CACI International Inc (CACI) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Q1 FY 2020 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I'd like to turn the conference call over to Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Well, thank you, Allison, and good morning, everyone. I'm Dan Leckburg, Senior Vice President of Investor Relations for CACI International. And I thank you for joining us this morning. We are providing presentation slides so let's move to Slide 2, please. 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. Those factors are listed at the bottom of last night's press release and are described in the company's SEC filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's turn to Slide 3, please. To open our discussion this morning, here's John Mengucci, President and Chief Executive Officer of CACI International. John?

Thanks, Dan, and good morning to everyone. Thank you for joining us to discuss our fiscal year 2020 first quarter results. With me this morning are Tom Mutryn, our Chief Financial Officer; and Greg Bradford, President of CACI Limited, who's joining us from the U.K. Slide 4 please. Last night, we released our first quarter results for fiscal 2020 and I am very pleased with our performance. We do have a strong financial performance across all measures, strong revenue growth and profitability, and robust cash flow. We also won $4 billion of contract awards with approximately 60% of that representing new business for CACI. These results are an excellent start to our fiscal 2020. In addition, we continue to invest for future growth, leveraging our distinctive M&A program. We recently closed on three acquisitions that enhance our capabilities for our mission customers. I'll provide more background on these acquisitions shortly. As a result of these acquisitions, we are raising our guidance for fiscal year 2020 which Tom will discuss in more detail. Slide 5 please. I’d like to take a moment to remind you of the way we talk about our business which we introduced at our recent Investor Day. When we talk about what CACI does, you will hear four words: enterprise, mission, expertise, and technology. We serve two types of customers, enterprise and mission. For enterprise customers, we provide expertise and technology that enable the internal operations of an agency. Examples of that are IT infrastructure, financial, HR and supply chain systems and support agencies in the clearance process. This provides for $130 billion of our addressable market and is consistently growing. For mission customers, we provide expertise and technology that directly enable the execution of an agency's primary function or mission. Examples of those are solutions in domain areas such as space, C4ISR, cyber and electronic warfare, driving a $90 billion addressable market and growing at a more rapid pace. I encourage you to review our Investor Day presentations on our website in the Investor Relations section to better appreciate the more fulsome discussion that we shared in mid-September. Slide 6, please. We are seeing healthy demand trends across both the enterprise and mission areas of our addressable market that will drive both organic revenue growth and margin expansion. A few examples of recent awards are a nearly five-year $385 million enterprise technology contract to support the U.S. Navy's MyNavy human resources transformation. Based on our strong past performance under similar program for the United States Army, Fixed Army, CACI will consolidate hundreds of legacy applications and deliver an interoperable solution to improve HR services and transform how the Navy recruits, trains, and manage its personnel. We also won a five-year $443 million mission expertise contract to assist the U.S. Army encountering emerging commercial based threats, including unmanned aircraft systems and IEDs. This recompete win also included expanded scope that doubles the size of the opportunity, highlighting our differentiated expertise and record of performance with this customer and their mission. In addition, we won a five-year $438 million mission technology contract to support the United States Air Force Research Laboratory with the multi-domain integration of geospatial and signals intelligence and operations across air, space, and cyberspace. This is largely new work to CACI which has since led to additional awards with the same customer. Slide 7, please. You've heard us previously discuss the three pillars of our strategy, win new business, drive operational excellence, and deploy capital for growth. Our record contract awards demonstrate our success in winning new business and our strong financial performance is indicative of driving operational excellence. We also continue to deploy capital to drive future growth through our distinctive M&A program, which remains our top priority for capital deployment. We continue to pursue high quality, innovative companies that fill capability gaps and drive further differentiation in our customer’s most critical investment areas. As I mentioned earlier, we closed on three acquisitions over the last week, Next Century, Linndustries Shielding, and Deep3. Next Century is a mission technology company that delivers advanced geospatial mapping, predictive analytics, data fusion, and machine learning to the Intelligence Community and the Department of Defense. This acquisition provides additional growth to our strong business base of high value technology offerings. Linndustries Shielding is a mission technology company that delivers hardened systems to protect equipment from electromagnetic interference, a key growth aspect of a large single award IDIQ that we were awarded late last fiscal year. And Deep3 is a mission expertise company that provides applications development, data analytics, digital transformation, and cybersecurity. This acquisition is part of our U.K. operations and supports U.K. National Security and Defense customers, a growth area for both our domestic and our U.K. operations. Well on the topic of acquisitions, I am extremely pleased with the performance of both LGS and Mastodon as they both not only are driving the top and bottom line growth we expected, but are investing ahead of customer needs to ensure we have the next-generation technology offerings our customers desire. In addition to our M&A program, we continue to invest organically and our capabilities and technology assets including key priority areas like signals intelligence, electronic warfare, cyber and communications, as well as business development. As I mentioned last quarter, throughout fiscal year 2020, we plan to invest at levels higher than previous years in internal R&D and business development. In addition, our strong contract wins are driving slightly higher capital spending to support that growth. Our first quarter results include increased investments in those areas, consistent with our strategy to invest ahead of customer demand. Slide 8 please. Turning to the market environment, we remain encouraged by demand trends. From a budget standpoint, the two-year agreement signed back in August provides healthy spending levels for our customers in both government fiscal 2020 and 2021 particularly in areas aligned to CACI capabilities. Government fiscal year 2020 started on a continuing resolution which is in effect through November 21 and could extend longer. As you know, we start virtually every year under our CR, and as in the past, we do not expect this to have an impact on our business. And given our record backlog and strong contract awards, we remain confident in our ability to deliver on our financial commitments. In closing, our first quarter results were a great start to the year with increased organic growth, strong profitability, robust cash flow, and record contract awards. In addition, we are deploying our capital for accretive acquisitions that continue to position CACI for future growth. We continue to execute our strategy and remain confident in our ability to deliver growth, margin expansion and shareholder value. With that, I'll turn the call over to Tom.

