CACI International Inc (CACI) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to the CACI International fourth quarter earnings conference call.

At this time, all lines have in a listen-only mode. Later we'll announce the opportunity for questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS)

At this time, I'd like to turn the call over to Mr. Dave Dragics. Please go ahead, sir.

Thank you, Melissa, and good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International and we're pleased that you're able to participate with us today.

Now as is our practice on these calls we are providing presentation slides and during our presentation, we'll make every effort to keep all of you on the same page that we are. So moving to the next exhibit Number 2, before we begin our discussion this morning I'd like to make our customary but 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 reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from what we say today.

Now, the primary factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evenings earnings release and are described in the Company's Securities and Exchange Commission filings. And our Safe Harbor statement is included on this exhibit, and it really should be incorporated as part of any transcript of this call.

Moving to the next exhibit to open up our discussion this morning here is Paul Cofoni, President and CEO of CACI International. Paul?

Thank you, Dave, and good morning, ladies and gentlemen.

I'd like to welcome those of you who are new to CACI and our call this morning. We appreciate your interest and invite you to join us on future calls. With me today to discuss our results and answer your questions are Tom Mutryn, our Chief Financial Officer, Bill Fairl, President of our U.S. Operations, Randy First, our Chief Operating Officer of U.S. Operations, and by phone from the United Kingdom, Greg Bradford, Chief Executive of CACI Limited U.K.

Our new team is firmly in place and energized to implement our strategy. We are determined to make CACI the very best in everything we do from building strong client relationships to developing valuable solutions that support our national priorities. We are committed to being the best employer in our industry, offering challenging and exciting careers where talented people can grow and thrive and we are dedicated to enhancing shareholder value.

Let's go to the next slide, please. Our growth strategy is centered on the highest national priorities and serving federal government clients who are combating terrorism here on the homeland, in Southwest Asia, Europe, Africa, and around the world.

We are focused on the highest priorities of the U.S. Government including national security, intelligence, homeland security, and the modernization of government services. These will see continued high priority funding. We are confident we can make a real difference in meeting our nation's challenge.

We're building a world-class management team to lead us to the next stage of CACI's growth. Our most recent addition to the team was just announced, retired Vice Admiral, Albert Calland has joined CACI as Executive Vice President for Security and Intelligence Integration.

Admiral Calland is a highly accomplished intelligence expert and special operations leader. He was Deputy Director of the National counter terrorism Center and Deputy Director of the Central Intelligence Agency. He served as Commander of Special Operations for U.S. Central Command and led more than 3,000 special operation forces in Operation Enduring Freedom in Afghanistan.

Admiral Calland adds new insight to our executive leadership team. He's an authority on integrating information at the nexus of intelligence, defense, and law enforcement, to create reliable, actionable data that will help our nation win the global fight on terrorism. With CACI, he will be a leader in building our intelligence, homeland security, and law enforcement business areas.

We believe intelligence capabilities are essential to America's first line of defense. In support of this, we offer our federal government clients an exceptional team of intelligence professionals with outstanding credentials and extensive experience in both strategic and military intelligence. We bring proven solutions to help clients integrate tactical and strategic intelligence to combat asymmetric warfare.

Next slide, please? Let's turn now to the highlights from CACI's fourth quarter fiscal 2007.

We delivered record quarterly revenue, topping $500 million for the first time in CACI's history. Contract awards in the fourth quarter were a record amount of more than $1 billion. We won all of our major recompetes as well as new work that expanded our business with federal civilian agencies.

We are especially pleased to win our recompete contracts with the Department of Justice on its $950 million ceiling Mega 3 program and with the U.S. Navy on its $48 million Readiness Based Sparing program. CACI has held both these contracts continuously since 1978. We take great pride in our ability to sustain long-term relationships in which we keep adding value to our client solutions.

We also undertook a major financial transaction in raising $300 million in convertible debt. This gives us additional financial flexibility to pursue corporate development and mergers and acquisition initiatives. We also bought back 1 million shares.

Another highlight of the fourth quarter was that we completed the acquisition of two professional services and consulting companies. First, the Institute for Quality Management, IQM, and the Wexford International Group.

CACI's corporate development and M&A program is a successful and ongoing process that has clearly demonstrated its value to growing the Company. Both IQM and Wexford are high growth organizations operating within our target markets, and they have outstanding capabilities that compliment our own professional services and consulting services. They bring us experts in the areas of intelligence and special operations respectively where we are focused on expansion.

Let's go to slide number 6, please. Turning now to the full-year of fiscal '07. CACI reported record revenue and contract awards. These contract awards are a strong indicator of our potential for long-term growth.

CACI also reported record contract funding. These contract funding orders are a favorable indicator of our near-term growth potential.

We enter fiscal '08 with record year-end funded backlog and total backlog, which will lead to improvement in our organic growth. Bill Fairl will have more details on our fourth quarter and fiscal '07 full-year operations results.

While our fundamentals are sound as we move into fiscal '08, we continue to operate in an extremely challenging funding environment. Congress returns after Labor Day with much appropriations work remaining. The process continues to be a contentious one and looking ahead, we believe that a continuing resolution will be needed to keep the government running when the new fiscal year starts in October.

