CACI International Inc (CACI) 2008 Q1 法說會逐字稿

Good day, everyone. Welcome to the CACI International first quarter 2008 earnings conference call. Today's call is being recorded. At this time, all lines are in listen-only mode. Later there will be an opportunity for questions, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) Please remember that during the question and answer portion of the call, we are only taking questions from the analysts.

For opening remarks and introductions I would like to turn the call over to the Vice President of Investor Relations, Mr. David Dragics. Please go ahead sir.

Thank you, Lisa, and good morning, ladies and gentlemen. I am Dave Dragics, Senior Vice President of Investor Relations. We are very pleased that you are able to participate with us today, and as is our practice on these calls, we are providing presentation slides, and during our presentation we will also make every effort to keep all of you on the same page as we are.

Move to the next exhibit, #2, before we begin our discussion this morning, I would like to make our customary but important statement regarding our written and oral disclosures and commentary. And 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 evening's earnings release, and are described in the Company's Securities and Exchange Commission filings. And our Safe Harbor statement is included in this exhibit, and should be incorporated in 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.

Thank you, Dave and good morning, ladies and gentlemen. I would like to personally welcome you all to the 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 Fuerst, Chief Operating Officer of U.S. Operations, and by phone from the United Kingdom, Greg Bradford, Chief Executive of CACI Limited U.K.

Let's go to slide four, please. I will begin with one of our most significant accomplishments, and one which is particularly exciting to us. We surpassed the $2 billion mark in trailing 12 months revenue for the first time in our history. We have been executing on our strategic growth plan over the last several quarters, making successful acquisitions, being awarded large contracts, and winning recompetes. We continue to have a strong focus on earnings, growth and we expect positive earnings comparisons in the second half of our fiscal '08.

Our first quarter results reflect our strategic positioning to serve as a national asset to our clients in their important national missions. We provide valuable professional services and solutions to help our clients solve their most challenging problems in defense, intelligence, homeland security, and the improvement of government services. These remain areas with priority funding, and our innovative value-added services and solutions continue to have a real and positive impact on our client's ability to carry out their missions.

Let's turn now to highlights from our first quarter. Our first quarter revenue of $554 million was an all-time high. What's more, this increase in revenue came primarily from organic growth which was 12.5%. Our organic growth is improving as we continue to retain and expand our business base, while winning large new opportunities at an excellent rate.

Another recent highlight of the first quarter was that we reached agreements to acquire Athena Innovative Solutions and Dragon Development Corporation. Both companies have strong growth records and provide valuable services to the intelligence community. They also have very good margins.

These two acquisitions combined with the acquisitions of IQM and the Wexford Group will increase our annualized revenue in the Intellegence and Security Services market space by $262 million. We will also benefit from the addition of 860 talented new employees, of whom 780 have clearances of top secret and above. This represents a nearly 25% growth in the number of our employees with this level of clearance.

These acquisitions demonstrate our success in selecting companies that are for long-term value to our clients and our shareholders. The professionals from IQM, Wexford, Athena, and Dragon will provide services that will have long range importance to our government, as it continues to expand its capability at the critical nexus of Intelligence and Security. This is the centerpiece of our growth strategy, to amass the critical capabilities and expertise, to assist our clients in overcoming the nation's #1 one challenge, global terrorism.

The acquisition of these successful high growth companies adds important counter-terrorism services and solutions to our core offerings. It compliments our information technology capabilities, creates exciting new cross selling opportunities within the company, and will contribute to the bottom line. We also reported that our contract awards, which are an important leading indicator for the first quarter, were strong, over $900 million. Our contract funding orders, another important leading indicator were up 17% from the first quarter of fiscal 2007.

Let's turn to slide five, please. I am happy to say our reengineered recruiting processes are producing positive results. We have engaged our entire organization in our recruiting program, and our outstanding leadership team has taken personal accountability for our hiring results. Our recruiting engine is firing on all cylinders and we are exceeding our goals, notwithstanding a tight labor market. This is a third leading indicator.

As a matter of fact we earned recognition of our growing employee base, as The Washington Business Journal named us the fourth largest IT employer in the Washington, D.C. metropolitan area. We continue to support veterans through our hiring initiatives for veterans with disabilities, and we are topping our goal in this area. In a related development, the Secretary of Defense has recognized us with a special award for our achievements in hiring disabled veteran-owned small businesses as our subcontractors. Works with veterans with disabilities right here at home, is not only good business, but the right thing for us to do.

I am very excited about our excellent revenue growth this quarter which builds upon our solid growth in the fourth quarter of fiscal '07. We continue to develop capabilities to help our clients meet urgent critical national priorities, we are growing our employee base and enhancing our top management team with experts, senior level experts in national security, business and technology.

We are advancing our leadership and providing professional services and IT solutions in the federal marketplace, and we continue to position ourselves to deliver shareholder value. Regarding shareholder value, we continually evaluate all opportunities, alternatives and options to maximize shareholder value. This is our fiduciary responsibility, and we take it very seriously.

Now here is Tom Mutryn with our financial overview.

Thank you, Paul and good morning, everyone. Please turn to slide #6. Our year-over-year revenue growth for the quarter was 18.4% with strong organic growth of 12.5%. Organic growth was driven by both an increase in our direct labor and a significant increase in other direct costs, which accounted for 60% of total direct costs. Up from 55% in the first quarter of 2007. Other direct costs include work which we subcontract to third parties to meet the needs of our customers involve this activity contributes to the bottom line it generates slower margins in the direct labor.

