CACI International Inc (CACI) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to the CACI International third quarter fiscal 2006 earnings conference call. [OPERATOR INSTRUCTIONS] At this time for opening remarks I would like to turn the conference over to CACI's Vice President of Investor Relations, Mr. David Dragics. Please go ahead, sir.

Thank you, Abe, and good morning, ladies and gentlemen. I'm Dave Dragics, Vice President of Investor Relations at CACI International and we are very pleased that you are able to participate with us today. Now as is our practice we are providing presentation slides during our conference call and we will make every effort to keep all of you on the same page as we are during the course of our presentation. Let's move to the next Exhibit number two. 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. 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 are subject to important factors that cause actual results to differ materially from the statements made today.

The primary factors that could cause actual results to differ materially from those anticipated are listed at the bottom of last evenings earnings release and are described in the Company's Securities and Exchange Commission filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as a part of any transcript of this call. Moving to Exhibit number three, to open up our discussion this morning here is Jack London, Chairman, President and CEO of CACI International. Jack.

Thank you, Dave. Good morning, ladies and gentlemen, and thank you for joining us today. I would like to extend a personal welcome to those of you who are new to CACI and to our call this morning. We are glad you joined us today and we would invite you to continue participating in our future conference calls. With me today to discuss our results and answer your questions are Paul Cofoni, CACI's President of U.S. Operations, Steve Waechter, our Chief Financial Officer, Bill Fairl, Chief Operating Officer of our U.S. Operations, and Greg Bradford, Chief Executive of CACI Limited in the U.K. Turn to the next exhibit, please. I'm pleased to report that CACI revenue climbed to $435 million during the quarter. Net income for the quarter was 21.4 million, or $0.69 per diluted share. Our third quarter contract awards were exceptionally strong.

The headline award during the quarter was the U.S. Army's selection of CACI as one of the prime contractors on the $19.25 billion Strategic Services Sourcing program, the S3 program, with the U.S. Army's Communications, Electronics, Life Cycle Management Command headquartered at Fort Monmouth, New Jersey. Recently we learned that we were one of the successful prime contractor awardees on the $20 billion multiple award contract to support the Army's Information Technology Enterprise Solutions Number Two Services contract, known as ITES-2S contract for the U.S. Army's Program Executive Office for Enterprise Information Systems headquartered at Fort Belvoir, Virginia. These two multi-billion dollar contracts, coupled with several other large Army awards we have won recently, shows CACI penetrating every facet of Army contract support. From combat systems to business systems, and from engineering and information technology to a wide range of intelligence support, CACI's business with the United States Army continues to grow.

These awards also signaled that as one of our most valued customers, the Army recognizes that CACI is a trusted partner with its most important contract business. The Army's confidence is a wonderful complement to CACI's dedicated employees and their commitment to providing the best possible customer service. CACI is now a member of the Fortune 1000 and ranked number eight among the Fortune's top IT services companies in the nation. Our entry into the Fortune 1000 is a direct result of the steady, solid growth of our business over the years. Our placement among Fortune's top IT firms recognizes our continuing technical excellence that our clients rely on to accomplish their important missions. More over, while we are pleased to have joined the Fortune 1000, we won't forget how we got here. That's why we fully intend to maintain the aggressive posture that CACI has been known for over the last 44 years. That will also be our approach to S3 and ITES-2S.

As one of the large companies awarded these contracts, including firms like Computer Sciences Corporation, General Dynamics and Lockheed Martin, we intend to win more than our share of the work to come. In addition, as S3 and ITES-2S are ten and nine-year contracts respectively, we are looking forward to long-term growth and success from these important contract vehicles. Also driving growth is CACI's mergers and acquisitions program. Our M&A efforts continue this quarter with the acquisition of Information Systems Support Incorporated, known as ISS. With the addition of a strong management team and with access to ISS contract vehicles such as the recent awarded ITES-2S contract, we believe there are significant potential revenue synergies for CACI. And ISS is the fourth leading prime contractor on the GSA Answer contract since its inception, with almost $1 billion in task order awards. ISS is also the second leading prime contractor on the GSA Connections contract, with more than 25% of the task order value awarded.

This acquisition will add and/or enhance relationships with several valued customers, including the Defense Intelligence Agency, the DIA, the U.S. Army Intelligence Center and School and the Army Corps of Engineers. As a leading industry strategic consolidator, CACI's acquisition strategy is built around identifying companies that open doors to new opportunities and ISS has done exactly that. We also expect to close soon on our merger with AlphaInsight Corporation, which will add to our Federal civilian business, particularly with the Department of State. Next please go to Exhibit five. Our organic growth rate is slowed this year. The loss of recompete work early in the year and the extended government budget process. Typically business picks up once the Federal budget is approved. But with a large supplemental bill yet to be passed, funding orders have been slow and have not fully recovered as yet. Nonetheless, we are starting to ramp up and we expect contract funding to accelerate through the end of September.