Thank you, John, and good morning, everyone. Please turn to Slide 9. Our first quarter revenue was $1.4 billion, 17% greater than last year with 5.6% organic growth. Organic growth in the quarter was a bit higher than expected driven by around $20 million of low margin pass through material purchases which occurred earlier than anticipated. Net income for the quarter was $68 million dollars consistent with our expectations in our annual plan but lower than last year. Recall that in the first quarter of last year we realized the one-time pretax profit benefit of $12 million associated with product sales occurring earlier in the year than expected. In addition, the effective tax rate in the first quarter of last year was below 13% as a result of the tax benefits associated with stock vesting versus this quarter’s effective rate of about 18.5%. Normalizing for these factors, we realized modest first quarter 2020 net income growth consistent with expectation. The LGS and Mastodon acquisitions continue to call more financially, in line with our expectations, generating approximately $18 million of adjusted EBITDA in the first quarter. Slide 10 please. We continue to generate strong cash flow with $115 million of operating cash flow in the first quarter excluding our AR purchases facility. It increased 38% over last year. Days sales outstanding excluding the facility with the low 59 days or 53 days including the benefit of the facility. We ended the first quarter with net debt to trailing 12 month adjusted EBITDA at 3.0 times, including the $105 million of incremental debt to finance the three acquisitions John discussed. Pro forma net debt to trailing 12-month adjusted EBITDA is expected to be around 3.3 times at the end of December, leaving ample debt capacity to fund additional acquisition. Slide 11 please. We are raising our fiscal 2020 guidance to incorporate these recent acquisitions. Cumulatively, we expect them to at around $50 million to our fiscal 2020 revenue and $3 million to net income and we have increased our guidance accordingly. All three acquisitions fit well from a strategic perspective and are expected to grow in the double digits, deliver adjusted EBITDA margins in the mid-teens and produce positive present values. In aggregate, we paid a bit less than 8.5 times next month EBITDA for these companies. Given the acquisitions, our improvement to DSO and our strong cash flow performance in the first quarter, we are raising our fiscal 2020 guidance for cash flow from operations by $20 million to be at least $420 million. At the same time, we expect higher capital spending due to investments in facilities to support growth from new business wins. We now expect fiscal 2020 CapEx to be between $70 million and $75 million. To help with your modeling, let me give you some color on the second quarter fiscal 2020. In aggregate, we expect the three recent acquisitions to contribute about $10 million to second quarter revenue but are not material to net income when considering the partial quarter in associated transaction costs. We expect second quarter net income to be consistent with what was a year ago. The positive impact of the LGS and Mastodon and organic growth are offset by the expected decline in profitability of one large recompete that moved from timing material at very favorable rates to cost plus during the quarter. This was fully expected and included in our initial FY 2020 plan and our guidance. Slide 12 please. Our forward indicators you may help with. As John mentioned, first quarter was a record for contract awards coming in at $4 billion in contributing to a book-to-bill of about 2.3 times on a trailing 12 month basis. This continues to drive backlog growth, now at a record $19.5 billion, up close to 50% year-over-year. We also have better visibility into fiscal 2020 than we discussed on the fourth quarter 2019 earnings call. At the midpoint of the guidance, we now expect 94% of our revenue will come from existing contracts, 4% from recompetes and 2% from new business. Our pipeline metrics remains strong with submitted bid pending award at $7.5 billion with over 80% of that for new business to CACI. And we expect to submit another $13.6 billion worth of bids during the remainder of the December and March quarter with over 70 of that - 70% of that for new business to CACI. Let me note that these pipeline metrics now exclude estimated values for multiple award IDIQ contracts. This is consistent with our practice of booking zero value for MAIQs upon contract award and will be our practice going forward. With that, I’ll turn the call back over to John.

