CACI International Inc (CACI) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the CACI International first quarter 2008 earnings conference call. Today's call is being recorded. At this time all lines are in the listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS) A special reminder to our media guests who are listening in, please remember that during the question and answer session of this call we are only taking questions from the analysts.

For opening remarks and introductions I will turn the conference over to the Senior Vice President of Investor Relations, Mr. David Dragics. Please go ahead.

Thank you, Roky, and good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International. We are very pleased that you are able to participate with us today. Now as is our practice on these calls, we were providing presentation slides. They are on our website and also during our presentation we will also make every effort to keep all of you on the same page as we are. So moving to the next exhibit number two. 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. 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. 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. Now our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. To open up our discussion this morning, moving to exhibit three, here is Paul Cofoni, President and CEO of CACI International. Paul?

Thank you, Dave. Good morning, ladies and gentlemen. I would like to personally welcome you to 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, Chief Financial Officer, Bill Fairl, President of 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 number four, please. A key component of our gross strategy is to be at the center of our client's efforts to solve the nation's number one long-term threat, global terrorism. This ideological struggle is independent of Iraq and beyond the borders of any country. It is a struggle for multiple generations. Our generation must collaborate and use our vast resources to protect our freedom now and for future generations.

CACI's focus is to deliver timely and essential capabilities at the nexus of intelligence and security services, to help our clients develop actionable information to identify and preempt terrorist attacks. We believe this is America's first line of defense against terrorism. Our intelligence capabilities uniquely qualify us to provide great value to our nation and make a real impact on defeating terrorist threats. Our clients rely on CACI solution to help solve their most difficult problems in national security, intelligence, homeland security, and the improvement of government services. Today I'm pleased to report that at the midpoint of our fiscal year we are delivering on our growth strategy and are performing ahead of our FY '08 plans. As we told you in June, we expected our earnings for the first half of fiscal year '08 to be below the first half of fiscal year '07. We also said we expected to see a positive growth in momentum in both revenue and earnings in the second half of the fiscal year and continuing into fiscal year '09.

We see positive forward indicators in our second quarter performance -- A growing top-line, especially organic revenue; growing operating income; acquisitions that are performing ahead of expectations; and continued strong hiring results. Next slide, please. The first indicator is our second quarter revenue. It was another record for our company, increasing 21% over last year's second quarter to $578 million. Contributing to that growth was revenue from our intelligence business, which we have targeted as a key growth area. Our intelligence revenue grew 46% over the second quarter of last year and is now approximately one-third of our total revenue. At the midpoint of the fiscal year our trailing 12 month organic revenue growth continues to move in the right direction. Second quarter organic revenue grew 10.7% following 12.5% organic growth in our first quarter of fiscal '08.

Another indicator was our operating income, which was up 3.6% over the second quarter of fiscal '07. As important, it grew 10% over the operating income we reported in the first quarter of fiscal '08. Our highly successful acquisition program exceeded our expectations. The two acquisitions we completed in November, Athena Innovative Solutions and Dragon Development Corporation, brought 640 talented professionals to CACI, of whom 97% hold security clearances. These new employees bring valuable skills and excellent relationships with new clients in the intelligence community. Another positive forward indicator is our hiring program, which is consistently producing above our expectations. Our initiative to hire veterans with disabilities has also surpassed internal goals. We continue to successfully recruit the highly skilled employees with top level clearances that are needed to perform our client's important missions.

The success we are experiencing in our hiring program is a major contributing factor to our growth. The overall government funding environment has also improved. While almost the entire government operated under a continuing resolution during our second quarter, now all of it, FY '08 spending bills have been passed. Let's move on to slide number six. All these positive indicators and results reflect solid progress in CACI's growth strategy and point to what we believe will be a successful second half of our fiscal year. We are executing on our growth plan, improving organic growth, and benefiting from the contributions of our strategic acquisitions. We have confidence in our strong growth strategy, our team, and our second half performance, which is reflected in our revised guidance for fiscal year '08. Tom Mutryn will have more details in his financial overview and Bill Fairl will provide more insight on the progress of operations. Now, here is Tom.