As you know, first we receive an award, then come the funding orders and then we convert them to revenue as we do the work. Based on our large contract awards and acquisitions, we expect a return to our growth goal target of 20% during the coming fiscal year 2007 beginning 1 July. We will continue to align our business with national priorities, specifically in national defense, national intelligence community work and Homeland Security. So CACI's business continues to enjoy record growth and we project continued outstanding returns for the future. Now let's go to Exhibit six, please. We will be happy to respond to your questions a bit later, but first I'll ask Steve Waechter for a more detailed look at our financial performance and guidance. Steve will then hand off to Paul Cofoni, to discuss our operations and what we see for the rest of this fiscal year. Steve, over to you,

Thank you, Jack and good morning, everyone. As a brief note, our results reflect the adoption of FAS 123R and the resulting non-cash charges. The third quarter and year-to-date results of fiscal year '05 have been adjusted to reflect the retrospective application of FAS 123R. Also since most companies have now adopted FAS 123R, we will not be reporting results both with and without stock option expense. We have, however, separately included stock option expense data in our earnings release for those of you who care to compute results without this expense. Let's move to Exhibit number seven and I will give you details on our financial results and other key metrics. Our revenue in the third quarter was up 5% over the same period of the previous year and was attributable primarily to our acquisitions.

Revenue for the quarter was lower than anticipated, primarily as a result of lower subcontract costs on one of our contract vehicles, which was approximately $7 million lower than our estimate. Additionally, funding for several large contract awards continues to lag behind our expectations. Revenue from subcontractors carries lower margins, so the impact to the bottom-line was relatively small. Funding orders were up 5% during the quarter over the prior year and 66% over the prior quarter. While we are encouraged with an uptick in the fundings during the quarter, year-to-date we remain down approximately 8%. Our Federal business grew 5% during the quarter and represented approximately 94% of our total revenue. ISS, which was acquired on March 1st, contributed approximately $13.8 million of revenue during the quarter. Our net income for the quarter was $21.4 million, or $0.69 per diluted share, up 5% compared with the prior year's income of $20.3 million, or $0.66 per diluted share.

Our effective tax rate for the quarter was 34.2%, down from 37.6% a year ago. The lower rate for the quarter reflects the impact of a foreign tax credit for our recently established German branch operation, lower state taxes based on recently filed state tax returns and higher research and development credit. We anticipate that the R&D and foreign tax credits will continue and we estimate that our overall effective rate will be approximately 36.8% for the fourth quarter and for the full year will be 36%. Our United Kingdom operation reported record results for the quarter. Revenue was $15.6 million, 9% more than the $14.3 million recorded in the year earlier quarter. The pretax profit for the quarter was 5.4% compared to 6.7% in the prior year. The lower margin reflects timing of sales of our proprietary UK software and data products.

Moving to Exhibit eight, let's take a look at some of our key income statement, balance sheet and operating metrics during the quarter, most of which are included in the financial exhibits in our press release. Our operating margin was 8.5% compared to 8.7% in the third quarter of last year. Our operating cash flow for the quarter was $46.8 million, compared with $44.9 million the prior year. Year-to-date operating cash flow was 93.9 million compared with 66.1 million a year ago. Our cash position at March 31st was $73.9 million and our outstanding debt was approximately $369 million. Including the acquisition of ISS, day sales outstanding at the end of the quarter were 73, a three-day improvement from last year's 76. Excluding the impact of the ISS acquisition, day sales outstanding were 68, an improvement of eight days from a year ago. In the next exhibit, number nine, with respect to our contract metrics, approximately 82% of our revenue this past quarter was earned as a prime contractor. For the quarter 51% of our revenue came from time and materials work, 29% for cost reimbursable and 20% from fixed price work.

Our next exhibit, number ten, we anticipate closing on our merger with AlphaInsight Corporation during the first part of May. AlphaInsight reported revenue of approximately $42 million in their fiscal year ending December 31, 2005, with operating margins in the high teens. We will provide additional information on the purchase price and other considerations when the transaction closes. Revenue for the remainder of the quarter is estimated to be $8 million, with operating margins of approximately 14%, which is inclusive of projected intangible amortization. We anticipate a contribution in the quarter of approximately $0.01 per share. For fiscal year '07 for AlphaInsight we would anticipate that they would contribute revenue of 50 to $52 million and EPS accretion of approximately $0.06 to $0.07 per share. Moving to Exhibit number 11. As I indicated earlier, funding orders improved during the quarter but we are below the rate we anticipated. On passing of the supplemental bill, we anticipate that funding orders will increase through the end of the governments fiscal year.

Our revised guidance for the fourth quarter, however, reflects lower than previously anticipated funding orders for the quarter, primarily for subcontractor related tasks. Including the acquisition of AlphaInsight, for the fourth quarter of fiscal year '06 we estimate that our revenue will range between 470 and $490 million. We expect that our operating margin for the quarter will range from 8.6 to 8.8% and that net income will range from 22.2 to $23.7 million. Finally, we expect diluted earnings per share for the quarter to range between $0.71 and $0.76 and that diluted weighted-average shares will be 31.2 million. That completes my financial review and now here's Paul Cofoni, who will cover the details on our domestic operations. Paul?

Thank you, Steve, and good morning, everyone. Let's turn to Exhibit number 12. Our third quarter results reflect our continuing efforts to offset events and market issues that occurred early in the fiscal year. As we discussed in our January call, we expected a slow recovery and that is what we saw in the third quarter. And continue to see. Increasing flow of approved appropriations dollars to our customers has replaced the earlier constrained environment under the continuing resolution. As you may have noted during the quarter, from our press releases, the pace of awards increased and the level of contract funding orders rebounded. We had strong contract awards in the quarter, highlighted by our award of one of the four large Company positions on the Army's S3 contract. We are receiving more longer term contract funding orders than in the previous quarter. But in some areas we still receive orders for shorter periods of time. This is the result of the long war being the priority for funding.

