CACI International Inc.’s (CACI) CEO John Mengucci on Q2 2020 Results – Earnings Call Transcript No ratings yet.

CACI International Inc. (NYSE:CACI)

Q2 2020 Results Earnings Conference Call

January 30, 2020, 8:30 AM ET

Company Participants

Dan Leckburg – Senior Vice President, Investor Relations

John Mengucci – President and CEO

Tom Mutryn – Chief Financial Officer

Greg Bradford – President, CACI Limited

Conference Call Participants

Gavin Parsons – Goldman Sachs

Edward Caso – Wells Fargo

Ben Arnstein – J.P. Morgan

Joseph DeNardi – Stifel

Scott Forbes – Jefferies

Colin Canfield – Citi

Matt Akers – Barclays

Josh Sullivan – Benchmark Company

Jasper Bibb – SunTrust Robinson and Humphrey

Dan Flick – Cowen and Company

Louie DiPalma – William Blair

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the CACI International Quarter Two Fiscal Year ‘20 Earnings Conference Call. Today’s call is being recorded. At this time, all lines are in a listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. [Operator instructions]

At this time, I would like to turn the conference over to Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Dan Leckburg

Thank you, Chuck. Good morning, everyone. I am 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 number two, 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 three, please. To open our discussion this morning, here is John Mengucci, President and Chief Executive Officer of CACI International. John?

John Mengucci

Thanks, Dan, and good morning, everyone. Thank you for joining us to discuss our fiscal year 2020 second 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.

Let’s move to slide four, please. Last night, we released our second quarter results for fiscal 2020 and I am very pleased with our performance. CACI again delivered strong financial results across the Board, significant revenue and profitability growth, accelerating organic growth and robust cash flow.

We also won $2.7 billion of contract awards with approximately 60% of that value, representing new business for CACI. These results round out a great first half to our fiscal 2020.

At the beginning of the fiscal year, we guided to accelerating organic revenue growth and margin expansion. Today, we are raising revenue and net income guidance to reflect further organic acceleration with ongoing margin expansion.

Slide five, please. We continue to see healthy demand trends across our addressable market, supporting both revenue growth and margin expansion. Let me illustrate this demand with awards from this quarter.

First, CACI won a five-year $1.1 billion enterprise and mission technology contract to modernize the customers’ business and mission applications portfolio, including extensive cloud migration.

This is one of the government’s largest Agile software development programs, which we won by leveraging our unique cash performance and the award winning innovative capabilities of our Agile solutions factory. CACI now delivers on two of the federal government’s largest Agile development programs.

And mission technology side, CACI won a $475 million sole-sourced contract with an intelligence community customer to enable their critical national security missions. We won this opportunity by offering new, unique intelligence and communications technologies, leveraging the R&D field innovation of LGS. This contract represents new and recompete work for CACI.

Slide six, please. These awards are just a few examples of the high value contracts we are consistently adding to our backlog. These are larger, longer duration and enduring drivers of organic growth and margin expansion.

In fact, today, the contracts we are winning have a weighted average contract duration that is 1.5 years longer than those we won over the past three years. This results in a dependable revenue base and allows us to focus items such as BNP investment on additional growth rather than simply maintaining our book of business via recompetes.

Many of these contracts are also more complex technology development efforts that initially ramped slowly, but provide a high quality, long-term growth we are focused on delivering. What we are now seeing is something we have discussed the past several quarters.

As we successfully deliver on these contracts and enter higher volume phases, we are driving accelerating organic growth. In fact, we now expect fiscal 2020 organic growth of at least 7%, up materially from just six months ago when we guided to about 5.5%.

Slide seven, please. Turning to the market environment, we continue to be very encouraged by what we see. The two-year budget agreement signed back in August was followed by the passage of government fiscal ‘20 appropriations bills in late December, funding the government at levels about 4% higher than government fiscal ‘19.

More important to us than the absolute budget levels are the multi-year investment plans of our customers. When we map CACI’s capabilities against these priorities, we see tremendous opportunity across our $220 billion addressable markets.

Within our enterprise business, customers are modernizing IT infrastructure and business applications. In our mission business, customers are investing heavily in signals intelligence, electronic warfare, cyber, communications and space. Our alignment to these critical areas enabled our ability to take market share and gives us confidence in our future growth.

Slide eight, please. To ensure CACI remains ready to address our customers’ emerging needs, we continue to invest for future growth. We are developing differentiated technologies ahead of customer demand through our research and development program. When we win on differentiation, we deliver more value to our customers and our shareholders.

Our business development and operations organizations are developing solutions in pursuit of the right growth opportunities, testing technologies with our customers and win opportunities that will provide long-term sustainable growth and we are consistently investing in our leadership and our people, ready strategic leaders like retired General Mike Nagata, who will establish a strategic advisory group of industry and customer experts to ensure CACI remains ahead of market trends, and on the broader people side, we continue to offer highly competitive benefits including training, certifications and work life balance to name just a few. This continues to attract and retain the industry’s best talent.

In closing, I am very pleased with our second quarter performance. We remain committed to our successful strategy that has served us so well, win new business, deliver operational excellence and deploy capital to support future growth.

Relentless focused across the organization on this strategy drives growth and margin expansion, which generates increasing levels of cash flow. We then deploy that cash to add strategic capabilities and customers’ critical investment areas. This combination of organic and acquired growth has successfully compounded cash generation and shareholder value over the long-term, we remain very confident looking forward.

With that, I will turn the call over to Tom.

Tom Mutryn

Thank you, John, and good morning, everyone. Please turn to slide number nine. Our second quarter revenue was $1.4 billion, 18% greater than last year, with 8.1% organic growth. Organic growth accelerated from the first quarter as our new business awards ramped up and existing programs continue to deliver.