Let me also point out that even though CACI's operating within an environment where government dollars are being prioritized to the war fighter, we do have contracts that support the war fighter. These efforts include contracts to provide intelligence, communication, night vision systems, and engineering solutions that counter the threat of IEDs. CACI supports both the war fighter on the ground and the command decision makers at the national level who are directly engaged in the global war on terrorism.

We are expanding our business base in the federal civilian sector with significant contract awards with the Departments of Homeland Security, Justice, State, and Housing and Urban Development. CACI was also most recently awarded a prime position on the General Services Administrations Alliant program.

We will continue to pursue large contracts to help our clients solve their most difficult problems. CACI's vision is to be the very best in everything we do. We will reach back into CACI's full resources and the capabilities of our 10,000 plus employees to sustain and enhance our position as a federal services leader.

And now here's Tom Mutryn to give us the details of our financial picture and Tom will be followed by Bill Fairl who will provide more details on our operational performance. Tom?

Thank you, Paul, and good morning, everyone.

Please turn to Slide 7. Our overall year-over-year revenue growth for the fourth quarter was 9% and our organic growth rate was 7.2%. The organic growth was driven by a significant increase in other direct costs which accounted for 59% of total direct costs, up from 56% in the fourth quarter of 2006.

This increase in other direct costs is a major factor in our lower margins since this activity typically has much lower margins than direct labor. For the full-year our revenue increased $183 million, or 10.4 % compared to 2006 driven primarily by acquisition activity. Full-year organic growth was 1.2%.

Let's go to the next slide. Our operating margin was 7.3% in the fourth quarter and was 7.5% for the full-year. In previous calls we highlighted three factors which are impacting our margins.

The first factor is the shift in our direct costs from direct labor to other direct costs, attributable in part to the movement to larger consolidating contracts which have significant subcontractor content.

These larger contracts allow us to meet the needs of our customers as they provide both top line and bottom line growth but often with lower margins. To partially offset this, our intent is to increase direct labor by continued hiring and by bidding work with greater CACI labor content.

The second factor relates to recompetes. We lost two major higher margin recompetes in 2007 and we often realized lower margins on the recompetes we win due to the competitive environment.

The third factor relates to less higher margin greenfield work as government funds are redirected to the war fighter and sustainment activities. We support and continue to grow this mission critical work through acquisitions and organic growth, and we are also well positioned to win new greenfield work as funds become available.

Our net income for the fourth quarter was $20.8 million and $78.5 million for the full-year. Diluted earnings per share for the quarter were $0.67 and were $2.51 for the full-year.

Next slide, number 9, please. Our U.K. subsidiary reported quarterly revenue of $22 million, a 29% increase over last year's fourth quarter. For the full-year, U.K. revenue was $81 million, up 28% with a pretax margin of 8.1%. This top line growth resulted primarily from the acquisition of Sophron last year and favorable exchange rates.

In July of this year, our U.K. operation acquired Arete Software Limited, a $4.4 million proprietary software business focused primarily on local government. This is the U.K.'s third acquisition in the past 21 months.

We had another strong quarter of cash flows, generating $47 million of operating cash driven by earnings and an impressive eight-day improvement in DSO to 66 days. For the full-year, our [cash] from operations was $168 million. Our cash position was $285.7 million at the end of the year which included $49 million of cash which was subsequently used for Wexford acquisition.

Next slide, number 10, please. We are reaffirming our guidance for fiscal year '08. While our fourth quarter revenue came in higher than expectations due to approximately $35 million of [higher] other direct costs, earnings were generally consistent with our expectations. At this point, we do not have enough new information to adjust 2008 guidance.

We expect revenue will be between $2.05 and $2.15 billion and our operating margin will be between 7 and 7.4%. Quarterly operating margin is expected to range between 6 and 8% during the year. The first half of the fiscal year will be in the lower half of the range with the second half of the year in the upper half.

The major reason for the increasing margin as we move through the year is the steady growth in the number of billable CACI employees driving margin and profit improvement. We expect negative earnings per share comparisons in the first half of fiscal year '08 and positive comparisons in the second half.

We realized significant improvements in working capital in fiscal year '07 and in particularly the fourth quarter mainly due to lower DSO. We do not expect similar DSO benefits in 2008. With further review of our expected fiscal year '08 earnings, non-cash expenses and working capital items, we currently expect 2008 cash flow from operations to be in the $140 million range.

Going forward, we plan to use our cash primarily for acquisitions. We have a solid pipeline of opportunities consisting mainly of companies doing work to support the Department of Defense and the intelligence community in similar in size to recent acquisitions.

With that I will now turnover the discussion to Bill Fairl. Bill?

Thanks, Tom, and good morning, everyone.

I'll address my remarks to highlights from operations during both our fourth quarter as well as our full fiscal year '07 and I'll also provide a few comments on our fiscal year '08 focus points going forward.

Let's move to slide number 11. As Paul mentioned, Q4 was a very good quarter for contract awards. We recorded approximately $1 billion in awards, up 215%. That's 215% over fiscal year '06. We also won all our major recompetes as well as significant new business in both the defense and federal civilian sectors.