Thank you, Tom. Let's go to Slide 13. In closing, I'm very pleased with our first quarter performance and starts to the fiscal year. The CACI team continues to successfully execute on every element of our strategy. We are delivering increasing organic growth by winning significant new business. We're delivering healthy profitability by driving operational excellence, and we are positioning this company for continued growth by deploying capital for strategic acquisitions that are accretive and enhance our capabilities. Our performance gives me great confidence in our ability to deliver on our commitments in fiscal year 2020 and beyond. None of this happens without the talent, innovation, and commitment of our employees. I am incredibly proud of the exquisite expertise and technology we deliver to our enterprise and mission customers, and I thank all of you for that. With that, Allison, let's open the call up for questions.

[Operator Instructions] Our first question today will come from Gavin Parsons of Goldman Sachs. Please go ahead.

Guys, bookings have been really strong so what do you need to do to make sure that converts into faster revenue growth? I mean, do you need to make sure that you can hire, expand footprint or is that more on the customer to exercise and fund those ceilings?

Yes. Gavin, thanks. Yes, it's very true that we've come off another quarter - actually, it’s our fifth quarter of consistently higher award levels. There's a few items here. One is - and probably most importantly is for us to manage the ramp-up periods of both the expertise and the technology jobs that we have been winning whereas we're extremely pleased with the record contract awards. The ramp up time do vary by different programs. I thought I take just a moment to walk through that because like all of us see we've had tremendous awards and really trying to be more predictive of when that - when that revenue shows up. On the expertise side, most times as those are take away programs will pick up the incumbent employees and that does support a quicker ramp up period but then transition timelines vary somewhere in the one to three month range. If you look at our technology programs, we need time for our facility build outs, lab and other material purchases, and really building our program infrastructure. So, ramp up times can be anywhere between three and six months. So once we've received the award, we're very focused on how quickly can we ramp up. Hiring clearly one element of it. But we are traditionally looking at all the job requisitions for jobs that we have submitted. All of our job requisitions are submitted when we submit our bid, so our fine recruiting team is out there looking for candidate prior to award. So, it's really a combination of what type of business we've just won managing the ramp up period and then making certain we have the right talent.

And then just on the higher R&D spend, IR&D spend. I think in the past you've mentioned the customer is willing to pay more for technologically differentiated IR&D. So, can you talk about whether or not you see that as having a higher IRR than it has in the past and if you could talk about the customer attitude towards retaining IP that would be great.

Yes. So yes, we are clearly spending more in R&D and bid and proposal money and a new element with the acquisition, I should say new, but a stronger element of our investment strategy is independent R&D spending. And I'm going to start to talk about this in some of the different quadrants that we put from our Investor Day. We're going to continue to invest in our enterprise tech areas such as cloud migration, agile software development, visualization tools that are really second to none. And I say that only because that's what our customer comments on. It's clear that DeAndre and her team have really moved more intelligence applications to the seats to TWS cloud that the next five companies combined. So, we're going to continue to invest in anything agile as well as in our distinctive visualization tools. We continue to invest in signals Intel, electronic warfare communications, cyber, things that you've heard me talked about in the past. Now, specifically on the independent R&D and intellectual property, those are really driven by LGS and Mastodon and their business models really, as you mentioned, rely on independent R&D where we're designing and creating technology based intellectual property. We've had a great track record frankly for those technologies and those investments that are focused on intellectual property. We like to do those ahead of customer need. We actually do that by being well-informed by our customers and us keeping a very good eye on where this marketplace is headed. Truly, we've had great success in turning the intellectual property into additional awards. One of those areas are multi-use devices that where a customer can download software and that can do the mission that customer needs. So, all-in-all, really focused investments. Customer is very supportive of this model and in some of our preliminary meetings have been asking for us to continue to invest more there because they can see future needs that will take great use of our intellectual property.

And, Gavin, let me add a couple of things if I could. LGS in particular has done a masterful job in the past at assuring that they own the intellectual property. They have exclusive rights to a variety of technologies and number of patents. And so, that has becomes an asset of CACI which is very positive. And you mentioned the internal rates of return in the IR&D. A bit of - I think - are in a science trying to forecast the profitability of these types of investment. But there is very robust prophecies, kind of business cases before the company commits money to IR&D trying to kind of rack and stack and prioritize different opportunities, all with the goal of what is the sales and revenue opportunities for these particular projects, not science projects, but very much tied to very well-defined opportunities.

And our next question today will come from Jon Raviv of Citi. Please go ahead.

On the CapEx, can you guys give us a little more on where it's being spent. Is it fair to say that FY 2020 is tracking to your highest capital intensity as a percentage of sales in history. So, what is the long-term capital as a percent of sales. Is it historically below 1%,I think 1% maybe going forward. This year, it’s 1.3%. It is over 30 basis points here and there, but we could expect it to actually go higher as you win more and that is the sort of that if you move into the next framework should surrounded that.

