CACI International Inc (CACI) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Third Quarter Fiscal Year 2017 Earnings Conference Call. Today's call is being recorded. (Operator Instructions) A special reminder to our media guests who are listening in, please remember that during the question-and-answer portion of this call, we are only taking questions from the analysts. At this time, I would like to turn the conference over to Dave Dragics, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thanks, Nicole, and good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International, and we're very pleased that you're able to participate with us today. And as is our practice, we are providing presentation slides.

So let's move to Slide #2. And as we look at 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. 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 on this exhibit and should be incorporated as part of any transcript of this call.

I'd also like to point out that our presentation today will include discussion of non-GAAP financial measures, and these non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP.

So let's turn to Slide #3. And to open up our discussion this morning, here's Ken Asbury, President and Chief Executive Officer of CACI International. Ken?

Well, thank you, Dave, and good morning, everyone. Thanks for joining us to discuss CACI International's FY '17 Third Quarter Results. With me this morning are John Mengucci, our Chief Operating Officer and President of U.S. Operations; Tom Mutryn, our Chief Financial Officer; and Greg Bradford, Chief Executive of CACI Limited, who is joining us from the U.K.

Let's please turn to Slide #4 in the deck. Last evening, we issued results for our fiscal 2017 third quarter. Record revenue and contract awards highlighted this quarter. Net income and operating cash were also quite strong. We also raised our full year guidance, reflecting higher demands for our solutions and services throughout the year. I want to thank our employees for yet another quarter of strong performance. It's your dedication, commitment, talent and ethics that drive our results.

During the quarter, we won a record $1.4 billion in contract awards. This is our fifth consecutive quarter of awards totaling over $1 billion. We continue to win larger contracts with a focus on high-priority solutions that address the government's most pressing requirements. And the results continue to confirm our market-based strategy.

Over the last 4 quarters, our awards totaled $6.5 billion, a trailing 12-month book to bill of 1.5x over that time period. We also continued to generate significant cash, pay down debt and increase our capacity for future strategic acquisitions. CACI remains focused on the long term, invested internally in cutting-edge capabilities, in people, strategic business development and the infrastructure to support organic and acquired growth.

Let's turn to Page 5 now. A 1 week continuing resolution was passed last week, which extended the FY '17 deadline until Friday, May 5. Since then, Congress came to an agreement on an omnibus spending package for FY '17 that will fund the government at new FY '17 levels until the end of this fiscal year. The House passed the omnibus yesterday and the Senate is expected to advance it before the deadline tomorrow. That is very good news. A more stable budget environment is quite beneficial to our customers, and we expect that the normal -- a normal seasonal flow of awards and funding in September will be particularly strong this year.

Now looking ahead at government fiscal '18, we are optimistic. The stated administration priorities for increased defense and national security spending, border protection, space resiliency and evolving and persistent cyber requirements align very well with CACI's position in the marketplace. Our market-focused strategy is driving the development in the pursuit of mission-oriented solutions and actually puts us in an ideal position as our nation invests in these critical areas.

In addition, we believe we have very little exposure to agencies that may be potential bill payers for these stated funding priorities. While we look forward to potential additional spending in key areas, we remain confident in the health of our existing core market and in CACI's ability to deliver on our stated longer-term goals of 1% to 4% organic top line growth, above our addressable market, and margin expansion of 10 to 30 points -- basis points annually.

With that, I'm going to turn the call over to Tom so he can give you the financial highlights of the quarter.

Yes. Thank you, Ken, and good morning. Let's turn to Slide #6. Our revenue at $1.086 billion was up 11.2% year-over-year, driven mainly by $88 million in NSS revenue. Organic revenue for the quarter was up 1.8%. Operating income at $67.3 million was up 5.6%, driven by profits from NSS and strong program performance. 2 items in the quarter negatively impacted operating earnings. The first is $4.7 million in long-term incentive compensation plan, or LTIP expense. This expense was triggered by our increased [top and line] bottom expectations and was not previously assumed in our guidance. The LTIP is designed to incent long-term growth and profitability above levels of other incentive plans, with metrics set at very challenging levels over multiyear periods. These accruals relate to performance under the 2016 plan for fiscal year 2017.

The second item is one which we mentioned in the December quarter earnings call, $3.1 million expense associated with right sizing certain facilities, with the most notable one being a facility we had (inaudible) with the NSS acquisition. These actions result in over $10 million of lower rent expense over the next several years. These 2 onetime items resulted in around 70 basis point reduction to our reported operating margin for the quarter.

Slide 7, please. Net income for the quarter was $40.4 million, with earnings per share at $1.61, up 16.9%. Net income benefited from the same factors that drove operating income, in addition to a $3.9 million research and development tax credit. With our focus on higher rent technological solution, much of it emanating from the Six3 acquisition, we have the increasing amount of fixed price customization in development work which meets the R&D criteria and is eligible for the credits.