For the full-year, our contract awards totaled a record $3.3 billion, and as Paul indicated, this included expanded business with federal civilian agencies. Fiscal year '07 contracts we won in this area include the multi-billion dollar EAGLE contract with the Department of Homeland Security, the Mega 3 litigation support recompete with the Department of Justice, a blanket purchase agreement from the Department of State to enhance information security, and a $74 million award from the Department of Housing and Urban Development.

Fiscal year '07 was also a record year for contract funding orders. $2.16 billion, a 23% increase over fiscal year '06. This strong foundation of awards and funding in fiscal year '07 gives us great momentum heading into fiscal year '08.

Our proposal activity continues at a vigorous pace. At the end of the fourth quarter we had over $3.1 billion in submitted proposals under evaluation and that's both new and recompete. We expect over 50% of those to be awarded by the end of the calendar year.

During the first half of fiscal year '08 we expect to submit more than $4 billion in additional proposals, also both new and recompetes, and we expect 50% of those will be for $100 million or more.

Also in fiscal year '07, we expanded the technical distinctions that enable us to compete and win at the Tier 1 level. Four of our operating units earned the capability maturity model integration, or CMMI, Level 3 rating. The Level 3 rating is an increasing requirement on large, complex federal contracts, so our accomplishment here keeps us very competitive.

Additionally, we were one of the first systems integrators in the federal market space to receive the ISO 20000 certification. ISO 20000 is a recognized standard for enhanced efficiency and cost effectiveness in IT service management and the federal government is beginning to embrace ISO 20000 as a key to achieving true performance based contracts. This certification gives us a significant discriminator in the federal services and solutions marketplace.

Next slide, please? Our objective for fiscal year '08 is to translate our record contract awards and funding orders into top and bottom line growth. To do that, we're going to focus on four key areas.

First, organic growth. We believe that we will see improvement in organic growth over the course of fiscal year '08 as our record fiscal year '07 contract awards and fundings convert to revenue and profit. We expect the success and momentum we built in our recompete win rate during the back half of fiscal year '07 will prevail throughout fiscal year '08 and all the while given the strength of our opportunity pipeline, our team will continue to bid and win new contracts and task orders.

The second focus area is profit improvement. Our objective is to concentrate our bid and proposal resources on winning new work that has a higher CACI labor content while maintaining the high recompete success rate I mentioned earlier. We're going to accomplish this while maintaining our practice of bidding large, multiple award IDIQ contracts such as S3, ITES-2S, and the Department of State security assurance services and innovations BPA, and they may entail a significant amount of ODCs.

Our third focus area is recruiting and retention. In support of our profit improvement objective and with the new work we see for fiscal year '08, the challenge of recruiting and retaining qualified individuals, especially those with high level security clearances, isn't going to lessen. While we have more work to do, I can tell you that we've made good progress in our hiring metrics.

During fiscal year '07, our human resources organization built what I call a best-in-class team of recruiters. Our recruiters then teamed up with our line managers to deliver great hiring results week in and week out while reducing our time to fill to historic lows as we enter fiscal year '08.

On the retention side, our team continues to focus on making CACI an employer of choice by investing in our people, including new leadership training programs for our managers, and by winning exciting new work that helps us both recruit and retain top notch staff.

The fourth and final major focus area for fiscal year '08 is integrating acquired businesses. I'm pleased to report that the integration of our recent acquisitions, the Institute for Quality Management and the Wexford Group, has gone very smoothly.

These two fine organizations are fully on board and contributing to our fiscal year '08 objectives. Given CACI's leadership position as the strategic consolidator in our market, we are prepared to integrate additional businesses as the opportunities present themselves.

In summary, our fiscal year '07 achievements in operational excellence, coupled with our record contract awards and record contract funding orders, give us a solid foundation to deliver a year of accelerating growth for our U.S. operations fiscal year '08.

And Paul, that concludes my remarks.

Thanks, Bill, and thank you, Tom, for your comments.

Let's go to slide number 13, please. CACI is well positioned for long-term growth. We provide valuable services in the highest priority areas of government including national security, intelligence, homeland security, and modernization of government services. These will continue to see priority funding.

In addition to our vital defense business, our portfolio is expanding in the civil sector of the federal government. Our management team brings strategic leadership and significant large enterprise experience from both industry and government. Our corporate development and M&A program is a successful ongoing process that has clearly demonstrated its value to CACI.

We are the market leader in acquiring and integrating new companies to increase our capabilities and accelerate our growth. Our growth strategy continues to be sustaining our recompete success to improve organic growth. We are increasing our operational efficiency and holding down cost to improve earnings.

We're also pursuing larger contracts with higher labor content. In particular, we're going after contracts with values of more than $100 million that are in our niche areas and have more direct billable labor. Our solutions are critical to our customers missions and are at the forefront of our nation's security.

Our important business with the federal government attracts talented professionals who seek challenging work and who are dedicated to the missions of our valuable clients. We will continue to invest in recruiting the best talent, including veterans and people with disabilities.

CACI people are fiercely proud of the work they do, and our management team intends to retain our top talent to grow our business. Looking ahead, we're confident that we will be able to build on our recent accomplishments and enhance shareholder value during fiscal '08.

I am very proud of all our dedicated employees and the fine work they do in helping our clients solve our country's most complex problems. We believe our solutions provide the critical resources to help our government to defeat global terrorism, secure our homeland, and improve government services. It is an honor and a privilege to lead our team and to serve our clients on America's national missions.