Net income for the quarter was $79.2 million, up 15.5% from a year ago. This is higher than the expectations that we had set last quarter as we were able to drive higher operating profit in a lower effective tax rate.

Slide 10, please. We continue to generate strong cash flow with $134 million of operating cash flow in the second quarter. Day sales outstanding were 51 days, down from 73 days last year. One major driver of the reduction is lower accounts receivable as a result of the AR purchase facility with MARPA, which we put in place in January 2019.

In addition, we have continued to drive efficiencies in our billing and collection processes. We ended the second quarter with a net debt to trailing 12-month adjusted EBITDA at 3.0 times. This provides ample debt capacity to undertake additional acquisition to add high value strategic capabilities.

Slide 11, please. We are raising our fiscal year 2020 guidance to reflect strong operating performance, as well as expectations for a lower tax rate. We now expect organic growth to be at least 7% in fiscal year ‘20, up from 5.5% when we provided FY’20 initial guidance, driven by a strong contract awards and our program performance. As a reminder, for organic growth purposes, Mastodon anniversaries at the end of January and LGS at the end of February.

Our guidance assumes an effective tax rate of approximately 22%, down from our original expectations of 23%. Drivers of this include increased benefits associated with the vesting of equity grants given strong stock price performance, as well as higher tax credits.

We continue to expect fiscal year ‘20 adjusted EBITDA margin to be around 10.3% and we are increasing our operating cash flow guidance to be at least $430 million, excluding any impact of the MARPA facility.

Slide 12, please. Our forward indicators remain healthy. As John mentioned, we again had strong contract awards in the second quarter, coming in at $2.7 billion, more than double the level we achieved last year.

On a trailing 12-month basis, this increased our book-to-bill to 2.4 times and drove record backlog of $20 billion, up 61% versus last year.

Our pipeline metrics remain healthy at admirable levels we reported last quarter. Submitted bids pending awards are $8 billion, with over 70% of that for new business to CACI and we expect to submit another $13.4 billion worth of bids during the March and June quarters, with over 70% of that for new business to CACI.

Finally, at the midpoint of our revised guidance, we now expect 97% of our revenue will come from existing contracts, 2% from recompetes and 1% from new business.

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

John Mengucci

Thank you, Tom, and let’s go to slide 13. The strength of our performance through the first half of this fiscal year positions us to deliver continued growth, margin expansion and shareholder value over the long-term. None of this happens without the talent, innovation and commitment of our employees.

I am incredibly proud of the expertise and technology we deliver to our enterprise and mission customers and I thank you all for what you do each and every day to make CACI a great company.

Great companies relying on their culture to define the right way to conduct business and their people to embrace that culture as a success factor, our culture of good character and innovation is foundational to our success.

Fortune Magazine’s recent listing of CACI as the world’s most admired company and as a top 10 information technology services company worldwide recognizes that our culture drives our success.

With that, Chuck, let’s open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question will come from Gavin Parsons of Goldman Sachs. Please go ahead.

Gavin Parsons

Hey. Good morning, gentlemen.

John Mengucci

Good morning, Gavin.

Gavin Parsons

So this is a pretty high class problem to have, but I mean, you have won a ton, at what point do you say we have won enough in the backlog to drive, say, mid- to-high single-digit growth for a few years now. We want to slow down on winning and just make sure we can execute on what we have or is it that they are not mutually exclusive?

John Mengucci

Yeah. Gavin, thanks. Yeah. I guess, clearly, we don’t plan on slowing down. We actually started, as many of you on the call know, with a very specific strategy several years back and it was to focus on growing both top and bottomline. And we made a quite a substantial commitment that will never sacrifice margin to get the kind of growth that you are now seeing today.

And that’s really foundational to us because it’s the belief that growing profit and cash flow over time is the best way to generate shareholder value and some of that was going to be organic. Some of that was going to be through our acquisitions.

We have been talking for quite some time now around when to see organic growth show up and how does it — at what point does it equal some of your peers and then at what time does it surpass it.

If we look at FY’20, I am really pleased and confident of the organic growth potential because we have consistently won larger and longer term business in the areas where customers are going to spend real dollars. We have been able to maintain rates over the last three years. So we are not pushing cost of our investments on to our customers. We are just managing a very a strong cost basis.

When we do that, when we win larger, longer duration, we actually generate this — what we are calling a B&P efficiency, which means, that if I am winning longer duration, larger awards. Then as I get a couple of years, I am spending far less to maintain the book of business and I am plowing more money into continuing to win.

So coming back to your — when do we slow down and just focus on execution are actually three part strategy. The first — the first two parts, win new business, which the team has done an outstanding job. The BD machine is working extremely well.

And then second, deliver, and our team has done an outstanding job on delivering, because as you all know, once we get the awards, we don’t gain margin unless we are generating revenue and so across the Board, we are very happy and don’t really see any end in sight.

Gavin Parsons

That makes a lot of sense. Tom, on the free cash flow conversion, I think, guidance implies about 110%. That’s down a good amount from the last few years and I appreciate you are growing a lot faster. But can you just help walk the bridge over the next few years? What does free cash conversion look like and can you improve that even if you continue to grow at a similar rate to this year? Thanks.

Tom Mutryn

Yeah. Thanks, Gavin. One of the things I will note in the last year or so is we have had a higher capital spending than we had previously and so that obviously impacts the numbers that you articulated. The capital spending is a direct result of the investments that we are making in the wins that we are having. I follow in a couple of buckets.

