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CACI International Inc. (NYSE:CACI)

FY10 Guidance Call

June 26, 2009 8:30 am ET

Executives

Paul Cofoni – President & CEO

Bill Fairl – President US Operations

Tom Mutryn – CFO

Greg Bradford – CACI Limited UK

Dave Dragics – SVP IR

Analysts

Jason Kupferberg – UBS

Cai von Rumohr - Cowen and Company

Michael Lewis - BB&T Capital Markets

Edward Caso - Wachovia

James Harlow – Stifel Nicolaus

Matthew Cruz – Noble Financial

Unspecified Analyst – JPMorgan

Tim Quillin – Stephens Inc.

Tobey Sommer – SunTrust Robinson Humphrey

Brian Kinstlinger – Sidoti & Company

Jeff Houston – William Blair

Joe Vafi – Jefferies & Company

Operator

Ladies and gentlemen welcome to the CACI International fiscal year 2010 guidance conference call. (Operator instructions) At this time I would like to turn the conference over to Mr. Dave Dragics, Senior Vice President of Investor Relations for CACI International; please go ahead.

Dave Dragics

Good morning ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International. We're very pleased that you're able to participate with us today. Now, as is our practice on these calls we are providing presentation slides, and during the presentation we'll also make every effort to keep all of you on the same page as we are, so let's move to slide number two.

Before we begin our discussion this morning, I would like to make our customary but important statement regarding our written and oral disclosures and commentary. There will be statements in this call that do not address historical fact and as such constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated results.

Factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are also described in the company's Securities and Exchange Commission filings and our Safe Harbor statement is included on this Exhibit and should be incorporated as part of any transcript of this call.

I would also like to point out that our presentation today will include discussion of non-GAAP financial measures and these non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP.

Now let's go to the next slide please, and to open up our discussion this morning here is Paul Cofoni, President, and Chief Executive Officer of CACI International.

Paul Cofoni

Thank you Dave and good morning ladies and gentlemen, I’d like to personally welcome everyone to the call this morning. We appreciate your interest in our company. With me today to discuss our guidance and answer your questions are Tom Mutryn, our Chief Financial Officer, Bill Fairl, President of US Operations, and by phone from the United Kingdom, Greg Bradford, Chief Executive of CACI Limited UK. Randy Fuerst, our Chief Operating Officer cannot join us today as he is on a well deserved vacation.

Let’s go to slide four, a year ago we told you about our growth plan for fiscal 2009. As we approach the completion of fiscal 2009 I am very pleased to report we are delivering on that plan with record results. We expect our revenue to be within the range of April 29th guidance and more importantly, we expect our diluted earnings per share to be materially better than our prior guidance.

Tom and Bill will discuss the major contributors to our revised FY09 guidance in some detail. They are a combination of continued strong performance in our domestic federal business, innovative sales offerings in our United Kingdom business, reductions in our effective tax rate due to the rebound of our deferred compensation plan assets, and a net gain related to commercial legal matters.

Our fiscal 2010 plan is in place and approved by our Board of Directors. Like all good plans, it is challenging but achievable. We are confident of meeting our annual goals which include double-digit earnings per share growth and mid to high single-digit organic growth.

We fully expect to meet these objectives as reflected in our fiscal 2010 guidance. Slide five please. We expect to see continued strong performance in our domestic operations. We are strategically positioned in the well funded areas of defense, intelligence, homeland security, and IT modernization.

Our intelligence business especially is growing within both defense and the federal civilian intelligence agencies. Unfolding events in North Korea and Iran and elsewhere around the world represent increasing threats and challenges to our national security.

We provide thought leadership and high value solutions to help our nation counter asymmetric threats and protect the homeland. We have strategically developed and grown valuable and innovative professional services, and solutions.

Looking ahead we believe the government is most likely to rely on these proven services and solutions to address their greatest challenges. We expect our solutions to remain in strong demand to support the Administration’s priorities in cyber security, smart power, and IT modernization.

Clients trust us to provide consistently high quality services and solutions and we are proud that we provide best value for hard earned dollars of American citizens. We see continued improvements in our operations in the United Kingdom. Our strong leadership team has innovated new offerings that help their clients lower operating costs at a time when those clients are closely examining their operations for ways to reduce expenses and optimize investments.

We believe these innovations will continue to help offset negative effects from the UK economy. At the same time our UK team has sought to diversify their business through acquisitions and organic growth. We enter fiscal 2010 with a talented, high energy leadership team and a proven strategic plan. We offer clients an innovative, sophisticated, and capable IT workforce cleared at the highest levels.

