CACI CEO Said Company Will 'Learn From' Narrow Misses On Large Contract Bids

CACI did not win as many high-value U.S. government deals as expected during the first quarter of fiscal 2018, CEO Ken Asbury said during the company's earnings conference call on Thursday. Asbury made the admission when asked about bids CACI submitted on a handful of $500 million-plus contracts.

The Arlington, Va.-based intel and defense IT specialist, No. 16 on the CRN Solution Provider 500, said some similar-sized contract opportunities remain in the pipeline. However, Asbury does not expect the company's 30 to 50 percent program capture rate to hold steady for the time being.

"We had a couple (bids) where we outpointed the incumbent contractors, but it probably wasn't enough for the customer to take the risk to be able to do it. It was close-but-no-cigar," Asbury said. "Another, we submitted a superior proposal, and the customer kind of went bottom-feeding and took somebody that was marginally qualified but had a much lower cost. We'll learn from those."

[Related: Changes In National Security Philosophy Have Resulted In Key Contract Wins, Says CACI]

In addition to the big-deal whiffs, CACI indicated that a "material" number of its recompete contracts were bridged – stop-gap solutions meant to prevent service interruptions – rather than awarded during the quarter. Only 40 percent of its contract awards were recompeting, with the remaining 60 percent coming from new business dealings.

CACI COO John Mengucci attributed some of those contract bridges to administrative delays caused by "major" reorganizations at certain agencies. The duration of those bridges have typically varied from a full year to less than six months, he said, but the overall level of bridging CACI experienced in the quarter was higher than anticipated.

Some intelligence customers, Asbury added, could bridge certain contracts "in perpetuity" because CACI provides mission-critical services that government leaders would not want to disrupt.

"Maybe we won't see an impact of same magnitude as we saw in first quarter, but we're more than likely to see more bridging," Asbury said. "Bridging has become a very common behavior. It's the first time we've seen it at this level … It's hard to predict."

CACI's stock price has fallen $8.60 (6.05%) to $133.55, as of 12:35 p.m. ET on Thursday.

CACI plans to evaluate the balance of its contract bids portfolio moving forward, aiming for a roughly even mix of professional services, managed services and solutions bids over the next 12 months. That would be a "better mix than what we're experiencing now," according to COO John Mengucci.

Asbury added that CACI is looking to build the products side of the business, investing in advanced capabilities such as electronic warfare and machine learning that he believes will expand what the company can offer in the intel services market. The broad focus is to prioritize solutions over services, he said.

Asbury said enterprise-side infrastructure contracts are especially appealing because they tend to run longer and become "reasonably" profitable over time. The cloud and in particular adjacent capabilities, such as machine learning and data analytics, will be of interest to CACI from a mergers and acquisitions perspective because of that, he said.

"We picked up quite a bit of work in machine learning and data analytics," Asbury said. "We had our Asymmetric Threat Symposium last week. The two fundamental themes that came out of it on the part of our uniformed military folks: What do we do with all the data we've got? How do we turn that into speedy decision-making?"

The $550 million L-3 Communications acquisition falls in line with that mindset, given its established customer base around early cloud adopters in the intelligence community. Asbury said CACI, which is also investing in getting its engineers certified to do public cloud platform development work, has gotten some beneficial references in that area since the L-3 deal was completed.

"There's a slow rate of adoption, still government customers who don't think the cloud is secure," he said. There's a market there for quite some time."

CACI reported revenue of $1.09 billion for the first fiscal quarter 2018 ended Sept. 30, up 1.2 percent from last year's first-quarter mark of $1.07 billion. That beat Seeking Alpha's projections by $10 million, or 1.9 percent.

Net income for the quarter was $42 million, or $1.67 diluted earnings per share, up 14.7 percent from $36.7 million, or $1.47 diluted per share, compared with the year-ago quarter. On a non-GAAP basis, CACI reported net income of $56.7 million, or $2.25 per share, up 10.1 percent from $51.5 million, or $2.07 per share. The performance beat Seeking Alpha's first-quarter projections by $0.15 per share.

CACI has adjusted its full-year guidance after benefitting from a corporate tax reduction during the quarter, which Asbury said was related to share-based compensation accounting. The company now projects net income between $171 million and $179 million for the fiscal year 2018, with diluted earnings expected in the range of $6.67 to $7.08 per share.