During the quarter, we finalized work on the tax credits for both 2016 and 2017 and recorded a benefit. Going forward, assuming no change in tax laws, we expect to realize R&D credits in the $2 million annual range. These items, the LTIP and facility termination expense and the R&D tax credits, resulted in an approximate $900,000 reduction to net income or around $0.04 per share.

Slide 8, please. We generated $81 million of positive operating cash flow in the quarter, more than 200% of our net income. We now expect to generate at least $260 million of operating cash flow for the fiscal year.

Net debt at the end of March was around $1.2 billion and our net debt to trailing 12-month adjusted EBITDA leverage ratio is now at 3.3x.

Slide 9, please. As Ken mentioned, strong demand, operating performance and awards have resulted in our increased guidance. The midpoint of our guidance now imply growth of 15% for revenue and 12% for net income for the full year.

With that, here's John.

Thanks, Tom. Let's go to Slide 10, please. With 3 quarters of the fiscal year now behind us, our financial, operational and business development performance puts us in a good position to finish FY '17 strong and focus on delivering our long-term revenue margin goals beginning in FY '18.

During the third quarter, awards, funding and backlog were all robust, and our pipeline continues to look healthy with a focus on larger, more enduring solutions business. To provide some detail around contract awards, we won $1.4 billion of business in the quarter. About 40% of that was for new business to CACI. This was a record amount of awards for our first -- for our fiscal third quarter, and was achieved while the government was operating under a continuing resolution. As Ken mentioned, this is now 5 consecutive quarters with awards above $1 billion. And our trailing 12-month book-to-bill ratio is 1.5x revenue. Funding was also strong in the quarter, coming in at $1.1 billion. And backlog now stands at $11.8 billion, which implies almost 3 years of revenue on a trailing 12-month basis.

Slide 11, please. We're in a very comfortable position to support the increase in our guidance now with 99% of our annual revenue expected to come from existing contracts and only 1% depending on recompete awards.

Turning to our pipeline, we have $14.1 billion in submitted bids awaiting award, with about 90% of those for new business to CACI. Over the next 2 quarters, we expect to submit another $10.1 billion of bids, with about 75% of that for new business to CACI.

At our last Investor Day, we noted several market areas in which we see high demand, specifically Business Systems, Enterprise IT, Intelligence Services, intelligence systems and support and Cyber. And while we see opportunity across all of our markets, these in particular will drive growth and margin expansion. All in all, I'm very happy with our performance and position in the market. We remain focused on operational excellence, delivering with high quality and customer satisfaction. And our business development results continue to be industry leading. In short, our market-aligned strategy is working.

Lastly, to echo Ken, none of this is possible without the agility, innovation, technical expertise and customer commitment of our employees. I thank you all for that.

With that, let's turn the call back over to Ken.

Well, thank you, John and Tom. I always appreciate your comments.

Let's turn to Slide 12, please, in the deck. Before we open the call up to questions, I'd like to reiterate how pleased I am with the performance of our team this fiscal year. We are seeing the results of having the relevant solutions, capabilities and contract vehicles to meet the current and emerging needs of our customers. The renewed commitment to enhancing America's national security and intelligence posture, coupled with our performance in FY '17, gives me a great deal of confidence in our goal of returning to consistent, organic growth next year.

With that, Nicole, let's open the call up to questions.

(Operator Instructions) Our first question comes from Jon Raviv of Citi.

Could you just address where the sales upside is coming from in your guidance? And maybe what the mix is of that? Just noticing that DL in the quarter has underperformed ODCs and didn't get as much of a bump on the EPSs or net income for the year as we would've thought.

Yes, Jon, this is Ken. I think what we've seen here in -- when we planned '17, we sort of planned a different profile that didn't take in to -- some of the ops tempo increases that we've seen. So what you're basically seeing, I think DL in the quarter was up 4% to 5%. And ODCs were up in the low 20s. That's really a function of a couple of things. One, the kind of -- a couple of contracts that we are coming -- that we brought on, that we won last year that were major consolidations, the initial stages of those are to bring in existing contracts under a single contract umbrella. And we had a big team to be able to do that. So our initial contribution of participation in that program is rather small, hence, a larger expansion of DL. The second is, we've seen -- excuse me, a larger amount of ODCs in the initial stages. And John's going to talk a little bit later about how that changes over time. The second thing that I would point you to is we sort of -- when we were putting this plan together back in early '17 or mid '17, we anticipated that we would see -- we knew we were coming to the end of one administration, but the likely successor to that administration would be -- would have very similar national security policies. And as a consequence, we -- our planning was that we did not -- would not see as much support activity in different parts of the world. Well, first surprise was in the waning months of President Obama's administration, we saw a surge in support to go after ISIS in a variety of places around the world, and that's what was reflected in our first and second quarter increase in ODCs. As time went on, we then got to November and a completely different administration with a completely different national security or a more aggressive national security posture, and ops tempo has come into play. And that's what you're seeing being reflected in the higher amount of ODCs.