We have enduring relationships with our customers and a strong customer loyalty through delivery of exceptional service and value. We’re also winning exciting new business and Bill will provide more details shortly on those.

One of our core competencies is strategic consolidation. We are intrigued by the increasingly attractive valuations in companies that we can leverage to enhance current client value and penetrate new markets. We are focused on acquisitions that are strategic, accretive, and in high growth areas.

We also have the capital structure to support our acquisition program and a proven track record of achieving the financial and operational goals that form the business case for our acquisitions. We are executing on our growth plan. In fact this quarter will make the eighth consecutive quarter in which we have met or exceeded our goals.

We believe our performance sets a solid foundation for the years ahead. Tom will now provide his financial overview followed by Bill Fairl who will provide more information on operations.

Tom Mutryn

Thank you Paul and good morning everyone, please go to slide number six. First let me update you on our fiscal year 2009 outlook. We are wrapping up the year and we will have our accounting completed in mid August. We currently expect our 2009 revenue to be within our prior guidance range of $2.65 to $2.75 billion and our diluted earnings per share to be in a $3.09 to $3.16 range, materially better than our prior guidance.

The drivers of the positive variants are, first, continued strong domestic performance worth $0.04 to $0.05. Second, better than expected performance of our UK operations and improving exchange rates worth about $0.01 to $0.02. Third, a reduced tax rate worth about $0.05 due to positive returns in our deferred compensation plan assets driven by the rebound in equity markets.

Based on performance through May, and assuming no gains or losses in June, we estimate a full year tax rate of 41%. And fourth, a net gain associated with commercial legal matters adding $0.03.

Next slide please. Let me remind you that in fiscal year 2010 we will be adopting new rules which change the way we account for our convertible debt adding $10.2 million of noncash interest expense to fiscal year 2010 earnings.

We will also be recasting fiscal year 2009 adding $9.5 million of noncash interest expense. From this point forward we will be discussing fiscal year 2010 guidance, results and comparisons under the new accounting rules.

Slide eight please. We anticipate that 2010 will be a year of solid growth on both the top and bottom lines. Our revenue guidance of $2.85 to $2.95 billion is 6% to 9% greater than the midpoint of fiscal year 2009 revenue guidance. Our fiscal 2010 net income guidance of $97.8 to $103.9 million is 9% to 16% greater than the midpoint of our recast 2009 guidance range consistent with our stated goal of double-digit net income growth.

Key assumptions implicit in our guidance are as follows. We expect that our operating margin will be between 6.5% and 6.9%. We expect our effective tax rate to be approximately 39.5%. We expect that capital expenditures will total approximately $20 million with the increase from prior years driven by the move to our new facility in Chantilly. This move consolidates three existing properties coming off lease into a new facility driving operational efficiencies and lower lifecycle costs.

And I would like to remind you that our guidance does not include any impact from future acquisitions. We expect another year of solid cash flow with operating cash flow forecast at approximately $130 million comparable to fiscal year 2009 levels.

We believe that cash earnings per share is a very useful metric to track since we have several large noncash [inaudible] expenses namely, stock compensation, intangible amortization, depreciation, and additional convertible debt related interest expense. For fiscal year 2010 we expect cash earnings per share to be in the range of $4.80 to $5.00, 7% to 12% higher than the fiscal year 2009 cash earnings per share based on the midpoint of the guidance range.

Let’s go to slide nine, similar to prior years we expect a sequential reduction in earnings per share from our fiscal fourth quarter 2009 to our first quarter 2010. The favorable legal issues were $0.03, and the lower tax rate was around $0.01 in fourth quarter 2009 will amplify the normal seasonal decline as we move into first quarter fiscal 2010.

And similar to prior years we expect to see steady increases in earnings per share as we move from the first quarter to the fourth quarter with favorable year over year comparisons in each quarter.

In summary we are excited about our continued progress in achieving our operating and financial goals. Our business is performing well, hiring continues at a strong pace, and our funding and contract awards are all [very] positive.

Cash flow was strong and our balance sheet is in fine shape. Now here is Bill who will provide further insights into our domestic operations.

Bill Fairl

Thanks Tom and I’ll go ahead and add my welcome to everyone on the call. Let’s go to slide 10 please. This morning I’ll update you on some of our key performance metrics for fiscal 2009 that are contributing to our raising of fiscal year 2009 net income and EPS guidance and establishing a solid foundation for fiscal year 2010.