With that, Melissa, we can open up the lines for questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Ed Caso with Wachovia.

Good morning. Thank you.

I was wondering if you could flesh out the employee retention turnover hiring a little bit more. Maybe you had some number metrics you could give us?

Well, I'll turn that over to Bill, but we generally do not give out specific metrics on retention, but I think Bill can give you some color on the initiatives we have under way and the effect that those initiatives are having.

Yes. This is Bill Fairl. It was a little hard to hear, Ed, but I think you were asking about recruiting and retention statistics, so I'll just tell you what I can.

On the retention side, we've made progress there. It continues to be a focus area for us, and I mentioned some of the initiatives we have going on there, we seek to continuously approve. I think we've said in the past that we believe that we're below the industry average, not as far below as we'd like to be but below the industry, our industry average on the retention statistics so that continues to be a focus area for myself and Randy First.

On the recruiting side, I mentioned that we'd gotten our time to fill statistics. That's the time it takes us to place somebody in a new firm open position down to historic lows for the Company, so I'm quite pleased there. I think our objective there is going to be to stay where we are and if we can improve it by another day or two that's great but the team just did great in fiscal year '07.

The number of firm openings that we have has gone up so I'm very pleased by that. It seems that the faster we fill these positions, the faster our clients open new positions for us, so I think we've got a nice kind of process going there.

And I may have mentioned this before, I'll mention it again. During fiscal year '07, our human resources organization, we appointed a new head of our recruiting staff, our corporate recruiters, and he spent the year building just the "A Team" of recruiters and they're working just great with our line managers and to that I attribute to success in reducing the time to fill and the corollary also giving us more positions to fill, so, so far so good. Got to keep working it.

A quick question for Tom.

On the convert, there was some emerging issue task force, I think 7-2 that may cause an issue. Can you give us an update there?

Yes. There has been some discussions with the emerging issue task force as well as the Financial Accounting Standards Board about changing the accounting rules for convertible debt securities. We [are some] of those ongoing discussions when we issued the convert.

The change in accounting would not have any impact on the underlying economics of the convert which we continue to be quite pleased with, however, there may be a change in accounting, a draft proposal is being offered with a relatively short comment period and if this change goes into effect, we may see some of the results in our fiscal year '09. Too early to know specifically what the impact will be.

We'll go next to Brian Gesuale with Raymond James.

Yes, good morning, guys.

Paul, I wanted to ask you kind of a philosophical and strategic question here. As you go forward-looking to balance organic growth and margin stability or even potentially expansion, what organic growth rate is sustainable?

And then on the margin front, what gives you the confidence that you can materially add direct labor content to your mix given heavier reliance on these larger IDIQ contracts, some of these lower profit renewal contracts that you've been successful with, and then the ongoing tight labor markets? Can you maybe address those issues?

Yes, it may have been four or five questions in there. That was a clever way of multiple questions in there. Brian, thanks for the question. Let me start off since you introduced it as a broad question with a broad answer and then I might ask Bill and Randy to add something in here.

But first of all, we are emerging. Some have labeled us as a Tier 1.5, not quite at the Tier 1 in scale but certainly, there's quite a bit of space between ourselves and, let's say, other mid size companies in our market space, so we are emerging and evolving toward Tier 1 in scale.

And as we do that, my experience in that area is that we will be taking on larger, more complex problems in the government sphere in order to support the organic growth that we need. So we will be going after contracts that are large and complex.

Now, when we do that our clients will generally want us to have a very broad reach back, more than we could have and anyone would have in a given company and therefore, we'll have more teammates to help us solve these complex problems going forward. As we have more teammates, obviously, our percentage of direct labor on those jobs is going to be lower than our average. That will have the effect of creating a tendency toward a lower margin.

Now, why would we do that? Because we can add revenue, large volumes of revenue and earnings that will give us greater earnings per share and that is the trade off. To get the larger earnings per share, we may have to, we will have a margin that's more consistent with a Tier 1 organization.

So we're not going to be able to support the organic growth we'd like to have with pure time and materials level of effort type of work. We love that work. We'll do as much as we can. It won't be sufficient over the long-term as we move toward our five-year goal of becoming a $5 billion company. It won't be sufficient to support the organic growth rate.

And now I'd turn it to Bill and to Randy for any other comments.

Sure. Brian, this is Bill Fairl.

I will add to Paul's remarks by saying that since we are a larger company these days, we do have a lot of capability. Paul talked about reach back. We have that reach back capability inside the Company as well so over the past year, year and a half, we've launched two separate initiatives, one called account planning, account management and the other one called horizontals.

And I won't go into tremendous detail other than to say the purpose of those two initiatives is to better enable CACI to cross-sell its capabilities across the entire organization. So whereas in the past when we were a smaller company, we may have had to go more often outside for capabilities.

One of our objectives here is to maximize the use of CACI's internal capabilities and therefore, sell more CACI labor. So ODCs, significant number of ODCs is a fact of life. We are trying, through these initiatives account management and horizontals, to increase CACI labor content and we've begun to see some traction there, we think that can work for us, but as Paul indicated, we are concentrating on growing our profits here.

