our civilian business now. It used to be, as you well know, more than half going back a couple quarters ago, so our other civilian agency work is growing very, very nicely.

Good, okay. Then just two follow-up questions, if I can for Ken and Jack. First, the impact of the recommendation that was made to GSA about winnowing out some of the GWACS contracts, specifically Safeguard, which I think is a place you have done some information assurance work before and then also any impact you see on the company or on the sector as a whole from what came out of the run sales memo that was leak to the media yesterday about where we need to go from here on out?

Let me start off, and I am absolutely certain Ken will have some interesting color to add, I think on the contract consolidation activity, I might respond by saying that the business, again, for the most part is a set of services relationships. I'm going to keep emphasizing this because I think it's something that the investment community would value in being more sensitive to. The contract vehicles – Safeguard, that you mentioned, for example, our relationships, the deals we have, the work we have under that, I'm quite confident can be realign over a period of time. I don't see a major impact on it, just from where I sit at the moment. The other thing with regard to the quote, unquote, leakage of Rumsfeld, I want to say that I have the absolute highest regard for Secretary Rumsfeld. I think he's set a path and course that is in the very best interests of the United States and its citizenry, and I believe that some of the things he's talking about are possibly just some realities of dealing. We're in a war. We're not going to win every skirmish. We're not going to win every street corner engagement. My inside awareness and knowledge of some of the things going on in Baghdad and Iraq are very positive, extremely positive. There are some difficult areas -- Mosel, Tikrit, some of the areas up for the Shiite, Sunni and as well the Kurdish interactions have some severity and some extreme friction and pockets of resistance, you're going to find that. We're at a war, ladies and gentlemen, and there's going to be that kind of thing. But I think that if his course can be sustained and maintained, we will be successful, and I am very hopeful that that will be the case, so it is regrettable when perspectives from the press and others don't see the overall big picture, but that tends to be the modus operandi of the, quote, the open society we have, which I value, but Ken, you might want to put some more flavor on that yourself.

The only thing I would add, Jack, is, Tom, with regard to the contract consolidation, we have been given some real substantive assurances, in fact, we just met with the Safeguard PMO people just the other day. Our work is in absolutely no jeopardy at all. In fact, one of the things we hope will accrue from this is as the work physically migrates to a BPA under schedule 70 and under different kinds of GSA vehicles, basically, we'll have the ability to provide a broader range of services to those same Safeguard kind of security customers, so we think that that's going to have a positive -- we're hopeful, we're cautiously optimistic that that will have a positive impact. And then the other things that we have our fingers crossed is there is some consideration being given for combining ANSWER and Millennia and maybe possibly even reprocuring Millennia, and I can guarantee that we will be on the sidelines cheering that decision on heartily, so I think the consolidation is good. They've got a bunch of those contracts that are, I don't want to say underperforming but aren't performing at the same rate and pace as some of the real fast, the fast trackers, so that's less things that we have to deal with administratively so that will help round the cost side, and I don't think it's going to hurt us at all, in fact I think it will help us on the operational side. To the leak of the memo, my bottom line there is I think any change that gets considered and then possibly implemented by our customers is good for us because we are, in fact, like much of our industry, quite agile in our ability to redirect, reallocate forces and capital resources, so to the extent that we address this threat in a different way from the way we're doing it now, because the way we're doing it now is we can't go fast enough, I don't -- I think big picture-wise you'll see most of us across the industry look on that as an opportunity as opposed to a problem.

My only footnote is that I think that I'd like to believe that we are even more agile. Next question, please.

We'll now move on to Clint Fendley with Wachovia Securities.

Hi, Clint.

Good morning, thanks for taking my call. Jack, you commented on your positioning for the Homeland Security visit and spirit award, are there any other mega contracts that you see coming out of this agency during the next year?

Well, I think that there's the possibility certainly as a general proposition, I would say the community, meaning the IT, government services, security-related organizations and companies, have not seen what might have been anticipated from the homeland area, but there is some jobs coming along that we're looking at, but I think that is much more appropriate for Ken to address as part of his constant review of these areas or frequent review of these areas. Ken, would you add some dimension to that, in particular, who the homeland area that Clint's asking?

Yes. On the mega side, the large contracts of consequence, those are the two primary thrusts that we have going right now that we believe are going to show their face out of DHS here over the course of the next several months. There's a thing inside of Homeland Security called [CHIS DN], which is the Homeland secure data network opportunity. It's a program of some consequence that we will be involved with in some very meaningful way. That's going to happen, I think, within the next one, two, three months. We've been waiting on that for some period of time. I don't know that there is anything -- there is no other program that kind of immediately leaps to my mind that we're spending a great deal of time and money. Now, unfortunately for me I'll get off this conference call and one of my marketing guys will call and tell me you forgot the ABC program and the XYZ program, but as far as my radar screen, those three programs are right at the top of my radar screen.

Ken, have you publicly aligned yourself with one of the three major teams for the visit award?

Well, Spirit we're bidding a prime so we've publicly aligned ourselves there. On the other two, we are in fact going to be a subcontractor, and what we typically do is leave it up to our prime contractor to make those pronouncements.

We now have a follow-up question from Cindy Shaw with SoundView Bank.

Hi, Cindy.

Hi. Actually, I think my questions have all been answered, there have been so many since I queued in for the follow-up. Actually, no – one. The accounts receivable. It was a bit of an issue last quarter. It sounds like probably the same acquisition is continuing to be an issue. Can you elaborate on that?

Yes. Cindy, it’s not -- the acquisitions are a little bit of the issue. It's really more of a timing issue related to when ODCs coming flowing through in the quarter. The way we calculate days, we do it on an average basis for the quarter, so if we get a lot that comes through in September, unfortunately, it's in the balance but I'm using a lower kind of rollback number, so it's really more the unbilled revenues, if you will, than billed. Billed has held fairly steady in the U.S., we’ve been running at about somewhere between 60-62 days on billed receivables. Where you've seen the uplift here really in the unbilled category, and a little bit associated with one of our acquisitions.