While it’s not over yet and we don’t have the final numbers but it’s safe to say that fiscal 2009 is going to be an excellent year for CACI contract awards which will definitely exceed the $3 billion mark and may in fact approach the $3.3 billion mark.

Looking forward into fiscal 2010 and beyond our opportunity pipeline is better than ever. I say this with a great deal of confidence due to our increased visibility into both the quantity and the quality of the potential bids in our pipeline.

As we’ve discussed during our recent calls, our account management initiative, it’s really making a difference. We now have multiyear visibility into our pipeline by account and by major operating unit. We have earlier identification of bid opportunities, giving us long lead times to develop and communicate our value proposition.

You put all of this together; we have an abundance of opportunities, better bid decisions, and just a terrific win rate across the board against the toughest competitors out there. Now I’ll take just a minute here and give you a great example of what I’m talking about.

I don’t think we’re ever going to actually be able to do a formal press release on this given the sensitive nature of the award we just got, but just within the last couple of weeks, we have a Tier-1 award that came to us and we’re already staffing it up here. This is with a multiyear pursuit; the total value of it is just under $100 million when all the options are exercised.

We took this away from a Tier-1 competitor. So here’s that toughest competitors I was talking about, how well we do against them. This will have solid CACI labor growth with it. It has to do with a secure, mission critical network job that has both real significant intel and cyber components to it. So that’s the sensitive nature of the job.

And best of all, we won this job on the value proposition, what we were going to deliver and contribute to this client’s mission. This was not a low price takeaway. This was all about value. The best kind of win out there.

I’m going to turn to contract funding orders now, when we get our final numbers for fiscal 2009, our contract funding orders will easily exceed the record $2.5 billion we reported last year, and they will also exceed our own internal fiscal 2009 funding objective. In fact, I’m going to go out on a little bit of a limb here and say that we’ll be in the neighborhood of $2.9 billion when we close the books on fiscal 2009.

We have been and will continue to be aggressive in customer centric and winning our recompete business. We do this through a highly structured program of client visits, coupled with our best in class customer survey program. Taken together these initiatives strengthen our customer relationships by giving our clients early and easy ways to provide feedback.

The result of all of this is a fiscal year 2009 recompete win rate that is the best it’s been at this point in the year during the last five years. Just a terrific metric.

Hiring is another key performance area where we’re having a great year and will exceed our fiscal 2009 gross hiring goal. We continue to recruit and provide the highly specialized and cleared employees our intelligence clients need to carry out their national security missions. I’m also happy to report our voluntary attrition rate continues to improve. It’s now the lowest it’s been since we started tracking annual performance five years ago. The best in five years. Just great.

Let’s go to slide 11 please. Looking ahead we believe our solid fiscal year 2009 performance has laid the foundation for a very strong fiscal 2010 and I’m just going to cut to the chase here. Every single key performance metric trend for US operations is pointing solidly in the right direction and I’m just going to go ahead here and tick them off.

Contract awards, funding orders, win rates for both new business and recompetes, our opportunity pipeline, our hiring, our retention, and here’s a really important one, operational excellence and my metric for this is our project performance. These days we have on average over 1,000 active contracts [in] 2,000 active task orders and we don’t have a single troubled program.

Now that’s my definition of operational excellence. So combine this with our strength and presence in the high priority government funded business areas of defense, intelligence, homeland security, and IT modernization, as well as our focus on the Administration’s priorities in cyber security, smart power, and IT modernization and you can see why we’re excited about what’s shaping up to be just a terrific 2010 for us.

And Paul, that concludes my remarks.

Paul Cofoni

Thanks Bill and thank you Tom for your comments. Please turn to slide 12. I am very pleased with our strong fiscal 2009 performance and the raising of our fiscal 2009 guidance is just one indication of that strength. I’m personally very proud of the extraordinary efforts of our highly talented management team and our dedicated and capable workforce in achieving these results, especially given today’s adverse economic conditions.

Going forward our growth strategy is working. Our domestic operations are solidly positioned in the well funded, high priority areas of defense, intelligence, homeland security, and IT modernization. Our UK operations are taking decisive actions on cost reduction and sales initiatives to weather the economic storm and emerge even stronger and more diverse.

Our fiscal 2010 guidance reflects confidence in achieving our financial goals of double-digit earnings growth and mid to high single-digit organic growth. Our balance sheet is very strong. Cash is king here at CACI. We manage it on a daily basis with a strong collection process and as Bill said, we keep our programs out of trouble.

We remain agile in responding to market changes and we are aligned with the Administration’s priorities in cyber, smart power, and IT modernization. We believe our clients will continue to rely on our proven CACI solutions to deliver the best value for our government and citizens and help keep our nation safe.

