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Edited Transcript of CACI earnings conference call or presentation 31-Oct-19 12:30pm GMT

Q1 2020 CACI International Inc Earnings Call

Arlington Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of CACI International Inc earnings conference call or presentation Thursday, October 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Leckburg

CACI International Inc - SVP of IR

* John S. Mengucci

CACI International Inc - President, CEO & Director

* Thomas A. Mutryn

CACI International Inc - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Cai von Rumohr

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Gavin Eric Parsons

Goldman Sachs Group Inc., Research Division - Associate

* Jonathan Phaff Raviv

Citigroup Inc, Research Division - VP

* Joseph William DeNardi

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst

* Matthew Carl Akers

Barclays Bank PLC, Research Division - Research Analyst

* Matthew Higgins Sharpe

Morgan Stanley, Research Division - Equity Analyst

* Robert Michael Spingarn

Crédit Suisse AG, Research Division - Aerospace and Defense Analyst

* Seth Michael Seifman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Sheila Karin Kahyaoglu

Jefferies LLC, Research Division - Equity Analyst

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Q1 FY '20 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.

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Daniel Leckburg, CACI International Inc - SVP of IR [2]

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Well, thank you, Alison, 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?

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John S. Mengucci, CACI International Inc - President, CEO & Director [3]

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Thanks, Dan, and good morning, 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 is 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 delivered 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 3 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 4 words: enterprise, mission, expertise and technology. We serve 2 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 to 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 5-year, $385 million enterprise technology contract to support the U.S. Navy's MyNavy Human Resources Transformation. Based on our strong past performance on a similar program for the United States Army, IPPS-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 manages personnel.

We also won a 5-year, $443 million mission expertise contract to assist the U.S. Army in countering 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 5-year, $438 million mission technology contract to support the United States Air Force Research laboratory with a multi-domain integration, a 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 3 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 development -- capital deployment. We continue to pursue high-quality, innovative companies that fill capability gaps and drive further differentiation in our customers' most critical investment areas.

As I mentioned earlier, we closed on 3 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 defense customers, a growth area for both our domestic and our U.K. operations.

While 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 in 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 2-year agreement signed back in August provides healthy spending levels for our customers in both government fiscal '20 and '21, particularly in areas aligned to CACI capabilities. Government fiscal year 2020 started under continuing resolution, which is in effect through November '21 and could extend longer.

As you know, we start virtually every year under a 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.

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Thomas A. Mutryn, CACI International Inc - Executive VP, CFO & Treasurer [4]

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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, consistent with our expectations in our annual plan but lower than last year. Recall that in the first quarter of last year, we realized a onetime 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 a low 13% as a result of the tax benefit associated with stock vesting versus this quarter's effective tax rate of about 18.5%.

Normalizing for these factors, we realized modest first quarter 2020 net income growth consistent with expectations. The LGS and Mastodon acquisitions continue to perform well 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 A/R purchase facility, it increased at 38% over last year.

Days sales outstanding, excluding the facility, was a 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 3.0x. Including the $105 million of incremental debt to finance the 3 acquisitions John discussed, pro forma net debt to trailing 12-month adjusted EBITDA is expected to be around 3.3x at the end of December, leaving ample debt capacity to fund additional acquisitions.

Slide 11, please. We are raising our fiscal '20 guidance to incorporate these recent acquisitions. Cumulatively, we expect them to add around $50 million to our fiscal '20 revenue and $3 million to net income, and we have increased our guidance accordingly. All 3 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 produced positive present values.

In aggregate, we paid a bit less than 8.5x next month's 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 '20 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 '20 CapEx to be between $70 million and $75 million.

To help with your modeling, let me give you some color on the second quarter of fiscal '20. In aggregate, we expect the 3 recent acquisitions to contribute around $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 levels a year ago.

The positive impact of the LGS and Mastodon acquisition and organic growth are offset by the expected decline in profitability of 1 large recompete that moved from time and materials at very favorable rates to cost-plus during the quarter. This was fully expected and included in our initial FY '20 plan and our guidance.

Slide 12, please. Our forward indicators remain healthy. As John mentioned, first quarter was a record for contract awards coming in at $4 billion and contributing to a book-to-bill of 2.3x on a trailing 12-month basis. This continued to drive backlog growth now at a record $19.5 billion, up close to 50% year-over-year.