Randy, did you want to add anything?

Yes, the only other thing I'd say, Brian, is that as Paul indicated in that Tier 1.5 journey we're on, we are really focusing on those types of deals. And there's lots of deals out there to go after where we can really provide strong CACI solutioning. And that's one of the areas that both Bill and Paul have charged me with to make sure that we're bringing the best of CACI across our $2 billion enterprise to our clients.

And I'd just wrap it up because there was one part of your question, Brian, that dealt with do we see the people, the openings being there and our plan calls for a significant incremental employment of new talent and hiring of new talent and that is all derived from our program managers bottom up saying we're going to win these programs on these dates and we're going to need this many people to do the work.

So it's built up from the grassroots. It's factored, of course, based on our probability of win, but we're quite confident in the numbers that we're planning to add to the work force in the year.

With that, let's go to the next question.

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

Good morning, gentlemen.

I'd like to just follow-up on that margin question and ask specifically why you, to some degree are in a period of transition. If you were to look out on a longer-term basis into FY '09, '10, given the mix of business, or the newer type of business you're going after, the larger contract, et cetera, is CACI a company that should have a longer-term operating margin structure in the middle 7% range versus the historically you were in the above eight?

I think that's about right. I think our evaluation is that our focus will always be working to improve our margins. We've got a number of things ongoing, but the reality of operating in a market with bigger contracts, with more teammates is that our margin would be more like what you said in the--.

Tom, did you want to add anything to that?

Yes, yes, Paul. The focus in primarily, as Paul mentioned, is growing earnings per share. Top line and bottom line growth, and while sometimes we, you guys kind of bemoan ODCs, other direct costs, the reality is they contribute positive cash flow, positive earnings per share, and so we are simultaneously embracing this work to meet the needs of our customers which also meet the needs of our investors.

Could you also go back and revisit your feelings relative to share buybacks? I mean, the stock has been treading water here clearly below, I think, the value of some of the companies that you have bought.

Given the outlook over the next six months for negative comps, would it not make sense to redirect some of the free cash flow generated by this company which is, obviously, very high towards buybacks, buying the best value in the marketplace?

I will answer this question again. It's Tom Mutryn speaking.

We continue to look at that particular issue and we feel that all in all, however, the best use of our cash is to continue on the path of being a strategic consolidator. We were successful with two acquisition recently.

We have a healthy pipeline which we believe will deliver long-term value to our shareholders and we want to use our cash to pursue our corporate development and acquisition strategies. We did repurchase, as you know, 1 million shares for $45 million in the short amount of, within the last few months, but we are looking at transactions which are accretive to our earnings per share which provides value.

Okay. Thanks, Mark. Can we have the next question, please, operator?

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

Hi, thanks.

Can you talk about some of the large IDIQs you've one like ITES-2S and First, how are you seeing task order flow under those in the RFP's out there?

And then second, on the ODCs have been running high in recent quarters. Is that largely due to task coming out of the S3 wins you've had or is there another contract vehicle that's causing more ODCs than normal?

Okay, Bill, it's Bill Fairl and I'll take that.

So the first question is about activity on some of our IDIQs. We've begun to see the task flow on both the ITES-2S and to a lesser extent on Army First. On ITES we've had some successes on that. We've bid a few and won a few and so we're pleased with our track record out of the gate on that one.

Army First, we really are in the early stages of that one so I don't have a lot to report on task order activity on that one. In fact, I'm told that First only has four task orders out so far and only two of those have been awarded, so, both to incumbents so the activity has been kind of low on that one. We're looking for it to pick up and we'll be very interested and active on that task order or task order contract rather.

Let's see, the second part of your question I believe was a little color on --

I think he was asking was there much of the ODC coming in?

Well, yes, where was it coming from and, yes, you put your finger on one of the big contributors on that, Bill, and that is S3. The other one is our [Etos] contract that you're probably acquainted with as well and those are basically for the same general customer set, and it splits about two-thirds subcontractor work and about one-third of CACI material purchases and it has to do with signal intelligence equipment receivers, antennas, what have you and work associated with systems like that. That's the biggest aspect of it.

And that has been a driver in the ODC, S3 and [Etos] combined have been, let's say, the lead factor in the ODCs that we saw come through in the fourth quarter.

Yes.

Bill, did that get it for you or do you have a follow-up? Bill? Operator?

We'll go next to Cai von Rumohr with Cowen and Company.

Yes, thank you. Just some follow-up.

Looks like almost all of your revenue growth over the third quarter was ODCs and your incremental margins looked like they held at 7.4, so does that mean that things maybe on the margin front are bottoming out? And could you comment on where you see ODCs as a percent of COGS in fiscal '08?

Well in terms of margin trends, we've guided our fiscal year '08 margins to be between 7 and 7.4%. That is where we see margins today in fiscal year '08 which is down a bit from fiscal year '07, so we're expecting to see a slight decline in fiscal year '08 for the reasons we articulate.

The trend that we have seen, which is increasing ODC as a percentage of direct costs, will continue for the reasons that Paul and Bill articulated. As we did larger consolidating contracts, we expect to have the team members play an increasingly important role. I'm not prepared to give you exact percentage at this point in time, but clearly that is the trend.