And then with that in mind, and given sort of where the year is ahead, can you give us a sense for the base off of which you expect to grow margin in FY '18? I heard you reiterate the 10 to 30 basis points, but where do you see this year finishing up, given the -- I guess, the mix issue?

Yes, so Jon, this is Tom. Let me just talk a little bit about FY '17 margin, and then Ken can transition. As I mentioned, we had 2 items impacting operating margin in the quarter, the facility restructuring costs and the LTIP. And the LTIP has both a second -- a third quarter accrual and an additional $1.7 million fourth quarter charge, given the way we account for these compensation plans. The impact is around 70 basis points for the third quarter and around 20 basis points for the full year. So adjusting for this, kind of margin is relatively close from the initial guidance, despite those higher kind of ODCs.

Yes, Jon, let me add to that. We started the expectation -- the year with an expectation -- '17 with an expectation of about [7 1] and as Tom just explained, if you take into account the onetimers, we're approximately flat. We're reasonably consistent with that. But what's more encouraging for me is that we've been delivering on those targets minus the onetimers in a world where there's a lot more increased material purchases driven by ops tempo, and I'm going to have John talk about what some of those factors are to give you a little bit more insight in just a moment. As we look forward, we're confident in our ability to expand our margins 10 to 30 basis points on average. But it's a little too early for us to be talking about take-off points. We're still in the midst of planning. We have to finish off '17. Each quarter so far, as we've looked at our forecast, we've done slightly better. And so I want a chance for the team to be able to do that before I start putting a line in the sand with regard to where we're going to kick off. And the other thing I would point out to everybody on the call is I think we're a different business. We have a different business profile in order to deal with ops tempo increases. In the past, when a customer wanted to increase the ops tempo with regard to anything, we -- our biggest ability to respond that way was through our IDIQ contracts, which generally were material and subcontracting pass-through kind of activities. Since the basis -- I mean, the balance of our business now includes a lot more solutions, we're seeing a call for higher solutions content as well as ODCs, which should help us manage margins better going forward. I'm going to ask John to give us some insight into that so that clarify -- it gives you some more detail into that premise.

Yes, Jon, so I guess also germane to the questions around take-off point scenarios, we're -- this time, we're in the middle of our FY '18 planning. So we're working through the typical items, like contract mix and recompete revenues and margins and staffing plans and levels and DL and [OD] and ODC mix and new contract phasing and the administration priorities and the like. So basically, nothing different than the items we always consider when we're building the following year's plans. But I thought it might be helpful to share a few specific examples of some of the items in this list as it pertains to FY '18. I think Ken covered one. And the first would be this new administration's priorities. I mean, we've experienced firsthand since about January around the strategic shift of resources as it pertains to ISIS and cyber and terrorism and the Pacific pivot and the like. Against those items, we have seen, as Tom and Ken have already mentioned, some increases related to op tempo in several areas of the world. And that's clearly driven increased demand from material buys related to those different activities. As we said in the past, we're very proud to support our customers as they engage in critical national security and defense missions. And those ODCs do support our top line growth and, frankly, those relationships grow even deeper. And that drives our ability to deliver even other opportunities as we move forward. A second item would be on contract phasing, and we could talk about CAMMO or about JIEDDO. First, with regard to JIEDDO, great example of a larger enduring contract, about $900 million worth of surge opportunity on top of the numbers that we earlier released. Now as all of you on the call know, we don't discuss individual programs in detail. But as I mentioned during last quarter's call, it's not a straight-line ramp-up to full burn type of program. So I cautioned you all not to divide the $900 million by 5 on top line. I also would tell you that, that implies margins to be higher because it will be based on the work performed. What we have learned since January is, as Ken mentioned, that the contract consolidation portion of this contract will be heavier upfront. Think the first 18 to 20, 24 months with a blended new surge requirements laid on top of that base work, which will cause lumpiness in top and as well as bottom line. A final example, frankly, is the role of electronic warfare in the fights listed earlier and to what extent SkyTracker and other CACI products are going to have in those fights. So we're taking a look at what the '18 mix of those different products are. I can tell you, we're very pleased with the level of orders we've received for that product and other variants thus far. And we are assessing what role that's going to have in our FY '18 plan. So suffice us to say we've been working through the same items we've worked through every year at this time. What we are happy about, and Ken mentioned this as well, the business we have been winning and the pipelines we've been growing support our long-term business goals, as he's already outlined in his set for the company.

