CACI International Inc (CACI) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the continuation of CACI International's first quarter full year 2016 conference call. Today's call is being recorded. At this time, all lines are in a 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 portion of the call we're only taking questions from the analysts. At this time I would like to turn the conference call over to Dave Dragics, Senior Vice President of Investor Relations for CACI International. Please, go ahead sir.

Thanks, Eric. Good afternoon, everyone. I'm Dave Dragics, Senior Vice President of Investor Relations at CACI International and we're very pleased that you're able to participant with us this afternoon given the short notice as a result of the technical problems with the provider of this mornings call. We certainly do apologize for the convenience.

This morning we provided presentation slides which are available on our website www.caci.com. Referring to slide number two, our Safe Harbor 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 anticipated results.

The 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 Commissions filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our Q and A session today will include discussion of non-GAAP financial measures and these non-GAAP measures should not be considered in isolation or a substitute for performance measures prepared in accordance with GAAP.

With that, to continue with our discussion from this morning, here's Ken Asbury, President and Chief Executive Officer of CACI International. Ken?

Thank you, Dave and good afternoon, everyone. Thank you for joining us again today to continue our discussion from this morning. With me again are John Mengucci, CACI's Chief Operating Officer and President of US Operations and Tom Mutryn, our Chief Financial Officer. Just to recap our comments from this morning. Our performance this quarter indicates that we are on track to achieve organic revenue and net income growth in fiscal year 2016.

We remain competent in our strategy to win business, deliver operational excellence and deploy our capital for growth opportunities and we are reiterating our full year 2016 guidance. We won over $1.9 billion in contract awards securing key solutions, new business and a large amount of recompete business that reflects positively on our continued delivery of value to our customers. Our cash flow in the quarter was strong and we built our backlog to a record level. We had modest gains in revenue driven growth on existing contracts and on the new business we won in FY15.

Our net income was higher than expected due largely to favorable timing and our team delivering outstanding performance on several existing contracts. We're very excited to enter into a co-operative research and development agreement with a federal agency to test a system that we developed that identifies, detects and tracks recreational drones. And we'll have more on that in the Q and A. With that, let's open up the call for any questions. Eric, we are ready now.

Thank you. We will now begin the question and answer session. (Operator Instructions). And our first question comes from Bill Loomis. Bill, lease go ahead.

Hi, thank you. Just on the leading indicators on the $12 billion that you actually have pending, you said 40% for new business, and then on the $11 billion over the next six months, 75% for new business. It looks like you have a lot more recompetes coming up in the near term or at least what's been submitted and you said 8% of the guidance is on recompete wins. Can you just talk about that a little more? The timing of them? Is it likely that we see them pushed out like we have in past periods? Or have those already been pushed out and we probably are going to see the award near term?

Bill, this is John. Your facts and figure is spot on. We have solutioning has been awarded half of our (inaudible) revenue for FY16 plan. Clearly every year we do have an effective bridges. We would expect that to be no different than it has been in the past years. So, you know, we've got about a little under half of our recompete revenue still out there that we have to bid on. And another portion of that will be decided upon over the next six months. So all in all, as we mentioned in the past, the awards are very lumpy. What's also another positive, we have a very healthy pipeline as you mentioned, pending awards to $12 billion, $11 billion that we plan to submit in the next six months. So that coupled with an appropriately timed factor plan still give us plenty of confidence to meet our FY16 plan.

Is there any chance you can give us some of the bigger recompetes or at least how big they are as a percent of revenue or any more detail on that?

If I were to look at our largest single contract in our entire portfolio, it's less than 10%. For the recompetes that we have left, there's really no large stand out. Our win rate in the past on our competes is always north of 90. We would love to have it be 100. Nothing of a material value that remains for the next three quarters.

Okay. Thank you.

You bet.

And our next question comes from Jon Raviv, please go ahead.

Good afternoon, guys. Thanks for holding this. First question, do you guys make conference call equipment because there might be some market share opportunities?

We're actually looking into that as soon as we're done with this call.