Our client satisfaction and loyalty has never been better. We are also winning new exciting business including prime positions on large contracts. We are focused on opportunities for long-term margin growth. And we remain active in pursuing acquisitions that provide attractive valuations that are accretive and bring new and complimentary solutions to both new and existing clients.

We look forward with great confidence in our performance and our vision of being the best in all we do. We will lead in our markets, bring value to our clients, deliver on our commitments, and build long-term shareholder trust and value.

With that we can open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jason Kupferberg – UBS

Jason Kupferberg – UBS

So congrats on the guidance increase here on the earnings side in particular, nice to see. Had a couple of questions around fiscal 2010, first off I wanted to get an understanding of your assumptions regarding the direct labor mix in fiscal 2010.

Tom Mutryn

It would probably be comparable to where it has been this year. On a quarterly basis it fluctuates a little bit, direct labor was anywhere between 40% and 42% of costs versus total direct costs and we anticipate that to be comparable going forward.

Jason Kupferberg – UBS

And then on the cash flow front, the $130 in operating cash flow that you’re forecasting for fiscal 2010 which as you mentioned is kind of flattish year over year, but you are growing your earnings in the neighbourhood of double-digit plus levels, so can you talk about why the cash flow growth might be lagging there a bit.

Tom Mutryn

What we’re seeing through our government collection process is pockets of kind of slowdown in government payments, nothing material but a couple of days DSO here, a couple of days DSO here. This past third quarter we reported DSO close to 60 days which was extremely strong and we’re very proud of that but I’m not sure of that`s sustainable. I think a longer-term DSO would be in the mid 60’s and so we’re building in some expectations that there may be a slight increase in DSO again nothing to be alarmed about but there always fluctuations and so I think we’ll be in fine shape.

Operator

Your next question comes from the line of Cai von Rumohr - Cowen and Company

Cai von Rumohr - Cowen and Company

You mentioned that you were moving three facilities into one facility, is that you’re moving out of a leased facility into an owed facility, and give us some help in terms of understanding the P&L impact there, the savings.

Tom Mutryn

What we have is in our Chantilly and outside of Washington, DC in separate facilities where a good number of our workforce are located, and those facilities are all coming off of lease more or less simultaneously and we worked to structure those leases such that they would all line up. And we took advantage of those units coming off lease to move into a new facility. Everyone is in the same location.

A lot better facility, operational efficiencies, it’s a green facility which is nice to have and we were able to take advantage of a pretty decent real estate market to negotiate kind of a favorable long-term lease. The new facility is leased versus owned. And the capital spending is the normal leasehold improvement that we as the major tenant would incur.

Those additional or the changes in facility costs are built into the numbers that we presented in terms of our guidance.

Cai von Rumohr - Cowen and Company

And if we look at, your comments about awards, if we just kind of do the backward engineering it implies that awards to sales and fundings to sales are a smidgeon under one which I guess is your normal and is the tone of business continuing if we look forward the next couple of months. Normally September is very strong for you. Any signs of slowing or still continuing at the same pace, give us some sense of a trend.

Bill Fairl

I always talk and we’ll have our pipeline actual numbers when we close fiscal 2009 and report that in mid-August as Tom says and I always talk about two quarter numbers there just because things move around all the time on the awards.

Regarding the funding, yes I would say in our first quarter and the government’s fourth quarter we typically do see a very strong funding quarter then and this year you again have that symptom of sort of a late, relatively late passage of the supplemental so that tends to, as Dave Dragics always say, they got to get all this money taken care of by the end of September there so that causes a lot of activity again in our first quarter and their fourth quarter.

So yes I would expect if I’m going to guess here that we will see another strong funding quarter in our first quarter.

Dave Dragics

And I think also the question was partly are we seeing any slowdown and we haven’t seen, in fact our funding has been really stronger then even our goals and expectations that we set forth here as we finish up the last few weeks of the fiscal year.

Operator

Your next question comes from the line of Michael Lewis - BB&T Capital Markets

Michael Lewis - BB&T Capital Markets

I was wondering if you could explain how you have implemented risk mitigation strategies across the organization specifically addressing when you recompete contracts and also how you access in which direction the company would like to [inaudible] bid and proposal resources.

Paul Cofoni

In terms of risk mitigation of course the first way to mitigate risk is not to lose recompetes and that goal is job one here and we have a very comprehensive program for doing that which Bill has talked about from time to time that starts off with high level executive involvement in our programs.