We believe that once the supplemental is signed into law by the President, we should see more full funding orders from our customers as we approach the end of the governments fiscal year. We anticipate that this trend should affect both existing contract vehicles, as well as new vehicles we have been awarded during our fiscal 2006. Let's go to Exhibit 13 and review some of the key operating metrics of this past quarter. Revenue growth was driven primarily by our DOD customers. Revenue from our Navy and intelligence business areas and our two acquisitions offset our C2 contract loss and reductions in requirements from our Department of Justice litigation support contract. As I mentioned a moment ago, we had an exceptionally strong quarter for awards. Outside of the $19.25 billion S3 award, we received awards totaling approximately $640 million. About 26% of that amount was for new work.

We believe that with our winning a large Company position on the S3 award and our recent win of the large Company position on the $20 billion ITES-2S award, our customers recognize CACI's capabilities and qualifications as that of a trusted large systems integrated. We intend to build on that recognition as we continue to compete for larger contract awards. I would like to comment on several of our recent large awards for a moment. First, our ETOSS award, a major recompete win for us. Continues more than 18 years of CACI support to the Intelligence and Information Warfare Directorate of the Army's Communications, Electronics, Research, Development, and Engineering Center at Fort Monmouth, New Jersey. That relationship, and our proven track record, were key to our being awarded these large S3 awards. With these two awards, CACI has a crucial roll supporting C4ISR for the U.S. Army. We also announced in the quarter $157 million in contract awards for the intelligence community. The center piece of these awards was a large systems integration program for one of the agencies.

On that program we will be managing the activities of several other contractors. Next exhibit, please. Our proposal activity continued at a fast pace. We currently have approximately $2.2 billion worth of proposals submitted and under evaluation by the government. We expect that most of these will be awarded between now and September. We also anticipate submitting over $2 billion worth in additional proposals in that same period, approximately half of those opportunities will be in excess of $100 million. Our pipeline of opportunities continues to be robust. The majority of pipeline opportunities continue to be greater than $100 million in total contract value. Let's go to Exhibit 15. As Steve mentioned, when he gave the guidance, next week we expect to close on our merger with AlphaInsight, a business that will bring us an increased presence at the Department of State and exciting new methodologies in rapid application development.

AlphaInsight is well known for its ability in the early adoption of emerging technologies for the benefit of its customers. Because of the size and significance of the S3 and our recent ITES-2S awards, a total of almost $40 billion in contract ceiling, we have been asked to comment on how we see the business ramping up. We believe it would be presumptuous for us to ascribe a specific value to either one of these awards because, after all, they are indefinite delivery, indefinite quantity,or IDIQ contracts, and as such each task under the contract will be competed. We will obviously compete aggressively for each of those task orders for which we are qualified and we expect to win more than our fair share. We will keep you and others informed on our progress and announce material task orders as they are awarded to us. As we look ahead to our fiscal year '07, we are very excited about the future of our enhanced position with many of our customers. With what we have recently been awarded, we believe our long-term outlook is excellent and our ability to compete successfully on a large scale is now proven and gives us great confidence for the future. Jack, that concludes my remarks.

Thank you, Steve and thank you, Paul, for those updates, most assuredly. Ladies and gentlemen, we will go to Exhibit 16 next. Growing larger is an invigorating experience for a business, as you might imagine. As CACI grows we have become one of our industry's leading strategic system integrators. And we are competing at the very highest levels of government support. We are also now well known as a major strategic consolidator in the government IT and services industry and have been doing a successful job of it. We are very pleased with our third quarter results. We bid for and won some of the largest contract in our Company's history and some of the largest in the industry, such as the $19.25 billion S3 award we've just discussed. Moreover, these big awards position us strongly over the many years coming, not just quarter to quarter. They enable us to go head to head with the industry's largest companies in an expanding area. Frankly, we intend to excel at these competitions. We intend to win more and more business, do it frequently and perform with distinction.

We thank our work force of talented CACI people for the success. We are counting on them to win business as they have always done, with a relentless commitment to excellence and a fierce dedication to their clients. We will also keep our strategic focus on national priorities in defense, intelligence, homeland security, law enforcement and the transformation of government. We believe our capabilities and systems integration, engineering services, network services and knowledge management are well aligned with the funding opportunities and priorities in these market areas. Our accomplishments this quarter, including our large S3 award and recognition on the Fortune 1000, are a signal to our competitors, as well as to our customers, that CACI intends to operate as a Company on the climb. We are growing steadily in our ability not only to compete at ever increasing levels and being successful in doing so, but also to serve our clients and shareholders successfully and vigilantly. With that, ladies and gentlemen, we are prepared to take your questions. So, Abe, I will turn the call back over to you, please.

Thank you very much. [OPERATOR INSTRUCTIONS] We'll go first to Brian Gesuale at Raymond James.

Wondering if you could elaborate, with some of these immense business wins, the largest in Company history here, wondering if you could elaborate how you are going to characterize those in the award numbers, the backlog numbers, the funding numbers, and just really how we should perceive those numbers as part of the key metrics that we follow going forward.

Okay, Brian, I think I'm going to ask Paul to address that one. We are looking forward with a lot of enthusiasm to bringing those big awards into our portfolio.

Yes, Brian. In terms of contract awards we don't ascribe a value to either the S3 or the ITES-2S contracts. And that is because, as you know we, with a small group of select [primes], will be competing for each of the task orders that come out under those umbrella contracts. And we will compete aggressively. And as we win significant task orders, we will announce those if they are significant scale and we will then attribute the total contract value of those task orders both to contract awards and to our backlog.