Great, and actually while I've got you, can you tell me how many of your employees or what percentage have security clearances?

In the low 70’s.

Cindy, I think it's fair to say that somewhere in the low 70’s, as my colleagues have mentioned here to me. I would say to you that we have a very high content of special compartmentalized clearances that we have been developing and building as our focus for our intelligence business. We also have a considerable amount of security clearances, special proprietary aspects of our dealings with the Department of Justice for which we have a large staffing organization. So if you're talking about 70% against, let's say, 7,000 employees, you're talking about almost, well, nearly 5,000 of our people, which is a extremely large number because you also consider then this 7,000 or 6900 people a considerable staff operation that would not normally be involved with clearances or security kinds of work or needs. So I would say of our operating force, our line delivery customer service, our percentage would be, obviously, quite a bit higher, more like probably 85%.I hope that helps you.

And we'll take our next question from Sandra Notardonato with Adams, Harkness & Hill.

Hi, Sandra.

Hi, there. A couple questions. First of all on the competitive front, can you talk about any change on the margin that you've seen, now Veridian and Titan have been acquired, either positive or negative?.

Let me just open up by saying that we have been competing and I'd say an active player in the market space certainly with the mid-size companies. We've been moving to, as I indicated or at least alluded to, competing with some of the very large companies these days, the Lockheed Martins, certainly EBS, Computer Sciences, SAIC, Raytheon, [Boos Allen], and so forth. I don't think in particular there has been a significant margin implication on either one of those transactions. We don't necessarily bid against them that frequently, so on any one deal the pricing factors tend to be, I'd say, a little bit more unique to the business issue or the contract issue, but I'd like to flip that over for Ken, who operates on that dimension day-to-day.

Yes. Thanks, Jack. Sandra, I don't think there has been any real appreciable change. The way I've answered that question in the past is that -- well, first of all Lockheed Martin’s a long way away from closing the Titan deal, so obviously there is no difference at all as we speak today, but even when it does get closed and when the ACS acquisition gets closed, Lockheed is such a large, formidable competitor that to add several hundred million dollars in new business to them, as I indicated on the last call, how big can they get and how formidable can you be? We operate and compete against them and team with them with the utmost respect, and it really has had no day-to-day real appreciable issues as far as how we compete and where we compete and how we team.

Do you think, though, that might change over the next few quarters as the Veridian and Titan transactions become more integrated in the buyers?

Let me give you my response. I don't think it will make a material difference, quite frankly, but that's as you say to be determined, but I don't see the feasibility or any particular drivers in that area. Certainly, anybody can lower prices in a by-the-job consideration. I'm talking about what I would say a more sustained, consistent kind of operating behavior that we've seen over many years from these organizations.

Okay. And then another question, maybe this one is for Steve, how should we be modeling internal growth in second half of the fiscal year?

Well, we did -- our guidance is really 10-12% for this next quarter. We would hope that as we roll these new operations in here, the new wins and that that might pick up a little bit. But our overall guidance that has been in that 12-15% internal growth rate for the full year, and I think the second half should hopefully pick up a little bit.

Next question, please.

And we have a follow-up question from Chris Penny with Freeman, Billings & Ramsey.

Thank you guys for answering all these questions. We really appreciate the open look into you guys. A quick question. I just want to make clear, the new guidance that you have, $1.82 to $1.89, that does not include anymore acquisitions, correct?

That's correct.

I just wanted to make that clear. Thanks very much.

And now we have another follow-up question from David Garrity with American Technical Research, and if you would like to ask a question today, please press star 1 on your telephone keypad.

David.

Yes, thanks a lot. Pretty much my only question has been answered.

Thank you. Susan, how are we doing?

Once again, a final reminder, if you would like to ask a question, please press star 1. And it appears there are no further questions at this time. Dr. London, I would like to turn the call back over to you for any closing or additional remarks.

Well, thank you, Susan. We certainly appreciate your help. And I would simply like to conclude by thanking everyone on our call and for all those who participated and had interest in calling in and participating in our conference call this morning. We certainly want to thank you for that. We hope and believe we have provided you with a clear picture certainly of our first quarter results and more to the point, perhaps, as to our expectations and how we see the potential unfolding for our -- the balance our fiscal year, and even over the horizon a little bit into the future. We think that CACI is positioned in a very interesting and dynamic market. We certainly have positioned ourselves to follow the impetus of the national priorities as they are merging in the national security and defense arena, and I think you can see that not only through our performance but in how we've outline our business for you here this morning.

We are always open and eager to talk with you. If you happen to be coming into the Washington area, we certainly invite you to come by, if you'd like to let us know a little bit ahead of time, we can set aside an opportunity to visit with you and respond to any of your interests in CACI International. We believe we have a fine company that has a very interesting future ahead of it and we intend to continue to build a successful corporation and enhance shareholder value thereby. Dave Dragics, Vice President of our Investor Relations, is of course our contact point in these areas if you'd like to come by, give us a call or if you'd like to have us stop by in your locale, as we do travel from time to time, including incorporating some of our line operators in some of those visits. On the other hand, we're going to be open here after a few minutes to take some further follow-up questions if you have any. I think our timetable says at about 10 or 20 minutes to 15 to 20 minutes will be available, again, through David and Steve. So, again, thank you, ladies and gentlemen. We've been delighted, we're delighted that you took time to be with us this morning, and we thank you for your call. I believe that concludes today's conference call, and Susan, we're ready to disconnect.

Thank you. That concludes today's conference and thank you for your participation.