Let's go to the next slide. Our first quarter operating margin was 6.3%, consistent with our expectations and down from the first quarter margin of 7.8% last year. In previous calls we highlighted three factors which are impacting our margins. The first factor is the disproportionate growth in other direct costs, attributable in part to the movement to larger consolidating contracts, which have significant subcontracts or content. These larger contracts are important to our customers provide and they provide both top line and bottom line growth, but often with lower margins.

The second factor relates to recompete. We are still experiencing the year-over-year impact of two major high margin recompetes which were lost in the second quarter of 2007. Additionally, we often realize lower margins on the recompetes we win, due to the current competitive environment.

The third factor relates to less higher margin greenfield work, as government funds are redirected to the war fighter and mission critical themed activities, much of which we support. As funds become available, we believe we are well positioned to win new greenfield work. Our net income for the quarter was $18.3 million, with the diluted earnings per share at $0.60, the same as last year.

Next slide number eight, please. Our U.K. subsidiary recorded quarterly revenue of $22.9 million, a 27% increase over last year's first quarter. Almost half the revenue increase came from organic growth, while the acquisition of Arete Software Limited last July of this year, and favorable exchange rates accounted for the remainder. Net margin was impressive 6.4%.

We generated $23.4 million of operating cash in the quarter, down from last year's level. Our operating earnings drove the positive cash flow, while an increase in Accounts Receivable proven by a growth of revenue with the use of cash. Day sales outstanding at 68 days continues to be at a historically low levels, with a 6 day improvement from the same period last year. Our cash position was $253 million at the end of the quarter, but will decline significantly, due to the Athena and Dragon acquisitions. We have successfully deployed the proceeds of the May 2007 convertible debt offering, and we continue to analyze our capital structure to ensure we have the right financial resources and flexibility to execute on our M&A strategy.

Next slide #9, please. We are providing updated guidance for fiscal year 2008. Revenue was projected to be higher than our original estimate, due to continued positive growth in revenue from other direct costs, as well as $100 million of additional revenue associated with the Dragon and Athena acquisitions. We now expect revenue will be between 2.25 and $2.35 billion. We continue to expect diluted earnings per share to be between $2.50 and $2.80 for the full year.

With the growth in revenue, we now expect our fiscal year 2008 operating margin will be between 6.6 and 7.0%. Our lower margin expectations are group has budgeted for future growth in lower margin subcontractor revenues, and by the impacts of Athena and Dragon. We expect 2008 cash flow from operation to be in the $140 million range, resulting in a solid operating cash flow per share.

With that I will now turn the discussion over to Bill Fairl.

Thanks, Tom. And let me add my welcome to everyone. This morning I am going to address highlights highlights from operations for our first quarter of fiscal 2008, and I will also discuss our very positive leading indicators. Let's go to slide 10, please.

I am going to start off by calling your attention to our contract awards for the first quarter. They totaled $934 million, that is an increase of $30 million over the same quarter in fiscal '07. I would also like to note that nearly two-thirds of these awards were for new business for CACI. I am pleased to report that our contract funding orders increased significantly to $709 million. Now that represents growth of 17% or more than $100 million over the first quarter of fiscal 2007.

We also won all of our major recompetes which was an important contributor to our positive organic growth for the quarter. At the same time, we won significant new business in both the Defense and Federal Civilian sectors. Our recompete victories included a $36 million award to continue CACI's data center operation support for the U.S. Navy's Enterprise Maintenance Automated Information System, or what we call NEMAIS. NEMAIS is part of the Navy's Enterprise Resource Planning, or ERP program, which CACI also supports through several contracts, including a new $48 million award we received this quarter to support the Navy's Single Supply Solution effort.

We also received a $64 million award to provide Information Assurance Support for the Military Health System, or MHS. We are proud to have the role in protecting the medical data of millions of Americans service men and women. The award not only continues our support to MHS' Western region, but expands our support to include the North and South, and that is 75% of all military health care regions.

We also continue to win new task orders on the Strategic Sourcing Services, or S3 contract vehicle, that we have with the U.S. Army. We received $190 million in S3 contract awards this quarter, and are now the leading S3 prime contractor, that is the leading S3 contracter in the value of task orders awarded. Since receiving the S3 contract in March of 2006, CACI has won nearly one-third of all awarded S3 task orders, for a total of approximately $975 million in awards. Quite an accomplishment considering the Tier 1 competitors we are up against in this arena.

Now, moving to Federal Civilian area. We were awarded a $48 million task order to provide Electronic Document Discovery and Computer Forensic Solutions to the Securities and Exchange Commission. CACI will support SEC attorneys as they go to court, and will help organize evidence and provide the specialized tools and expertise necessary, to inspect computer systems and their content for evidence.

Moving to exhibit 11. Our proposal activity continues at a robust level. At the end of the first quarter, we had approximately $2.5 billion in submitted proposals under evaluation, and that's both new and recompete, with 40% of those valued at $100 million or more. Now we expect nearly all of them to be awarded by the end of our third quarter, and the pace shows no signs of slowing down. During our second and third quarters we currently anticipate submitting more than $5 billion in additional proposals.

Now, at the risk of stating the obvious, we are clearly excited about the 12.5% organic growth we delivered during our first quarter. We believe this is a solid indication that the record contract awards and fundings we experienced during fiscal '07 are converting to revenue and profit. The Intelligence portion of our portfolio experienced particularly strong growth during our first quarter. We are up 44% quarter-over-quarter and Intelligence-related business now represents approximately 31% of our total business.

As we reported on previous calls, we have been concentrating our bid and proposal resources on winning new work with high CACI labor content. During the first quarter, our approach was rewarded with a number of new high CACI labor content wins, resulting in solid staff growth. During our last conference call, I discussed the progress we had made in our hiring. This morning I am just delighted to report that we achieved outstanding hiring results during our first quarter, adding over 200 net new hires, while increasing our number of open hiring requisitions. Now many of these new hires have security clearances of top secret or above, and today we employ over 3,400 of these highly prized specialists.