Okay, terrific. And my follow-up question is probably for Jack. With some of these large strategic deals, Jack, CACI has always been seen as kind of a key consolidate here, but I imagine the overtures for CACI as an acquisition target have probably gotten a bit louder. Can you just revisit what CACI's policy is towards handling these overtures?

Sure, Brian. We obviously a public corporation, Delaware corporation, independent Board of Directors, have as our primary objective is shareholder value. And obviously as we go along, should there be overtures, CACI will be receptive to those if they are from -- the bona fides of the offer's obviously is important. But CACI, although not for sale, is also trying to build shareholder value in both dimensions, internal growth, operational growth and being a viable, attractive situation in the market space.

We'll go next to Tom Meagher at Friedman, Billings, Ramsey.

Good morning, two questions. Maybe first one for you, Steve. As concerns ITES-2, I think there's a separate $10 billion hardware piece to that contract. I'm just wondering is that separate and distinct from what you guys have won? And second, when given that hardware passes are generally low margin, would you expect this vehicle to be perhaps less profitable than some of your other contracts?

I am going to turn it over, I think that Bill can answer the question, I believe, on the hardware component better than I.

Tom, it's Bill Fairl. You're right, that's separate so that wouldn't be something that would be in our sweet spot here. So I think that would address the second part of your question having to do with the margin. We are more interested in those opportunities that bring direct labor into CACI.

We'll go next to John Mahoney at BB&T Capital Markets.

Good morning. Could you give us some idea about -- on the acquisition targets, obviously you've -- what kind of acquisitions you guys will be looking for?

Sure, John. We were going to continue in the vein that we've been operating certainly for the last five or six years. We are endeavoring to pursue candidates that are in the national priorities, if you will, certainly defense, national security, intel community, those are the areas that we've concentrated, as you well know. Network services, communications in particular. And we are seeing still a number of companies out there. At this point we don't see any lack of opportunities. Obviously it continues to be competitive. I don't see any particular change in that, although there are probably less mid-tier acquisitive companies these days as you well recognize. But our game plan has been successful. We consider our consolidator activities as core to CACI's business capabilities and we will be very vigorously pursuing sort of the same profile, John, that we have been.

Can I ask a follow up?

Yes, please go ahead.

Given the politics that caused the delay in the budget process last year, what kind of politics do we think are on the horizon right now and could we have further delays?

We certainly hope not. You may have as good a guess as we do in some of these areas in terms of the political implications out there ahead of us. We anticipate, as we indicated in our formal remarks, there will be more movement in this area in the short-term and we expect some rising opportunities into the balance of this government fiscal year ending in September in terms of funding awards. But we are not clairvoyant, those are our best professional estimates. We always come forward with the best analysis we can do. We carefully review the situation before we come to these positions. But we believe there will be increased activity and we think that the budget supplemental will come through here in the not too distant future.

We will now go to Bill Loomis at Stifel Nicolaus.

Thank you. You said you don't have a value of S3 and you will not on ITES in the backlog. Can you talk about any task order activities you've had so far on S3? And I know you were just awarded ITES, but if you have any so far on that one? And also as a follow-up, in the 2 billion in bids you said that are under evaluation currently, I should say, to be announced, most of which will be awarded from now to September, does that include the mega recompete? And I know that is advertised at $950 million, but that's multiple vendors, I assume. Can you tell us what the lower value you are putting in that $2 billion is?

I would just say, Bill, that we anticipate some successes as we go along but for some of the details I'm sure Paul and Bill will be able to give you some color here.

Bill can help me on the details of the mega value and all. But in terms of S3 there is a task order that is sort of emerging that we expect to be competing for. There have been no task orders awarded yet for ITES. You're right, it's early and there have been no task orders awarded. But we expect, I would say, in the next month or so to see the first S3 task order come out on a RFP and we will be competing aggressively for that. Bill, there was a question on -- .

On mega, yes. Bill, we see the mega award in our second quarter. So that would be after September 30th. So that would not be part of that -- .

It's not in the 2 billion.

It's not in the number that Paul talked about, right.

We'll go next to Mark Jordan at A.G. Edwards.

Good morning, gentlemen. You've stated that you are looking to move back towards your traditional goal of 20%, which has been again traditionally 15% organic and 5% acquired. Given the acquisitions of ISS and AlphaInsight, is that the typical 5% acquired component to fulfill that model or do you have other things in your mind? And secondly, related to that is in that 20% model you allude to is the sort of 15% organic goal still operable?

It's an excellent question, Mark, and we have begun to spend some time focusing on it. I might mention for all of our listeners, we are in our fiscal 2007, I will call it detail planning build up, so our targeted goal of 20% we do see, even at this point, as a visible reality. From our M&A posture we are seeing somewhere, a little bit hard yet to pin down because we haven't finished all our detailed financial planning review, but 10, somewhere a little bit beyond 10%, perhaps, maybe 10 to 12%. The organic opportunity therefore will be made up of the balance.

But we think we have some good strong programs in place that can feed that, in particular, as we just mentioned, the S3 and the ITES 2, ETOSS contract and several other significant awards that we didn't get to in our conversation here. But I would say on top of that, on top of that we will be aggressive in the marketplace with an M&A program for this next fiscal year. Our capital structure is quite adequate to begin to take on significant additional opportunities. We still have our shelf registrations. So we have plenty of capital structure mechanisms in place to continue our strategic consolidated role and we have developed a considerable core competency in this, as you maybe some of you have begun to realize.