Yes. I took a couple hours off here. My real first question, thanks for humoring me, is on organic sales drivers. Which end markets are outperforming others and also I notice in your guidance that you kind of changed the ODC and direct labor mix. What's driving that, and wouldn't there be an impact from that change in mix?

Jon, this is Tom. I'll take the latter part about the ODC, DL mix and then John or Ken can talk about kind of where the growth is in the marketplace. So, we have had a kind of reduction in our kind of direct labor, kind of versus our plan. For a variety of reasons. Some awards that we thought we would win we were unsuccessful on, so that reduced it and a couple large protests that we had from 2015 were delayed longer than we anticipated. We initially anticipated favorable resolution closer to the first quarter, now we're expecting resolution in the third quarter. That has been offset by some ODC growth. Direct costs are generally about the same and I will note that on more solutions based fixed price work, the distinction between direct labor and ODCs are less important because it's really the cost associated within the associated kind of revenue. So, despite the fact that the ODC DL is down a bit, we are maintaining our guidance during the forecast period.

Jon, this is John. As for the other part of the question was around markets and spread of what our current awards were. You know, it's the same message as always. We had great performance across all of our markets. If I were to look at the rate compete business, a lot of the rate compete business came in our (inaudible) market, in our commanding control area and in our enterprise IT area and that's at least for the first quarter where we saw some of the greatest rate compete awards. But again, we've got three quarters left. We've got half of that in our backlog now so still remain very confident moving forward.

Okay. And then, not to get ahead of myself but sales cadence, I hate to ask this, but sales cadence into FY17, do you expect to grow greater growth in FY17 than in FY16 or does that depend on where your finish this year in that 0 to 6 range?

Yes. John, we're very comfortable talking about first quarter right now. You're kind of accelerating it a little bit. But let me tell you this. In our opening comments this morning, there are a few things around what's going on in the market that would have us believe that we are a going to see additional stability. If the bipartisan budget bill act does get approved, and it seems likely that it's on that, we're going to see two years worth of planning stability for our customers which after the last nine months, they could really use. And I think that will show up in terms of increased opportunity for all of industry.

Second of all, the cadence that we have right now with regard to new business, we've secured over 50% in the first three months of our recompetes for FY16. That means as John indicated, later on down the road, we're going to see much more attention being paid to either new start-ups or to take away contract opportunities. So, you know, take that I believe the market's going to be a little bit more agreeable and less uncertain going forward, and I would hope by the time we get to second quarter we'll know exactly what we're going do in FY17.

And our next question comes from Cai von Rumohr.

Hi, Cai.

Thank you so much, guys. Your bids due to submit looks like it's kind of down from where it's been and yet the revenue growth feels like where it's been, maybe a little bit better. What does that imply for your indirect, you know, indirect and selling expenses? Could they moderate as percent of sales and how should we look for them to move over the year?

This is Tom. Bids to be submitted, I have some history here. Cutting into 2014 we were around $8.5 billion, $9 billion. Those numbers increased kind of 2014, 2015 kind of $1 billion. Now it's down to $11 billion. All in all directly we're moving in the right direction. Those are lumpy often times and I think the good news is there's a robust pipeline so that does not give us pause with the pending and to be submitted, that's certainly supports growth expectations. I think we're, you know, fine as far as that is concerned. The second part of your question related to what?

It was really related to the SG&A, those numbers. Are those going to moderate as a percent of sales?

The intent certainly is. As we grow, you know, it's easier to control the indirect expense, that's a percentage of the enterprise. If an entity contracting that's more challenging problem. But our goal certainly is to have an efficient organization both to help our bottom line and to help to have competitive rates. With that being said, we're a people based basis. Salary increases are normative and necessary to attract and retain people. We have benefit plans which are competitive benefit plans, medical inflation.

So those factors are at play but at the same time we're working to drive efficiencies looking at our processes. Investing in some automated systems and like to ensure that we have competitive and direct expense. And I will make one final note. The way we account for our indirect expense, we include fringe expense associated with direct labor. So often times we'll see an increase of our indirect expense excluding that from direct labor often times. This year we expect our indirect expense to be flat. But with it, it will grow but that's good expense because it's supporting our customer base.