Thank you, Paul, and good morning, everyone. Please turn to slide number seven. Our year-over-year revenue growth for the second quarter was 21.2%, with organic growth at a strong 10.7% and acquisition related revenue contributing $50 million or 10.5%. This quarter we experienced a significant increase in both direct labor, up 21%, and in other direct costs, up 26%. The direct labor increase was driven by both our hiring activities and by our acquisitions. Other direct costs consist primarily of subcontractor content integral to the solutions we deliver to our client. Next slide please. Our second quarter operating margin was 6.6% compared to second quarter margin of 7.8% last year. The primary causes of the changing margin are the timing of award fees in continuing higher subcontractor content.

While our second quarter pre-tax profit is in-line with last year's level, our net income is below last year due to a higher tax rate. Our tax rate in last year's second quarter was favorably impacted by the retroactive extension of research and development tax credit. Next slide number nine, please. Our U.K. subsidiary reported record revenue of $22.9 million, a 20.2% increase over last year second quarter. Net income of $1.5 million increased 67% over the second quarter of last year. Over half of the revenue growth came from organic growth and the remainder resulted from the acquisition of [A'reteSocra] Limited last July and favorable exchange rates. Our cash position at the end of the quarter was $11.7 million down from over $250 million at the beginning of the quarter, as we used $241 million of cash for our acquisitions. Operating cash flow for the quarter was negatively impacted by a temporary slowdown in receipts from various payment offices caused by weather and other issues.

Had payments been at the levels we had anticipated, our cash collection would have been about $25 million to $30 million higher. I am happy to report that we have already collected most of these funds and are returning to our normal collection payments. Day sales outstanding of 74 days reflective of the payment delay I spoke of, as well as of a three day negative impact on our DSO calculation due to the short-term impact of our recent acquisitions. Next slide number ten, please. We are providing updated guidance for fiscal year '08. Revenue is projected to be higher than our prior estimate due primarily to continued positive organic growth. We now anticipate revenue will be between $2.3 billion and $2.4 billion. And we expect diluted earnings per share to be between $2.60 and $2.80 for the full year. Implicit in this guidance is steady sequential earnings per share growth in our third and fourth quarters, as well as positive third and fourth quarter year-over-year earnings per share comparisons.

We expect our fiscal year '08 operating margin will be between 6.6% and 7%. And we anticipate 2008 cash flow from operations to be in about the $130 million range, reflecting a return to normal collection activity and a further increase in working capital associated with our higher than originally anticipated revenue growth. Lastly, we expect a full year tax rate of approximately 39%. With that, I will now turn over the discussion to Bill Fairl.

Thanks, Tom, and let me add my welcome to everyone. This morning I will address highlights from operations for our second quarter of fiscal year 2008. Let's go to slide number 11. Our contract awards for the second quarter totaled $444 million. Approximately 75% of these awards were for new business for CACI. For the first half of fiscal year '08, our awards totaled approximately $1.4 billion. Our contract funding orders for the second quarter totaled $446 million and approximately $1.2 billion for the first six months of fiscal year '08. Like to touch for a moment on one of our key contract awards for the second quarter. During the quarter we received our initial award under the U.S. Army's Field and Installation Readiness Support Team, also known as F.I.R.S.T., contract. It's worth approximately $60 million and provides for support to the Fort Bliss Directorate of Logistics.

There is a number of reasons why we are so excited about this award. The Fort Bliss Directorate of Logistics is a new client for CACI. The effort requires us to add significant new CACI employees, virtually all of which started to work for us at the beginning of our third quarter. And perhaps most importantly, the number of troops based at Fort Bliss is expected to grow significantly over the next few years to include the stationing of a re-enforced Army combat division and the testing and evaluation of the Army's future combat system. Since we are now the largest support contractor at Fort Bliss, you can understand why we are so excited about this award and our prospects for further growth. Now while I'm on the subject of being the largest, as a result of our wins last summer at the National Ground Intelligence Center and our acquisition of Athena Innovative Solutions, we are now the largest intelligence contractor in the Charlottesville/Virginia area.