And we will go next to Sandra Notardonato at Robert Baird

I have a follow-up to the prior question on the growth. I'm trying to put two comments that you made on the call together. One is that it's very difficult to assess a value on the large IDIQs. Yet for the fiscal year '07 growth you are expecting incremental revenue to come from these contracts. Can you give just a sense of where or what that amount is? I know you haven't finished your budget for 2007, but just a sense of what you think that's going to be out of the two contracts?

Let me just say off of bat, we are in the midst of examining this. It's very hard to try to get some insight to S3 from our people that work the Fort Monmouth program. But I am going to turn that over to Paul to fill in the details as best we can at this point.

Okay.

You're correct, Sandra, we are just beginning to develop our FY '07 plan. And while we haven't ascribed any value and won't ascribe any value specifically to S3 or ITES, in the case of S3 we've got a very exciting list of opportunities of types of work, specific work that we expect will be awarded out of the S3 vehicle between now and the end of FY '07 that represent -- give us confidence about the kind of organic growth that will come from those . I'm reluctant to give you more specifics just because we are in the very early developmental stages of the FY '07 plan. But I would say the list that Bill and I looked at just yesterday that are likely candidates under the S3 was an exciting list of opportunities.

Another question, shifting gears to hiring, can you give a sense of how many folks you've hired year-to-date in the fiscal 2006 time period and directionally what turnover has been doing?

Well, the market for talented folks continues to be a challenging, I would say that. We have been successful in bringing, I will start from the back end first and then I'll turn some of the information over to Steve here. We've been more successful, increasingly successful I should say, in reducing the turnover circumstances. Retention is better. We are certainly hiring and recruiting, but we were certainly not pleased overall -- we are pleased with the improvement but not satisfied that we've gotten to the point we want to be. Steve, do you have some information you can share or shed on this as well?

Not specifics. Sandra, I can follow with you a little bit later, but we are about 10,100 employees today. That's up about 9% from where we were a year ago. And that of course that includes some of our acquisitions. I'll have to get back to you with the more specifics on the -- ..

I can help, Steve. In the course of the -- since the beginning of the fiscal year we've hired over 1,000 people, gross hires of over 1,000 people. And our retention rate is higher by several percentage points than it was six months ago. So we are on an improving trend on retention and we are hiring at a very robust clip. Still a very challenging goal to hire enough people. But we have been able to reduce the amount of open requisitions that we've had. We've knocked that down from about 700 six months ago to now we are right around the 300 mark. So we've knocked down a lot of those open requirements by hiring these over 1,000 people. Bob Boehm, you may remember we announced Bob Boehm, who is now our Chief Human Resources Officer, came to us and he has a lead on all this and is doing a great job.

We'll go next to Cai von Rumohr at Cowen & Co

Thank you very much. If we look at your numbers it looks like your sales guidance from March to where you kind of are now has come down by 27 to 17 million. And if we kind of adjust for the AlphaInsight deal, you are missing by 25 to 35 million, when you were really only one month away from the quarter beginning. It seems like a pretty big miss. Could you explain how you could miss by that much and whether part of that miss is any loss of business?

Well, let me start by saying that when we come to the Street, you can depend on the very best professional current estimates on the part of the management team here at CACI International. Regrettably, we are not perfect. Sometimes the market changes a little more abruptly than we anticipate. I would say broadly that the other direct cost area was the most significant, I will just call it a surprise for us, in the lack of subcontract initiatives and the material orders that were coming through on some of our contracts. We use a predictive model, frankly, that has been honed over a number of years, sort of a heuristic model, you might say, but it's not perfect. And we did have a shortfall in some of the areas, clearly. But for additional detail, Steve?

Cai, I think as Jack indicated, we do try to compile our best professional estimates at the time. And those of you who have followed us for many years know that the most volatile component of our revenue forecast are these ODCs. And as we look forward here we had a very positive January and, of course, we updated our guidance here on March 1st, but we hadn't closed our February results at the time. But indicators were fairly positive at that time and we were, quite frankly, a little disappointed here in the third quarter with ODCs being lower. As we look forward, with the funding still lagging where we would like to see them and with the supplemental bill still not passed, we just feel that it's prudent to take a more conservative approach on where we see these ODCs coming in in the fourth quarter. And that's primarily -- the shortfall is primarily related to a shortfall in the ODCs, which is you also know is a very low margin kind of a business.

Thank you. Second question. Jack, you talked about expecting 20% growth in 2007. First, I assume that excludes incremental acquisitions from today. And the second part of that question is you indicated, and I come out also, at around 10, 11, 12% impact from M&A, which would suggest organic growth of about 9%. Really pretty good, given that you are going to start off, at best, at low single-digit rates, which would imply you'd probably reaching your 15% goal by the end of the year. Is that a fair way of looking at it?

I think clearly you've picked on the or identified rather the elements that we look forward. I would say again, remind everybody that we are talking about a 20% target and growth goal at this point, it's not guidance. On the other hand we see, beginning to see, quite frankly, the means and mechanisms to get there and you've identified some of them. In particular the 10, 12% and hopefully some organic growth on top of the M&A piece. We also have these significant major driver contracts. These are important to the United States Army, front line war fighter support contracts. This is not so much all the back office stuff. We anticipate the driving impetus on that going into next year. We have been very successful recently in winning our recompetes. We also have the big new wins.

And, of course, completing the ISS acquisition and looking into the market space to finish off AlphaInsight and our doors are still open for business on the M&A side. We feel like that a combination of all of that is not unreasonable to set within a goal bucket, if you will, or a total bucket of some close to 20% for the next year. It's sort of our target but we've built up some analytics underneath it and we are beginning to refine those. And we will be coming out probably in June or certainly the first of fiscal year with our guidance.

