CACI International Inc (CACI) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Q1 FY '18 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] A special reminder to our media guests who are listening, please remember that during the question-and-answer portion of the call, we are 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, Allison, 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. Now, about 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. Now 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 also described in the company 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. 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 fiscal year 2018 first quarter results. With me this morning are John Mengucci, our Chief Operating Officer; Tom Mutryn, our Chief Financial Officer; DeEtte Gray, our President of U.S. operations; and Mr. Greg Bradford, President of CACI Limited, who is joining us from the United Kingdom. Last night, we released our first quarter results for fiscal year 2018. We also raised net income and earnings per share guidance. This morning, I'll provide you an update on the quarter results and some strategic positioning. Tom is going to give you details on the financials and John will cover the operational aspects of the first quarter. Let's turn to Slide 4 in the deck please. I'll start with a quick overview. Operations delivered right in line with our revenue and profit plan for first quarter, generating positive organic revenue growth for the third consecutive quarter and getting our FY '18 plans started in excellent shape. Our net income and earnings per share benefited from a tax reduction associated with share-based compensation accounting, which Tom is going to elaborate on in just a moment. As a result, we raised our net income and EPS guidance accounting for this benefit. We also continued to track record strong flow cash flow generating $80 million of operating cash in the quarter. Turning to contract awards. We won $1.2 billion in the quarter, which at first appears significantly lower than what we have done in previous years. The key factor to this quarter was that there was a significant number of short-term recompete bridges, which contributed fractional value to our total awards in the quarter, despite being incredibly positive for us in terms of our outlook for the year. John will have more to say in that just a moment. That said, we won a material amount of new business at the 60% level of our overall awards. I really liked the quality of the bids and solutions that we submitted this quarter. There were a couple of outcomes which I would've loved to have seen go our way. But all-in-all, I think we had a really solid start to first quarter and puts us in a great place. Our strategy, we'll continue to bid larger, bid less last and win more, has been very successful the last two years with full-year book-to-bills of one 1.4x in both '16 and FY '17. This strategy also returned to company to organic growth and built a significant backlog. I'm confident our strategy will continue to serve us well as we execute a high-quality pipeline within a large and increasingly larger addressable market. Let's turn to Slide 5, current indicators are that we will probably have, and I emphasize probably, a fully-appropriated government fiscal 2018 budget in place before year end 2017. There has been movement on both the House and Senate side but authorization and appropriation bills have yet to be passed. If enacted, the current budget numbers will drive increased Defense, Intelligence and Homeland Security spending, which will be positive for CACI, our industry and particularly, our country. In closing, our strategy is working. We continue to win new business and execute with quality and value. We are pursuing larger contracts with a particular emphasis on solution content. And we are investing in growth initiatives across our 12 market areas. CACI will also continue to be a strategic consolidator through our M&A program as we deploy capital for growth. All of this gives me confidence in our continued success and our ability to achieve our long-term financial goals of organic revenue growth 1 to 4x -- 1% to 4% better than our addressable market, in addition to expanding our margins by 10 to 30 basis points annually. Now I'm going to turn it over to Tom to take you through the details of the financials. Tom?

All right, thank you, Ken, and good morning, everyone. Let's go to Slide #6. Our first quarter revenue was $1.09 billion, 1.2% greater than the first quarter last year with 1.1% organic growth. Net income for the quarter was $42 million, up 15% driven by tax benefits related to equity-based compensation. Our adjusted net income, which excludes several non-cash expenses, was $56.7 million for the quarter, 35% greater than our GAAP net income. Operating income in the quarter was down a bit. Gross margin dollars increased but indirect expenses grew modestly at 1.5%, driven by spending related to various growth initiatives and investment in systems to drive future efficiencies. Let me discuss the mechanics of the tax benefit in the quarter. A significant portion of executive compensation is tied to our equity, to align compensation with shareholder interest. In FY '16, we adopted an accounting rule related to share-based payments. Previously, differences between the value of tax deductions from when share-based compensation was initially recorded and when the awards vest were treated as balance sheet adjustments. The new guidance specifies that the differences flow through the income statement. Restricted stock units are typically granted annually in the September quarter, invest at the end of year 3 and 4. Given the material increase in our stock price, the units divested this September generated significantly higher tax deductions than initially reported. This resulted in approximately $6 million of tax savings, all of which is reflected in this quarter's effective rate. Slide 7 please. We generated $80 million of operating cash flow in the quarter with days sales outstanding at 64 days, up from 59 days at the end of June, due to typical fluctuations in collections. Accounts payable also increased due to normal payment timing. Operating cash flow grew 38% compared to last year and it was almost 190% of our net income. In the absence of compelling acquisitions, we have been using our cash flow to retire debt. Net debt at the end of September was $1.1 billion. And our net debt to trailing 12-month EBITDA leverage ratio was now at 3.0x, down from 3.9x following the NSS acquisition. Slide 8 please. And lastly, As Ken mentioned, we are raising our upper and lower net income guidance range by $6 billion to reflect the equity-based compensation tax benefit, with corresponding increases to the earnings per share range. We now expect our full-year effective tax rate to be 34.5% and we are on track to realize our annual organic growth and margin expansion goals, which Ken articulated. With that, here's John to provide operational highlights.