Well, if it improves, if it increases, it was like 41% in the final quarter but it looks like 44% for the year. Do you expect it to stay at that 41% or that would seem to be a bit extreme.

The numbers, as you can imagine, do fluctuate quarter-by-quarter depending upon the needs of our government customer, specific task orders. As I said, we expect the ODC content to increase in fiscal year '08. I would not take the fourth quarter and reset the base based on one quarter's worth of data.

Okay. Great. Thank you.

We'll go next to Jason Kupferberg with UBS.

Good morning, Jason.

Good morning, guys.

On funded backlog, obviously, you had some really strong growth there exiting fiscal '07 and if we look at that funded backlog as a percentage of your fiscal '08 revenue guidance just taking the mid point for example, looks like that ratio is about 59%.

If I go back and check a similar calculation over the past few years, that number has been more like 48 or 49% if my numbers are right. So the numbers would seem to suggest that if funded backlog is a proxy for visibility, you guys would have better visibility this year versus the past few years. Is that an accurate way to look at it?

Bill, do you want to take that?

Yes, I'll take the first shot at it.

First of all, you're correct I believe in your analysis. We've been observing now for about the past six months that our funded backlog is really at recent historic highs when you kind of convert it to number of months that you have in the cupboard, if you will, and your calculations there are very much jive with ours.

We're looking at seven, seven-and-a-half months of trailing 12 months revenue kind of in the cupboard there for us so that is, that's high compared to what we normally experience at CACI and in our industry. So the question has been is when would that start converting into top and bottom line, and we, of course, begun to see that in our fourth quarter and the question is what next, and we're on that, observing it, we're very early, really, into fiscal year '08.

We really have one month under our belt, if you will, maybe six weeks, and so it's kind of early to kind of draw any trends from that right now but we are on that and the whole team, Paul's got us all focused on that.

And Tom, do you want to add anything to that?

I will reinforce what Bill said. You pointed out in previous calls that our contract awards, our funding order and our backlog was increasing and we were not seeing a commensurate increase in our revenue. We were building up this pent-up demand.

This quarter in the fourth quarter we saw some instances that backlog translating into revenue and the question that we have going forward is how quickly will that backlog translate into revenue, and as Bill said, we're watching this very carefully.

And then the other thing, of course, it's in the mix here is what's going to be what happens to fiscal year '08 budget appropriations process and there's, certainly, I think it's fair to say there could be some contentious discussions going on there and so we're going to have to wait and see how that plays itself out as well.

So this first quarter '08 for us is an important quarter for us to do a lot of watching and analysis of all the things we just talked about and we're going to be prepared as we go through the quarter when we deliver our results for the first quarter to give you some update. By that time we'll have some of the uncertainties of around the government budget process will be clearer, I think, and also we'll have multiple months in '08 to look at regarding the ODC levels and is the conversion rate of the backlog holding up or was that a momentary kind of thing that occurred in the fourth quarter of '07, but we'll keep you posted.

Okay.

So just to sum up that commentary, it sounds like what you're saying is you're encouraged but what you've seen so far in the leading indicators that there's no reason this early in the fiscal year to get ahead of yourself (inaudible)?

That's right. We've got a lot of staff to add through the year. We have a budget process that's going to be contentious, we are encouraged by the conversion factor for the backlog but that's one indicator and there's multiple working parts here that we have to factor, so --

Okay. And just a follow-up.

So we'll keep you posted as soon as we get clear visibility of that through our analysis we will update you all.

Okay. And just a follow-up on the quarter.

I know you called out, Tom, the $35 million of extra ODCs, so if I back that out, you would have been, I believe, above the high end of your revenue guidance range for the June quarter if I'm not mistaken. Can you also comment on where operating margins might have been without the excess ODCs in the quarter?

I don't have that statistic off hand, but clearly, in the absence of ODCs, operating margin would have been higher but our earnings per share would have been lower. We can talk separately with regards to the specific analysis but I certainly haven't done that yet.

We'll go next to Michael Lewis with BB&T Capital Markets.

Good morning, Michael.

Good morning. Thanks for taking my call. I'm going to try in ODCs, M&A and margin in one question.

So on the M&A front, would part of the strategy be to improve or isolate the margin, to improve it to be going out there and identifying some of the higher end subs that you work with and trying to bring them into the fold that which will essentially convert some of these ODCs to the more direct labor content? Can you talk a little bit about that if that's part of the strategy?

Yes, Michael. Let me take a shot at that for you.

First of all, we're reluctant to buy our subs, so to speak, because we already have that revenue in our, so it wouldn't support our growth objectives, it would add to our profitability, of course, because the margin would then be organic margin versus ODC margin. Rather, our strategy in M&A is to go look at the areas where we are focused where the nation's priorities are the highest and right now the nation's priority is the war on terror.

It's a threat that's going to be with us for decades to come. It's global. It's pervasive and persistent, and that is the nation's number one challenge and so we are intently focused there.

We're uniquely positioned with the strong intelligence component of our business and now a company like Wexford adds this operational training and consulting aspect as well. And our plan is to continue to look at the nation's number one problem, one and two problems, and go look for companies that are well positioned with high growth rates, as Wexford and IQM both were, high growth rate, good margin business, and to bring them on board and to build the competency center here that would be substantial and it's helping our clients to fight the global war on terrorism which is the nation's highest priority.