Given the defense intelligence agencies, that's the DIA's plans for a significantly increased presence in the Charlottesville area, this is an important and critical achievement in our growth strategy. Please turn to slide 12. Looking to the future, our proposal activity continues at a high level. At the end of the second quarter we had approximately $2.5 billion in submitted proposals under evaluation, with more the 70% of those for new business. We expect nearly all of them to be awarded by the end of our fourth quarter. The pace shows no signs of slowing down. During our third and fourth quarters we currently anticipate submitting more than $6 billion in additional proposals. We are very pleased with a 10.7% top-line organic growth we delivered during our second quarter. In particular, the intelligence portion of our portfolio experienced very strong growth. We were up 46% quarter-over-quarter and intelligence related business now represents approximately 33% of our total business.

As we've reported on previous calls, we have been concentrating our bid proposal resources on winning new work with high CACI labor content. During the second quarter our approach was rewarded with a number of new high CACI labor content wins. Two of them in particular, our win at Fort Bliss and a $100 million plus win for an intel client, are expected to generate more than 200 new hires in our third and fourth quarters. During our first quarter conference call, I discussed the progress we had made in our hiring. This morning I'm delighted to report that we achieved outstanding hiring results during our second quarter as well, adding over 175 net new hires while increasing our number of open hiring requisitions. Many of these new hires have security clearances of top secret or above and today we employ over 3800 of these highly prized specialists.

Finally, regarding the performance of acquired businesses, the integration of the Dragon Development Corporation and Athena Innovative Solutions group has gone very smoothly. In summary, I'm most encouraged by our performance through the first half of fiscal '08. Our continued strong hiring, key acquisitions and contract awards have set us up for what we believe will be strong performance in the back half of fiscal '08 and we anticipate continuing to build on that momentum as we enter into fiscal '09. Paul, that concludes my remarks.

Thanks, Bill. And thank you, Tom, for your comments. Let's go to the last slide, number 13. We believe our first half results and strong second half earnings expectations demonstrate that CACI is well positioned for the future. We serve clients who carry out the nation's most important missions and provide valuable support for national security, intelligence, homeland security and government transformation. We are positioned at the center of helping our clients solve the nation's number one problem, which is global terrorism. We believe all these areas will remain high priority funding areas for years to come. The more we do to counter global terrorism threat today, the safer our future generations will be. We enter the second half of fiscal year 2008 with confidence and strength.

We have assembled a highly skilled management team, a combination of experienced, in place leadership and key new hires, making outstanding contributions to our growth. We are sustaining excellent client relationships that continually retain and expand our business base. Our recruiting program is more successful than ever, as we hire talented professionals who bring immediate benefits and capabilities to our clients. And our corporate development and mergers and acquisition program continues to be a core competency and a key part of our growth strategy. I am proud of all of our CACI employees. Our people are dedicated to being the very best in all we do. We carry on the CACI culture of honesty, integrity, excellence and distinction. We make clients number one, provide valuable solution for our nation's greatest challenges, and deliver positive shareholder value. With that, Roky, we can open up the lines for questions.

(OPERATOR INSTRUCTIONS) We do have a couple questions in the queue. We will hear from Brian Gesuale with Raymond James.

Hi, guys, nice job on the quarter here.

Morning, Brian, thank you.

Wanted to dig into some of this pipeline of business and look at recompetes and maybe if you could tell us, give us a sense of timing and size of both recompetes coming from recently acquired businesses as well as the core businesses. Bill, do you want to take that one?

I will, Paul. Brian, this is Bill Fairl. First of all, concerning recompetes from acquired businesses, that, of course, is one of the things we look very carefully at as we go through our due diligence process to see what's coming up. We have a good track on those. There is nothing extraordinary coming up there this year. I would say we kind of take a look over the next 12, 18, 24 months as we go about acquiring businesses. As far as our organic acquisitions go, I will let Randy take that one. Randy has been tracking that one kind of carefully. Randy.