Our next question comes from Mark Jordan of NOBLE Capital Markets.

This is actually Ben Klieve in for Mark this morning. Just a couple of quick questions regarding your pipeline figures that you reported on Slide 11 here. Wondering if you can kind of break down the pipeline a bit by contract size, kind of expected timing of awards and level of competition and especially note if there's any kind of major bid that are really driving these numbers. And then specifically with the $10.1 billion expected over the next 2 quarters, it seems like kind of a significant number. So we're kind of curious what's really driving the wave of near-term opportunities in your pipeline.

Well, this is Ken. Let me start. And so in the pending category is one single large contract and a number of, I would say, a significantly large contract. And then the rest of it is made up of other large contracts. So our strategy for the last 4 years has been to bid less, to bid more -- to bid larger, I should say, and to bid jobs that are of more complexity, which is consistent with our ability to deliver them. So where we have a chance to deliver or to bid for more firm fixed price work, we want to take that because we're actually very good at delivering on firm fixed price work. And what you'll see, and what you have seen over the last 2 to 3 years, is a steady increase in the size and complexity of the contracts that we've been bidding. The contracts that we're looking at in the future, again, reflect that theme, although maybe without the single large potential award that is reflected in the pending category.

Ben, this is John. I'd also add that -- you asked the question about the $10.1 billion. About 75% of those are going to be for new business. And since those are jobs that we're about to submit, it's been our practice not to share too much on in an individual area. But I can tell you that the market areas, the Business Systems, Enterprise IT, Intelligence Services and Intel Systems and Support are actually very heavily weighted in that $10.1 billion that we expect to submit by June.

Our next question comes from Krishna Sinha of Vertical Research Partners.

On cash flow, kind of a quick 2-part question. Looks like your CapEx is trending at maybe double the rate it was last year, something like 1% of sales. What's driving that? I don't know if you guys had talked about that earlier, but I'm just curious.

Yes, so when we guided for the year, we guided around $30 million of CapEx versus prior year run? rates of about $15 million, as you pointed out. The increase is driven by facility expenses. We've been doing a lot of work kind of reducing and optimizing our facility footprint. We exited a relatively large facility. We've -- and as a result made some modifications to existing facilities to kind of restructure kind of the work environment. And so that has been driving it. Now $35 million is our CapEx to date, higher than we originally planned. And that was driven by some additional facility expense. We won CAMMO, John mentioned that to us. We needed to do some facilities there. We had some adverse weather down in Fayetteville, North Carolina that required us to invest in -- redo some facilities there, Some internal ERP systems, those are generating those kind of onetime CapEx. Kind of going forward, as we get into '18, I suspect we'll get to a more normalized level. But we'll provide more information in June.

Okay. And then your DSOs were about in the high 50s this quarter. How sustainable is that going forward? And what's the kind of normalized underlying run rate for that?

Yes. So we're very happy with the kind of DSOs. It got team support, kind of -- we performed quick programs, we invoiced quickly, we get approval to the invoices, we send out the bills, we have a good relationship with the -- contracting or payment agencies, also that's positive. The DSOs fluctuate, as we know. Some of it is in our control, some of it is not in our control. I'm comfortable with what we're doing in our control. Oftentimes, we see issues with regards to paying agencies, kind of staffing levels, holidays and the like. I would -- you suggest a 60-day DSO; kind of the low 60s is what -- kind of normative. We'll strive to get below that but I'm not sure if we'll be able to deliver on that every quarter given certain things which are not in our control.

Our next question comes from Cai Von Rumohr of Cowen and Company.

So some of your competitors have mentioned that they saw delays in contract awards because of the slow filling of billets at DoD. And then on some programs, basically, the funding was curtailed because of the CR and yet the revenues continued. So book to bills were artificially depressed. That doesn't seem to be the case with you, but did you see any of those trends in your business?

Cai, this is Ken. No, I don't believe we have seen the same sort of trends. We have certainly seen some variability at -- in smaller programs where funding ends or there's some question about it, and that has had, on a very minor scale, some impact. I will tell you, probably the single largest impact that we have seen in the -- is the clearance processing activity through the adjudication by the government. We need -- I think as an industry, this is -- frankly, for the country, it is a problem. We sit today with somewhere between 800 and 900 positions that we could fill that are waiting at various stages, either for initial clearance processing or just crossover. And we're doing a variety of things, both as a company and as an industry group to try to work with our customers to be able to deal with that. But as -- we had a record quarter for awards this quarter. And so I can't say that we saw that kind of slowness. And I don't know if that's reflective of where we sit in the market versus others, but clearly, I like the trends that I see towards our business base now and into the near future.