As we win work often times, that work is provided at CACI locations, oftentimes, we need a new facility, some of those have skip space, which is expensive facilities, some of the spaces we have, have customized laboratories and relatively expensive test and assembly equipment internal CapEx, internal — so that’s driving some in that conversion.

Other than that, kind of relatively straightforward walk down from net income to operating cash flow. We have a good number of non-cash items, depreciation, stock compensation expense, intangible amortizations. So we expect the levels that you articulated to be somewhat consistent going forward with that level of CapEx.

Gavin Parsons

Thank you.

Operator

And our next question will come from Edward Caso of Wells Fargo. Please go ahead.

Edward Caso

Good morning. Congratulations. Can you talk back in your history here and give us a sense on the upcoming election cycle. How that may impact award decisions both before and after and whether it’s maintained the current administration or change to the other party? And then maybe weave into that, your commentary around extended duration and does that help you here sort of over the hump? Thank you.

John Mengucci

Yeah. Thanks, Ed. So, look, we have been in business for 57 years in county and we — I’d like to say we fared well, under various administrations, they clearly have different priorities. We can debate whether this year’s field has even more divergent sets, but we won’t do that here.

Part of why we see growth coming and continuing regardless whether there’s R or a D leading the nation is, we have got a well-balanced portfolio of business and if we look at our enterprise and our mission customers and the numerous capabilities that we have, Ed, I mean we have got some pretty strong expertise and technology offerings.

So if we talk this discussion around mission business and our enterprise business. On the mission side, I mean, we are well aligned to critical defense and national security areas. You have always sort of say, the world is a very dangerous place and the defense budgets have historically been a highly bipartisan part of the federal government budget. So we believe that we are well covered there.

On the enterprise side, every time we move social funding and different programs around both the fed, civil and the defense side are always looking to modernize and updating their systems and making more technological infrastructure estimates and that really drives long-term cost savings.

So I — we believe that our business is less susceptible then maybe some pure services business, because as you mentioned to weave in the kind of work that we do, a much larger portion of our portfolio today, maybe going back five years, is more of technology in nature and it’s with high-end mission customers, and those are very immune to Monday afternoon budget cuts.

So at the end of the day, great power and competition continues to be a focus and some of the capabilities that we have to go fight those and also counter terrorism missions. At least an EW era has eroded and our strategy has always been to position this company to where the government is going to spend their budget dollars less.

And at the end of the day, the election is the election. It is Congress that actually votes on and allocate and spends. The budgets which are out there, so we are looking forward to who gets reelected or who fills that role and believe that we are that kind of business that we will continue to grow regardless.

Edward Caso

Thanks. The other question is around, you had sort of an uptick in cost plus work here is. Can you give us a sense of what’s in the pipeline, is this sort of a short-term phenomenon or is there more cost plus in your future and what the implications, therefore, are on margins? Thank you.

John Mengucci

Yeah. Ed, so that’s one of those things that, as a leadership team, we are always watching. But when you see minor movements in cost plus versus fixed price and time and material, when we did the LGS acquisition, a large portion of their work is cost plus. So when we brought that acquisition in that would have driven the percentage of cost plus work up.

The rest of the minor movements there is really on mix. There’s different awards that we are out there winning. We looked at the pipeline. At a macro level, Ed, the more technology work that we are winning, more of that as our products business begins to spin up will be for fixed price and the expertise work is sort of a split sort of 50-50.

So we like that mix, and of course, contract type is only one dial or knob that we have to be driving margins, so it will continue to watch that but there should be nothing inferred that we are winning more cost plus work, therefore, margins are going to go the wrong direction.

Edward Caso

Great. Thank you.

John Mengucci

Yeah. Thanks, Ed.

Operator

Our next question will come from Seth Seifman of J.P. Morgan. Please go ahead.

Ben Arnstein

Hey. Good morning. This is actually Ben on for Seth.

John Mengucci

Good morning, Ben.

Ben Arnstein

I was hoping you could add a little more color on the upside in organic growth. Is this something that is broad-based across the portfolio or is there something stemming from either the mission or the enterprise or one of the four quadrants that you had laid out at the Investor Day?

John Mengucci

Yeah. Thanks. If we look at our organic growth, it truly is a function of multi-year plan that now that you are all starting to see the benefits of generating awards that are longer in duration and that are much larger in dollar value.

When we — I think we were at 2.8% when we came out of last year. We guided to 5.5%. We are at 7%. And what you are starting to see is, based on the mix of business, which is the other part of your question. When the mix of business is more towards the technology side, those are longer term programs that have a longer term ramp up. So you will start to see that growth later, possibly three months, six months, nine months after award. And for the more expertise jobs that we win, where we are delivering talent, those have a much quicker ramp up.

Across the four quadrants, if I were to put it in that quadrant so to speak, expertise starts up quicker and holds a sustained level of revenue and on the technology side, those programs are going to start up slower and then deliver their growth.

The combination of that and the multi-year nature of book-to-bills far far beyond 1.5 and 2, I think we are at 2.4 now on a trailing 12 months. The mix of that work really is driving future organic growth and the more we continue to win, back to Gavin’s question, we have no intention to sort of slowing the train down. At the end of the day, broad growth across both our enterprise and our mission businesses.

Tom Mutryn

Yeah. And I will add, I think, one comment on, there’s also growth potential which we are seeing on existing work. A large number of base of business and we have a strong kind of program management discipline whereby we do everything that I power to provide more value on existing programs fill open positions quicker on labor-based types of activities and looked at scope on existing working. So that’s another source of organic growth going forward.