Thanks Tom, let's go to Slide 9 please. Operations delivered revenue and profit right in line with our plan for the first quarter. We had several notable accomplishments and continued to invest in strategic growth areas. We delivered a positive organic revenue growth, our backlog remains healthy and our forward indicators confirm our market-based strategy is working. During the quarter, we continued to deliver on our contracts with quality, value and high customer satisfaction. Positive organic revenue growth was driven by the new business we won in fiscal year '17. And we continue to invest in strategic growth initiatives to better position us for the future. For example, we're investing in new sophisticated and highly differentiated electronic warfare capabilities. We are also incubating other innovative approaches to address emerging threats and new customer requirements. Efforts like these are an important accelerator of future solutions and market differentiation. We won $1.2 billion in contract awards this quarter. As Ken noted, we saw a material amount of recompete contracts bridged rather than awarded in the quarter. While this contributes positively to the continuity of our business, it resulted in lower award volume than we expected. In fact, only 40% of our contract awards in the quarter were recompetes. We would've expected at least 60% if not for the bridges. New business awards in the quarter were quite strong at about $720 million. We all added a number of IDIQ contracts that we do not include in our awards or backlog. But which will be very important to our future growth. One example, is a $480 million contract to develop and integrate technologies for the U.S. Army night vision, an electronic systems directorate. Slide 10, please. Looking at the rest of fiscal 2018, our forward indicators remain very positive. Backlog stands $11.1 billion, which provides more than 2 years worth of revenue on a trailing 12-month basis. Our revenue composition now stands at 89% existing business, 7% recompete and 4% new business to CACI. This profile is consistent with prior fiscal years, following our first quarter results. And our pipeline of opportunities remains very robust. Submitted bids pending award stand at $6.5 billion, with 72% of those for new business to CACI. We expect to submit another $12.9 billion over the next 2 quarters with 83% of that new business to CACI. In closing, we remain focused on executing our market-based strategy. We will continue to pursue large bids in our addressable market where our innovative solutions and services bring significant value to our customers' enduring and emerging missions. With that, I'll turn the call back over to Ken.

Well, thank you, John. Thank you, Tom, I appreciate your comments this morning. Let's all turn to Slide 11 in the package, please. Before we take questions this morning, I'd like to take a moment to discuss the hurricanes that impacted Texas, Florida, Puerto Rico and the U.S. Virgin Islands. Our thoughts and prayers go out to everybody who has suffered from these natural events. We hope for a quick recovery and we are thankful to all the first responders who gave so selflessly during this time. CACI had more than a 1,000 employees across these various storms that were impacted by these events. And we're incredibly happy to be able to report that all of them are safe. A special thank you goes out to those employees, who with their own homes damaged and their families displaced, worked long and hard to bring our customer mission capabilities back online immediately after the storms passed. These folks demonstrated outstanding character and commitment to our customers, our mission -- our customers, our mission, our company and our country. At the same time, our employees here that weren't impacted volunteered their time, contributed to various recovery organizations and donated a significant amount of annual leave to help those -- to help the other employees that were impacted. The response was incredible and made me incredibly proud to be part of the CACI team. I thank you all for your selfless dedication. With that, Allison, let's open the call up for questions.

[Operator Instructions] Our first question will come from how Cai Von Rumohr with Cowen and Company.

So in the first quarter, your direct labor was down 4%, ODCs were up 6%. Maybe you can help us understand, what kind of pattern those 2 items are going to have in terms of year-over-year growth over the remainder of the year?

Cai, this is John. So it's true that our direct labor, which means our headcount did decline a bit due to a number of factors. First, it's result of a couple of recompete losses that we had last year. And the continued delay of an Intel services program that we won, we've survived a couple of protests and we find ourselves sitting in the middle of our third protest on it. Second, the delay of a major EIT program, I believe we spoke about that during our FY '18 guidance call. We continue to see that move into the third quarter. And then, we have other contracts, which based on the phase they're in are running with a little bit more subcontract effort than we'll see over the life of those contracts. JIDO would be one in particular. But that initial startup phase relies on subcontracts, all of which are part of our wins strategy. So the long-term optional growth of those types of programs in direct -- direct labor really outweighs some of these short term subcontracting items. The bottom line is, we're comfortable with where we're at and I'm sure that Ken will share some views regarding how we're -- what we're going to attract the right talent.