Finally regarding the performance of acquired businesses, the integration of IQM and The Wexford Group has gone very smoothly. In fact, I am pleased to report that the first quarter performance exceeded our plans. We are in the process of welcoming aboard and beginning the post-acquisition phase for the two latest additions to team CACI, as Dragon Development and Athena Innovative Solutions.

In summary, our forward indicators are all very positive. Our great hiring, acquisitions, strong contract awards, and record contract funding orders, have gotten us off to a terrific start in fiscal '08. Our team is focused on maintaining our momentum through the remainder of fiscal '08 and beyond.

Paul, that concludes my remarks.

Thanks Bill, and thank you Tom for your comments. Let's go to the last slide.

Slide number 12. CACI is well-positioned for long term growth, and on-track to meet our goal of achieving $5 billion in revenue and proportionate earnings by fiscal year 2012. Our services are critical to our clients who are charged with the highest priority missions of government. We provide valuable support for defense, intelligence, homeland security, and the modernization of government services. All areas that continue to have priority funding.

Our first quarter results puts us on-track with full year expectations. We will get there one step at a time. Our first quarter was our first step. We achieved strong organic growth, at the same time we continue to focus on earnings growth. We have more work due here, and are committed to improvement during the second half of the year. Bottom line growth remains a key goal.

Our management team continues to provide exceptional leadership, and our corporate development and M&A program is vibrant, with four completed acquisitions, including one in the United Kingdom, and a fifth scheduled to close later today. The valuable services and solutions we provide for the Federal government's high priority missions attract talented professionals as Bill discussed. And we continue to make recruiting a top priority.

Most of all, and throughout all we do, our people perform with honesty, integrity, excellence and distinction. Our dedicated employees provide outstanding support that help our clients counter global terrorism, secure our homeland, and improve government services. It is indeed an honor and a privilege to lead our team and to serve our clients on America's national missions.

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

Thank you Sir. (OPERATOR INSTRUCTIONS) Our first question comes from Bill Loomis with Stifel Nicholas. Please go ahead, sir.

Good morning, Bill.

Good morning. Thank you. I have a question on the acquisitions. One of the reasons you talked about having the lower pressure on margins was the acquisitions. Just taking Athena, you said they were above average margins. Then have I is a mid EBITDA assumption and throw in the amortization, and still getting operating margins well above CACI's. Why are those acquisitions dilutive to margins for fiscal '08?

If I look at the margin statistic and specifically the acquisitions are not dilutive to kind of our operating margins. But we did make the point that once interest expense is factored in, they are not contributing much to our earnings per share. So if we left you the impression they were a margin driver that was not correct.

And one more on the consolidation. Of the wins you had, you mentioned one with the Navy ERP program. Are there some larger ones where you can give examples of programs where you have been consolidated, and brought on a lot of subs, because obviously that's the biggest factor by far in the margin pressure I would guess over the next year.

Bill?

Yes, I will. This is Bill Fairl. Mainly it is one of the things I mentioned is the wins we are having, task order wins on the S3 vehicle, we have a lot of subcontractors on that, and despite having a lot already from time to time, the governmental will turn to us and have a new requirement that we go out with someone else. Mainly it is a lot of task orders, almost $1 billion on S3 now, and a lot of that is ODC related.

Okay, thank you.

There are other large ID/IQ vehicles where we play this role of the system integrator, bringing together the works of many subcontractors. S3 is the one that is predominant let's say in terms of our revenue growth. Etos is another one, ITES, Army FIRST, these are all the types of contracts where our customers depend on us to bring together the best in class, to help them solve their needs. And we are looking for more of this.

This is part of our leadership aspirations, to be a Tier 1 system integrator. This is the kind of work we want. Typically dealing with the most complex and challenging problems in government.

Bill referenced S3. Much what we do there has to do with innovating technologies that will compete IED in war, and can't think of a more important thing to be working on. And we bring together all sorts of technology companies to assist in that effort.

Our next question comes from Brian Gesuale with Raymond James.

Good morning.

Good morning, Brian.

Good morning, guys. Question on guidance here. We are a quarter through the year, and you have acquired two nice businesses that you talked about in the initial press releases as being accretive. You have kind of maintained that wide $2.50 to $2.80 range in earnings guidance, do you want us to interpret that that the core business and margins are maybe under a little bit more pressure? Or perhaps that these acquisitions may not be all that accretive?

Let me deal with the acquisition part first, Brian. These acquisitions were selected because of their strategic value to us in our growth strategy. Our growth strategy is to be at the center of helping our clients. Center stage helping our client defeat the nation's #1 problem, which is global terrorism.

The companies we selected are Best-in-Class. These companies have a key role today, and will integrate very nicely with our existing capabilities at counter-terrorism, and Intelligence and Security services. So we pick them because of their, what they portend for the future. They will be at the center stage of funding streams, and going forward. The battle or the fight against global terrorism is a long-term battle. It will go on for decades.

And we are committed to helping the nation solve this problem by bringing together the resources' we believe that is where the funding will be very strong for years to come, to support defeating global terrorism. So we selected them, but we also retain our commitment to accretive acquisitions. These acquisitions we paid full price for, but we think the value they bring is worth every penny we spent.

It is a longer term investment. It will be accretive within the first 12 months as opposed to historically our acquisitions have been immediately accretive. These will be accretive, and I think it's fair to say in the case of IQM and Wexford, as Bill pointed out, they are exceeding our expectations, and they are accretive right now in the first quarter that we had them.