Ben Arnstein

Got it. Thanks. And I guess, maybe piggybacking a little bit on Gavin’s question. But on the M&A front. This is pretty — the focus of your strategy here, with organic growth being so strong this year and you are at 3 times leverage, like, we have seen a number of deals in this space at pretty lofty multiples. Is there any — can you comment on maybe your willingness to go out and pursue more M&A with elevated deals in the space or would you be willing to build a little cash and get the leverage maybe down a little bit or closer to 2 times?

John Mengucci

Yeah. Thanks. So I will start and I will let Tom talk somewhere around of leverage levels. Look, M&A is always going to be a key priority for capital deployment, just beyond organic growth and the way we look at M&A and how it grows us is we are a strategy based company. So strategy is a place where we come from. We consistently look at any gaps that we have or any new areas of white space where we have no capability in, but we believe that the government is going to spend materially over the next one year, three years, five year, seven years, nine years.

So we did a couple of acquisitions in the March time frame. We just came up with doing three others, still have dry powder, but where we come from on the M&A side, whether they are large transformational ones or smaller ones. The acquisition’s got to provide long-term strategic value. It has to fill capability gaps or it has to come with customer relationships that we absolutely need for long-term growth and then it needs to create shareholder value.

You mentioned something around all the multiples. Yeah, they are somewhat elevated perhaps. What we are looking at and we look at an awful lot of books that come in here, but we also look to build relationships with companies that aren’t looking to be sold today, but over time, working with us, enjoy and get delighted in the fact that when they get integrated inside the CACI, the majority of them see additional growth and additional opportunities for their employees.

So yeah, I mean, we are watching some of these multiple numbers. Again, that’s sort of a number that comes along after the deal is done to our shareholders out that we have been very prudent and very focused and disciplined buyers of other properties, and again, it has to drive the fundamental long-term growth of this company.

Tom Mutryn

Yeah. And I think I will comment on kind of both leverage and kind of the elevated multiples that you kind of referenced. When we look at acquisitions, we kind of base our decisions once we establish, it’s strategic and it’s the right company on a present value analysis and so the value of an enterprise is future cash flow, we discounted that.

We spent a lot of time trying to accurately forecast future cash flows. It’s kind of no easy task. But companies which are expected to grow materially are going to command higher prices than companies which have a need for cash flow growth just kind of mathematically.

So to a certain extent, you get what you paid for in acquisitions, and oftentimes, we would be willing to pay a higher multiple simply because the company does have materially higher growth potential, which we have identified.

In terms of leverage, 3.0 times today, we are comfortable with that. In the absence of acquisitions, we will delever, but there’s no set target to delever, everything else being equal, given today’s debt capital markets, we would prefer borrowing money at relatively inexpensive rates and investing in the business for long-term success via acquisitions. So it is not a constraint for us and we were going to kind of utilize leverage effectively to allow us to kind of grow shareholder value.

Ben Arnstein

Got it. Thank you

John Mengucci

Thanks.

Operator

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

Joseph DeNardi

Hey. Good morning, everybody. John, I want to ask the M&A question a little bit differently, if I can. It was about two years ago that you guys put in a bid for CSRA that would have involved a lot of stock and your stock has almost doubled since then. You have been able to find other transactions over that period that seem to be working for you in a smaller-ish transactions. I am just wondering if that experience influences the way that you look at larger scale M&A if it influences the way you think about using your stock. Do you want to keep doing smaller type transactions or are you agnostic as to size? Thank you.

John Mengucci

Yeah. Joe, thanks. I think, we are very — we are focused on small niche ones. We are focused on acquisitions that have capabilities and customer relationships that can fill a single gap. And we are focused on some — what we have been calling transformational ones that really — the way I see the word transformational is just an asset which fills multiple gaps with one transaction.

I am probably not going to go down the CSRA path and we have our own views on that one. We did believe and we still believe that, that acquisition would have helped both companies and we believe that we would have recognized the value that we had talked about, but unfortunately, we can’t win them all.

There are a lot of companies out there today. There are folks out there paying very high multiples, as the last question mentioned. But at the end of the day, we are going to be a disciplined spender of our cash and make certain that we are getting the best value that we absolutely can. So it’s not transformational versus small. It’s really, does an asset out there, have a capability that we can use.

Now at the end of the day, we have now become a company that’s investing far more internally to generate our own intellectual property. So the way I look at acquisitions, we have a gap, I would much rather invest if we see that gap early enough and I can meet the time line that our customer needs that kind of solution. I’d much rather spend in R&D funds on the intellectual property and those cases where we didn’t see that coming, and we do find gas will go out there.

So I am sort of indifferent towards small versus large. When we don’t have something, we don’t have an edict to do a certain dollar value worth of acquisitions each year. So it really is strategically based.

I will tell you that LGS has filled a lot of gaps on the intellectual property and some of the knowledge that they have, if we look at communications at 5G and the like. So very, very open to all the kind of companies which are out there and we will continue to build upon the long history of doing successful M&As. Tom, anything you want to add?

Tom Mutryn

The only thing I will add just one a follow-on comment. The ultimate kind of decision, should we buy a company or not is, will it drive long-term shareholder value. We will see our stock performed better with the acquisition than without the acquisition and that’s how we measure kind of long-term shareholder value at the end of the day.

And then as consistent with my previous comments, focus on future operating cash flows associated with the acquisition. And then once we establish this is future fit, it’s economic. How do we ultimately consummate this transaction and as acquisitions gets larger, we would have to rely not only on debt financing but I am using our equity capital as a form of consideration and we are very cognizant of the higher cost of capital for equity, and that goes into our capitalists, determining what the appropriate purchase consideration may be.

Joseph DeNardi

Yeah. Thank you for that perspective. Do the capabilities or the gaps that you had hoped CSRA would fill. Do those still exist do you still want to fill those? And Tom, if you could just remind us what leverage you are comfortable getting to kind of at the high end with the transaction?