We also had better visibility into fiscal '20 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 remain strong with submitted bids pending award at $7.5 billion, with over 80% of that for new business at 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 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 0 value for MAIQs upon contract award and will be our practice going forward.

With that, I'll turn the call back over to John.

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John S. Mengucci, CACI International Inc - President, CEO & Director [5]

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Thank you, Tom. Let's go to Slide 13. In closing, I'm very pleased with our first quarter performance and start 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 are 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 '20 and beyond. None of this happens without the talent, innovation and commitment of our employees. I'm 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, Alison, let's open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Gavin Parsons of Goldman Sachs.

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Gavin Eric Parsons, Goldman Sachs Group Inc., Research Division - Associate [2]

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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?

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John S. Mengucci, CACI International Inc - President, CEO & Director [3]

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Yes. Gavin, thanks. Yes, it's very true that we've -- we're coming 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 times do vary by different programs. I thought I'd take just a moment to walk through that because like all of us say, we've had tremendous awards and are really trying to be more predictive of when that revenue shows up.

On the expertise side, most times, if those are takeaway programs, we'll pick up the incumbent employees, and that does support a quicker ramp-up period, but then transition time lines vary somewhere in the 1- to 3-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 out program infrastructure. So those ramp-up times can be anywhere between 3 and 6 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 candidates 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.

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Gavin Eric Parsons, Goldman Sachs Group Inc., Research Division - Associate [4]

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Okay. That's great. And then just on the higher R&D spend -- IR&D spend. I think in the past, you've mentioned the customers are 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 that customer attitude towards retaining IP, that would be great.

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John S. Mengucci, CACI International Inc - President, CEO & Director [5]

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Yes. So yes, we are clearly spending more in IR&D and [bidded] proposal money. And a new element with the acquisition, I shouldn't 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 support 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 DeEtte Gray and her team have really moved more intelligence applications to the C2 AWS cloud than the next 5 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 talk 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 model, really, as you mentioned, rely on independent R&D where we're designing and creating technology based on intellectual property. We've had a great track record, frankly, for those technologies and those investments that are focused on intellectual property. We'd 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 intellectual property into additional awards. And one of those areas are multi-use devices that -- where a customer could download software and that can do the mission that, 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.

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Thomas A. Mutryn, CACI International Inc - Executive VP, CFO & Treasurer [6]

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And Gavin, let me add a couple of things, if I could. LGS in particular has done a masterful job in the past of ensuring that they own the intellectual property. They have exclusive rights to a variety of technologies and a number of patents. And so that is -- becomes an asset of CACI, which is very positive. And you mentioned the internal rates of return, the IR&D. A bit of it -- kind of in our -- in the science, trying to forecast the profitability of these types of investment, but there is very robust processes, 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.

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Operator [7]

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

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [8]

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On the CapEx, can you guys give us a little more on where it's being spent? Is it fair to say that FY '20 is tracking to your highest capital intensity as a percentage of sales in history? So what's a long-term CapEx as a percent of sales and historically below 1%? We've talked about 1% maybe going forward; this year, it's 1.3%. Start the long-winded question, not to nitpick over 30 basis points here and there. But could we expect it to actually go higher as you win more? And as the sort of -- your movement to the net framework should [surround] a bit?

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John S. Mengucci, CACI International Inc - President, CEO & Director [9]

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Yes, John. Thanks. The question is like CapEx spending. It's actually a nice high-class issue for us to talk about. First off, we did factor into our guidance a level of CapEx. But we often have startup 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 make 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 1 facility so we can house multiple programs in it. I'd also 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. I'll let Tom talk a little bit more about the financial side of it.

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Thomas A. Mutryn, CACI International Inc - Executive VP, CFO & Treasurer [10]

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Yes. So in terms of where we spend the capital, kind of, #1 is facilities, kind of John mentioned. Second, internal IT, 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 IR&D efforts. If somebody now gets to working capital, growing companies need more working capital to sustain that growth. And as companies shrink, they can free up working capital, very similar to capital spending. As companies grow, they'll 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 of -- in our business.