I think the actual flow of those deals hasn't been anything out of the norm. And quite frankly, we positioned pretty well well in advance of those recompetes. In fact, as Bill and Paul said, as soon as we win a job, we start figuring out how we are going to win it the next time. From that standpoint, we don't see anything out of the ordinary.

Okay. Terrific. And my follow-up would be, Paul, it sounds like you have some exciting things where you are getting some incremental direct labor into your mix here starting in the second half of this fiscal year. Is this going to be the time where we anniversary out of these negative kind of direct labor or mix issues year-over-year? Is that going to be Q3 and Q4 of this year or do we have to wait a little bit longer to see that mix start to turn modestly positive?

You are talking about the mix between direct labor and ODCs?

Exactly.

I think we actually are seeing that settling out here. We had over the last year and a half or so shift heavily toward ODCs and that seems to have stabilized now. We are at about a 60/40 split and it's not varying quarter to quarter dramatically at this point.

Okay. Great. Thanks a lot, guys.

Thank you.

Moving on we will hear from Chris Donaghey with SunTust.

Hi, good morning, guys. I wonder if you could talk a little bit more about what's going on in the intelligence business and, if possible, can you kind of give us a sense of the overall magnitude, what the dollar value is from an exposure standpoint you have to intelligence?

Well, Chris, it's Bill Fairl. First of all what we have right now, Tom provided our updated revenue guidance which is now for fiscal '08 between $2.3 billion and $2.4 billion. And intelligence business -- now 33% of that, so you can do the math there. We are approaching $800 million a year in our current run rate of intelligence business. I can tell you when we --- I just look at the pipeline of open hiring requisitions that we have in front of us here that the large majority of those are folks that require clearances and at least half of those are folks with the intelligence related community as well. It continues to be the fastest growing part of our business. In particular, I would draw your attention to the C4ISR part of our business, which is the very important work that we do for a variety of our clients, but I would say largely for our Army clients up in the Fort Monmouth up there area. That's been our business that we do through our S3 vehicle, our ETOSS vehicle and other associated vehicles continues to be very fast growing.

Okay, great. And I know this is probably pretty sensitive information. Can you qualify a little bit the spread across the intelligence community? Is it fairly even, is there one customer that accounts for the bulk of that? Can you address that?

Well, as you pointed out, it's a little bit sensitive there. What I will say to you is it's a mix between national level intelligence agencies and service level, meaning military level. As I mentioned the Army up at Fort Monmouth, for example. I will give you an idea, it's kind of a mix between those two. But I can't get into the specifics for particular customers at the national level.

Okay, great. And, Tom, just one quick question on the guidance for earnings for '08. Still a pretty decent spread. Can you just walk us through the levers that impact that guidance range?

Yes. Like anything, there is a degree of uncertainty in our forecast. Our ability, due to continuing our hiring pace, government funding activities, in timing of awards of the like, we are happy to have narrowed the guidance, could arrange from where it was previously. But there is still a degree of uncertainty and we were trying to kind of reach that balance of providing a meaningful guidance but stay within our range. I think that's just the normal fluctuation. As we provide guidance in our next quarter I suspect the range will narrow a bit more.

Thank you. We will now move on to Michael Lewis with BB&T Capital Markets.

Good morning, everyone. Nice quarter.

Thank you.

Tom, I was wondering if we could just talk a little bit about the operating cash flow guidance. It looks like there is a slight revision of about $10 million, from $140 million to $130 million. Now, is this -- let me just understand this a little bit better. Is this directly related to the payment office issue that you said related to the weather? And is this Dayton, by chance?

First of all, I just as soon not talk about specific kind of payment offices. I don't think that's appropriate. So I will pass on that one. And the payment office delays that I spoke about was a temporary situation and we are essentially fully recovered from that. So the full year cash flow guidance is not reflective of those delays. That's behind us. What is happening is as we continue to grow and our revenue continues to grow, that in effect uses working capital. And as we increase our revenue expectations, that's also related to our acquisitions, that is a use of working capital, so as a result we are pulling down our guidance a bit to around the $130 million range. And I will caution the folks that there is a degree of uncertainty in any forecast. The cash flow forecast is that is not dripping down our earnings per share guidance. There is a range on that one.