Yes. Jon, thanks. You know, the question is like CapEx spending. It’s actually a nice high class of issue for us to talk about. First off, we did factor into our guidance a level of CapEx, but, we often have start-up costs of some form with our new contracts, this is something that we routinely manage. We actually look at each and every program and we perform a bottoms-up basis. But then, with some of our wins, since we win those jobs, our customers made changes to things like work, locations, the amount of space, and possibly some of the facility plans we had based around those wins and we see another award being awarded closely to that, we may make a different facility buying decision that allows us to buy one facility, so we can house multiple programs in it. And also we’d tell you that as the mix of expertise and technology programs change, the level of investment in things like test facilities and labs and those types will also drive additional CapEx as well. And I let Tom talk a little bit more about the financial side of it.

Yes. So, in terms of where we spend the capital, kind of number one is facilities kind of John mentioned. You know, second, you know, internal IT, you know, the infrastructure to support our 22,000 employees. And then probably the third element is kind of laboratories, testing equipment to support some of the R&D efforts. Somewhat analogous to working capital, growing companies need more working capital just to sustain that growth. And as company shrink, they can free up working capital. Very similar to capital spending, you know, as companies grow, will need more CapEx to support that growth. In the extremely unlikely scenario that we never grew anymore beyond it - beyond this year, we would need very little capital spending. So, it's somewhat of a leading indicator in our business. And I will also underscore that the expense associated with the capital spending which has kind of falls into depreciation, etcetera, are reliable expenses and recaptured in our kind of rate structure. So, that's part of our kind of bid process to have CACI owned facilities where employees will do work on behalf of the government.

And then just as a follow-up, margin down a bit here year-over-year and you're talking about flat net income in the second quarter. Can you just give us a sense for the cadence to get that 10.3% margin for the year versus 9.3% this quarter? We know it’s sort of back-end loaded but just - can you give us a sense of the moving pieces there? Thank you.

Yes. So, for the first quarter on a year-on-year basis, we have some goodness in the last first quarter so that made a tough comparable. But in terms of absolute value, LGS contributes to the positive margin in the quarter. The $20 million of pass-throughs were kind of negative to a kind of margin performance and I did mention a large contract transitioning from kind of time and mature very attractive rates to cost plus. That transition kind of dovetail the first and second quarter. So, that was a little bit negative headwind associated with that. Based on our kind of analysis once we do those adjustments, core CACI kind of margins were flat to slightly up in the first quarter in respect the base business to continue to perform. And as we add LGS and Mastodon into the mix, we will kind of throughout the year, in particular the third and the fourth quarter, see some healthy kind of margins to support that 10.3% guidance that we provided. A - Unidentified Speaker Yes. I might also add, Jon, that if I look at our first quarter I believe it sets us up very well for having a fine year. We provide yearly guidance and I would tell you that our progress thus far is in line with that guidance. It's sort of playing out as we expected. We've got two other items here when we look at these year-over-year, quarter-to-quarter measures. One is that the mix of our business continues to change. As we get more into the mission tech side of our business, and as I mentioned those ramp up times are very different than our traditional expertise programs. So, overall, I'm very pleased with where we're at and we're really looking forward to a strong second half, which is very much in line with the guidance that we provided.

Our next question today will come from Matt Sharpe of Morgan Stanley. Please go ahead.

Just wanted to touch on LGS and Mastodon performance here for a moment. Obviously, given the bad times, choppy nature of deliveries there, revs and profitability can jump around somewhat and I think we saw that last quarter. So, maybe if you could provide some color on how those acquisitions have tracked through 1Q and whether or not they're on plan to-date would be helpful.

Yes, Matt. Thanks. I mean, as Tom mentioned during this prepared remarks, financially, both are performing just as expected. You did mention there’s going to be choppiness in some of their product deliveries but, for us, thus far going as planned. You know, I'd also share a little bit of color on just how that integration is going. Since March, the CACI team LGS and Mastodon teams really have been collaborating to come up with the best solutions for our customer's SIGINT, Cyber, EW and communications need. I'm very happy to report that those three groups have had very material customer meetings and verbal and financial support to procure software-defined solutions. So, the reason why we bought those two companies and integrated them with what we're doing in communications area was to make sure that we had products slightly ahead of need. So, the collaboration is going very, very well. In the limited time maybe mark was not that far back. And, I mean, overall, you know, when we look at the significant margin expansion, I think it was about 100 bps that we're expecting from both companies, we are nicely on track.

And then I also wanted to touch on international opportunities here. You know, obviously, back in the summer, I think you guys acquired MooD Enterprises, and now Deep3. It seems as though at least the U.K. has a growing interest to the company. How are you thinking about international business opportunity and what you might do going forward to build it out as it is an interest?