And then, John, you mentioned contract phasing and you gave some specifics on JIEDDO. What -- but you mentioned CAMMO. What should we look for in terms of contract phasing on CAMMO?

Yes, Cai, thanks. So we've got about 8 months under our belts on CAMMO now, so that was a program coming to FY '17 that we had to plan that contract phasing in as well. I would tell you, we're probably -- we're 85% to 90% fully staffed there. So unlike what you saw in FY '17, FY '18, you should start to see a full year impact, both top and bottom line from our efforts on CAMMO. So really, really nice start-up and very happy customer.

Our next question comes from Brian Kinstlinger of Maxim Group.

This is actually Josh Seide in for Brian. Can you just maybe provide some color on any emerging trends in the mix of contract types in the company's pipeline? And then similarly, do you expect any trends suggesting maybe lengthening of contract terms overall, given the more favorable budgetary environment?

Yes, Josh, this is John. I guess, on the first -- on the last question -- actually, Josh, can I have you repeat the back part of that question?

Yes, sure. I was just wondering, I guess if -- given the more favorable budgetary environment, if you expect to see maybe contract terms extending overall maybe to a more -- more closer to the 3- to 5-year average that we saw prior to the Budgetary Control Act of 2011?

Yes, great. Thanks, Josh. Yes, so what we've experienced -- and I would say over the last maybe 10 to 12, 12 months is we are starting to see terms in our services and our solutions where we'll start to expand. When LPTA came out and Better Buying Power 1.0 came out, there was an absolute drive to shorten the terms of the professional services contracts because that allowed the government to continue to drive down prices. I think what the government has gotten themselves to is a more balanced norm of how to buy professional services. So we have seen -- and we believe over the longer term, some normal factoring coming back. So today, we're somewhere average across professional services. About 28 to 36 months, we would expect that to at least get up to 3 to 4 years.

Great. And then maybe just a quick comment on the mix of contract types emerging in the company's pipeline and any trajectory you're starting to see there.

Yes. So as we've mentioned, we have been looking to move the company over time to more solutions-based work versus professional services work. And as we talked about in the past, it is a knob and not a switch. So it's a very slow-turn dial that over time, as our capabilities grow on the solutions side, we would like to see the balance of our top and bottom line driven by that. As for specific numbers, we -- if I looked at the $14.1 billion of pending awards as well as the $10.1 billion, it does trend more toward solutions than professional services. I'd also say that with the acquisition of L-3 and NSS, the amount of managed services work and Enterprise IT work has gone up. And that was one of the critical factors of that acquisition.

Our next question comes from Tobey Sommer of SunTrust.

This is Kwan Kim on for Tobey. As you provide more solutions work and with the trend of moving away from LPTA contract, have there been any changes to the way small businesses fit into your strategy? And do you think we could see a shift in the small business requirements in the near future?

Yes, great question. I think small business are a huge part of the defense and intelligence industry, and we certainly saw that come into increased prominence over the last -- in the last administration. I don't see that really shifting any. I think it is important that we figure out the proper ways to team. We have seen some cases where there were contracts that were put in place that were switched to small business that were probably not fair in terms if asking them to be able to do things, but -- in terms of overall capability and complexity, but there are a number of our -- we depend on our small business partners, particularly in some of the very, very advanced technologies to help us think through things. There is a -- working small, but working smart is something we want to take full advantage of. But I don't see a recidivism or I mean a going back in terms of what the government's going to want to do. In fact, I see opportunities to, I won't say, do more but maybe contract with small businesses in different ways that are more reflective of their ability to perform the business.

Our next question comes from Brian Ruttenbur of Drexel Hamilton.

It appears that you guys are gaining market share with your strong bookings. I wanted to get your opinion on where the market is going and what you're doing differently if, in fact, you are gaining market share. It just appears that way versus your peers. So if you can address that. And then I have a follow-up question.

Sure. Well, what we've been doing is focusing on the same thing. We felt that it was really important to emphasize the talent and kind of expand our talent in our business development. We were going to have to grow our way out of the contacting market once sequestration hit. We did that in a couple of ways. We acquired some companies that put us into completely new markets and allowed us then to continue to expand in places that we felt we're going to be incredibly relevant as time went on and become less dependent on just conflict-related activities. So trying to find the more enduring pieces of the market that were always going to be valuable. When we went to the market strategies, that really took us to a different level. Instead of organizing by customer, we were able to concentrate our talent, our tools, all of our emphasis and then be able to pick and choose between the increasingly larger contract base that we saw in each one of those areas. And in some cases, that's worked very well. And in other cases where the markets receded, we've been able to maintain. In other words, there are some areas where logistics and material readiness about 5 years ago was probably the single largest market in the federal government. That's come back a great deal since Iraq and Afghanistan. Iraq has gone away largely and Afghanistan has been reduced. It allowed us then to apply resources to the areas that we thought were the hotter pieces of the market, like Enterprise IT, Business Systems, Cyber, Intelligence Solutions. So honestly, there's no secret sauce. It was just being religious and disciplined about how we talked about going and doing this. We added a bunch -- we added some new folks to it. We added some new incentive programs, like LTIP, to get people out of their comfort zone and allow them to take on and to think that there were bigger goals to be achieved. And this year, in this quarter actually, we saw a little bit of that come to fore. We'll see if it keeps going, but it certainly contributed this year.