That's fair. And then, Paul or Bill,I was wondering if you could provide us a little additional information on the intel contract, the $1 billion plus IDIQ that you mentioned in the press release. More specifically, how many primes are actually awarded that contract and what do you think some type of ramp will look like for possibly bringing in some revenue off that?

Mike, this is Bill Fairl, it's a multiple award contract and I believe there are eight contract holders on it. The task quarters are beginning to flow and my understanding is they're somewhere between -- rather north of 50 task orders in a pipeline ready to come out. We started to bit a couple of them. I'm going to withhold making any projections here other than to say the pipeline has just, within the past week or so, begun to flow on that contract. We will see as time passes here a little bit.

And as I recall, Bill, that's all new work.

Yes.

It's all new work.

Exactly right.

This is only positive for us and we know we will get some of this work. We have a really strong team working on this, not just our own people, but industry partners as well. So we are going to get a real gain on this vehicle that will help our business.

Thank you.

We will now move on to Jason Kupferberg with UBS.

Hi, good morning, guys. Nice to see the margins starting to bounce back here and I wanted to get some commentary around that. Is it fair to say that the trough in margins is now in the rearview mirror, having been last quarter and that that gradual positive trajectory that we've started to see here in December should continue going forward?

You know, Jason, as you and other people have observed and we have observed our margins have trended downwards over the last couple years, primarily due to the shift in mix which we spoke about. We watch this very carefully as you can imagine. And I think we were coming close to kind of the bottom. We are very cautious of trying to make bold predictions in this particular area. The situation is is we are going after two activities simultaneously. CACI direct billable employees, good business,profitable adds to the bottom-line. At the same time often we are in the role of a prime contractor with a large number of subcontractors, which is good business for us, profitable as to the bottom-line. It's a mixed issue, if you will. And it becomes a challenge to project and predict that mix going forward. A long winded answer, but we feel that we are close to the bottom if not at the bottom.

Okay. If we can just talk about the award and funding environment. Since the appropriations bills in the bridge got done at the end of December, what have you seen so far in January? And as we look ahead during the balance of your fiscal year, understanding that the balance of the supplemental has yet to be approved, how do you see that award and funding activity, the tempo of it, playing out here over the next remaining five months of your fiscal year?

Jason, this is Bill Fairl. I will talk to the funding environment. Your observations are right on the mark there, but much like the way Tom described the cash flow situation, I can tell you that at the beginning of the year we construct a plan for ourselves as to what we need in the way of funding to fuel not only this year but the growth into next year and we track that week by week. And as we are sitting here essentially at the end of January, I can tell you that we are slightly ahead of plan there. We kind of made up for that, much like Tom talked about with the cash situation there. But we have to watch the supplemental as you observed. That's kind of the next key thing that has to happen here.

Thank you. We will now move on to Bill Loomis with Stifel Nicolaus.

On the direct hires you mentioned, you will add 200 for Fort Bliss and the intel wins the second half. What's the amount of hires you will need net to meet the guidance in total in the second half, then I have a follow-up question.

Bill, we have not historically given out the numbers that we put in the plan for net hires. Let me say that we are ahead of our plan. At the halfway mark we are well ahead of our plan for hiring the numbers of people we need to achieve our plan. That's part of why we are so confident at this point. We still have a great deal of work to do. This is a thing that you work on every single day. But our team, recruiting team combined with our operations people, hiring managers are doing a superb job at identifying the right resources and getting them on board joining the CACI family for the benefit of the client. And we are doing it at record rates of hiring and well ahead of our plan.

As far as hiring, you said most of the open reqs refer intel and quite a few of them for top secret or hire. How is the days to fill been running on your hiring for -- on the intelligence side for both just the secret and cleared and then on the top secret.