Matt, thanks. So, upon taking this role, one of my focus areas was to look at our U.K. footprint and take their attractive margins, their customer relationships, both expertise and technology capabilities in how do we expand that. And as you mentioned, over the last year or so as recently as yesterday, we did MooD, we did Purple Secure and now Deep3, all mission expertise companies that provide technical and domain knowledge. To us, the world is a very dangerous place. U.S. continues to work with the site to our partners out there, many of whom get support from across our company both in the enterprise technology area and especially in the mission tech area. So, in the future, it's safe to say that we'll use our U.K. business as a beachhead of sorts from where we can deliver and support mission technology to those countries that our buying and are looking to buy our products as well as establish ourself to facilitate direct sales to the U.K. government. Today, what we sell goes to other primes the fact that we have a large, a material well-established 30-plus year business there with great customers relationships who knows how to do business in the U.K., really sets especially Mastodon up very, very well to be delivering their SIGINT and their EW products directly into that marketplace.

Our next question will come from Matt Akers of Barclays. Please go ahead.

I wanted to ask to the deals that you just announced. Could you talk a little bit about the process how you reached those deals? It looks like the valuation was pretty reasonable. Were there any other kind of bidders and how do you sort of think about your ability to continue to define assets at reasonable prices even when some of the other deals we've seen in the space have kind of gotten more expensive overtime?

Again, thanks, Matt. As part of our kind of market-based strategy, we look at kind of where we have strengths and where we have whites pace in either a technology, or a customer, or a geographic or other kind of space. And the operations organization business development team, you keep a running list of where that white space exists and what type of acquisition targets we fill in those particular white spaces. For two of the domestic acquisition, they were sole source. We knew the company. We've had conversations with one company for over two years, kind of in dialogue about potential opportunities for us to acquire them. The other one was more recent, but it was 6 to 12 month process to have those discussions. And we convinced them, I think, rightly so that we would be a very good home for their companies from a cultural fit, treating their employees appropriately. A very consistent culture kind of mission values associated with those. And we were able to negotiate a price which was feel from their perspective and feel from our perspective The three acquisition was a process, competitive process brought to kind of embark in the U.K. And we did appropriate due diligence trying to understand the capabilities of it and in a studios process excellent there. Yes, we were happy with the financial of the acquisitions, good growth in the margin characteristics and we purchase that on a - what we consider an attractive price. That’s probably enough said for that.

And then, maybe I missed it, but what do you see for interest expense in your guidance now?

We did not kind of changed it, but the acquisitions, $100 million worth of incremental you know capital, at 3.5% on an annualized basis will deliver or produce $3.5 million of additional interest expense. For a full year, this is a part year or so with, you know, a couple of million dollars of interest expense. You know, that being said, rates appear to continue to come down. And so, you know, that should offset - the lower rates should offset some that incremental debt.

Our next question today will come from Sheila Kahyaoglu of Jefferies. Please go ahead.

I was wondering, can we - maybe following up on Jon's question regarding the profitability bridge. Is there any way - Tom, I know you gave a ton of color, you know, the pass-through business is maybe 20 bps of an impact in Q1. How do we think about the recompete? And then, year-over-year, can we just - is there any way you could bridge the moving pieces, the headwinds, and maybe the benefits from the change in, you know, focus on more mission technology and how that benefit mix?

Yes. So, you know, Sheila, I’ll start my remarks with, you know, we provide full year guidance. And we run our business on a kind of 12 month basis. Although good portions of our business are relatively steady and there's not a lot of change from period to period, there are aspects of it which would create, you know, some fluctuations, I highlighted a few product sales last year, material pass-throughs kind of this year, and the like. In terms of the overall bridge, when we provided our initial guidance, we spoke about the contribution to the acquisitions, new business that needs to be won this year, new business which we won last year which was being executed in 2020, as well as falloffs in the business because of natural program kind of life cycles, and that provided that kind of revenue bridge. Generally, that's unchanged but for the three acquisitions which we just spoke about. In terms of profitability, two things are occurring. One is we’re adding LGS in Mastodon and we spoke about the marketing characteristics and revenue characteristics of those acquisitions. In core CACI, the bigger piece of the business should be experiencing EBITDA gross margins consistent with the goals we've previously articulated, that 10 to 30 basis points. And so, that's the full year. Within every quarter, we're going to see those fluctuations. I did mention one contract which was generating high levels of profitability at TNM rates to support a key government customer. We were successful for the recompete of a good piece of work, long-established relationships. The customer decided to structure that is a cost plus. And so, that has some headwinds a little bit in the first quarter and a little bit in the second quarter. I wanted to highlight that for you because it did add - subtract a few basis points in EBITDA margin that was consistent with the guidance we knew we were occurring. That was going to occur. And as we get into the back half of the year, we will have the appropriate offsets in terms of organic growth and improvement in other aspects of our kind of business.