Yes, Cai, this is Ken. Good morning. Adding talent to CACI is incredibly important to delivering value to our customers. And a couple things that we've done differently this year to ensure that we're able to do that. I think our full-year plan for FY '18 had direct labor and ODCs up about 2 points each, so we're a little bit off in the first quarter. And John just explained what that is. I think we're going to continue to see fluctuations in ODCs as things going on around the world. Our concentration right now is on direct labor. One of the things we did institute this year is 20% of each one of our leaders' incentive compensation is based on meeting direct labor goals that they put in place for the year. So we recognize that we're in a very tight labor market. And in some cases, a very tight labor market that needs clearances. So what I've spent a great deal of time doing as we've formed the industry group amongst all the mid-tier government services CEOs. And we've spent quite a bit of time on the Hill discussing the issue of why does it take so long to get a security clearance through the process and why are there so many rules and regulations. And to be frank, I believe that we're having an impact on that, which will benefit the entirety of the industry, not just CACI. Finally, one of the investments that we talked about in efficiencies, a couple of years ago, we went from being a company that built all of our own CHRM management systems and we have adopted Workday. We just completed our second phase, which is Workday recruiting, which we believe will make a more efficient opportunity for us to attract and retain people in this marketplace.

A quick follow-up. You mentioned that the plan was 2 points in DL and ODCs for the year. It looks like -- that looks a bit aggressive. Is it realistic that both of them can be up, a slight bit like 1% or so?

Yes, Cai, this is Tom. As Ken mentioned, the primary focus is on DL, it's kind of more predictable, it's kind of more in our control, kind of when does it staff it, kind of get the DL. And given the forecast that we do on a kind of monthly basis, we're comfortable with the 2% DL growth. In ODCs, if they grow more than 2%, that's okay. A lot of it is episodic. Ken mentioned the unpredictability from the material purchases, some activity to support larger fixed price contracts. So we're convinced or comfortable kind of with the 2% DL growth, ODC at least 2%. If it's higher, so be it.

Our next question will come from Jon Raviv of Citi.

Can you just give some perspective on what's driving some of this customer behavior with the bridging activities? And are you seeing it more in defense or in civil? And how do you see that resolving itself or not?

Yes, Jon, this is John. It's true, we have seen some material increases in the bridge and some of our delayed recompete programs. Some are with agencies that are frankly in the midst of major reorganizations. And it's clear that those are directly related to what we would call administrative delays. In addition, on our [indiscernible] high op tempo programs, which is really in our Intel services market, we are seeing customers bridge and postpone some of our larger recompetes. I mean now, clearly, those customers are not looking for a break in the services we provided them in the middle of prosecuting some really important missions. And our Intel services folks, frankly, are very much relevant to the data analytics and the Intel work critical to that fight. So what I would tell you, Jon, is that the delta in recompete awards during the flush period, was about $500 million. And that impacts our awards numbers. But as a reminder, it's not related to revenue because we're simply remaining under contract to continue our delivery. We're very pleased to say that through the first quarter, we've continued to achieve our greater than 90% win rate on all of our recompetes.

Got it. And then a quick follow-up on the margin. You guys referenced some of the efficiency initiatives that you have ongoing investing in growth. Some of those sorts of items tend to be sticky. In addition, you've highlighted some of the programs that are running at perhaps lower margin levels. So what gives you the confidence or the visibility into improving off of fiscal 1Q's EBITDA margin, which is down year-on-year to achieving year-on-year margin growth on a full year basis?

Yes, so I'll start it off, Jon. If I kind of look at the top of the income statement, the -- kind of DL, ODC mix is driving gross margin, the gross margin percentage. That in turn drives EBITDA margin, that in turn drives operating margin. So if we have a richer DL mix or grow DL, that's going to flow down the balance sheet. And so the answer we've had on direct labor is in effect the same answer on margin. We have spent some indirect expense to support some of growth initiatives and efficiency initiatives. In the grand scheme things it's not large material amounts, $2 million to $3 million, but worthy enough to comment upon. Indirect expense for the quarter was up 1.5%. Somewhat modest considering year-over-year, there was inflationary pressures, employees getting kind of annual increases, lease expenses increase and the like. So we're controlling expenses, we're able to make some incremental investments. But the major margin focus is to drive DL, greater program performance, larger programs, fixed price solution content are going to be higher-margin programs, which kind of flow down the PL.