Great. And could you just give us a little more color, you mentioned those two protests, $375 million, roughly each of them, what's the revenue run rate on each if they really get resolved? When might they resolve and why have they kind of conditioned to be with us and why aren't they done as of now because they've been around for a while?

Cai, this is John. I actually could not agree more with your last statement. However, you know, both of those protests are currently in the corrective action phase. But I'll try to give you a little bit more. One of those we just finished submitting additional information requested by the government, and we would expect a decision to be made relatively soon. On the second one, we provided additional information and we're probably one more turn worth of data that they will be requesting.

The two remaining protests account for about $20 million of our FY16 revenue. We are very confident, still that we will be successful on these awards. They will begin to contribute in third quarter and also of note but to a much lesser extent, in first quarter we only had one small protest but the value of that was very immaterial when compared to the full year revenue base. Hopefully that provides some additional color for you.

And our next question comes from Mark Jordan. Mark, please go ahead.

Thank you. You had obvious upside in the first quarter that was pulled in from latter part of the year. And you first led us or gave guidance for fiscal 2016. You had called for weaker first and second quarter and then have a strong build in the second half as some of the new awards started to really ramp the second half of the year. If we're looking at the same model and had upside in the first quarter, what quarters should we take that upside out of and what's your view kind of sequentially in terms of performance?

Hey, Mark, thank you. Yes, so we did have some up side versus our original expectations for the quarter. And the three items we articulated previously. Generally that timing came from the second and third quarters adjusted into the first quarter. So that's essentially how the numbers are moving around.

Okay. Also related to that, since you saw that polling and obviously it was customer driven, was that in absence a desire to spend available cash by the end of the governmental fiscal year? And since they did pull that in, would that imply incremental funds might be available in fiscal 2016 on your contracts?

Yes. I think some of it is not necessarily driven by year end governmental funding. The product sales were episodic. We had the products available and a willing customer. Besides the award theme, I don't think there's anything with regards, year end funding associated with the award fee. In the various programs we mentioned where in some cases, the government had some deliverables they wanted earlier so I don't think on the government funding end of the government fiscal year was driving it even though they each had their own story associated with it.

And our next question comes from Brian Ruttenbur. Brian, please go ahead.

Interesting pronunciation, but that's okay. A couple quick questions as a follow-up. This has been hit on around the edges but are your plans to hire new personnel because of your strong backlog and pipeline and when do you expect the hiring to start?

Brian, this is Ken. It's started. It started well into last year and I think it will continue into the foreseeable future as we win business. Some of the businesses that we won this year was recompete. In fact a little bit higher level than the year before. And in some of those contracts have grown through consolidation or just additional contract requirements. So we find ourselves needing to add people. Of course there's always ongoing attrition in our industry as people make decisions to do other things. So we're hiring now and we'll continue to hire in the foreseeable future.

Okay. So you're hiring now. You're getting attrition. Are you net adding people to your current levels, full-time people?

I think based on the modest growth, I think I would have to say yes, we are adding people, but I would like to add more. And it's sourcing them, finding them. In some specific case where we have highly classified contracts, we're still looking for golden unicorns and things of that nature to put on to particular contracts. And so that's a little bit slower than some of our other business. But I think the hiring activity is going just fine.

And our direct labor expense which is highly correlated with a 5% on a year-over-year basis.

Yes, thank you, Tom.

(Operator Instructions). And our next question comes from Jairam Nathan. Please go ahead.

Thanks for taking my question. One clarification, the $375 million in protests, which bracket is that do you put that in the slide to us?

Let's see. This is John. Both are in the new side. So that $375 million, two separate awards all considered new.

Okay. So it's in the 2% new business, is that what you mean? That seems a little high. Is that in the 2% new business bucket that you have, is that where it is?

Yes, because if you look at how we talk about 90% is existing and 8% is recompete and 2% is new, that's the resulting revenue from it. So what you want to pull out of the $375 million is the $20 million worth of FY16 revenue and that is part of our 2% which remains.

Okay, great, thanks. And the UAS R&D has it started or can you give us some timing? I don't know if you talked about it before?