I think the question is days to fill for the intelligence reqs, is that the question?

And, Bill, we don't split them out quite that way. But I can tell you put all together, and again most of these positions require some sort of clearance, put them all together, we are running at essentially historically low rates for the company. Again, it's an indication of what Paul talked about, how well that team is working together.

Our recruiters and our line people working together to get them filled, get the positions opened and get them filled as quickly as possible, stay ahead of plan.

And I think Bill may have mentioned that the number of requisitions are increasing. So it's almost as soon as we fill a slot, one or two more open up. And that is another really important factor that is giving us confidence looking forward.

Thank you. (OPERATOR INSTRUCTIONS) We will now hear from Greg Wowkun with Banc of America.

On the last call you mentioned you had about 40 recompetes left in the year. Can you give us an update on your win rate, how that's trended in the quarter and then maybe any pressure you have seen on pricing?

Yeah, Greg, this is Bill Fairl. There wasn't a lot of activity in the second quarter with awards. You see that reflected not only with our recompetes but our total award numbers for the quarter. Again, I think that was in part related to the resolution activity. We still expect those to be awarded, as I mentioned on the last call, by the end of our fiscal year. The recompetes, we're down, we're about halfway through the year in terms of total number of recompetes. Our goal is always to win 100% of our recompetes. And until we get and stay at that level we aren't going to be satisfied there. We are south of 100% on that win compete -- recompete win rate. But focusing on getting towards that all the time. So I still expect that those things will be awarded by the end of the year. We like our (inaudible.

Great.

Prices on -- competitive pricing pressures. I mentioned last time, it really is deal specific. In some cases yes, there is pricing pressure. In other cases, because of the complicated nature of the business or some new wrinkle has been added, it is more about innovation than it is about price. The trick for us is to know which is which and construct our deal appropriately. In all cases we want to be best value driven and win these things on the basis of innovation.

Great, thanks. And as a follow-up, can you comment on your preferred uses of cash? Are acquisitions still the preferred use of capital here or should we start thinking about share buybacks or debt pay down?

Yeah. We continue, this is Tom, to be -- we continue to see good opportunities in the market for acquisitions. Our acquisition program has been very successful. We anticipate it to continue to be successful and so our preferred use of cash right now is to continue to invest, provide value to our shareholders through our successful M&A program.

I will add to Tom's remarks that we do from time to time visit this question with the board and have had a variety of discussions about potential for stock buyback. And we do that with business case approach to thinking about it. And to date we still, as Tom said, see acquisition targets out there that will yield a better return on investments then our weighted average cost to capital. And also yield to positive net present value and are accretive, if not immediately, certainly within a short period, ie, within a first year. And if we look at the five acquisitions, counting the one we did in the U.K. that really occurred in and around the first half of our year, what we have seen so far is that our business case was a little conservative but pretty much right on and that the, in aggregate, the acquisitions are performing to the business case that we established. I will remind everyone that when we did the convertible awhile back, it was May, and at that time we did purchase as a part of that whole process or transaction 1 million shares. So we have done that. We will look at this again from time to time and continue to evaluate it, but that's how to looks right now.

We will now hear from Gautam Khanna with Cowen and Company.

So I just want to dig into the guidance a little bit more. In the second half it looks like you are guiding sales 11.68 to 12.68. So that's about a 8% spread, 100 over that. And if you look at the EPS, it's 137 to 157, which is a 15% variance or so. Is there something with respect to the profitability -- ? Obviously, what this means is the margins, there is some variance to the margin on the work you are expecting. What is that variance and how should we think about margins in the second half of this fiscal year, what the progression is likely to be and what's going to move that

Well, this is Tom. I will take a first crack at your question. Consistent with our initial guidance, we have a greater spread on our earnings per share guidance than we have on our revenue guidance for the somewhat simple explanation that it's easier for us to forecast revenue, that is one variable. As you go down to operating income there is operating expense, indirect expense, ODC versus directly for mix tax rate, et cetera. So there are more variables in play and so hence a wider range. I think that's consistent with how we look at the world and it is consistent with prior guidance. What are the variables? We talked about them before, government funding, ability to hire, mix of business, get a tax rates, indirect expense, et cetera. So those are some of the items which will impact our second half performance. As we said, we expect our full year operating margin to be between 6.6% and 7%. Kind of implicit in that is higher operating margin in the back half than in the first half. That's very consistent with what we said when we first issued guidance for fiscal year '08.