And I will also underscore that the expense associated with the capital spending, which is kind of full post into depreciation, et cetera, our allowable expenses recaptured in our kind of rate structure. So that's part of our kind of bid process to have CACI own facilities where employees will do work on behalf of the government.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [11]

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Okay. And then this is a follow-up. Margin down a bit here year-over-year. You're talking about flat net income in 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 give -- can you give us a sense of the moving pieces there?

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Thomas A. Mutryn, CACI International Inc - Executive VP, CFO & Treasurer [12]

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Yes. So yes, for the first quarter on a year-over-year basis, we have some goodness in the last -- first quarter so that made a tough comparable. But in terms of absolute value, LGS contributed to the positive margin in the quarter. The $20 million of pass-throughs were kind of negative to kind of margin performance. And I did mention a large contract transitioning from kind of time and material at very attractive rates to cost-plus. That transition kind of dovetailed 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, and we expect the base business to continue to perform. And as we add LGS and Mastodon into the mix, we will -- throughout the year, in particular, the third and the fourth quarter, you're going to see some healthy kind of margins to support that 10.3% guidance that we provided.

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John S. Mengucci, CACI International Inc - President, CEO & Director [13]

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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. And we've got 2 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.

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Operator [14]

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

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Matthew Higgins Sharpe, Morgan Stanley, Research Division - Equity Analyst [15]

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Just wanted to touch on LGS and Mastodon performance here for a moment, obviously, given bad time's choppy nature of deliveries there, revs and profitability can jump around somewhat, and I think we saw that the last quarter. So maybe if you could provide some color on how those acquisitions have tracked through Q1, and whether or not they're on plan to date would be helpful.

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John S. Mengucci, CACI International Inc - President, CEO & Director [16]

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Yes, Matt. Thanks. I mean as Tom mentioned during his prepared remarks, financially, both are performing just as expected. You did mention there's going to be choppiness in some of their product deliveries thus far going into this plan. 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 customers, SIGINT, cyber, EW and communications need. I'm very happy to report that the -- those 3 groups have had very material customer meetings, and verbal and financial support to procure software-defined solutions. So the reason why we bought those 2 companies and integrated them with what we're doing in the SIGINT and in the 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 March was not that far back. And I mean, overall, 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.

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Matthew Higgins Sharpe, Morgan Stanley, Research Division - Equity Analyst [17]

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Got it. And then I also wanted to touch on international opportunities here. Obviously, back in the summer, I think you guys acquired MooD Enterprises and now Deep3. It seems as though, at least the U.K. is 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, if it is an interest?

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John S. Mengucci, CACI International Inc - President, CEO & Director [18]

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Yes. 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 and both expertise and technology capabilities and 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 its ITAR 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 in those countries that are 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 customer relationships, 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.

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Operator [19]

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Our next question will come from Matt Akers of Barclays.

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Matthew Carl Akers, Barclays Bank PLC, Research Division - Research Analyst [20]

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I wanted to ask, so 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 find assets at reasonable prices, even when some of the other deals we've seen in the space have kind of gotten more expensive over time?

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Thomas A. Mutryn, CACI International Inc - Executive VP, CFO & Treasurer [21]

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Yes. Thanks, Matt. As part of our kind of market-based strategy, we look at kind of where we have strength and where we have white space in either a technology or a customer or a geographic or other kind of space. In operations organization, business development team, you keep a running list of where that white space exists and what type of acquisition targets would fill in those particular white spaces. After 2 of the domestic acquisitions, they were sole-sourced, okay? We knew the company, we've had conversations with 1 company for over 2 years, kind of in dialogue about potential opportunities for us to acquire them. The other 1 was more recent, but it was a 6- to 12-month process to have those kind of 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 fair from their perspective and fair from our perspective. The Deep3 acquisition was a process, a competitive process brought to -- kind brought it into the U.K., and we did appropriate due diligence, trying to understand the capabilities of it. And through this process, we were successful there. Yes. We were happy with the financials of the acquisitions. Good growth in margin characteristics, and we purchased that at a -- what we consider an attractive price. That's probably enough said for that.

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Matthew Carl Akers, Barclays Bank PLC, Research Division - Research Analyst [22]

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Great. And then maybe I missed it, but what are you seeing for interest expense in your guidance now?