Okay. And then as a follow-up, I'm just trying to drill down and try to figure out your long-term growth trajectory and figure out where '18 is going. I know you're not going to make specific comments, but maybe you can talk a little bit about your long-term growth. Is it going to be 3%, 5%, what are you seeing out there? And then CapEx for '18. I know it was inflated in '17, but is it going to revert to the norm in '18, maybe $15 million to $20 million?

Yes, let me take this CapEx question. It'll revert to the norm probably closer to around $20 million. We're still putting our plans together. We're a bigger organization than we were a few years ago when we were around $15 million a year. So I would think that should be good for planning purposes at this point in time. And as we finalize our plan, we'll have some more insights as to what facility work that we need to do, internal ERPs, IT infrastructure and the like. So $20 million.

So cycling back to the -- this is Ken again -- to the beginning of your question. I mean, our stated goal, and we're not wavering from that, is we're going to grow 1% to 4% top line better than our addressable market. Last year, when we discussed our guidance in June, we had just completed an addressable market study that showed that over the next 5 years, based on looking at budgets, we -- did that was the first time in quite some time that we saw a 5-year plan that had modest growth in it. And that growth was basically 1 -- beginning at about 1% in '18 to 1.4% as you went higher on a compound annual growth rate. So think of our goals as anywhere from 2% to 5% top line. And the 10 to 30 basis points are our best guess at driving our business towards both enduring and more profitable things. We are not bidding pass-through contracts anymore. It's just not in our lexicon. What we are bidding is we do have a portfolio of those that have been going on for quite some time; and as reflected in this year, in the first 3 quarters, our customers have called on those to support their efforts around the world. But going forward, that's going to be less of how we invest, and we'll invest more in higher-solution and higher-margin businesses.

Ed Caso of Wells Fargo.

I'm trying to get a sense for how important new business, new, new business is to your long-term outlook. As we're hearing that decision making still is uncertain and you're still seeing extensions as clients -- I know we've got '17's budget done, but the battle for '18 could be quite sizable here. So can you give us a sense how important for your quoted long-term outlook is to new business wins?

Great question. So let me start this way. I would -- in the macro view, I would believe that '18 starts in some series of CRs. Now the antidote to that is we have a '17 now with full appropriations through the year-end with additional money for intelligence, defense, homeland security and the like. So our pending business, which is about $14 billion, is going to play out against a fully funded and, in fact, increased funded budget. As we look into '18, it becomes a little bit less certain, but I'm pretty confident in the way we've been winning lately, particularly on new business. And I think our pending business is somewhere in the neighborhood of 90% new are awaiting award. So that's a good news story for, let's just say, the next 2 years. We've also demonstrated that even in the CR, I think this year, we've been in the second-longest CR in history, and we've still been able to knock down very, very strong awards quarter-after-quarter. Now that could change at any point in time because it's an inflection point, but I believe we've built up enough capacity and we have enough of a set of pending contracts that, that's going to help us get through both this year and in the beginning part of next year. John, do you want to add something to that?

Yes. I'd also -- I guess from your comment around new, new and then some of these takeaway variance. I think on the takeaway variance, the way we've been looking at this the last couple of years, which drove the L-3 acquisition, was in our Enterprise IT market, as a customer goes from more of, what I would call, desktop services to managed services, I mean that requires a balance sheet investment of sort upfront. But it also does pave the way for stronger returns as those 7- to 10-year programs play out. I would tell you on the new, new, Ed, what's exciting for us and something we're watching very carefully and looking at shaping as well is in our Intel systems and support market is the whole concept around this refocused electronic warfare area...

(inaudible) Cyber.

Right, yes. We're seeing the Army and the Navy ramping up not only their requirements, but their predicted spend. And we really believe that companies that come with a proven solution will be well poised. As you know, we were talking about SkyTracker in the past. As we come out FY '17, we're looking at mid-double-digit million dollars worth of awards with that product. And that is one that, that, coupled with some of the cyber capabilities we have, is where EW's going. And this is a company that's been focused well over a decade on where EW goes and in helping customers shape where that -- what those potential solutions are. So that's one area, Ed, of new, new that we've got our focus on.