And again is that a mix issue, meaning you are having more direct labor sales in the back half? Or is it just a function of G&A absorption as the top-line moves higher?

There are several factors going on, the mix issue is one of the issues that we have been successful in hiring direct billable employees. In your earlier question was asked with regard either the bottoming out of margin or are we reaching a steady state, a subcontractor versus direct labor mix, which we think we are. So several factors are at play.

We will now hear from Julie Santoriello with Morgan Stanley.

Thanks, good morning. So a couple of questions. We are seeing a nice pickup in the pipeline, you said $6 billion getting set to be submitted by June. We have seen a pipeline looking pretty strong in the past, if I think back to 2006 the pipeline was looking good. The problem was that a lot of the deals in the pipeline were being pushed out. Is there a change now versus back then? Do you see less risk in a lot of these upcoming deals being pushed out?

Question, I will just give you one thought and I'll let Bill or Randy jump in here. I would say level of protest is reduced a bit. But there is still some important protests that are holding up work. You remember Encore, I think that's been over a year now. And the Alliant, that's the GSA. Encore was DISA and Alliant GSA, these are very large vehicles, tens of billions of dollars of ceiling. And they are both hung up now for a long time. It was a little worse than that because we had first in ITES2 back in the timeframe you are talking about, Julie. So I would say that there has been a little bit of improvement in the, let's say, the damming up of work over protests. And I think that the government -- we aren't having the radical sort of stop and go activity from government funding that we were experiencing back in that timeframe. Those are two very important things. Bill and Randy, you might want to add to.

Yeah, I will add a little bit to that. I think your second point, Paul, last year at this time we were talking about the conversion of those awards to actual revenue and earnings and we were seeing this stop and go that you refer to. Since about our last quarter of last year and coming through our first and second quarters, we have begun to see those awards, those phenomenal awards in bookings that we had converted to revenue and earnings. So I would say that's different this year. And your point about the protests I think is well taken. Two years ago this protest thing just, I don't want to say came out of nowhere, but all of a sudden it really blossomed. Like everybody was protesting everything. That's now part of the landscape. We are used to that. We put it into the planning. So when we think about these award schedules that we talked about, we are taking into consideration things are going to get protests. It is going to be a long time before things happen. I think we are better at understanding that phenomena.

Yes, Julie, this is Randy Fuerst. I would say that you are right, the pipeline is very robust and you mentioned the $6 billion mark. The pace of the deal flow from a year ago, I believe, is increased. And we have got a lot of people working props. And quite frankly, we've -- Paul has moved us into more of an account based approach as we look at the market. So we are getting better visibility on deals and how the power shaping those deals. I would say the flow has actually increased.

And the flow increasing, sounds like what you are saying has a lot to do with just internal CACI changes on the business development side rather than just the government being more active?

From my perspective, we are -- we have a much stronger focus in the strategic accounts that we are pursuing. Yes, we were helping shape those deals as well.

We will now move on to Laura Lederman with William Blair.

Thanks for taking my call. A few questions. One is on the subject of funding, actually I have another supplemental coming up. Can you talk a little bit about the ads of the government running out of money before that is passed. I realize it is a hard things to forecast, but love to talk about it a little bit. Also, shifting to acquisitions, can you talk a little bit about the health of the pipeline, the size, if you are looking at what is in there, are they kind of small, a lot of little ones or a couple big ones. And then I have one follow-up question. Thank you.

That was two. Prime, secondary and a follow-up. Very good. Nicely done, though.

Laura is getting good at that.

You did that well. Go ahead, Dave.