Yes, Jon, you also mentioned about where some of those investments were. We're -- as this world continues to change, so does our need to invest and -- beyond the need of the timing. And the timing today is slightly different than the timing we may have laid out in June when we put forward our FY '18 plan. We're investing in protection again cyber threats, against -- that will protect critical platforms and data links. On machine learning, data analytics, we're looking at bringing in just amazing amounts of ISR data from airborne and space-based sensor and training machines as to how to do some of the preliminary Intel analyst work. We've mentioned in the past, electronic warfare and the needs of the current and future fights. Those are just a few, and I have to tell you, those align very well to real solutions we provide today. We're going to continue to invest in those for long-term growth in those growing domains. And unfortunately, at times -- the timings of those investments, I mean they don't fit neatly into a quarterly plan. However, we do remain confident these investments are very critical to our long-term growth, while at the same time being extremely vigilant to the financial plans that we put forward.

Our next question will come from Krishna Sinha with Vertical Research Partners.

So last quarter, you talked about 3 margin tailwinds. And you highlighted, one was the higher direct labor on consolidation contracts. Obviously, you just talked about that, the other 2 were some contracts converting from cost-plus to fixed-price. And then of course, you had a 20 basis points of long-term incentive payments that happened in the third quarter last year that are not -- and a building charge, I believe -- and both of those things are not expected to repeat again this year. So if I take those 3 pieces and I compare that to your 10 to 30 bps of margin improvement that you've laid out in your long-term guidance, you get 20 basis points already from just not having the long-term incentive payments and the building charge not recur. And then based on what you're telling me about higher direct labor and contracts converting from cost-plus to fixed-price, it sounds like you have significant lever to the upside on your margins. So can you just run through the moving pieces there? And, what you are expecting through the year for on margins and maybe what the trend is going to be in the next 3 quarters?

Yes, Krishna, I'll take the first stab at it in terms of getting into some of the numbers, and maybe Ken or John will want to articulate it. You're absolutely right, last year we had some kind of one-time charges [ to L-tipped ] kind of building in expenses, which were helpful kind of moving into FY '18 in terms of kind of year-over-year comparisons. We did guide to 10 to 30 basis points margin improvement, we're sticking to that guidance. The factors -- the knobs are the DLs, let's grow DLs, let's grow more profitable program, fixed price programs and that drive kind of margin. We've also had some products, which are higher margin, John in previous calls talked about SkyTracker, which is -- it appears to be significant to me and for those types of solutions that we're driving. So I think that will allow us to get a higher margin throughout the year. And I will point out that this year for the last year, we still have award fees impacting our quarterly numbers. The second and the fourth quarter are very high with regards to award fees and the first and third are lower. And so that's always a factor when I look at a one particular quarter. Again, with the new revenue standard in FY '19, we will smooth award fees during the periods of performance.

Okay, and then just one follow-up on your revenues. So you talked earlier, I think someone made the comment that you're still winning 90%-plus of your recompetes. Can you give us the other 2 portions of that? So how many -- how much of your revenues this year are just going to naturally sunset? And then how much new awards do you need to win in order to fill the gap? So you have the recompetes, naturally sunsetting awards and then new awards. So can you just give us those 3 pieces of the revenue bridge?

Yes, Sure, Krishna, this is John. I think I believe during our FY '18 guidance call, we shared that coming into the year about $0.5 billion of revenue will come to a natural program life cycle end. And I guess what I'll do, I'll answer this in also in terms of book-to-bill because that's a -- seems to be a leading indicator that everyone watches. If we figure $500 million out of our $4.3 billion or $4.4 billion, is going to naturally sunset, that's about 12% for FY '18. If you apply about 25% of our new -- of our awards, our recompete, a 1.4 -- or 1.3, 1:4 -- [ 1 to 1.4 ] book-to-bill ratio, pretty much keeps us flat if not slight or organic growth and that's right in line where with -- where we see our trends working out through all of FY '18. Now it is true that we've had a lot of recompetes bridge, that makes that level easier for us to achieve. I think we also shared 89% of our revenue is existing today. So beyond what the first quarter appears to be financially numerically, we're absolutely on track to achieve our FY '18 financial goals.

Our next question will come from Ben Klieve from NOBLE Capital Markets.

Just one quick question regarding the recompete bridges here. Do you have a sense that what you saw this quarter from agencies with administrative challenges is going to continue into the near term? Or do you see these agencies kind of evolving such that you believe this will largely be a first quarter event with things kind of moving towards business as usual now?