Okay. That's fair. Just a quick follow-up on that.

If we were to, again, if we were to look out into FY '09, we're not in the days that prior years where you'd see 50 to 100 basis point year-over-year improvement EBIT but should we be able to expect 20 to 30 basis points because I want to reflect back on a question that someone else asked and it sounded like you had guided to somewhere in the 7% range. I just want you to clarify that for us.

Well, let me say as we go after larger, more complex jobs to support the clients needs and to support our growth rate, organic growth rate requirements, we by necessity are going to have a substantial ODC content in the work we do. That's the characteristic of those large jobs where you have a leader system integrator.

Our clients are asking us to take that leadership role, to lead teams of contractors to go after big problems, consolidating databases that are scattered and disparate, attacking complex technical problems that required large resources and unique resources from various parts of the industry and we're happy to take on the leadership role. It supports our growth objectives, it supports our clients needs but the derivative of all of that is that the ODC content's higher because you're using partners with rich capabilities to solve these complex problem sets.

So that's where we're going. That's our future. As we move toward $5 billion, we're going to have many teammates working on us on large programs, and that's not a bad thing. That's a good thing. That's our planned future because those jobs give us large contracts which support the organic growth rate we need.

Now, having said that, we're going to continue to work internally on jobs that have the opportunity to provide us with a higher labor content where we see those, we're going to prioritize, we are prioritizing those. We're also really focused on cost control here.

We've always had a lean overhead structure. We're going to keep that lean and as we acquire companies, we are going to take out excess costs so that we can have accretion in the acquisitions and all of that will lead to growing earnings, managing margins but growing earnings. That's our objective. Growing earnings so we can grow earnings per share.

We'll go next to Ferat Ongoren with Citigroup.

Good morning.

Good morning, Ferat.

One question I have is on the margins, and, you know, the comment you made in the strategy to move to Tier 1. I'm looking at your and maybe competitors there moving towards an 8% margin and CACI is moving towards mid 7 and you mentioned Tier 1 so I didn't know who you are talking about but if you kind of look at the primes, you're not sure, (inaudible) I said that, IT services business so those guys would be 9 to 10% margin.

No, no, no. If you go look at the IT services components of those prime platform companies, you will find that their margins are not at that level.

I mean, they just provide that information, it's around 9 to 10%. Now you could argue--

That's not the data we have, Ferat, but we can compare notes with you later off line.

That's fine. We can just focus on your immediate competitors, be it SRA or ManTech.

My point is this: I mean some of these larger companies have also have greater complex programs and they use subcontractors. Is it fair to assume that some of the partners that you're going to work with for some of these bigger projects are going to do the higher end work?

No. No, it's fair to assume that some of those subcon teammates we will bring on board will have specialty areas that they do extremely well and we select them because of that. But not that they will do the higher value work. In fact, the higher value work is the system integration work and the leadership work and the program management work.

We'll go next to Tim Quillin with Stephens, Inc.

Good morning.

Good morning.

In terms of your margin progression, I mean, how should we think about this over the course of FY '08 6 to 8% is a pretty wide range. Is it, should we think about leverage on your indirect costs as the primary driver of sequential margin improvement throughout the year or is there anything happening on the gross margin side that would drive margin improvement towards the back half?

This is Tom taking the lead to answer this question.

We expect for the full-year fiscal year '08 to realize operating margins between 7 and 7.4%. We mentioned that we expect lower margins in the first half of the year and higher margins in the second half of the year and the major driver of that increase in margins as we go through the year is the increase in the number of CACI billable employees.

We have a large number of open requisitions right now, we are actively filling those positions and as we fill those positions, that will help our gross margin statistics and that will drive that margin during the year.

Okay.

So I guess to restate that, you would expect at least within your guidance that ODCs would trend down as a percent of your labor or your direct costs over the course of the year?

On the first half versus back half of the year, that's a fair assessment, yes.

Okay.

And then just my only other question is regards to business mix and I agree what you're saying in terms of margin expectations. As you move forward with your current business mix, is there any thought process, and I think one of your competitors was considering just change in business mix, maybe a move towards more of a product business model that would allow you to move up the margin chain and add some proprietary technology to your solutions, I guess as you're doing with the most recent U.K. acquisition. Thanks.

Thank you for the question, and we in fact do have today in our business product components. They tend to be things that give us differentiation and therefore, give us a competitive advantage, and so as we look at acquisition candidates, we do look for is there some proprietary technology that would represent a barrier or an improvement in their competitive position, therefore ours, so yes, we're always looking for that.

We are predominantly a services company. We're not going to become a product company, but we look for technology in those services that is proprietary methodology, technology, domain knowledge. These are the things that provide an advantage to our clients and therefore, we'll continue to look for those.

We'll go next to Greg Wowkun with Banc of America Securities.

Good morning, gentlemen.

DSOs trended lower to about 66 days in the quarter. Can you comment on how we should expect that to trend going forward?

Yes. We were very proud of the significant improvement we made in our DSOs during fiscal year '07 and particularly in the fourth quarter.

Going forward, I would expect DSO to be [attained] with those particular levels, in fact, I would be happy to maintain those particular levels. While we believe in continuous improvement, I think a reasonable expectation is to assume that they will stay at those levels.