Tom Mutryn

Well, I will start on that CACI.

John Mengucci

[Inaudible]

Tom Mutryn

We have said in the past, you are getting to 4.5 times leverage is something that we would be comfortable doing — kind of recognizing that we would be able to delever relatively quickly given strong free cash flow performance. And so in your mind, I would think of kind of 4.5-ish times kind of maximum leverage, maybe 10 basis points or 20 basis points thereafter, but generally, that’s where we feel comfortable.

John Mengucci

Yes. Joe, and on your other question, trying to shake CSRA away. At the end of the day, we were looking at doing some things in the managed services area and in the past three years since that deal has been finished. We have come up with those capabilities. We are out there winning managed services jobs. So we have filled that gap.

If you look at where we are on the software development front, we were sort of in that $50 million to $100 million award range, now we are at the five-year $1.2 billion doing Agile. We actually own the — we are actually performing on two of the largest Agile software programs out there and did all that without having closed on the acquisitions. I’d say that we have quote-unquote healed nicely and we are out there seeing growth in the areas that we would like to grow it, so thanks.

Joseph DeNardi

Yeah. Thank you very much.

John Mengucci

You bet. Thank you.

Operator

Our next question will come from Scott Forbes of Jefferies. Please go ahead.

Scott Forbes

Hey. Good morning, guys. I mean it looks like…

John Mengucci

Good morning.

Scott Forbes

…you guys have a bit of a margin ramp in the second half and I am just wondering if there’s anything to call out there in terms of products and product mix, efficiencies or any one-time items? Thanks.

Tom Mutryn

Yeah. So we are guiding to 10.3% kind of EBITDA margin for the full year. One can do this first half calculation. It implies that the back half is higher than that. Nothing is particular to call out. Like awards, sometimes margin performance is lumpy between quarters, if you go back over the past several quarters you will see that we fluctuate in some of that timing of product deliveries, which are higher margin, sometimes there’s award or incentive fees which are unique to a particular quarter or other singular events which are driving that some expense items.

So I would not call out any specific items driving that. Underlying across the portfolio, we are seeing positive momentum in driving higher margins both on existing work and to new work that’s ramping up that John kind of mentioned. And probably, lastly, as we get larger, we are able to take our indirect costs and spread it over a broader base and that’s productive to margins as well.

Scott Forbes

Thanks. And then, I mean, the protest environment seems to have picked up recently and just are you guys seeing any challenges coming from that or any delay of new opportunities?

John Mengucci

Yeah. Thanks, Scott. No challenges, there’s always a ambient level of protests going on out there. Today we actually have two awards that were awarded to us that have been tested. It was one back from the fourth quarter last fiscal year, one this quarter. But nothing that gives us pause, and I think, our track record on sustaining awards to CACI has been quite amazing over the last few years, I would expect these outcomes to be no different.

Scott Forbes

Thanks, guys.

John Mengucci

You bet. Thank you.

Operator

Our next question will come from Jon Raviv of Citi. Please go ahead.

Colin Canfield

Good morning, guys. This is Colin Canfield for Jon Raviv.

John Mengucci

Good morning.

Colin Canfield

Following up on the protest environment kind of talking sort of shifting to the bid environment. Can you talk a little bit to the competitiveness of bids and how 12 months to 18 months on your competitors scaling up has impacted both the competitive bids and then also kind of the margins that flow through for the more traditional services work?

John Mengucci

Yeah. Sure. We are still looking at 60% to 70% win rates on new business. So I like the odds of when I am spending money to take market share. It’s about a 10 time. We are successful. So I like those odds and I will continue to invest when the odds favor me to that level.

As for margins, if we look at the — and our expertise work versus our technology work sort of getting back to our 2 by 2 quadrant. It’s true there’s far more competitors on the expertise side and that does have an impact on the margins and also the risk factors that go along with delivering talent has a slightly different for risk model. We are looking to continue to grow the expertise elements of our business, even though those may be at a slightly lower margin.

If we look at the technology side, we are looking to accelerate growth within that part of our — part of our business and because at the end of the day, those higher margins are going to be what we use to drive bottom line growth.

So margins that we are seeing out there. Clearly, when we differentiate based on the technology and the way we are going to solve the customer’s problem and our customers buy on value, which is the kind of work that we are looking for and we are continually going after larger contracts versus smaller ones, which also narrowed the bidding, the number of potential bidders down.

And we lay on the table our intellectual property in ways that we can deliver faster than everyone else, that drives the best value decision, that also gives us a great reason to ask for higher margin because we are investing ahead of customer need.

At the end of the day, every time we differentiate on the technology and the people of this business. We find customers wanting more of CACI versus others and when they want more of us than everybody else, we win longer jobs that come with a higher margin that over time continues to drive bottom line growth.

Colin Canfield

Got it. Thanks for color. And just following up on that, if we think about the timing of that transition, right? And say, for example, if you look at LGS and the fixed price transition that’s going on there. Can you just talk a little bit about how the timing of that transition happens in fixed price and then maybe within the context of the aspirational mid-teens margin?

John Mengucci

Yeah. Thanks. Thanks, Colin. I — the way we look at it is probably not by contract type, but it’s more by the kind of work that we have been out there and have been winning. Now we have augmented all of our awards press releases with whether it’s expertise or a technology program, because we are trying to provide more information, allows you all to sort of model where our top and our bottomline growth are out there going.

On the technology programs, which I think is closest, Colin, to relating to some of the LGs and Mastodon firm fixed price work. Those technology programs take time for facility build-outs. You got to put labs in place. We got additional material purchases. And we are also working on finalizing the requirements with our customer. And that’s usually a three-month to six-month delay, that’s quote-unquote, delay in seeing material revenue from those awards.