So the margin, again the margin part of your question, our focus is clearly on growing our earnings. And as we pointed out we expect to see strong earnings growth in the second half of the year. The margin pressures that we are experiencing today come from the fact that our revenue growth is coming in the area of subcontractor labor. It is, both our organic labor and subcontractor labor, are growing. The organic labor is growing well.

The ODC or subcontractor labor is growing faster than the organic labor. And that has the effect taken together with the fact that the acquisitions are accretive over a longer period than historical acquisitions. Those two effects are having the effect on margins. Again, our focus is on growing earnings. We know we have to do that, and we are committed to it.

That is very helpful. Just a quick follow-up if I may. This may be for Bill. Bill, you have quite an impressive pipeline of stuff that is getting ready to be adjudicated over the next several months. Can you talk to what the direct labor content would be anticipated within that mix? Any change from what we are seeing today, or just how we should interpret those contracts coming up?

Yes, Brian. Let's see, we have a fairly deliberate milestone review process that you use around here to take a look at all of our bids as they come up, and decide what we will spend our bid proposal money on, if you will. And I would say beginning about over a year ago we really started to focus on the point you just made here, which is investing our money where we had the flexibility and the high CACI labor content-type bids.

So going back to what Paul says, that doesn't mean that we are going to stop our practice of bidding these large ID/IQ programs, which sometimes have a lot of subcontractors associated with them. Generally speaking our focus these days is on bidding and winning these high CACI labor content jobs. That is why our recruiting or head count increase was so strong during the first quarter, and we are encouraged through the rest of the year as well.

Really off to a great start in the second quarter as well. And that is a result of focusing on these high CACI labor content bids. At the same time vehicles like S3 are still delivering large ODC-related task orders but even there we grown our direct labor content quite a bit. To wrap up, for the past year we have been really focusing on the directing our BMP resources into high CACI labor content. It is paying off.

Thanks a lot.

You bet.

Thank you, Brian.

And our next question comes from Michael Lewis with BB&T Capital Markets. Please go ahead.

Good morning, great quarter.

Thank you, Michael. Good morning to you.

Just a quick question for Tom. Can we talk about the recompetes and the repricing that we are seeing, and what you are witnessing. Or is the margin contraction that you are seeing on the pricing 20 basis points, 50 basis points typically across the group. Can you talk a little bit about actually what the amount of contraction that you are seeing there on the typical contract?

Let's see if I understand the question before we -- I think your question, Michael, is are the recompetes more competitive therefore driving margin compression?

Yes --

Looking for some, maybe a little more description of that.

Yes. Exactly.

I think, Bill probably could start off.

I will start off and, Tom, if you want to add anything. Michael, it is a bit of a mixed bag. Generally speaking recompetes, you would expect over a long period of time that the nature of the work would become more well defined, more efficiencies would be introduced into the process. And that perhaps the client would be looking for a lower price on it. That is some the time. Other recompetes we are seeing, there is new challenges that come along. The client gets a new mission added or a new task area they have to get into. In fact, the work becomes more expensive if you will. I am giving you a mixed answer here.

Some of them are more competitive but they are not all more competitive on a pricing basis. In fact, as I mentioned before, the two that we lost in the second quarter of last year, we did not lose to somebody who bid a lower price. The people that won those jobs bid a higher price than we did. They had a better value proposition than we did. So one of the galling things about that is that they are making more money on that today than we were when we had it. So there isn't a 'One size fits all' answer to that question. Some are more price competitive. Some aren't. Tom , do you have anything to

No. That does a good job of summarizing.

Okay. Then that is very helpful. Thank you. With regard to discretionary Appropriations bills and the Supplemental, what are you seeing with regard to the timing, and do you think that there will be a bridge on the Appropriation bill coming before the calendar year?

Michael, it's Dave, earlier this week it there was talk of a bridge fund being put in the Appropriations Bill. That has been cancelled, that was taken out on Tuesday night. Basically what you will see is last night they approved the Defense Bill in conference. They are going to combine it, they intend to combine it with Labor, Health and Human Services Education, and the Military Construction VA Bill, and send all three up to the President, and he is already on record saying he is going veto that. Any kind of Supplemental funding won't be considered until after the first of the year. Although Murtha on the House Appropriations side has said that the next continual resolution which will come into place after the 16th of November, will probably allow the Pentagon to spend prorata portions about $70 billion in war funding, and that's the same language that is in the current CR we are operating under.

Pentagon is already on record saying if it's going to put stress on them, from the standpoint of the way that that is being funded. It is an interesting picture that's going to take place over the next few weeks. And I don't think we are in a position to call what is going to happen, other than the fact that three Bills will go up to the President, and there will probably be a veto, and then they will see how they fund things after that. It is not an exactly a smooth picture.

Thanks for helping frame that.

And our next question comes from Greg Wowkun with Banc of America Securities. Please go ahead.

Good morning. Have I question regarding your recruiting efforts. It sounds like you had a decent quarter in terms of net adds. Where are you having the most success in your recruiting efforts, and are you starting to see a pickup in retired government employees applying for opportunities at CACI?

Yes. This is Randy Fuerst. Actually, we are seeing pretty good success across the board. We were really starting to target particular geographic areas. We have a lot of openings up in the Fort Meade area, and what we are doing is holding a lot of different recruiting events up there. Really putting a lot of force on target. That has been Paul's #1 priority in terms of getting that recruiting engine going. Quite frankly, we are seeing success across the whole spectrum.

Great. As a follow-up, in terms of DSOs, they improved to 68 days in the quarter. How should we think about this number going forward?