Laura, this is David Dragics. With regards to the funding of the rest of the supplemental, I don't think anybody on the outside of Capitol Hill has any idea how congress is going to attack that at this point. They have not played their -- laid their cards on the table, so to speak. Suffice it to say, come March it will be a topic because they have to finish the responding to the request. And that's also when General Petraeus comes back for another six month report. So it's -- we just have to take a wait and see position. But, yes, it will put pressure on the D.O.D. appropriations and I would refer anybody that is interested in that to go back to Gates' December 21st press conference when he talks about funding of the D.O.D. So that's the situation with regards to the supplemental for FY '08. With that I will turn over to Bill for the acquisition part, part two of your question.

As far as acquisitions go, we remain quite active there. We have a very active pipeline and I will tell you we are looking both at the targeted sort of very tactical acquisitions. We want to get into a certain customer space or new technical capability. We have got lots of options there that we are looking at. Our team has been great at identifying those kind of gaps that we have there and how we want to fill them and if you reflect back on acquisitions we have done here recently, we have just been very pleased with how that's worked.

I will name Wexford, for example, that got us into the whole special operations, asymmetric warfare and just a great, great acquisition, along with our other folks that have joined us, Dragon Development, software development for the intel community that we didn't have before. New presence there. Athena Innovative Solutions. I mentioned that's now got us as the largest intel contractor down in the Charlottesville, Virginia area, a great growth area. So we are still looking at that going forward at those targeted fill that will get us into a new customer spot, get us a new technical capability, get us into a new geography, if you will. Same time, we are looking at opportunities for these larger deals as well. We have got a number of those that we're taking a look at and evaluating.

Thank you, we will now move on to Tim Quillin with Stephens, Inc.

She didn't get her follow-up. Oh, that was her follow-up. Okay.

Good morning.

Good morning, Tim.

A year from now a new administration is going to take office. At what point do government customers start to put off new projects because of uncertainty about changing priorities with the next administration? And if you can also say what's the tax rate's expected for the next couple quarters are. Thanks.

That's a good question and I imagine we might have multiple points of view about that because it is not exactly predictable, as you can understand. Keep in mind that we have been for the last two or three years not seen high volume of new start programs. And the reason is, of course, that necessarily government resources have been prioritized toward the efforts in southwest Asia. And therefore there hasn't been a -- we actually seen a reduction in new start-type work. So it's hard to imagine that that would change between now and the change in administration.

I think we are on a sort of a tempo that will continue only affected by any decisions to drawdown troops in southwest Asia. And some of that is starting to occur. We heard from the President during the State of the Union speech that several units have been -- have returned to the states and will not be replaced. So as that increase or the reduction increases, there could be some new start activity. I don't know, David, did you want to add anything to that?

Tim, it's a 14 month government process. Next week the budget that comes out starts on October 1st, so whoever gets elected in November isn't going to have much to do with changing that except on the edges. We see this every time there is a change in administration. I actually get these questions every four years. The real impact the next President will have will be on the budget that is turned in two years from now, if you think about it, because three weeks, two and a half weeks after the inauguration you have got the budget for the fiscal year starting October 1st of 2009. So you may see some changes on the edges, but the real impact won't be felt until the budget that is proposed for 2010.

Tim, you also had a question with regards to tax rate. I said that for the full year we expect tax rates approximately of 39%. And I would model 39% for the third and fourth quarter as well.

Thank you.

Thank you. There are no further questions at this time. I will turn it back over to our speakers for any additional or closing comments.

Thank you, Roky, for your help today. We certainly appreciate it. And we would like to thank everyone who participated on the call today for your questions. There were some very good questions and we enjoyed the opportunity to respond to those and help inform you further on our progress. We know that many of you have, may have other questions or more detailed questions for us and our team will be available to take your calls in about 20 minutes or so. So again, thank you for coming on board with us this morning. That concludes our fiscal year 2008 second quarter conference call. Have a great day.

Thank you. Ladies and gentlemen that does conclude today's conference call. We thank you for your participation and have a great day. You may now disconnect.