So the more technology work that we win, the better margins there are, but it has a longer protracted ramp up period. So if you looked at our backlog growing, you look the kind of work we have won in the last six months to nine months. What you are seeing now are those technology programs we won whether they are LGs or they are core CACI. We won those in the fourth quarter of last year and those are now starting to generate higher levels of revenue and then margin growth.

Colin Canfield

Got it. I appreciate the color.

John Mengucci

Thanks, Colin.

Operator

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

Matt Akers

Hey. Good morning, guys. Thanks for the question. I wanted to ask about working capital and you guys talked about kind of the strong collections in the quarter. How much more kind of runway is there to go there and how should we think about where that could kind of go in the long run?

John Mengucci

Yeah. So we have been doing a very good job of focusing on timely cash collections kind of driving kind of lower DSO. There’s opportunities for continuous improvement kind of getting the invoices off the door quicker kind of working closely with the government paying agents to make sure that bills are promptly on time, making sure invoicing is done accurately.

We have several programs, which have in fairly complicated invoicing requirements, which take time for us to ensure that the invoices were 100% accurate and if it’s not oftentimes to get rejected.

Going upstream, we are working with various contracting organizations to kind of rethink some of those invoicing requirements. Is it really necessary for the government to have that level of detail and backup in this to support invoices.

In often cases, our belief, the answer is no and we are having those dialogues to try to kind of change the nature of those requirements in payment terms to facilitate some quicker payment processes and so there is some opportunities to continue to drive lower DSO.

Matt Akers

Got it. Thanks. And then, I guess, could you maybe comment just on how LGS and Mastodon are doing? You talked about, I think, at the start of the year, kind of a ramp up as we go through the year on those two new acquisitions, so just kind of an update on how that’s going?

John Mengucci

Yeah. Thanks, Matt. Look, overall, extremely pleased with their performance and as a proof point, last quarter, I was talking about the beginnings of having some customer meetings where they would bring some of our core CACI technology and we had folks from both Mastodon and LGS in those meetings. And now we are one quarter on quarter later.

And we have been getting great response and support by those customers on a couple of facts, one, the fact that we continue to invest ahead of these and then also being very easy to work with, so they can consolidate rig requirements that they may have done with three or four other vendors and sort of sit with us and say you can take technology from LGS and this device from Mastodon in some of your core technology, we see a much better future for us in how we want to address some of our mission needs, so the reason why we bought both of those to continue to provide us a great library of technology that — on the front is going well.

Financially, they are both doing well and in line with our long-term expectations with an understanding that some of the product nature of their deliveries can result in quarter on quarter lumpiness, be it in deliveries or in margin, as Tom mentioned earlier, but again, we are running the business on an annual basis, over that period, we expect any lumpiness will smooth itself out.

And then on the awards front, the one award that I mentioned during my prepared remarks. That was a rather large LGS award that is going to support our intelligence customers. So whether it’s what we are delivering and the customers take up rate on what they see from CACI moving forward, given the fact we have LGS and Mastodon.

I would check that as a positive financially over the long-term, I would check that box as being very successful in their ability to come into this company, be fully integrated and under their leadership team, win a $475 million sole-source job is sort of a nice punctuation point out while those two assets are out there doing.

Matt Akers

Great. Thank you.

John Mengucci

You bet. Thanks.

Operator

Our next question will come from Josh Sullivan of Benchmark Company. Please go ahead.

Josh Sullivan

Hey. Good morning.

John Mengucci

Good morning, Josh.

Josh Sullivan

Just, I mean, in light of the acquisitions you just talked about there. Can you also talk about the strategy to push out into some smaller tech hubs regionally, any metrics on the headcount growth in these areas, looks like Mastodon, I think, there’s some reports might be quadrupling headcount. Any metrics you can give us on that front?

John Mengucci

Yeah. Sure. Yeah. So we have mentioned a lot around something we started, I think, probably five years or six years back now, which was trying to leverage more of a dispersed workforce to get some of our technology programs and software development done.

It’s going extremely well. Actually, our Mastodon folks up in Rochester have doubled the number of employees. I mean, I’d like to hear today — quadruple maybe you have information, Josh, on what you are sharing out, but very excited. Because it’s this model that when we look at the background clearance processing, we look at the competition for talent in the Northern Virginia area, the more technology programs we win, the less important it is that we do work outside of our customers’ front gates.

So we can move that work to many, many locations in the Rochester area, in the Sarasota area, Denver, Colorado Springs, Tampa, Florham Park, some really great talent there and folks of the technology that we are delivering. They like the mission and when we can check those two boxes, the fact that they can report to work where they want to live and raise a family works out really well for us.

So we have got the infrastructure in place. And as we do more and more acquisitions that they have beachhead and also university new university relationships help us as well. So the more dispersed our technology workforce is, the better relationships that we are able to obtain and allows us to hire even quicker.

Josh Sullivan

Got it and I appreciate that. And then just on the longer term duration, you are seeing with the contracts. Do you think that’s unique to CACI or is that a broader reality of the defense contracting in general on the IT side?

John Mengucci

Yeah. I probably can’t speak for everyone else within our sector. But what I can tell you is and it’s the same thing I talked to my team about weekly, we are in a $220 billion addressable market. We want to drive top and bottomline growth, and we want to be driving shareholder value.

So the real thing that we changed in this company was just the discipline and the focus that it takes to go, shape the right deals that make sense for our customer set and for our shareholders. So there’s always been larger dollar value jobs. I tend to enjoy those more than re-winning work I won last year and next year, because every time I am spending investment dollars to re-win what I already have. That’s just taking up capital. I’d much rather plow that money into new technologies and new offerings to go grab or gather new market share.