Our target is to maintain or improve on these particular levels. We made significant progress, a huge team effort over the past 6 to 12 months and we continue to focus on it. I will caution you that sometimes there is some kind of episodic activity, which can cause some fluctuations. Our goal is to continue to improve these types of numbers.

Is your long-term target below 70? Would that be fair?

That is fair. Yes.

Thank you.

And our next question comes from Cai von Rumohr with Cowen and Company.

Good morning, Cai.

Good morning, gentlemen. Tom, refresh my memory, your operating margin target of 6.6 to 7. That is a little lower than it was before?

That is correct.

Okay. As I do my math following up on Bill's observations with the mid-teens and then take on the acquisitions, you take out the intangibles, I am coming up at they have op margins, not pre-tax margins close to 9%, and that is about half of your incremental revenues here. So the other $100 million kind of if we do the quick math has to be 3% or less. Or the profitability of the base contracted it. Am I missing something there?

Well, just a lot of moving pieces. I would have to sit down and reconstruct that type of arithmetic. I think it's, suffice it to say that the acquisitions are providing higher kind of operating margins, and that is correct. Our incremental revenue is coming in at lower margins, kind of the ODCs which we spoke about. And when we look at the totality, we are expecting kind of lower margins.

Okay. And you mentioned this 44% growth in Intel. How much of that is organic? Basically all your acquisitions have been in the Intel space.

This is Bill Fairl. Just about all of it. 40% of the total is organic. It's 90 some-odd percent organic.

The only acquisition that contributed to that growth was the IQM acquisition, and that's the one that we categorize in the Intel space. The other two of course, they, one closed yesterday and the other one will close today, and the Wexford acquisition is categorized in the Security Services area, not in the Intel area.

Okay. That's not --

Wexford is in interaction with the Intel business. But we classify that as Security Services, they are doing training and consulting, training the forces that deploy to the theater on how to detect and avoid IEDs. They are looking for technology gaps.

Right, no, no, I assumed you were classifying that as Intel. That is a great answer. That explains a lot.

And M&A, you have done these two acquisitions. You kind of used a good portion of the money you raised. Where are we going forward? Are we still looking, or are we going to take a little break here? What is your strategy?

We continue to be very active. We are certainly, not a week goes by where we don't visit with some company and talk to them about their interest and the possible combinations. No, we are not slowing down a bit. Tom might want to comment a little bit about us preparing ourselves in terms of capital structure on our strategy strategy going forward.

Yes, we continue to focus on kind of strategic consolidation. We are looking for companies that have high margin-type growth potential. It fit very tightly in our strategic vision, provides operational leverage going forward. Paul mentioned we are continuing to see a good number of companies. We continue to be selective looking for companies that have [inaudible], either with regard to a customer set, or a technology capability. At this point in time we have a revolving credit facility, which provides sufficient capital, and some flexibility for us going forward.

That being said though, we continue to look at our capital structure to make sure that we have sufficient capabilities going forward. Very similar to what we did previously. We raised money in a convertible when the time was right to raise money for the convertible, that we deployed that capital wisely. We like that model. But ensure that we have sufficient capital to allow us to execute on our strategy.

And we continue to find excellent candidates out in the marketplace. Companies that bring very strong competencies in the areas where we believe the funding will be going forward, particularly in this Intelligence and Security Services areas in the conflict with terrorism.

And our next question comes from Jason Kupferberg with UBS.

Good morning, guys.

Good morning, Jason.

Just a follow-up question on the margins. The tick down in the fiscal '08 outlook versus the prior expectations. Are you just being prudently conservative? Obviously it's only the first quarter of your fiscal year. There are some macro uncertainties out there, with regard to the budgets as Dave outlined. Is that what we are seeing, kind of above and beyond everything else here? Or has there really been step function change in your mix over the last quarter, compared to the last time we talked about the fiscal '08 margin expectations?

Jason, this is Tom. Our first and foremost goal is to grow earnings. So we are very bottom line focused. We are doing two things simultaneously in order to accomplish that. Well perhaps three things. One is to grow CACI direct labor and a very profitable opportunity for us.

Number two, continue to grow in the subcontractor work other direct costs, which is profitable as well, and then certainly acquisitions. Now margins are kind of largely an outcome of those three somewhat independent phenomenon growing at various rates. When we add these all together and what we notice is a very large increase in other direct costs, we right now are expecting I will characterize it as slightly lower operating margins than we originally planned to. But we are still confident that our earnings per share guidance, which is a more relevant metric, will be at the same level that we initially guided you to.

Okay. As far as ODCs for the full year fiscal '08, what is your assumption for the percentage of direct cost that will come in. I think you said 60% in the first quarter?

60% in the first quarter. And if you are tracking this number it's been itching up over the last several quarters in the last year I think full year was about 57%. This first quarter was 60%. Comparable to the fourth quarter of last year. I don't have any exact number, but I think that kind of range is appropriate to model going forward, over the next three quarters.

Just lastly, were there any pure hardware/software kind of pass-throughs that contributed to the revenue upside in the quarter? I know ODCs generally were a big part of it, but it sounded like a lot of that was subcontractor labor, as opposed to hardware/software pass-throughs, can you parse any of that out?

It mostly was ODC subcontractor labor, as opposed to materials or equipment. The vast majority of it was labor related.

And our next question comes from Alex Hamilton with Jesup and Lamont. Please go ahead.

Good morning.

Good morning, Alex.

Two questions in relation to the guidance. I guess firstly, revenue is expected to grow 21%. How much of that is acquired growth?

Could you repeat the question. I think you broke up there in the beginning.

I'm sorry. In your guidance for '08, what's the organic growth guidance that's implied?

Organic, what is the organic growth component in our guidance today?

Yes.

I think it's mid to high single digit range.