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Thomas A. Mutryn, CACI International Inc - Executive VP, CFO & Treasurer [23]

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We did not kind of change it, but the acquisition is $100 million worth of incremental capital. You add 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 a couple of million dollars of interest expense. That being said, these kind of rates appear to continue to come down. And so that should offset -- the lower rate should offset some of that incremental debt.

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Operator [24]

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

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [25]

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I was wondering, can we -- maybe following up on Jon's question with regarding the profitability bridge. Is there any way -- Tom, I know you gave a ton of color. 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 focus to more mission technology and how that benefits mix?

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Thomas A. Mutryn, CACI International Inc - Executive VP, CFO & Treasurer [26]

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Yes. So Sheila, I'll start my remarks with -- 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 will create 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 contributions 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 fall off 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 3 acquisitions, which we just spoke about. In terms of profitability, 2 things are occurring. One is, we're adding LGS and Mastodon, and we spoke about the margin characteristics and revenue characteristics of those acquisitions.

And core CACI, the bigger piece of the business, should be experiencing EBITDA gross margins consistent with the goals we previously articulated that 10 to 30 basis points, and so that's the full year. Within every quarter, we're going to see those unit fluctuations.

I did mention 1 contract, which was generating high levels of profitability at T&M rates to support a key government customer. We were successful for the recompete of a good piece of work along, establish relationships. The customer decided to structure that as a cost-plus. And so that had 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 or subtract a few basis points in EBITDA margin. That was consistent with the guidance we knew we were incurring. 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.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [27]

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

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John S. Mengucci, CACI International Inc - President, CEO & Director [28]

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Yes, Sheila. I think we're at 94% currently [in place] of 4% recompete and 2% win. So yes, coming off of 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 is 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 it at -- we'll see how awards go in the second quarter and also look at what that ramp-up pattern is to determine what our guidance looks like going forward.

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Operator [29]

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

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [30]

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I've been joining a little bit late, so excuse me if this has been asked. But everyone in this space has complained about some push-outs and some protests. And pretty much everyone who's 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 a particularly strong fourth quarter or not so strong? Give us some color on that, if you could, please?

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John S. Mengucci, CACI International Inc - President, CEO & Director [31]

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Yes. Sure, Cai. I have to tell you, we've looked at all those types of measures, at least over the last 5 to 6 quarters. And 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 got involved in the electromagnetic spectrum and where we believe the government was 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.

I -- 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 1 very immaterial and less than $30 million of our $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 in a $220-or-so billion addressable market. So we would attribute our awards, 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 have any funding in place. We just, frankly, have not seen those issues.

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [32]

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

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John S. Mengucci, CACI International Inc - President, CEO & Director [33]

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Yes. Cai, thanks. 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 allows 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 we would classify as expertise ones. So as we've won some of these $800 million, $900 million jobs, those are not $110 million 3-year programs, those are multiyear 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 multiyear technology programs. When we get beyond that 3- to 6-month ramp up, that really allows us to focus on greater organic growth as we go forward.

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Operator [34]

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Our next question will come from Tobey Sommer of SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [35]

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

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John S. Mengucci, CACI International Inc - President, CEO & Director [36]

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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 in understanding what other parts of the federal government needed, one of those was secure communications. Some of those day-to-day, everyday voice and text communications going on across the federal government. A lot of that, we believe, for quite a long time, and our government customers are 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 2 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 2 of our federal government customer. What's unique is, we can offer it as a service, either in a customer's infrastructure or 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 of 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.

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Operator [37]

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

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [38]

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John, I wonder if I could 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 dollars of sales. How should we think about the sales level that business with $20 billion of backlog can support?

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John S. Mengucci, CACI International Inc - President, CEO & Director [39]

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Yes. I guess first is, you should see us to continue to grow. The easy answer. We're -- we watch the backlog number. We look at the funded 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 gotten 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 as 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's 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 and better margins. What's exciting about, if you -- using your numbers, if you compare where we were maybe 2 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 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 flow because that additional cash flow funds additional acquisitions that not only fills gaps, but every time we fill a gap out there, it grows our addressable market and allows us to differentiate it even more.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [40]

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

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John S. Mengucci, CACI International Inc - President, CEO & Director [41]

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Yes. So we've been spending a bunch of time talking about that. And when we talked about it at our Industry Day, we did provide this new framework around enterprise and mission expertise and tech -- and 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 4 areas. What we've done since then, if you've noticed this on 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 what I'll tell you is that Tom and I and the IR team, we're continuing to assess, providing more information, maybe that's by those 4 quadrants, maybe it's by customer type, be it enterprise and mission. So a 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.