Hey, Ben, this is Ken. I think some of the ones that we were referring to is reorganizations. And there are 2, in particular, in the Intelligence community that we believe some of these impacts M&A from. I think that's going to be a little bit longer-term. We might see -- we've seen not all the bridges have been of uniform duration. A couple of them have been full-year, couple of them have been 6 month and then we've seen several that are even shorter term just to maybe to buy them some time to get done. So there's no uniformity around that. I would suggest, though, the idea of their reorganization will take somewhat longer. So maybe we won't to see an impact of the same magnitude as we saw in the first quarter. But we're more than likely to see a little bit more bridging. Bridging's become a very common behavior. It's the first time, we've seen it at this level. The other component that I believe is going to be persistent for a long time is on contracts, where we are -- how should I say it -- we are critical mission providers. Particularly, in the Intelligence Services arena. I -- some of those contracts could be extended just in perpetuity because nobody wants to take the time to try to disrupt the operational rhythm of those contracts. So it's hard to predict, when we were sitting here putting our plan together last May and June, we saw a little bit of this. But we didn't anticipate it at the level that we saw in the first quarter. Good news is, we still have the work, the better news is we're performing well on all these contracts that we might have been recompeting and it's going to build to a bigger future at some point in time when they decide to recompete those.

Our next question will come from Sheila Kahyaoglu of Jefferies.

Just on the broader line of questioning around margins and profitability. You do have a big pipeline of bids coming up. And I think you mentioned $12.9 billion with 83% towards new business. How does that sort of impact margins?

Well Sheila, ultimately, there's a mix in each one of those. We don't look at each for the margin profile. The general strategy of our business, these days, is to do more solutions than services. But if there is not a solutions contract available in the particular market area that a business leader is pursuing at that period of time then they're going to look at the higher end of those services. Ultimately, what we really would like to do is replace -- we'd like to have a business that is responsive to our customers' needs. So there's going to be a mix of things that may continue to have some elements of pass-through contracting such as the R-3G program where they do a lot of that or S3 in the past. But on the other hand, we'd much rather go after the consolidation of Air Force Satellite Control Network, which we did a few years ago. That had a couple of things that were interesting. It took 3 large elements of a very important set of Engineering and sustaining engineering tasks, put them together and you did it on a fixed-price basis. So you get to control your performance. It's -- over time we'll be driving to a much higher margin. That's the kind of business that we see in our portfolio. And the more we get in our portfolio over time of that kind of business, that's what's going to support our 10 to 30 basis points above the addressable market, which is our goal for margin improvement.

So I guess for the remainder of 2018, when we think about new business impact or contract mix, does that improve throughout the year?

Yes, so for the remainder of '18, when we look at the composition of revenue. 4% of the revenue for the rest of year is new business. And let's assume for a minute that the new business has higher margins, the mathematics are such that it's not got a material impact on it. The margin improvement and you're going to fundamentally be increasing kind of direct labor that we're expecting on both existing and kind of recompete activities.

Yes, Sheila, I might want to also add that if we look at the bids to be submitted over the next 6 months, as Ken and both Tom mentioned. It's all about mix about plus timing. If we were to look at the mix of Professional Services and Managed Services and solution bids, it's about a 1/3, a 1/3, a 1/3 as we look out another 6 to 12 months, which is a slightly better, better mix then what we're experiencing now.

Yes, Sheila, let me just add that as we ask our business development teams to go out there and look, what I'm really interested in is bigger, fewer, more complex jobs that we believe will deliver higher margin. If you bring something that's just bigger and has no margin, we're really not interested in pursuing that kind of business. It is -- there may be others in the industry that want that but that's not going to deliver the plans for this business over time. On other hand, we are looking to build on our products side. And that's where we talked about investing in electronic warfare, in some of the machine learning, in that we have some very small but very powerful programs going on right now that we believe that we could expand. It's very similar to what we did with SkyTracker. We were doing a core mission related to forward intelligence signals intelligence. And now we've converted that now to a completely different derivative anti-drone product that many people are buying. So there's going to be a part of us that are innovation but the whole business will be moving -- I mean really product and, I would say, outcome focused, which will change the nature of our discussion about DL and ODC. And -- but in general, we really want to be in the parts of the business that are going to be more enduring such as the work that we're doing with IPPS-Army. And there's a whole series of modernization activities going on in the various services. We have a great position on IPPS-Army today. We've performed incredibly well. We think that's a reference for where we go in the future with that. So that's just a little bit of a cross look at some of the things that we're doing in the company. I hope it gives you a better idea of what we're attempting to do.

Our next question will come from Brian Kinstlinger of Maxim Group.

Last quarter, you mentioned, you had 5 to 7 deals submitted worth about $500 million or more. And from your comments, it sounds like some of those bids didn't go your way or at least I assume that. So maybe can you talk about the success rate on these large deals? And if there was any common feedback from the customers?