Okay. And as a follow-up, can you please also speak to the pricing you're seeing on your recompetes?

Bill, do you want to address that?

Sure. It varies by customers, you might say, as you might expect, rather, and Paul talked about with the priority, the funding right now to the war fighter that there aren't that many greenfield type opportunities and the nature of recompete work is that in many cases, not all cases, but in many cases, as you go through a number of cycles of recompetes, you have to find ways to become more and more efficient, and that can happen in a number of ways.

As you know, we announced we won our Mega 3 recompete, and there what we did is we started basically a couple years in advance and developed some new technology, kind of going back to Paul's point about distinction and proprietary things that offered our customer a way to be more cost effective and get more done with sort of the same amount of CACI labor using our tool, if you will so.

That new tool is being used on the most recent task orders.

Yes, yes. So a lot of traction with that tool. It was a good investment on our part. That's one of the kind of competitive things that we use to win our recompetes more so than pure pricing considerations.

We want to win on a best value basis and we want to continually kind of offer them more value, if you will, with the CACI offering and we're generally pretty successful with that. I would say that we talked a bit about the two recompetes that we lost in fiscal year '07. We didn't lose those on the basis of price.

We'll go next to Jeff Houston with William Blair.

Hi, guys. Jeff Houston for Laura Lederman. Quick question.

Wanted to see if there's any significant or recompetes that are coming up in the next 12 months and maybe if you could speak to their dollar value?

Well, Jeff, this is Bill Fairl again.

What I can say is that unlike some previous years that generally speaking, our fiscal year '08 is characterized by a larger number of relatively smaller recompetes, we have approximately 70 recompetes coming up in fiscal year '08 where the dollar value is roughly $2 million a year run rate or higher.

So we don't have the mega kind of a recompete coming up this year that we had in the years past, but we have a lot of work to do because we have all of these individual recompetes to bid and win, and we're, believe me, the team is focused on that.

Okay.

And then separately, had a question about your opinion of the defense and civil continuing resolution. I think you mentioned in your commentary that you expect there to be one but just wanted to kind of get a feel for how drawn out you expect that to be?

Sorry, I missed the question. Could you repeat the question because I sort of missed the end.

(Inaudible) the continued resolution process.

Dave, do you want to go ahead?

Yes, this is Dave Dragics, Jeff.

You know, I guess we can answer that question better at the end of October when we do our first quarter release. No one can tell how long the continue resolution process is going to go. That's a function of a lot of things that we can't control.

Our view of it is it's business as usual because, as you know, almost every fiscal year started with continued resolution. But it will extend into the October/November time frame at least, but beyond that, I don't have any better visibility than anybody else in this town.

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

Good morning, again.

Could you detail what the stock comp and option expense was for fiscal '07, what it should be in '08 and what percent of that expense for '08 should hit in the first quarter?

Okay.

For fiscal year '07, stock comp, this is both 123R option expense and restricted stock expense, was around $13 million pretax, and for fiscal year '08, we expect it to be approximately $18.4 million. For the fourth quarter of fiscal year '07, the number was $3.1 million in total.

And what would you expect for the first quarter because historically that's been very heavy?

Yes.

What percent of that 18.4 might hit in the first quarter?

Approximately one-third, $6 million.

We'll go next to Cai von Rumohr with Cowen and Company.

Yes, a quick follow-up on the recompetes. Could you tell us what percent of your current revenue run rate are the recompetes you face in '08 approximately?

Sure. It's around 20% give or take a little bit, so if you think of your contracts having four and five year --

Okay. So it's a normal five-year?

It's just a tad light but think of it as a normal year.

Okay.

And the other question is kind of your vision for the future in kind of more subcontract labor. Do you assume that you're going to continue to build your direct labor because if so, and you're increasing your subcontract labor, that would assume accelerating organic growth and given your new business model, where do you see organic growth going? I mean, does it go back to 12 to 15% or are we talking 6 to 8? How's it look?

Well, I think we're only, Cai, we're only guiding for fiscal '08 and what we've shown in the fiscal '08 period is sort of the mid to upper single-digit type of range, and that's what we can see right now. It would be speculative to try to portray a percent beyond that period and I would be reluctant to do that, but in terms of adding your earlier part of your question was around head count.

We have a bold plan this year for adding head count. We have strong requirements. They're grassroot level requirements based on the needs of the clients.

As Bill has pointed out, we have a very rich recruiting program and strong initiatives around retention, so we expect we will add significantly to the head count. We've already added reasonably well in the first month of the year to the head count and so we expect to have a strong addition to the head count in fiscal '08 and that's built into our plan.

And we will, as I said earlier, we will continue to go after the most complex problems and they generally require teammates to help us address those with unique specialties in niche areas, and so our subcontractor content will continue to be around what it's been.

Okay. Thank you.

And we have no further questions at this time.

Well, I want to thank you, Melissa, for your help today and especially thank all of the callers for your very good questions.

We appreciate this opportunity to share progress of our company and the prospects going forward, and our team will be available for those of you who might have ancillary questions to answer them after the call. So thank you for coming on board with us this morning. That concludes our fourth quarter and fiscal '07 year-end conference call. Have a good day.