We will go to Jason Kupferberg at UBS.

Hi, guys, it's Allison for Jason. We are just wondering with the bookings that are down 8% year-over-year on a year-to-date basis, the awards look like they are up about 73%, what kind of lag should we expect between the awards, the funding activity and then the revenue recognition? And then how much visibility do you have on this? That is certainly an excellent question and a bit of a challenging. Of course I think we have identified the effect of the government slowdown, but I think Paul has been watching that carefully.

Right. It is reflected, in fact, in our guidance and Jack's recent comments about FY '07, that we expect that there will be a continued, while year-to-date down on funding orders, in the quarter up 5% over the prior year's third quarter. And that improvement -- and by the way, 66% improvement Q3 '06 over Q2 '06. So there is a rebound and a year to year comparison 5% improvement, we expect that will get better as we go through the balance of our fourth quarter. And into our first quarter of '07 and beyond we expect the real benefit of a free flowing contract funding order environment, freer flowing.

Okay. And then also you had guided to $0.04 for the FAS impact for the March quarter. Is that still what you expect? Even though it came in at $0.02 are you still expecting $0.04 for the June quarter or is there some flexibility there?

Yes, the $0.04 is the right kind of number to be looking at. We get sometimes a mix between the stock options and RSU. We report stock option expenses separately. The RSUs are imbedded in direct expenses. $0.04 is an appropriate number.

We'll go to Cindy Shaw, Moors Cabot.

A couple of questions here. For fiscal '07 the 20% growth target, from what you are saying it sounds like that wouldn't be achieved in the first half of fiscal '07. So my question is is that a target you are expecting to hit on a run rate basis later in fiscal '07 or do you actually think you could achieve 20% growth for the entire fiscal year? And then if you could also talk about as your revenue picks up what kind of operating leverage we might anticipate.

Again, an excellent question. Let me just repeat, we are in the midst of trying to size up quarter by quarter going into next year, hoping for a little bit of illumination and clairvoyance here. But we do see probably a little slower first half. But Paul and Bill have been right in the midst of some reviews this week so I am going to quickly turn it over to them.

It is a year-over-year 20% growth that we are talking about. And the ramp we expect will be a gradual ramp through the year with a sort of building towards the back half of the year. But in total, 20% throughout the year, a year to year comparison.

We'll go next to Laura Lederman at William Blair.

A few questions. Looking at that 20% growth that you are holding out as a goal for '07, put a band on that for us if you would? In other words, that's a point estimate but if you were to band it where and how would you band it? And the second question is if you look at C2 loss and the DOJ business falling off, how much internal growth did that cost you or how much growth did that cost you if you look at all of '06, what would that growth negative impact be? Thank you.

I am going to take the first part of this. In terms of band, we would indeed plan to come out with that in our guidance. At the present I am not, frankly, prepared to go past a target number. I think we are sharing with you a bit of our guarded optimism going into next year. We feel like we've got a good solid business platform. We feel like we are being recognized by some extremely important customers and some extremely important programmatic areas for the U.S. Army, in particular. And our acquisitions have been successful and we are being able to integrate those. So we are looking at it in that vein, not within the vein of guidance, yet. But we will be forthcoming in due course here and if you will just bear with us as we go through our final financial planning and business development processes here in the next couple of months leading to our June meeting with our Board of Directors. We are right in the midst of it. We think with guarded optimism the 20% figure is realistic or we wouldn't be talking about it. But we have got some homework yet to do. In terms of the other side of that question, Paul, you want to pick that up?

If you add the loss principally due to C2 and the downturn in DOJ litigation support work, that would be about 4 to 5% of our total revenue. So our growth would be normalized upward if you were to exclude those events, which we view really as kind of non-recurring.

We'll go next to Ed Caso at Wachovia Securities.

Good morning. Can you just clarify on the tax rate here, can we extrapolate the comments about Germany and the R&D credits on into '07 to sort of get a feel for sort of a new tax rate level?

Steve?

Yes, Ed, I would say the R&D tax credits will continue. You will certainly see that. The foreign tax credit probably not as great a level. I would think if you used a 37.5%, which is what we kind of guiding here for the fourth quarter, if you use that rate, I think that's probably a reasonable rate to assume for fiscal year '07. Again, as Jack indicated, it's still preliminary. We are still working through our plans. We need to do some tax planning and we are going to take a look at the impact of R&D tax rates. We are continuing to develop and invest in some software products and development for future kinds of sales and what have you. So we will look at that. But 37 to 37.5% is probably a reasonable range to look at for taxes.

The other question is can you give us a sense of recompetes that you are facing through the June, '07 time frame? Percent of revenue?

Fine. Bill will handle that for us.

Yes, sir. Ed, this past year, or the one we are in now, the last 12 months has been pretty intensive for us in terms of recompetes. This coming year, it's a bit of a down year for us on the recompetes. The mega is really the only large one that's out there and, again, we look for an award on that one some time in our second quarter. That's October through December of later this year.

I would like to add that there was a significant patch of recompetes this year. We had a couple of disappointments early in the year. But the back-end of this thing has been extremely successful and we have sustained, I think, or recovered at least into a very aggressive successful recompete profile, which is our history and tradition.

We'll go next to Matthew Conrad at Friedman Billings Ramsey.

Hi, good morning, gentlemen. Actually all my questions have been answered. I appreciate it, though.

Thank you very much.

Thank you. We will go to Alex Hamilton at Benchmark.