John, this is Ken. It has started. We're in the initial phases of picking sites and sort of building the operating concept. I imagine that over the course of the next six months we will complete the initial R&D phase, somewhere in that neighborhood and John, is there any more that you want to add to that?

Yes, sure. I mean, it's probably worth spending a couple minutes talking about this. It's certainly a relevant solution at this point in time, the rate of drone incursions in the terminal approach area is actually increasing at an alarming rate and I'm certain that everyone out there on the call has been reading about those in the press. Our partnership with the federal government is to pilot our proprietary solution that locates, as Ken mentioned, not only the drone but the position of the operator in order for law enforcement and airport operations folks to quickly address that situation.

Now we do have a slice of revenue built into our FY16 plan. Based on the success of the pilot, we believe that we will see this grow over in time. What's important to realize, as Ken mentioned, around this timeline is the timeline of the financial potential to the solution is either stay in step with the government policies on protection for these commercial drones. So we have a long list of requests from critical infrastructure providers for our system so it's clear we have a strong demand signal but the federal government still needs to sort out. For example what is or isn't legal for a power plant operator to do to protect the air space around that power plant.

So again the demand signal is high. That demand signal it going to continue for a long time given the long standing nature of this threat and that coupled with our unique early mover position will drive growth over time and we will be absolutely certain to provide more updates as the opportunities develop.

Thanks. And just one more. Based on the $12 billion proposals outstanding and similar that you will be bidding on, over the next two or three years, does that change the mix between DOD and civilian or does it remain the same?

It's very representative of the current mix of business. Just as that number changes, the percentage which is fed civil or DOD changes, but for right now, as we stand closing up the first quarter, it's very representative of what our, you know, first quarter revenue looks like.

And our next question comes from Edward Caso. Please go ahead.

Hey, guys, it's actually Tyler Scott on again for Ed. It wouldn't be right if we didn't squeeze in capital deployment question. Is there any change there? Maybe just some comments on what the M&A pipeline is looking like and how you guys are balancing organic versus inorganic growth moving forward?

Tyler, this is Ken. You know, nothing changed on our capital deployment plan. Our primary goal is to divest our capital, to grow ourselves organically and then through acquisition when we find the right kind of companies. We've believe our M&A investments are synonymous with that goal of how we grow the business and position ourselves in the market. There's a lot of things happening in the market place today. None of them are exactly very clear and our M&A pipeline, I would say, active but nothing out there that we're ready to talk about or that we've even refined enough to decide whether it's an interest or not. So not much is going to change on that front although I will say that the market place itself, there are a lot of properties, some big, some small, some interesting, some less so.

Absolutely. Great. Thanks for that and maybe if I could just sneak one more in? I know this morning you mentioned the President's decision to kind of keep more troops on the ground in Afghanistan for longer. Could you quantify what your OCO exposure is there and maybe any other color you can provide on what the upside could be to you guys from that decision?

Sure. Tyler, this is John. Our FY16 plan revenue and we don't actually call it OCO. It's our uplift Asia based revenue was $140 million in the plan. It still remains that throughout the first quarter. To provide a little more color, what we're not seeing is any additional scope or any material purchases driven by the sustained troop levels. There still is a possibility of that. If any at all, but it's just too early. One example where it would not have an impact to us is that we typically provide ISR support for protection of a base or an operating position. So whether those locations have 100 troops or 200 troops in them, it won't immediately directly impact the level of the goods and services that we provide. So for right now, I would keep under $40 million in your models.

Great. Thank you, guys, very much.

You're welcome.

And we have no further questions at this time and I would like to turn the call back over to Ken Asbury.

Thank you, Eric and thank you for your help today. We appreciate that. We would like to thank everybody who dialed in a second time for your participation and your interest in CACI. Again, we apologize for the technical difficulties we experienced with the call this morning. We realize that your time is valuable but the time that you spend with us I hope we have and made it rewarding for you. We know that many of you will have follow-up questions and Tom Mutryn and Dave Dragics and Jeff Christensen are available for calls later today. This concludes our call. I thank you again for your interest in CACI and have a very good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Speakers, please stand by for your post conference.