Yes, Brian, this is Ken. We did and we weren't as successful as we would've liked to have been on some of them. There's no -- as we look at the forensics of each one of them. We had a couple of them where we actually outpointed the incumbent contractors but it probably wasn't enough for the customer to take the risk to be able to do it. So it was sort of a close but no cigar. And another one, we submitted a superior proposal and the customer kind of went bottom feeding and took somebody that was marginally qualified but had a much lower cost. So we'll learn from those but if I go back a year ago, we were -- we put a bunch of those into -- we put CAMMO in place, we put JIDA in place. So we're going to continue to try to win those kind of jobs. I will tell you it’s harder and I don't think our 30% to 40%, or 30% of 50% win -- or capture rate is going to be the same. So we're looking at how we balance the portfolio of those bids. We got to have a -- and I think we're probably in a pretty good place. If you look at how we started this year, we're directly on plan based on 2 really wholesome years of -- basically almost 1.4, 1.5 book-to-bills of the last couple of years have built up a lot of -- and with a lot of that new -- built up a lot of momentum. And so first quarter's sort of representative of that.

Okay. And I assume, this is my follow-up, there's still a handful of large type deals in the pipeline? Or were they all awarded in the quarter?

No, there's still some in the pipeline. Probably, the biggest one was the -- and I don't even think this was in this quarter, was it? It was the SOF GLSS one that we had talked about that was truly a game changer. And we put up a good fight but that was one where you really had to be spectacular. And I think we were close to it but not enough to compel the customer to be able to switch. But would I do it again, yes. I'd take it on again, different circumstances, different people making decisions, we might have had a different outcome. That being said, I will say about that procurement, it is probably one of the best run procurements I've seen in government contracting in a long time. So it was a pleasure to see that. I hope we see more like that.

Our next question will come from Tobey Sommer of SunTrust.

Follow-up question on your pipeline commentary with 83% of it being new. How much of that will represent take-aways versus new, new work? And then could you comment if there are any accounting changes on the horizon to think about, including in particular, kind of guidance on book-to-bill calculations?

We've never done a book-to-bill calculation, have we? So I don't think you see change in guidance that way.

Contract awards, I should say.

Okay. Tom, you want to take it?

Yes, there were 2 questions, one kind of in terms in accounting changes, as you move into FY kind of '19, we will have adopted the new revenue recognition standards, primarily impacting the treatment of award fees or some other kind of minor issues for us. The following years they'll be new guidance associated with lease accounting which we will adopt in 2020. In terms of the way we're kind of describing, kind of funding an award, definition of -- kind of what's new in recompete, kind of backlog, cleaning up the back log, do not anticipate any changes. I think we have a very well defined set of rules and principles, we're applying them on a consistent basis. So do not anticipate any changes there.

Yes. Go ahead, Toby.

On the revenue recognition, is there any change to the treatment of pass-through revenues? Or is that going to remain consistent under the new guidelines?

Yes, we remain consistent under the new guidelines.

Our next question will come from Josh Sullivan of Seaport Global.

This is actually Adam Friedman on for Josh. Are you guys continuing to win longer duration contracts? And can you point to any areas of particular strength there?

I think, in general, the industry's moved back towards a 5-year program base. When we first got into the Budget Control Act and nobody knew where the money was coming from and how, when it was to come and all that, we saw some pretty silly short duration contracts being put in place. But we seem to be on the other side of those. A couple of that we've competed for recently have been in the 8-year realm. And there's a couple more that are in the pipeline that I think may be even 10. So we are seeing things where, particularly, on the enterprise side, where you're coming in and you're basically delivering the infrastructure for a customer. Those contracts tend to be longer, which is great. Because well -- maybe you have a cash outlay at the beginning of them. Over time, it becomes a reasonably profitable activity once you get your operations down. So I think in general, where we see opportunities to go after longer duration things. I'm not sure I want to go after long-duration professional services jobs because there's a different level of competition. What I do want to do is go after jobs that are -- require you to have a differentiated approach to be able to do it. And frankly, we are able to assess the risk of being able to do that over a period of time. And hopefully, deliver above-average profit as a result.

Okay, great. And then in the past, you guys have sort of broken this out. But what percent of your revenue are you generating from your top 10 customers? And how do you see that sort of changing over the next few quarters or years?

I'm not sure if we break that out. The part of it is the definition of a customer. We do show there's probably, the in 10, civilian agencies, we break it down to Army, Navy sometimes. John, do you have some of that there?

Yes, the way I can answer that. Looking at current year, Adam, we like to talk about things in terms of markets. If you look at our business systems market, our Intel systems and support market, those are large markets for us. I'd also tell you that in the Intel services enterprise IT area, 3 out of those 4 areas were actually driven, one, by the Six3 acquisition and second, by the L-3 acquisition because we expected the federal government would be having a higher level of spend there. So those 4 the 5 markets drive a -- I guess I'd say a larger percentage of our FY '18 revenue.

Our next question will come from Brian Ruttenbur with Drexel Hamilton.