Yes.

Okay. And Dave painted a picture of the funding environment, which clearly hasn't really changed to the positive side. Given kind of your range in the guidance especially on the bottom line, is it safe to assume that a Supplemental might not have been considered until after the first of the year is taken into account?

It is taken into account in our guidance. Wouldn't be taken into account is if there were if this were more dramatic than what we already observed. And if there were some major reductions that were directed from the top of the Department of Defense, for example, and the O&M activity, we haven't seen anything like that. But if something like that were to occur we haven't anticipated that. I would say anything we anticipated all of the things you would normally consider in this kind of environment.

And then just as a follow-up to that, any major recompetes in the fiscal '08 year?

Yes, this is Bill Fairl. I mentioned on our last call that when we began the year we had about 70 recompetes coming up this year, and they were characterized by a larger number of smaller recompetes, if you will, not any huge big buckets.

And where we stand today having gotten through our first quarter is we have about 40 more to go. It is looking pretty much the same way I characterized it. We have done pretty well as I mentioned. Won all of our major recompetes in the first quarter, and have about 40 left to take off.

Great. Thank you.

And our next question comes from Julie Santoriello with Morgan Stanley.

Good morning, Julie.

Thanks, good morning. A question just I think generally on the strategy. Now I heard you telling me your comments about focusing on earnings growth. But it seems as though at least for this year the focus is more on revenue growth over operating margin and margin improvement, just as you are trying to go after these larger deals, and it has become a bigger company. Is it fair to say that more near-term strategy or tactic here is just to add revenues, and expectation that the margins will improve over time?

No, Julie. Our strategy is to grow earnings, and we are quite focused on that. And the acquisitions we are doing this year will show up. We believe in strong earnings next year. We are quite confident of that already, seeing early indications indications from IQM and Wexford of that, even in greater results than we had planned or anticipated. Our focus is clearly on growing the bottom line and the top line. We realize just growing the top line is of little interest to shareholders. I think that is my answer.

The one comment I will make is our margins are the outcome of several activities going on which I articulated earlier. The growth in direct labor. Our acquisitions. Our growth in other direct labor as well.

We have a earnings target and driven to improve earnings. If our goal was to increase margins, we can do things, but those would not be in the best interest of our shareholders or our Company. It is really a bottom line focus. Margin more of an outcome of simultaneous activities, as opposed to a unique strategy.

And this has slowed down through all of our incentive programs to all of the leadership team, over 450 officers have in their annual incentive plans to grow earnings, and are measured on net after tax and earnings, and pre-tax and gross profit. Those are the focus areas. We have been careful not to give them a more specific margin target, because we want them to pursue more business and focus on growing the earnings for the shareholders, and not be picking and choosing based on margin. We are more focused on growth of earnings.

And our next question comes from Tim Quillin with Stephens, Inc.

Good morning.

Good morning.

Just on the Intelligence business, what percent of sales will that represent after the acquisition of Athena and Dragon?

Well, I think we reported that it is 31% at the end of the first quarter. And I'm not sure if we have that Bill, do you have that? We might have to get back to you on that.

But we said that over the next eight months the combination of Dragon Development Company and Athena will add $100 million. So that should provide sufficient ability to make an assessment there.

Just a quick calculation there. Looks like quick calculation about 35% once we do the acquisitions, more or less.

Okay, great. And what do you see in terms of the pipeline there, and are you seeing any signs of flattening out of budget growth in the Intelligence community? Thank you.

The pipeline, Tim, looks pretty good. As I mentioned, we are planning, currently anticipating submitting over $5 billion in additional proposals over the next two quarters. That is our second and third quarter. And the content there is a strong component from the Intel community, both at the service level and the national level.

I haven't seen any flattening of that at all. That looks to be, continue to be a strong growth area.

Strong growth area. Bill has pointed out the characteristics that as we do a good job of filling the openings in this area, this is true in general, but especially in the Intelligence community, as we do a good job of filling requirements with talented people, our clients turn to us more and more. And open more requisitions for us.

Further, I am pleased to say that the acquisitions that we just did, Athena Innovative Solutions itself has already won more business, in the interim period between signing the purchase agreement and closing today. They have already won two or three things that we haven't expected. They are exhibiting growth already, and haven't even, well joined us today.

And our next question comes from Laura Lederman with William Blair.

Good morning. Just a few questions, and thank you for taking my call. Can you talk a little bit on the recompetes you mentioned that the pricing pressure comes from the client, basically asking for a lower price based on the work getting somewhat less complex. Is there is pricing pressure from the competition, or is it really the customer saying the work really shouldn't be as expensive as it was? That is my first question. Thank you.

This is Bill Fairl. I may have miscommunicated there. What I meant to say was in some cases in some recompetes, the expectation is because the work has going on for a long time and the nature of the work has not changed, the fact that it is gotten more into a life cycle maintenance sort of mode, that there may be an expectation that the price should go down.

The other side of the coin is some work gets more complicated as you go along, and in fact the price goes up. What I meant to say, and I want to correct, is that it's a mix from one side to the other. There is not a 'One size fits all' answer.

I also would add that one of the things we track around here is our success in taking away other people's recompetes. And we have been very, very successful at that over the past year, and in particular during this first quarter. And looking at why we won those jobs, you cannot look at that, and say we consistently underpriced the competition. That is not the case.

More often than not we went on a better value proposition. In many cases our price is higher than the previous incumbents on that. It is all about understanding what the client is really looking for. On each individual bid taking each one of its individual merits.

Alright, can you talk about what the staff turnover was voluntary and involuntary in the quarter roughly. Did it increase? Decrease?