So I don’t know if it’s a trend in the sector. It’s been a trend for us in the fact that we are focused on longer duration larger jobs. And with everybody’s patience, I mean, we are actually starting to see how that actually pays off and back to Gavin’s first question. This is a train we are not going to get off of. This model works. $5.5 billion company, $220 billion addressable market. There’s plenty of things we know how to do well and we can be very selective as to how we want to go after new business pursuits.

Tom Mutryn

Yeah. And I would say, and I don’t have the broad statistics across kind of the industry, but I am pretty confident in saying the longer duration is a function of the size of the awards in the differentiated capabilities within those awards. And those are to the tenants of our business development that we put in place multiple years ago and we are seeing the fruits of that.

Josh Sullivan

Good. Appreciate it. Thank you.

John Mengucci

Thanks, Josh.

Operator

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

Jasper Bibb

Hey. Good morning. This is Jasper Bibb on for Tobey. So from our view it seems that agency customers have increasingly looked to wrap cyber intelligence capabilities into a single contract award. So I was hoping you could comment on that dynamic and how that might impact CACI?

John Mengucci

Yeah. Sure. So, I mean, there’s multiple customers that are out there and we actually assist customers in taking multiple contractual vehicles and collapsing those into one. One, it takes less contracting power from our customer to free them up to work on other items and also gives our customer, someone who is going to ensure that what they are looking to have delivery gets delivered.

So if you look at our intelligence to many customers. They are combining various contracts. We support that move. We also support helping those customers move work from an expertise type contractual arrangement to more of a technology one and from a cost plus buying talent to a fixed price delivery in outcomes. We have become a very good company at delivering technology that gives a customer the outcome that they are looking for. So we have seen that.

DHS is doing some of that work as well. Josh, they are out there, combining contracts. One of the largest awards that we have had over the last five years was our FS/DE contract with DTRA, where the customer combined 11 or 13 different contracts.

What that does for us, is allows us to have a one-on-one relationship with that customer to help them drive productivity levels higher than they would have gotten with 11 different contractors out there and also drives, as Tom mentioned earlier, some great on-contract growth that as our customer sees gaps within what they are out there buying, that allows us to bring more folks on Board and drive our organic growth.

Jasper Bibb

Thanks. And then I think we touched on LGS and Mastodon, but can you provide an update on the smaller acquisitions from last quarter?

Tom Mutryn

Yeah. So we did a few kind of kind of Next Century, Linndustries and Deep3. They are all performing kind of well. Next Century was the largest one. The other two were relatively small, but important capabilities and everything is on track for those three acquisitions to deliver what we said they were going to deliver for fiscal year ‘20.

Jasper Bibb

Yeah. Appreciate the detail.

John Mengucci

Yeah. Thanks, Jasper.

Operator

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

Dan Flick

Hey. Good morning, guys. This is Dan Flick on for Cai.

John Mengucci

Hi, Dan.

Dan Flick

So just a few points on the Agile task order from this quarter, so is it fair to assume that the ramp on that looks, like, you described, tax should look earlier in the call, was the full $1.1 billion included in backlog this quarter and should we continue to expect Agile contracts of this scale moving forward, it sounds like this was one of the larger ones that we have seen? Thanks.

John Mengucci

Yeah. Sure. So, yes, it is in our backlog at the $1.1 billion level. The ramp for this is very similar to both our expertise and our mission technology programs. It’s probably a three-month to six-month ramp, which means we will see some revenue, assisting us in the third quarter, a little more in the fourth, but we will see clearly, a more material ramp as we get into the first two quarters of next year and then from that point and beyond because just about $225 million assuming contract each and every year.

I think the other part of your question is the nature of Agile software contracts in these sites, boy, I hope so. We are actually shaping customers. We have quite an extensive investment we made about 4 years back in Ashburn, Virginia. It’s our Agile solutions factory, where if you picture delivering a hardware product is pitching a factory line, we have the same type of building layout and functional lay down for us to develop software as well.

Customers can see it, they can feel it, that they can touch it, they can witness the much better metrics that are being done out there and like any production line, once you refine it and you are delivering 99 and two 9s error free software. That drives a lot of attention.

So what you are seeing is customers taking multiple software development applications and work that they need and they are consolidating those and buying those from one specific contractor and we are enthused and are very pleased and very happy that we are performing on two of the governments largest and we would expect that trend to continue.

Dan Flick

Great. Thanks.

John Mengucci

You bet.

Operator

Our next question will come from Louie DiPalma of William Blair. Please go ahead.

Louie DiPalma

Good morning, John and team.

John Mengucci

Good morning.

Louie DiPalma

What has been your secret sauce that has enabled you to move up market and win these larger billion-dollar deals? Is it a function of how you have always been strong at software development and these large software development programs didn’t previously exist and these mostly aren’t takeaway wins right?

John Mengucci

Correct. So, part of it is focused three years to four years back as to what gaps do we have and how do we fill those and then once we have those gaps filled our business development and our line leadership team do an outstanding job of shaping customers.

And so what we mean by shaping isn’t directing customers what they buy and how they buy. What it really is them being able to come to a CACI location or through numerous meetings, showing the customers the art of the possible. So not just selling what we have today, but here is the augmentation of the investments we are willing to make to help you get your mission solved.

So a lot of it is an intentional investment and intentional meetings that really drive the customer to not just buy what they believe they need but actually by the outcome. When a customer buys an outcome that they have seen from us, we are able to differentiate.