Couple of questions. First of all, now that you are fully integrated, I assume with all the L-3 issues from that acquisition. What are your plans going forward? Do you see another potential transformational acquisition on the horizon? You guys have already gotten beat up a lot on the bidding activity, so I thought I'd take my foot off the pedal on that one and talk a little bit about what's going on in terms of M&A?

Brian, thank you, you're very kind this morning. Look, we're a strategic integrator, we've done 67 acquisitions. I will tell you that if I could find another L-3 because that turned out to be such a wonderful addition to our team and it was very good financially and it put us in some really, really key markets, then we would've already done it. But we're active, we're looking. What -- we spent a little bit of time in the first quarter looking at a couple of different properties. It turned out we didn't think that they were the correct fit. We were finicky about the kind of things that we want to add today. Our bias is towards adding technological solutions, particularly, in a number of the areas that John referred to. We're very strong in digital signal processing today. Additions to that, would be helpful. The -- what we -- we picked up quite a bit of work in machine learning and in data analytics, that's going to be an area that we think is going to -- we had our asymmetric threat conference last week. And while I'm not going to get into, it's an non-attribution meeting but I will tell you the 2 fundamental themes that came out of it on the part of our uniformed military folks. And what they were concerned about, all the commanders, was what do we do with all the data we got and how do we turn that into speed of decision-making. And in fact, I've been saying internally, we're no longer a government IT business, we are a decision -- we are a business that makes, that helps our customers make decision faster. So that's where we're going to be. As far as a transformational one, that's just going to depend. We're very active in looking. The market is okay, there's been some properties that have come up. There's been some issues with valuation, people believe they're worth more than they are. And so -- we're going to make sure that we do the proper thing in evaluating them. But most importantly, it's got to be what they add in terms of capability or customer exposure. And their financials have to fit. And I would say, the final one is cultural, we've come across a couple companies that were really cool. But we didn't see a way that they would really fit with us. And so, it's not worth -- there are somethings that are just not worth were trying to do. So that's that.

Okay. And then just as a follow-up real quick. On your opinion and positioning versus a DXC with Vencore, KeyPoint roll up, I guess you would call it, to put together those 3. Are you directly competing against that entity? That new combined entity, I guess, it won't be for another quarter or 2. And what's your opinion on that?

Well, Mac Curtis is a good friend, he'll do a good job with it. But in terms of commenting on where I see them. We do compete with the them and we also team with them. So in this world, we're all competimates, in one way shape or form, to be able to deliver into the requirements that the federal government has. So I think -- we directly -- the KeyPoint part is a competitor for our OPM work. On the other hand, maybe some of the DXC, I'm not as familiar with that. But I believe that's Enterprise IT so yes, I think that generally is. But in the core business that was Vencore before, we were doing quite a bit of teaming and we've spent some time talking. So I'm sure just the very nature of Mac and myself we'll continue to look for places to continue to do that and if we have to slug it out, we will slug it out. But I welcome them to the market. There's an awful lot of work in this market, awful lot of important things that need to be done. I think they will do a good job.

Our next question will come from Justin Donati with Wells Fargo Securities.

Can you shed some color on the margin profile of some of those bridge contracts, wondering if they are higher and if creates kind of a natural headwind as those start to roll off?

Justin, I mean at -- there are some of these clearly as the government looks for potentially in some areas, better pricing by this recompete nature, perhaps, but I think Ken also mentioned earlier, we're being very cautious on making sure that this company's only differentiator is not just price. Okay, which is why we're looking to move and get ourselves into more highly differentiated markets. More Managed Services, as Ken mentioned earlier as well, as solutions work. The only thing that we're watching is someone asked earlier around the mix of cost-plus and firm fixed price work, there's a couple of these recompetes that we've actually put forward to do more of that work in a firm fixed price manner versus a traditional time and material or a cost-plus manner. So that would help us on some of the margins but I'm sure if I looked at all the details, there is a few that are going to be price driven. So overall, net -- net-net, I don't see that being a deterrent nor a large positive based on timing of those recompete awards.

Justin, I'd say -- what we're looking for is the pockets of product and product development that are very relevant that we believe will sustain higher margins. It's not going to be a huge volume. But it is going to be disproportionately accretive to the bottom line just simply because they're unique, we can sell them for a price that is reasonable but we can build them for a whole lot less. And so that's never going to be 50% of our business. It’s just not who we are, but we are reaching a level where it will be impactful. Those sort of innovations will be impactful.

Got it. And then just a follow-up to Josh's question earlier about your customers. Can you kind of break out where you see your revenue growth coming from this year? So your 1% to 4% above market target, is most of that is going to come from the defense segment, EC is kind of -- the civilian agencies, getting back to kind of flat growth for the year?