Yes, this is Bill Fairl again. We ended our first quarter of fiscal '08 almost exactly at the same point, as we ended the first quarter of fiscal '07 from a voluntary attrition standpoint. I was hoping to get a little improvement this year over last year. I can tell you that we weren't satisfied with that result. We want to drive it 2 percentage points lower, and get down to the very bottom end here.

Regarding involuntary attrition, that frequently results from lost recompetes. So I am pleased to report because we are winning our recompetes, our involuntary attrition is down significantly.

And our next question comes from Ferat Ongeron from Citi.

Good morning.

Good morning.

You are talking about earnings growth as a key target. I just wanted to go back to that. This quarter the operating income was down sharply, about 5% or so. And if I take out some of the acquisitions, probably it was down more organically.

And if I look at your guidance for the rest of the year, again, if I look at organic operating income growth, it is also down. Can you just basically tell us what you are thinking in terms of the upcoming years in terms of this margin trend, because it seems like the core business is deteriorating in terms of its margin, and we have higher ODCs on the other side some of these acquisitions are providing decent margins, how should we think about the margin longer term beyond this year?

I will respond to that question a little indirectly. Paul earlier mentioned that our long-term growth was to grow kind of revenue 20%, and growing earnings at comparable levels. So at the end of the day we care about our net income and our earnings per share.

Now in this quarter as you can see while our earnings per share were flat, our net income actually was down 2 to 3%. This is something that we are focused on kind of turning around and growing earnings. And the way we do it is through acquisitions which are longer term accretive to us, through growing CACI billable employees, and employing subcontractors. So in the long run we expect those earnings should be tracking revenue growth. Margin is going to be an outcome of that. We are not specifically targeting the margin.

The question about the base business is rock solid. The base business is rock solid. We have the best clients. We have strong, strong client relationships. There is not some notion here that there is a problem with our base business. It is rock solid, and has more to do with the things we have already said, that have contributed to the negative comparison in our first quarter.

Having said that, we explained last quarter that there were two lost recompetes in our second quarter of fiscal '07. That until we anniversaried them it would be more difficult in terms of comparisons. But we feel very confident, and expect that our earnings growth will be strong in the second half of the year.

And since you mentioned focus on the earnings growth again, when we go back and maybe reconsider buy-backs because the last two years it appears to have been around 11 to 12 times forward EBITDA. And your stock is trading much less than that. And these deals, you know, are not that accretive in the first year. When are you going back and reconsidering the buy-back as a leveler to improve the earnings growth?

I think regarding buy-back, this is something we talk about routinely. We discuss all of the alternatives and options with our Board. We do this routinely. We continually look at options like that. We did a little, some buy-back in combination with the convertible that we did. So we are open to those ideas.

However, what we are finding is there are compelling arguments to invest in the growth of the business, especially at this nexus of Intelligence and Security Services. This is a problem that is facing our nation for decades to come. And there is no doubt that this will be Intelligence is the #1 one way to defeat terrorism. And if you look to the evidence, you will see the newspaper and television reports about our interactions and preventions at Heathrow, and JFK, Frankfurt Airport. Those look like they are law enforcement actions.

What they really are behind the scenes, is weeks and months and sometimes years of analysis of data by the intelligence community. It is that searching for the needle in the haystack that leads to the intervention that prevents another 9/11. And our nation, our government gets that. And we get that. And that is the way to defeat global terrorism.

When we can preempt seven, eight or nine times out of ten global terrorism, which is the greatest single threat to our National Security, then the operating model of the adversary breaks down, and they will have to change their tactics. You can be assured of one thing. This country is going to do everything in its power to prevents another 9/11. And no one is going to take their guard down, and that means more intelligence, and more interaction between local law enforcement, national law enforcement, and the military, and the intelligence community. That is our growth strategy. That is going to be very successful for us going forward.

Our next question comes from Joe Vafi with Jefferies and Company.

Good morning. Just go back to the ODC numbers here in the quarter. There is anyway we should be looking at that relative to there being more direct labor coming on, maybe some of those vehicles in the maybe in the next few quarters, given a surge in the ODCs right now? Or is it really kind of simply an independent function of those ODCs being delivered on those contracts?

This is Bill Fairl. I can actually give you a case in point there. The S3 vehicle which I mentioned earlier, is one of the top sources of the ODC growth. It also turns out that is one of our strongest labor growth and strongest profit growth portions of our business as well.

So the management team there has done a fabulous job of using that vehicle that they got a year and a half ago. And all of the business that has been driven through there to over time steadily increase the CACI labor content in that business. The reality is that the ODCs are still growing faster than the labor is, but the labor is growing very fast. So we are doing our job of growing our earnings there. Fabulous bottom line growth out of that organization this year.

Okay. Thanks. And then maybe one follow-up here. Both yourselves and ManTech last night seem to be posting a lot of contract activity that is in the new awards or brand-new business category . Is there anything that you have seen here in the last quarter, relative to award activity actually kind of picking up across the board, both relative, I guess relative to what you have seen obviously your awards are up, But just generally in the environment? Thank

I will let Bill take a crack at that.

Joe, we have had strong awards now for I will say going back six quarters now, and I don't have all of the data in front of me. But it's been one quarter after another of our award pace has picked up. And I think it is a tribute to team work that our corporate business development and line organization focus, and we put on our allocation of our B&P resources. I also mentioned that we are going to turn in another over $5 billion in proposals over the next two quarters. So there is no slowdown in this pace at all.

And we focus mainly on our own business development here, but certainly we are seeing a lot of awards out there. There are multiple awards, there still is the protest thing going on though. And ourselves among others as you know we wee winners of the Alliant award a while back. And the encore before that. And those both are still under protest. We are not counting those in our award totals or anything. That is still a reality.