We have been using that term a lot during this call because it truly matters. If we can differentiate on the technology side and deliver faster, better, cheaper. Then my customers aren’t so focused on that I’d make 8% in a cost plus model or 12% in the fixed price on, they are actually focused on getting something that they absolutely need.

So this didn’t start overnight. We looked at some larger transformational acquisitions a few years back to give us this capability sooner. Those didn’t go the way we wanted them to. But we then go to the next arrow in our quiver, which is let’s internally invest and those investments are out there paying off.

So we would like to believe that the trend of our customers are going to be buying more of these larger scale jobs. At the end of the day, we have built and we make our own successes and the more we stay disciplined and focused on how we win larger, more profitable business, the better off we will be, and as I mentioned earlier, this train isn’t going to stop anytime soon.

Tom Mutryn

Yeah. And I will add to that. It’s — John, in your prepared remarks, you talked about having a company with good character and culture. I mean it really starts with that, it starts with a strong vision of where we want to go, everyone is rowing in the same direction.

And then you give the people processes and technology. So some very highly talented and a motivated people throughout the organization with some consistent processes, which gives us confidence that we have the right building blocks in place for that success.

Louie DiPalma

Okay. And on this topic of differentiation via M&A versus internal investments, you guys are obviously one of the leading providers of single intelligence and electronic warfare sensors. Two other sensor providers over the past several years, Raytheon and FLIR acquired drone platforms to vertically integrate their sensor capabilities, and Leidos recently acquired a key position in Gremlins. Do you feel that you need to own or internally develop a drone platform in order to further expand your singles intelligence capabilities?

John Mengucci

Yeah. Thanks, Louie. We are very careful and very focused on where we see the market going. We have been very vocal around is our intention to be a platform provider. That’s another step. Right now it’s a step too far.

We think that there are companies out there that build outstanding platforms. They know how to bend metal in some of the large aerospace and defense companies won that IMA and I have to do an outstanding job there. But we are really looking at the mission package as part of where all these platforms go.

If we look at the outlook at the outcomes in the capabilities that our customers need, it’s not so much that need more platforms, what they need is an ability to have a single way to find a new signal out on the battlefield that had that reverse engineered in a manner that we can not only detect it, but we can understand how to mitigate around that signal or communicate through it.

So we believe that the far longer term larger dollars are in the technology packages that write on those platforms. So when a new signal comes up, I don’t need a new drone capability. What I need is a new algorithm in a shared manner and this — both our DoD and our Intel customers are really looking for shared work from multiple vendors that can help them address these needs.

So we believe in the singles intelligence, electronic warfare, are a spectrum world that changes so dynamically, so that a digital footprint is not going to be solved with better and faster and more elegant platforms. It’s going to be solved with processing power that are on those platforms and the algorithms and the ability and the amazing people we have within this company, core CACI, but we picked up with LGS and Mastodon are some of the nation’s leading folks on understanding signals.

And how quickly can we turn around a solution to a signal. It’s going to be our war fire issues. We actually believe that’s where the sweet spot is and that’s where we will stay part for some time, and so the ability to build a platform to us is not where the, at the end of the day, greatest growth is coming from.

Louie DiPalma

Thanks for the color.

John Mengucci

Yeah. Thanks, Louie.

Operator

Our next question is a follow-up question from Joseph DeNardi of Stifel.

Joseph DeNardi

Thanks very much. Tom, I think, that’s a question you get asked from time to time, but there’s a narrative out there that the topline defense budget growth is slowing and that should translate into slow growth for your business. It doesn’t seem like that number, the topline number really factors much into how you view your addressable market, so as you look at your markets as a whole, the next few years, do you see trends slowing or not?

Tom Mutryn

Yeah. So we mentioned a $220 billion addressable market. We got a very kind of robust. The areas that we are focused on kind of mission capabilities, enterprise capabilities, are swim lanes, which have faster currents. I am probably mixing my metaphors here, which are kind of sweet spots.

And kind of given that, we do not see the foreseeable federal defense budget or civilian budget to be an impediment for us to realize our goals of increasing the organic revenue and increasing margins simultaneously. So we feel we are very well-positioned providing services and technology in a dangerous world, our technology that John just alluded to play a key role in those areas.

Joseph DeNardi

Thank you.

Operator

[Operator Instructions] Our next question is also a follow-up from Gavin Parsons of Goldman Sachs.

Gavin Parsons

Hey. Thanks for squeezing me in. Just a quick one a follow-up on Matt’s…

John Mengucci

Yeah.

Gavin Parsons

…question earlier. What percent of your current outstanding kind of submitted bids include some form of LGS capability and where do you think that will be a year from now? Thanks.

John Mengucci

Yeah. Gavin, I don’t think that number off at on the tip of my tongue. What I would tell you is that, clearly, it’s involved in less today. It will be involved in more tomorrow. I am sure you didn’t ask a follow-up question to get that kind of genius response.

But LGS came with a really nice book of business. They continue to perform on those. I think over the coming quarters, as we see our customers build requirements that really pulling on the strength of core CACI technology, the Mastodon devices and the intelligence algorithms that LGS provides that they will be part and parcel to a larger percentage of our awards out there.

To the extent that we are looking at single Intel, electronic warfare, anything in the electronic domain, I would expect to see both LGS and Mastodon play more prominent roles.

Gavin Parsons

Thanks, again.

John Mengucci

Yeah.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to John Mengucci for any closing remarks. Please go ahead.

John Mengucci

Well, thanks, Chuck, and thank you for your help on today’s call. We would like to thank everyone who dialed in or listen to the webcast for their participation. We know that many of you will have follow-up questions and Tom Mutryn, Dan Leckburg and George Price are available to take your call after today’s call. This concludes our call. Thank you and everyone have a great day.

Operator

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

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