And just as a follow-up maybe on the contracts that you expect to win. I think you said 94% which seems relatively high. How do you think about the 2% that’s only from new rewards? How big is the pipeline? Kind of what kind of opportunities are you guys looking at? Thank you.

Yes, Sheila. I think we're at 94% currently because of a 4% recompete and 2% win. So, yes, and coming off the first quarter that was very, very strong. We’re confident on closing both the 4% and the 2% gap. For the mix, a relatively high percentage of new business that has its own challenges as very little of that work as new. So, those are all takeaways. So, I would say that the mix is what we would like to see coming out of the first quarter. Should we have - well, I guess I'll just leave at that. We'll see how the works go in the second quarter and also look at what that ramp-up pattern is to determine what our guidance looks like going forward.

Our next question will come from Cai von Rumohr of Cowen. Please go ahead.

Yes. Thanks so much. I've been joining a little bit late so excuse me if this has been asked. But everyone in the space has complained about some push-outs and some protests and pretty much everyone who has reported has reported terrifically strong September quarter bookings, you guys especially. What does all of this mean for the fourth quarter? I mean are we looking at because of the stretch outs, are we looking at particularly strong fourth quarter or, you know, were not so strong? Give us some color on that if you could please.

Sure, Cai. You know, I have to tell you, we've looked at all those types of measures at least over the last five to six quarters, and, you know, we, CACI, we haven't seen any different trend. We attribute our strong book-to-bill numbers around making sure that we're staying close to our customers, that we make sure we actually understand where they're going to go. About 5 to 10 years back, we’ve gotten involved with the electromagnetic spectrum where we believe the government is going to spend their funds. And lo and behold, we find ourselves with very well-funded programs and programs out there that we, as a larger company, can go out there and bid. You know, we consistently look for end of the year flushes. We did not see that. We've been hearing about multiple protests and how those have changed, frankly, only one very immaterial and less than $30 million or $4 billion was actually protested. So, I mean, what it portends for us is, we're in the right places. We're actually bidding less and winning more. We're a 220-or-so-billion dollar addressable market. So, we would attribute our award’s successes around being very judicious and very focused on what we're out there bidding rather than trends or the federal government having a well-versed contract for us or having funding in place. We just, frankly, have not seen those issues.

And last one, given your super bookings, has the backlog - the length of the backlog, the average duration changed at all?

Absolutely. So as we’ve been focused on winning larger what I think we’ve always called stickier programs, those things that are closer to the flagpole where we can differentiate based on technology and our intellectual property and our capabilities that allow us to pursue a different class of programs, let's say. And many of those are larger and they're also longer term because many of them are technology programs versus programs that we would classify as expertise one. So, as we've won some of these $800 million, $900 million jobs, those are not $110 million three-year programs. Those are multi-year programs where we're delivering a solution to our end item customer. And that's what we've been focused on. It's taken us a while to sort of take the next step in CACI’s long-term history but we find ourselves well positioned at winning those. So, if you look at our backlog, yes, it’s going to be a longer term one. And what we like about what we're starting to see, Cai, is that compounding growth of winning more of these multi-year technology programs. When we get beyond that three to six-month ramp-up, that really allows us to focus on great organic growth as we go forward.

Our next question will come from Tobey Sommer of SunTrust. Please go ahead.

Could you talk about the ongoing opportunity for you to push in the kind of higher margin recurring services, and I asked in the context of the announcement you had recently with BlackBerry which I found quite interesting. Thank you.

Yes. Sure. So, still within that mission tech area, we have been looking at, not only internal investments and acquisitions but that third leg of how we fill the gap is around partnerships. So with some strategic hires and understanding what other parts of the federal government needed, one of those was secured communications. Some of those day-to-day, every day voice and text communications going on across the federal government, a lot of that we believe for quite a long time in our government customers or coming to that, which is how do we do a better job of not only securing the e-mails that are sent around the federal government but how do we secure text and voice. We looked at that problem about two years back again ahead of need and found a great partner in BlackBerry. John Chen and his team there have been outstanding partners. We've actually come up with a win-win solution for not only both of us but to our federal government customer. What's unique is they can offer it as a service either in a customer's infrastructure or a cloud or within ours. And it starts to get us into those perpetual revenue streams, right, where we're delivering a software solution that sits on an already issued government smartphone and allows us to drive revenue and earnings growth on a monthly basis. We've got a couple pilots going on now. We like that type of model and I would expect you would see us doing more of that in the future.

And our next question today will come from Seth Seifman of JPMorgan. Please go ahead.

John, I wonder if I can maybe ask Cai’s question - second question a little bit different way. Back when the backlog - total backlog was around $11 billion that seemed to support a business with almost $4.5 billion of sales. How should we think about the sales level that a business with $20 billion of backlog can support?