Good morning, gentlemen. Most of my questions have been answered but I have I guess two questions. One, I keep hearing a lot of talk on new investments and a robust B&P proposal pipeline. Can we talk about if there's any impact at all to the margins? It seems like, especially with a weak funding environment, there might be some sort of impact or is that a counterpoint in your guidance? I think Paul will handle that for me.

No, we continue to have, first of all a very robust pipeline and more than enough opportunities. And we have really our job has been to be selective because not so much because of B&P funding but rather because we want to focus our management attention on those things we have the greatest probability of winning. We are also highly prioritizing work that has high labor content, good direct labor content, so that the margins on the business will be strong. And we manage our B&Ps like any other expense. We pay attention to it. On the one hand we won't let an excellent opportunity go by because we are running towards the limit of B&P. We will do what we have to get a crack at the big important opportunities. On the other hand, we don't throw cash around at opportunities. We manage that like any other expense item.

Very carefully.

And if you can clarify the funding environment? Should we assume that the funding environment is going to continue at the pace that we saw in the second quarter?

Our feeling is that we saw this 5% improvement a quarter over prior years quarter, in the third quarter. We expect that trend to continue and hopefully pick up as soon as the supplemental is signed into law.

We'll go next to Eric Olbeter at Stanford Financial Group.

Just to follow up on Cai's question, in the past you provided quarterly growth numbers for the intel business segment. Wonder if you guys would be willing to do that again for us?

I think our intel is still our most dramatic increasing line of business and most successful in that regard. I think our year-to-date is somewhere around 20%. We can get a refinement on that. But my looking at this from time to time, I know it's been a significant grower and we are looking at continued growth at that. And probably by the time the year is over, I would say -- here I have got a better number, about 28% or so for the year-to-date, 28% year-to-date.

Okay, that's great. So that's actually up from about 26 last quarter. And just one follow-up on the margin story. A little bit of margin compression, you had 20 basis points year-over-year. We saw the shortfall in the ODCs, which are low margin, so we should have seen them taken out. When you take those out you would have generally expected a small bump in margins. What else is going on there? Are we just seeing there -- is the hiring environment just causing greater costs? Are we seeing just a little more investments? And what should we expect going forward?

I think, Eric, this is Steve. If you look at the overall on a year-to-date basis, our operating margins are down a tick. I would attribute most of that to higher equity plan related expenses, if you will, yea-over-year. If you roll that, if you take that out we are flat to up a little bit on the margins. Those are non-cash charges, as you know. I want to just clarify on the intel side, the 28%, 28 to 30%, is the percentage of our total businesses related to intel. Year-to-date we are up about 20% year-over-year.

Next question goes to Julie Santoriello from Morgan Stanley.

Thank you, good morning. Just a question on general government procurement trends. I understand the situation with the supplemental and how that can unlock some additional funding. I'm wondering about the trend we've seen in the last year or so toward push outs of brand new contract awards. Are you seeing any improvement in that regard or is there still some risk that some of the large contracts in the pipeline can get pushed out?

It's actually kind of a mixed picture. We see in some cases large new contracts that have moved a little bit to the right. On the other hand, large contracts such as S3 and ITES have been pretty much right on their procurement schedules. So I wouldn't say some difference, big difference between what we are seeing now and we've seen historically. Bill, do you want to amplify any of that?

Yes, Julie, just thinking about this third quarter compared to last year's third quarter, and I agree with Paul's point about it being kind of a mix. But I'll tell you the award activity this third quarter was significantly increased over last year's third quarter. And clearly we are very pleased to have come out a winner on a couple of really terrific deals. It's just fantastic all the way around.

In total year-to-date, in fact, our contract awards year-to-date are up 80% over the same period last year, the same nine month period last year. So that's huge.

We have seen a pick up in terms of awards. Where that will head in the next six months to a year I'm not sure.

Just a follow up to that. Can you discuss a little bit CACI's positioning on the upcoming large Homeland Security procurement, the Eagle contract?

Yes. That is one of the contracts, in fact, that has been moving to the right. As you know there has been a good deal of difficulty at the Department of Homeland Security getting these large procurements done. And this one is now out there still another three or four months ahead of us, I think, on the schedule. It is a large sort of vehicle type of contract, not dissimilar to a S3 or ITES in nature in terms of how it will operate. They have asked for proposals in about four or five major categories of work or types of work. And the respondents, there will be many respondents to it, and we expect there will be a large number of recipients of awards as well. So that's about what I could tell you. The categories that are coming out are what you might imagine, there's network category, a desktop category, applications is a category, system integration is another category. So there will be like four or five categories and probably multiple, certainly multiple winners in each of those five categories.

We'll go next to Tim Quillin at Stephens Inc.

Can you tell me exactly what your expectations are as far as the supplemental appropriations bill impacting your customers funding? Is it that you are seeing some diversion of funding away from your services related projects to fund O&M procurement in Iraq right now and you expect the supplemental to kind of take that pressure off? Or are there specific things in the supplemental appropriations bill that will impact CACI?

I will take a shot at that. It's not exactly a clear picture, but I can give you our view, is that the supplemental itself won't directly affect our customers. Most of the supplemental is aimed at war fighting, the needs of the war fighting. However, with that supplemental not yet approved, our customers are reluctant to release all of their funding until they see the final number and its approval. It has this indirect effect of causing our customers be conservative. They are holding back a bit until they see the supplemental amount and its approval. And then we expect that they will be a little more comfortable releasing some of the funding they have. Just as you or I would be conservative given that big variable out in front of us. It is not a direct impact to our customers, it is an indirect impact. Bill, do you want to add anything to that?