My other question is on pricing. Other firms talk about things getting stuck in the awaiting decision category that have much older pricing involved. Have you -- are you over the hump yet? Are we getting to the point now where your average pricing might start to lift a little bit and take some of the pressure off of margins?

Yes, Ed, this is Ken. I think the simple -- the way -- the discipline that we're bringing into how we get to pick or choose, what we're going to invest B&P in is reflective of that already. We're not going to pursue the things that you got to fight it out on the basis of 25th percentile labor category bids and no benefits or very, very limited benefits. It's just not -- there's not a good future to that in this. And there is enough work in various parts of our different markets that is more reflective of the customer recognizing the value proposition of the seniority of people, of the tenure of people and the qualifications of individuals and the tools that they bring to them. And that's what being a lot more -- that's what bidding less and pursuing more is or hoping to getting more out of, that's where our strategy is taking us. Sorry, I got a little tongue-tied there.

Our next question comes from Josh Sullivan of Seaport Global.

Can you just talk a little bit about the recruiting market dynamics? Obviously, your backlogs and bidding activity are impressive here. But what does the talent market look like, just given the uncertainty around budgets? Are potential hires more likely to come over to a larger operator like CACI? Or are people staying put just given the uncertainty?

Yes, so I think the macros that we're seeing is that we are seeing a need in certain marketplaces for highly cleared talent in the software development area, intel analysis, intel solution business. And in certain geographic locations, there's not enough of them, so there is a bit of a food fight over how do you attract them. The other thing -- the other deal that we're experiencing is a decline in the baby boomer generation and an increase in the millennial and Gen X component of our workforce. And we are -- I think everybody in the industry, and I know that we're working on it in particular -- is making ourselves and making national security and the kind of things that we do very attractive. And so we just completed the largest employee engagement survey in the history of our company, and it's given us some really cool data about how we should think about making our benefits more attractive, how we talk about the kind of work that we do to increase the probability that we're going to be successful. I would reiterate back, and then we'll flip it over to John because he can give you some more detail, probably the single largest issue we have is the clearance process. We have a lot of people that would love to come to work on the kind of mission-critical work that CACI has and, I dare say, every one of our peers in the marketplace. But the clearance process and the adjudication process through the federal government is a bottleneck right now that needs to be solved.

Yes, Josh, just -- I would just add to Ken's comments something quickly, which is we've actually seen that this fight for personnel is no different than shaping in the fight to win awards. It's really listening to what our customers are saying and where they're headed. As we look at within CACI, as Ken mentioned, we did just complete an employee engagement survey. It's really about differentiation, right? I mean, part of that survey, they actually told us that we're working on the right things to retain and attract talent. But they also shared some areas for us to consider. They love the high tech nature and the missions that we support out there. So we have shared examples of our work. As an example, we worked with the Virginia Tech Hume Center to help develop tomorrow's security warriors. So it is true that the labor market's tight. We just believe we're doing the right number of things to retain and attract folks. So once we can get to the clearance process issues, we'd like to think that we are doing our best to differentiate CACI from other folks within our government services space.

Our next question comes from Joseph Vafi of Loop Capital.

Just one quick one. Ken, I know you're bidding larger and larger deals. Are there any smaller deals that you're not bidding now? And why wouldn't you be bidding those in -- moving forward?

Joe, thanks for the question. The -- when we look at the marketplace, we get to be a little bit more discriminating than just chasing every job that anybody wants to put out. And there are certain -- there really are very large pockets in the marketplace of customers that are interested in a different kind of relationship. With the LPTA market, the LPTA environment had -- was really sort of driven by having to do short-term savings of money. And frankly, you could get that at a professional services a lot easier than anything else. But what we did -- it had 2 problems. It drove us to do a [natural acts] in terms if bidding, in some cases. And some companies actually aligned themselves to the lower end of the market. We chose not to do that, even though we did bid, in certain cases, places where we couldn't always provide the people. And we paid a price for that. On the other hand, in buying 6, 3 -- almost 4.5 years ago, 3.5 years ago in NSS, we're in pieces of the market now where the customer's really looking for longevity, they're looking for mission-critical change to happen. I won't tell you that they're lavishing money on anything, but it is a better place. So if I have a choice between bidding a 100-person contract that has -- where nobody -- where price is the most important criteria, not capability, then I'll probably pass on that. I must say it is something that leads to something strategic over -- in the long run. But bidding jobs of 5 people or 20 people and less is, it's hard -- when you're approaching $4.5 billion in sales, it's hard to manage those things. And while when we were $1 billion company, those made up a good portion of it, we want to see that lessen as time goes on and do more contracts with 500 people.