Yes. I guess first is you should see us to continue to grow, the easy answer. We watch the backlog number. We look at the front of backlog number. We're also keeping an absolute eagle's eye on making sure that we continue to be disciplined in what we chase. As Tom mentioned earlier, we've had a great first quarter. We've got a lot of questions on second quarter and all. What we're really focused on is where is our year-end. We are confident. If you look at our book of business today, it is of longer duration. What that says about revenue growth and therefore earnings growth over time is we should consistently want to see that going up into the right. We have been talking about growing this business not only top line because there is a lot of organic growth chatter out there that's just not for us. We actually believe that we build better shareholder value when we're being very discriminate on what we're out there chasing and the things that we're out there chasing and shaping need to not only provide top line growth, but also provide additional capabilities to grow our addressable market and, at the end of the day, grow better, show us better margins. What's exciting about if you are using your numbers, if you compare where we were maybe two years ago to where we are now, our backlog is greater. We are a larger company. We are consuming backlog at a much more rapid, rapid pace. And all I can tell you is that we are extremely focused on bottom line as much as we are top, as well as cash and cash flow because that additional cash flow funds additional acquisitions, it not only fills gaps. But every time we fill a gap out there, it droves - it grows our addressable market and it allows us to differentiate it even more.

And maybe as a follow-up, how close are you to kind of a disclosure level for product sales and filings?

Yes. So, you know, we’ve been spending a bunch of time talking about that. And, you know, when we talked about it at our Industry Day, we did provide this new framework around enterprise and mission expertise in technology. To be very, very transparent, we just rolled this framework out. We’re still making sure that the definitions that we have for these areas - because the one thing we strive to do with what we think is a very simple way to talk about our business is make certain that the receivers of our updated messaging believe that it's simple. Now, having said all of that, at Investor Day, we did provide the current mix of business and we also provide the information, if I remember, on bids submitted and to be submitted. I believe we did that in each of the four areas. What we've done since then, if you've noticed, is in our press releases, we've continued to share that level of information. So, every award that we have out there, we put dollar value. We also talk about whether that's mission or enterprise expertise and whether it's mission or enterprise tech. So, you know, what I'd tell you is that, Tom and I and the IR team will continue to assess, providing more information. Maybe that's by those four quadrants, maybe if by customer type, be it enterprise and mission. So, long way to say we’re still in the early stages. We know you all would like more and more information. We’re trying to be as transparent as we believe we can now. I think I also mentioned there to instrument our internal systems is another step along this process, but very much appreciate your question there.

Our next question will come from Joseph DeNardi of Stifel. Please go ahead.

Tom, so the book-to-bill a little over two times trailing 12 months. So, given what you’ve said about the pipeline and the expectations for bid activity, if you win what you think you'll win, what does that imply for kind of a book-to-bill for FY 2020? I guess this is your opportunity to say that book-to-bill should moderate if that's the case. If that's not the case, then that's good too. Just interested in your thoughts. Thanks.

It’s quite an interesting question. So, we do have a good amount of kind of bids outstanding, kind of bids to be submitted. Last year kind of in 2019, $10.3 billion of awards. Our capture rate, the percentage of revenue that we won, was 70%. So, this is kind of a very high level for us, certainly higher than any number that we had before. And is that repeatable? I'm not sure. So, if we repeat those very high overall winning rate, we'll continue with this. But it's hard for me to speculate as to what the total amount of awards will be for the full year. So, I'm going to refrain from trying to go down that particular path.

Yes, okay.

Joe, I would also add in there, you’ll never hear me talk about awards without saying the word lumpy, right? Every time somebody goes through some of these streaks, all it would take is for us to do $3.9 billion next quarter. And, unfortunately, Tom and I will spend most of a quarter asking what happened. So, it's a mix. The way I see it is that we had a great FY 2019. We have the FY 2020 first quarter that we expected plus or minus a couple of points. The timing is going to play a factor as well, not so much based on budget and these end of the year flushes that I continually hear of. It's really more about when our customers are ready to release. So, we're going to continue to watch the mix. And also I would tell you - we’ll expect respectable bookings throughout this year.

And then, it does sound like you guys are giving some thought in terms of how to help the market understand how to think about kind of the bookings and the backlog as the duration changes a little bit. So, can you guys just disclose or help tell us kind of what the - maybe the weighted average duration of your bookings in the quarter was or kind of what the duration of your backlog is at this point. It seems like that would be something that's kind of fairly straightforward to calculate? Thank you.

Yes. So, Joe, John previously answered the question that we believe the duration is increasing because it is. Some of the larger words are five, seven, eight years which is driving higher duration. Let us kind of reflect on providing that specific level of delta in preparation and that maybe a helpful metrics s kind of duly noted.