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Operator [42]

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Our next question will come from Joseph DeNardi of Stifel.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [43]

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Yes. Tom, so the book-to-bill a little over 2x trailing 12 months. Given what you said about the pipeline and 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 '20? 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, that's good, too. Just interested in your thoughts.

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Thomas A. Mutryn, CACI International Inc - Executive VP, CFO & Treasurer [44]

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What 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 2019, $10.3 billion of awards. Our capture rate, the percentage of revenue that we won was 70%. So just 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 win rates, yes, 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.

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John S. Mengucci, CACI International Inc - President, CEO & Director [45]

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Yes. Joe, I'll also add in there. You'll never hear me talk about awards, and I'll say 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 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 '19. We had the FY '20 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 customer is ready to [re-lease]. So we're going to continue to watch the mix and also, I would tell you, we'll expect respectable bookings throughout this year.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [46]

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Fair enough. 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.

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Thomas A. Mutryn, CACI International Inc - Executive VP, CFO & Treasurer [47]

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Yes. So Joe, John previously answered the question that we believe the duration is increasing because it is. Some of the larger awards are 5, 7, 8 years, which is driving higher duration. Let us kind of reflect on providing that specific level of -- if you delved in the direction, and that may be a helpful metric. So kind of duly noted.

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Operator [48]

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And our next question today will come from Robert Spingarn of Crédit Suisse.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [49]

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So I wanted to go back to where Seth was and just to ask you about integrating these technology-focused or more product-focused 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?

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John S. Mengucci, CACI International Inc - President, CEO & Director [50]

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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 Six3, where we would put parts of L-3 NSS, where we'd put Mastodon and LGS and 2 of the smaller ones that we announced today. To get through the integration, I actually look at it in a few different ways. One is, how do we all ride 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 system. So we have had some acquisitions where the acquired party comes in, and their financials are on one system and their human capital information is 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 like to bring those companies. We 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, innovative kind of ways.

LGS, perfect example. So Kevin Kelly was the CEO of that company. Kevin came in. The majority of LGS today looks just like what LGS looked like. The difference 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 we're very, very careful. And frankly, we've done 79 acquisitions now, if I'm right. We get to say that we're very experienced at it. And 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, 2 of those 3 areas look 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.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [51]

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

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John S. Mengucci, CACI International Inc - President, CEO & Director [52]

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Yes. Thanks. So yes, we've had a long-standing relationship with AWS. We have an almost equally long relationship with the Microsoft folks. Whether we're talking about the 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, just to put a sort of exclamation point on it, we've been involved in the AWS cloud for quite a long time. The Intelligence Community's cloud is called C2S and by our customers' measure, not by us, CACI has moved more applications to the cloud than the next 5 government providers combined. So I -- we enjoy a great past performance record. Our customers know that as well. We have people trained in both Azure, which will 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.

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Operator [53]

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[Operator Instruction] Our next question is a follow-up from Jon Raviv of Citi.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [54]

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Just quickly here on the CapEx. So just is there -- CACI has grown before, and I think CapEx was lower. So just thinking here, is there a chance for the 1.3% to stick around for longer?

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Thomas A. Mutryn, CACI International Inc - Executive VP, CFO & Treasurer [55]

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Yes. Yes, I think so. And the other factor kind of driving the CapEx is some higher capital x would be kind of mission technology focus. LGS, in particular, came with a materially higher CapEx as a percentage of revenue than legacy CACI. A very expensive kind of test equipment laboratory to allow them to stay ahead of customer demand in terms of some of their unit capabilities. A lot of our work is classified. When we get facilities, we have to give space associated with it. So it's a little too early to make longer-term forecasts 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.

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Operator [56]

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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.

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John S. Mengucci, CACI International Inc - President, CEO & Director [57]

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Well, thanks, Alison, 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-up 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.

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Operator [58]

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