That's great. That's helpful. And then if you keep bidding larger and larger pieces of business, I think, maybe tell me if I'm wrong, that there probably will be more -- perhaps more significant product pass-through components to those very, very large pieces of business. Does CACI model somewhat change, away from just being services led to more of a hybrid product services model over time as, perhaps, you win more and more of these larger and larger contracts?

Yes, Joe, I think you nailed it and you said it very nicely. I mean, our ambition has been to get away from the op tempo, driving how well the company does and get to a place -- there's a part in the government where the things that they depend on, whether it be IT systems, whether it's cyber, whether it is consistent intelligence analysis, but it is not pass-through contracting, that's sort of subject to whatever potentially conflict our humanitarian activity that needs to go on. We want to be in the more enduring places of the marketplace. Some companies have chosen to be in health care. Some have chosen to be elsewhere. Ours is going to be in the core decision analysis pieces of the Department of Defense and the intelligence community as our principal place to look for the endurance. I would also add to that, wherever the government needs to be more efficient in how they do their hiring and doing their financial management and doing their supply chain management, all of those I think are also enduring pieces, enduring in pieces that are going to be modernize over a longer period of time. So thank you for stating our strategy out loud.

Our next question is a follow-up question from Krishna Sinha of Vertical Research Partners.

I guess this is just a follow-up of a question that somebody else asked earlier, but given -- you talked a little bit about your margin targets going forward. The mix of your pipeline seems to be turning more towards solutions, which is positive for margin. But I guess, given your very, very strong win rate on new awards, is there any threat that there's an offset in terms of the price that you have to bid to win or to beat everybody else in these competitions? As that -- is that an offsetting force to what your margin is -- your margin profile going forward? Or are you -- do you find that you're able to win on favorable terms to CACI and, again, that's just more supportive of your ability to drive 30 or 40 bps of margin going forward?

Yes, so this is Tom. Let me start out. The kind of the price we bid is a function of our cost level. And for us to be successful winning, we need to make sure we have kind of lower rates than our competitors, and that's been a focus of ours pretty consistently. So that should give us a competitive advantage as we drive kind of our rate structure. Operating efficiently, we spoke about our facility reduction, focusing on operational excellence within the indirect infrastructure. And I think that allows us to be successful in our bids by pricing effectively and taking advantage of our cost structure.

Yes, and I guess I'd also add that, as a heritage professional services company, we always had this look of it's DL or ODCs. I think where you've heard us move in the last 3 to 4 years has been moving ourselves to a more profitable mix of both, which are actually very representative of firm fixed price solutions work versus purely time and material professional services work. So it is a mix. And as I stated earlier, every year at this time, we're looking at no less than 10 to 12 different knobs and dials of how do we put this collective mix of business we have for -- to give us the best representative chances of hitting where our long-term goals are. And I would also stress long term.

(Operator Instructions) Our next question is a follow-up from Cai Von Rumohr of Cowen and Company.

So one for Tom. So you'd mentioned the margin pressure this year from the leasehold buyout of $3 million in the third quarter and then the $6-plus million for the year for the LTIP. As you think about the 10 to 30 bps of margin upside next year, what are your assumptions about those 2 factors and what they'll do? Because at one point, you said -- mentioned that the leasehold buyout will actually benefit next year. Should we expect an LTIP impact next year? And how do they figure into your margin thinking for next year?

Yes, so as Ken mentioned earlier, we're still in the process of kind of formulating the '18 plan. And we have stated long-term goals. How that operationalizes into '17 versus '18 kind of needs to be finalized as we complete our FY '17 planning and our FY '18 planning as well. When we speak about the margin goals, though, every quarter, we're going to have some kind of good guys and bad guys. There's kind of, fluctuations, we'll have some accruals, we'll release some reserves, we'll have some kind of onetime positive and negative benefits. But the spirit in which we're operating is kind of underlying kind of the noise of those fluctuations is given the fact that we're bidding higher-end solution-oriented fixed price business that will drive kind of a signal of higher margins going forward. So I will leave it at that.

This concludes our question-and-answer session. I would like to turn the conference back over to Ken Asbury for any closing remarks.

Well, thank you, Nicole, and thanks for your help today on the call. We would like to extend our thanks to everyone who dialed in or logged into our webcast for their participation as well. we know that many of you will have follow-up questions through the day, and Tom Mutryn, Dave Dragics and Dan Leckburg are available for calls later this morning and throughout the day. So this concludes our call. Thank you. Have a very good day, and we appreciate your long-term interest in CACI. Thank you.

The conference has concluded. Thank you for attending today's presentation. You may now disconnect.