And our next question today will come from Robert Spingarn of Credit Suisse. Please go ahead.

So, I wanted to go back to where Seth was and just to ask you about integrating these technology focus or more product focus acquisitions. How that differs from integration of an expertise type domain or an expertise acquisition. And just from a strategic perspective, how does it differ, and then perhaps from a cost or integration expense perspective?

Yes, Rob thanks. So if we focus on the mission technology area, clearly that would describe long before we had these terms what we would - where we would put six, three, where we would put parts of L-3, NSS, where we put Mastodon and LGS and two of the smaller ones that we announced today. To get to the integration, I actually looked at in a few different ways. One is how do we all write on the same systems, and I would tell you whether it's an expertise company or a mission acquisition. We all benefit from being on the same systems. We have had some acquisitions where the acquired party comes in and their financials are on one system and their human capital information on another. And frankly, that's a distraction when we go forward together. So first and foremost, we look at systems. Beyond that, the next area is how do we bring new employees in. And there's really no difference between expertise and the technology in it, bringing technology companies in. The third area is what type of company are they and I have to tell you that, as we do more mission technology companies, we’d like to bring those companies - we’d like to connect them, but not fully integrate them. What makes a mission technology company great is the kind of creative culture and how those people within that acquired asset work together. So, although we may put them in the same umbrella, we're really looking for those companies to come in and keep their unique and innovative kind of ways. LGS, perfect examples so, Kevin Kelly was the CEO of that company. Kevin Kelly came in. The majority of LGS today looks just like what LGS looked like. The difference is, is along the way, Kevin Kelly picked up another $1.2 billion of our business, which are things that sort of looked more like mission tech. So, you know, we're very, very careful, and frankly, done 79 acquisitions now, if I'm right. We get to say that we're very experienced at it. The one thing we pride ourselves on is driving and increasing their value that they have the day that they came in. And not - I hate to use the word destroy because that's too draconian, but not take away from the value that they bring. So, the integration to those three areas looked exactly alike. But as we look at larger, perhaps, technology companies, we're going to make some very good decisions with the incoming management team, which is what we always do, is to how best to position them inside of CACI.

And then the only other thing I wanted to ask, just with what the big jet eye award that just happened. Is there any opportunity for CACI to play as a contractor, or do you have any existing partnerships, for example, with Microsoft that might benefit you there?

So yes, we've had a longstanding relationship with AWS. We have an almost typically long relationship with the Microsoft folks. Whether we’re talking about AWS Cloud or we’re talking about Azure. Those are great commodity cloud-based infrastructure/frameworks that both DoD and the intelligence community and federal civilian agencies need out there. We have more folks trained on the AWS Cloud than most. One of my answers earlier, I would just put a sort of exclamation point on it. We've been involved in the AWS Cloud for quite a long time. The intelligence communities, cloud has called CQS, and by our customers’ measure not by us. CACI has moved more applications to the cloud than the next five government providers combined. So, we enjoy a great past performance of record. Our customers know that as well. We have people trained in both Azure which are now be the DoD cloud standard as well as AWS. We’ll continue to work well with them, both outstanding companies, both provide outstanding products and we enjoy that integrator’s position, which means that we will continue to be the market leader in moving government applications to the cloud.

[Operator Instructions] Our next question is a follow-up from Jon Raviv of Citi. Please go ahead.

Just quickly here on the CapEx. So just is there a [indiscernible] grown before and I think CapEx is lower so just thinking here. Is there a chance for the 1.3% to stick around for longer?

Yes I think so. The other factor kind of driving the CapEx is some higher capital X would be kind of mission technology focused. LGS in particular okay with a materially higher CapEx as a percentage of revenue than legacy CACI, very expensive kind of test equipment laboratory unit to allow them to stay ahead of customer demand in terms some of their capabilities. A lot of our work is classified when we get facilities. We have good space associated with it so - a little too early to make longer-term forecast of what CapEx will be as a percentage of revenue for 2021 and beyond. But suffice it to say to reiterate, as we grow, we will require more CapEx which is in our mind, a very good problem to have.

Sure, sure all right, got it. Thank you.

You bet.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to John Mengucci for any closing remarks.

Well, thanks, Allison, and thank you for your help on today's call. We would like to thank everybody who dialed in or listened to the webcast for their participation. We know that many of you will have follow questions. Tom Mutryn, Dan Leckburg, and George Price are available after today's call. Now, to those Washington Nationals fans out there, congratulations on winning your first World Series Championship. For those of you who are local to the Washington area, I trust that you enjoyed our commercials. They really celebrated the Stay in the Fight theme which is what we as a company do each and every day to protect this great nation of ours. So with that, this concludes our call. Thank you and have a very good day.

Ladies and gentlemen, the conference is now concluded, and we thank you for attending today's presentation. You may now disconnect your lines.