Also a significant size that we had in the Intelligence community that is under protest as well. So there is just sort of a damming up of some backlog there that will break loose.

We are quite confident by the way.

Our proposals in these areas were so strong. That even when there were multiple winners, we were showing at the top of the stack, with purple proposals and good pricing, and so we have great confidence that once these protests resolve, they will be resolved and we will move on and have good revenue flow from them.

But the environment is in certain areas stronger than others. In the civil agency sector it is a little more problematic. In the areas where we are focused fortunately, we were positioned in the areas that continue to receive priority funding in Defense and Intelligence, Security Services, Homeland Security, these are all getting high priority funding.

I would say, Paul, I want to add one thing to that, as we mentioned earlier the FY '08 Appropriations process is hanging out there. If there were some monkey wrench in that, or delayed a long period of time, I suppose that could put a break on a little bit of this activity, we don't see that right now, but that is out there.

There is some potential for that. And last year about this time, we started getting evidence back from our team that the, there was amongst and we told you, amongst our clients there was a certain reluctance to even though the funding was there to sort of authorize the work. They were being kind of conservative. Worried about the government budget process. We haven't seen as much of that this year.

I would say it looks a little better than it did last year. However that can change if we hit some really rocky times in, rocky times in the government budget and approval process, that can change and turn on a dime here. Especially with the Supplemental hanging out there. And the discussions about approving portions of the Supplemental, as opposed to the whole Supplemental. We are all waiting to see, and you will know it as soon as we know it because it's in the newspaper.

And our next question comes from Chris Donaghey with SunTrust, Robinson, and Humphrey.

Hopefully this doesn't take too long. Quickly a question on the guidance. The guidance has about a 4% spread in revenue. But about a 12% spread in EPS. Can you just talk about the needles that impact the earnings for the rest of the year, relative to the revenue?

Relative to the revenue, what we did is we increased our revenue midpoint of guidance range of $200 million. $100 million of that was due to the two acquisitions in Athena and Dragon, and $100 million of that is due to other direct costs. In terms of kind of correlating or relating to earnings guidance to our revenue guidance, there are several factors at play.

One is the mix of revenue direct versus ODC. Our ability to continue at our very positive hiring capabilities is important. And the government procurement process or the appropriation process obviously, is another wild card in it. And so kind of given all of that, we do recognize a wider range in earnings because there are more variables impacting that. Did that answer the question?

Yes, I guess so. I think it does. Thanks.

(OPERATOR INSTRUCTIONS) And we have a follow-up question from Cai von Rumohr with Cowen and Company.

Yes, thanks so much, gentlemen. Tom, at the last call you when you discussed the year, you talked about margins throughout the year in a range of 6 to 8%, starting at the lower point of that range, and moving toward the upper part of that range by the end of the year. Is it getting up toward the 8%, is that doable by the end of the year, or is it more than 7.5 is the ceiling as we get out?

Getting up to the higher range is this less doable, given the mix of kind of worked that we are seeing. So as you can see we shifted the full year margin expectation down, and it would be a, it would be in the quarterly margin as well. The key driver to increase margins during the year is our hiring activity, again which Bill articulated and spoke about. But at the same time, we are having higher ODCs, which is a positive event from a earnings perspective, but it is changing the margin composition.

Thanks so much.

Thanks.

And there are no further questions at this time. I would like to turn the conference back to our host for any additional or closing remarks.

Thank you, Lisa. I would like to make a few comments as you all know this is I just finished my fourth month in this job, and am having a great time.

And I wanted to compliment our team, because our team has just come together beautifully here, up and down the chain. But especially our top management team, we have been building that, adding strong talent to an already great team. And they are coming together and working, playing off each other really well. The collaboration level in the company is getting better and better every day. It was already good but it is getting better and better. We were seeing more and more coming together on, swarming on opportunities as a team. And that is a really healthy sign.

I would say the other thing I would say is that all of the key indicators I look at in the business are positive right now. And I am feeling really good about the way the team is performing. The way we are collaborating together. And I think we are unbeatable on any given day on any opportunity. We are taking more than market share. At an all-time high level in win rates here. So I am feeling very good.

And I would also like to take the opportunity, we have been building our expertise at the senior levels in the Intelligence and Security Services area. And I think last quarter we mentioned Bert Calland had joined our team. Bert being the Senior Flag Officer in Afghanistan when the war began. And a leader of Special Operations forces there. And then later a Deputy Director CIA, and at the National Counter-terrorism Center for a time. Burt is on board now and in his third or fourth month and doing great.

And we are so pleased to have with these last two acquisitions added to our team. Another strong group of leaders that are going to be an important part of our future going forward. Jim, Retired Lieutenant General, Jim King, who is a leader of Athena who built that organization so well, and has joining us along with his first team there, Brian Page, and Dave Brogan, and John Flowers. These are well-known experts. They are not just managers and leaders. These are experts at Intel, counter-Intel, counter-terrorism, human to human, et cetera.

Also in the Dragon team there, some really strong talent, which made them so appealing to us. Chris Prestel and Ed Grimes are just industry leaders, and we are so proud and pleased to have them joining our team, I couldn't end the call without mentioning, just to make our team even stronger yet. So I would like to thank you all for participating.

Lisa, thank you for your assistance today and thank all of you. We had some 85 people on the call today. I don't know if that is a record, but it was certainly a good attendance, and I thank you for your interest, and we look forward to talking to you again in the second quarter, and having more good news, hopefully. And our team will remain available in about 20 minutes for any of you that have other questions you would like to post. So again, thank you all! And we are signing off here.

And that concludes today's teleconference. Thank you for your participation, and you may now disconnect.