Yes, Justin, this is John. We like to look at that in terms of markets and we've said in the past that business systems Enterprise IT, Intel services and Intel systems and support would be those 4 markets that would drive the larger share of our growth as we have in our '18 plan.

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

So Tom, your direct labor was down 4% in the first quarter and normally the December quarter with vacations is kind of close to the first quarter or little lower. And yet you said, you're still looking at 2% percent for the year. By my math, that implies by the fourth quarter, you have to be going up 5% to 7%. And it looks like to get to that sort of a pattern, you really have to have sequential growth in direct labor over the next 3 quarters. Is that correct?

Yes, so I'm not going to question your math. We give annual guidance but not quarterly guidance but kind of mathematically, we expected a 2% increase for the full year. And the first quarter, we're down 4%. We have to have increases on average in quarters 2, 3 and 4. You mentioned seasonality, there is some seasonality. There's more vacations in our first quarter, July, August vacations versus the second quarter, which is impacted a little bit by Thanksgiving and Christmas. But the big driver is -- you're getting to our staffing levels, and some of the new business kicks in. Some of the new activities kind of ramp up. And so those are all the factors that go into it. But directionally, we need to add additional growth labor to hit those targets.

Cai, this is Ken. I also think that there's going to be a point in time where we're going to have to factor in how the solution content of our business, which really has a different labor profile, particularly, if you're doing solution development. We've got to figure out how to explain that better because it's just not a straight -- it's just not like -- we need 100 Intel analysts to do such and such. The profile is going to be very different and it's probably going to have an impact on how we discuss direct labor goals versus ODC goals and the like. So we'll work on that to make that better as time goes on.

Our next question will come from Joseph Vafi of Loop Capital.

Just kind of looking across the sector and the landscape of deal activity and M&A. It does seem like there's a bit of a shift going on towards what I call kind of more pure or kind of commercial centric -- commercial-like IT services work, cloud, cloud Internet type of demand activity, and lot of that's coming out of the civilian side of the business. I was wondering what your commentary is or views on that type of growth moving forward versus what we may, perhaps, kind of call some of the more classic c4-ISR work, that CACI and peers have focused on over the last say, 5 to 7 years?

Yes, Joe, I think your observation are good one. I think what we seen in that part from a next generation IT point of view, frankly, that was one of the primary reasons why we bought the L-3 -- the L3 business a little over a year ago. They had some pretty good offerings in that arena. They had an installed base. Particularly, in the early adopters of the folks that were adopting cloud and a lot of those things in the Intelligence community. So it gave us some very, very good references for doing that kind of work. And in the meantime, what we've done, there's a couple of ways to do it. We've seen a couple of companies out there that have been for sale for doing it. But what we've also found is just related to cloud and AWS and Azure development, we put out -- we started investing in our people to get the certifications to be able to do that I think we're, what? North of 400 people that are highly certified for being able to do this and assist other people to do it. So we haven't seen the absolute -- there was a basis of that in L-3. But when we started making that available and we're starting to do it for a whole bunch of other things now just inside the company, we think it's having a really good advantage on retention. And we're expanding in the skill space that really customers are looking for. There is -- there has been a slow rate of adoption for this, I mean there's still some government customers out there who don't think the cloud is secure or this, that and the other thing. And so I think there's a market there for quite some time. At the same time, that's one aspect of the Enterprise IT market. As I answered one of the questions earlier, what you do with the data that comes of the cloud is probably even more important. Just think of cloud as storage and the ability to do virtualization in a sense. But what you do with all that data that you've stored is I think an even better value proposition and so companies that have that kind of capability would be of interest to us from an acquisition point a view.

Our next question will come from Jonathan Raviv from Citi.

Just a quick clarification, CapEx guidance is unchanged for the year?

That is correct.

Okay, and then on margin. Not to beat dead a horse but just trying to understand the cadence for how margins pick up over the rest of the year. Again EBIT margin's down in the first quarter on a year-on-year basis. Should we expect more in the same in the second quarter as there's some more investments you have planned? Or should we start to see that margin expansion starting in the next quarter? Just trying to get the sense when we see that margin growth to get to that 10 to 30 for the year?

So certainly in terms of absolute margins in the first and fourth quarter, we have more award fees and so we expect those, excuse me, the second and fourth will be margins higher than average and so we expect to see those increases. I don't have the numbers here, how they do versus last year's kind of quarterly margin. So I could -- we could have a follow-up call in regards to that.

[Operator Instructions] Showing no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Ken Asbury for any closing remarks.

Well, thank you, Allison, and thanks for your help today on the call. We would like to thank everybody who logged onto the webcast for their participation as well. We know many of you will have follow-up questions. Tom Mutryn, Dave Dragics and Dan Leckburg are available for calls throughout the day and into tomorrow. So this concludes our call. Thank you for your interest in CACI, and have a very good day.

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