I think we saw the same behavior last year on the part of our customers as they waited for the supplement to get passed. Once that happened, then things that weren't necessarily directly related to the front line war fighter ended up getting funded better. So, I think you're right, Paul.

Anything else?

Yes, just one other question on AlphaInsight. I guess it's my understanding that they are competing for a fairly large contract with the State Department right now. And what is your assumption on when that might be awarded and it's a small business set aside, do you expect that to be sustainable beyond the five year term of that contract?

Yes, this is Paul. Obviously, we haven't concluded the transaction with AlphaInsight and it would be inappropriate for us to make comments regarding their pipeline or their bids. We can tell you one thing that their work for the Department of State is spread out over about eight different bureaus within the Department of State and we never saw in our due diligence any one big contract that would be a problem if they were to lose it on recompete, or not win a new one.

We'll go next to Bill Loomis at Stifel Nicolaus.

A couple of questions on the supplemental. When do you think it will be signed and how long after it is signed before some of the funding you talked about starts to free up? And also, you mentioned that this seems to be impacting ODCs more. Why would it impact your subcontractors more than your direct labor as far as the supplemental? And is this for your total DOD or just impacting your Army work under ETOSS and some of your bigger Army programs? Thanks.

I got it. This is Paul again. First, our expectation, sort of the timetable, we don't have control, obviously, over the supplemental timetable. It's currently in the May time frame and that is all just wait and see, because we can't predict that any better than you can. So that's that. The second question about why would ODCs be affected more than other things. If you move toward the end of the governments fiscal year and they have money that they need to spend, the thing they are likely to hold in reserve more than anything is ODCs and that's not subcontractors so much as it is equipment. And the reason for that is, it's a lot easier to spend a large sum on equipment that you can purchase rather quickly and beginning the installation process than it is to try to ramp a large number of new people onto a program. So the inclination is as you get less time in your fiscal year to spend the money, you are more likely to spend it on equipment. And that's what we are talking about.

The government is able to get the value without the risk of an inordinate manning on projects, or inappropriate manning on contracts.

Mark Jordan, A.G. Edwards.

Good morning, again. Could you give an update on your operating cash flow expectations for the full year? And also a free cash flow number estimate for '06?

We've been very pleased with our cash flow program overall. Steve, will you respond for me, please?

Mark, I think we are still looking in the range. I think we were talking about 135 million to 150 million. We are still comfortable with that. We are at about 93, 94 million year-to-date and threw off about 40 million here in the last quarter. So we are comfortable with that. As far as any CapEx kinds of numbers, we are looking 10 to 12 million, probably in that range for the year.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go to George Price, Stifel Nicolaus.

Thanks. Just a couple of follow-ups. First thing, what was the -- I think you gave expectations for AlphaInsight. But what was total acquisition revenue in the quarter, Steve?

For the third quarter?

Yes.

If you hold on. We had 13.8 million for ISS.

Right.

AlphaInsight is not in the third quarter as yet. ISS was about 13.4 and about 5, so about 19.6 overall was total acquired revenue in the quarter.

Okay.

That included NR, a little bit from a U.K. operation and ISS.

Do you have a number, overall inclusive number assumption for next quarter or for fourth quarter?

I would guess somewhere between 50 to 55 million, in that range.

Okay. And I know you guys are just in the early stages of your overall planning for fiscal '07 and a couple people have asked about margins and so forth. I want to ask the question again on margin trajectory, even if maybe you can be more qualitative about it. Just for example, you have got some positives with good acquisitions like AlphaInsight and its level of profitability. And you've talked about your desire to push for more direct labor, which is going to, should improve profitability. On the other hand you have larger deals which of more sub revenue, certainly it seems like there is an increasing level of competition for those larger deals. And you definitely have things like wage inflation, can you just maybe comment on how those puts and takes are coming out qualitatively as we go forward on margins?

I would say margin performance is a important metric. We pay at lot of attention to our cost profile versus our revenue expectations. And I am going to, having said that, turn it over to Steve to give a little bit of a detail.

You hit on a lot of the key variables. Clearly the mix of our contracts, whether we have more ODCs on some of these large contract awards, plus our ability to get our own direct labor on that, are all key variables. And then you layer on top of that an acquisition like an AlphaInsight which has very high margins. Our hope and anticipation as we look at and plan, and as Jack has indicated we are still in those early stages, 8.5, 9% is kind of the range I would give you today if I was trying to guess where it would be. I don't see any detriment to the margins as we are looking forward. Hopefully some improvement going as we, again, as we do these acquisitions, we get some economies of scale from those which help our margins.

Dr. London, we have no other questions in the queue, so I would like to turn the call back over to you for any closing comments, sir.

Thank you very much, Abe. I would just like to summarize by saying that CACI International management team is very pleased in our very impressive award profile for the quarter. We continue to implement our strategic consolidated role, recognize that as the core competency for CACI International. We are looking for a significant year coming up 2007. We've been a little disappointed in some of the events of this year, but we feel like that we have a nice rebound opportunity ahead of us in 2007. So we would like to thank everyone, thank you, Abe, and everyone for your interest and participation, ladies and gentlemen, and I might add that Steve and Dave Dragics will be available in about 20 minutes, as is our custom, to take follow-up calls for those that you may be interested. Ladies and gentlemen, this concludes our conference call for the third quarter of CACI fiscal 2006. Have a good day.

Thank you. That does conclude the call, of course, and we do appreciate your participation. At this time you may disconnect. Thank you.