We have a very strong process for executive on-site visits early in the beginning stage of the program and then throughout the life cycle of our programs. That’s to make sure that the top of the corporate structure we understand if there are any issues that our customers have so we can quickly intervene and resolve those.

And we have a survey process that works on an ongoing basis as well to sort of stimulate dialogue from the client on issues that they may be experiencing. That is the biggest thing we do to mitigate risk. Aside from that we have strong program management training programs. You have to build this in, build quality in and the way you do that is to train our program manages on all the elements of service delivery and program management so the client experience is uniform and high quality in terms of program management, interface.

Now on the disaster recovery side of that, if in the rare case where we lose a recompete, what we do to mitigate that is we have a process for prior to the actual recompete and perhaps six months in advance, we actually do a simulation exercise. Simulation is imagine that we were going to lose this, the unlikely event that we would lose this recompete, what will we do with our people, where else could we deploy or people so that we don’t lose those valuable people and the associated revenue that we derive from them.

And we actually build a plan for every recompete, we call it Plan B, as kind of the local term for it but we build a plan that is a contingency plan that in the rare event of a lost recompete, we have optimized the redeployability of our people to other opportunities and needs and fortunately we always seem to have 200 to 300 open requisitions and it’s a matter of resource management to position the right people in the right places and the geographic constraints, etc.

It’s not a perfect process, in other words we don’t get 100% but we probably are achieving 70% to 75% on that in terms of retention of our people and the revenues associated.

Bill Fairl

I think you covered that, there was a second question about allocation of B&P resources, the bid process and so I’ll go ahead and tackle that one. So we have a very mature, we call our milestone review process around here. It has eight phases to it and starting with early identification of our bids and kind of marching through all the way through actually post award or God forbid we lose one of these things, kind of a lessons learned sort of session right at the end there, sort of eight stages in between there.

And that’s all part of kind of a grooming sort of sorting process leading up to a point where we actually make kind of a no fooling decision to bid this thing and so the idea there is to deploy your B&P resources. As our stated goals have been our first, absolute first goal is growth in net income and earnings per share.

So that’s our going in position for deciding how we’re going to allocate our B&P resources. That’s our first gate, our first metric, our most important one if you will and so we have kind of a little mantra around here that we look at at least 60% CACI labor content on those kinds of deals when we have a choice.

Now that’s not to say that we won’t make a strategic decision from time to time to go after something like and S3 vehicle where initially our labor content is lower than that. But over the long-term we see an opportunity to hire lots of CACI folks while that we’re getting the ODC’s and that’s great too.

And that all leads again to our number one objective of growth in net income and earnings per share and that’s basically it in a nutshell.

Operator

Your next question comes from the line of Edward Caso - Wachovia

Edward Caso - Wachovia

I was wondering if you could elaborate a little bit more on the better performance out of the United Kingdom.

Greg Bradford

It was first and foremost it was down to stronger sales. We repositioned many of our products over here over the last nine months to help our clients reduce cost and/or improve productivity in face of the recession going on there. And there’s been a good acceptance of those products. The sales are up. We likewise as a company have been reducing our costs, containing our costs, and we’ve been successful with that.

And that’s led to increased profitability. And there has been a slight improvement in the dollar pound exchange rate as you know which plummeted here at the beginning of our financial year and that’s come back up so that’s added to our improvement in performance as well. So it would be those three factors that are the key ones.

Edward Caso – Wachovia

Investors never quite understand why you have any business in the UK, now that it seems to be back on track and presumably a more valuable asset to be sold, why don’t we just clean up this couple of percent of revenue and make you sort of a cleaner, easier to understand story. Has the Board considered that at least?

Paul Cofoni

We as you might imagine, that sort of discussion is had from time to time at the Board level but here are the facts, we couldn’t be more proud of that business. It is, I think we looked at it over, in fact we presented to the Board back when this, the economic issues really hit hard in the UK, we gave the Board presentation and actually put that question up on the table and Greg did it to his credit, he put that on the table.

But what we showed the Board was over a 20 year period there’d only been one year where this business had been unprofitable and every other year, the average, their margins exceeded our average margins so they had a net positive effect.

Beyond that, we look at our UK platform as an ideal launching point for international business growth. And I have encouraged Greg to be aggressive in the acquisition space to diversify that business. It’s got a beautiful commercial product base business but I asked him to grow it both in that part and also to diversify it more toward the public sector where of course we can provide greater opportunity for leverage with our US knowledge in both the acquisition process and in actually delivery and technologies, etc.

So Greg’s challenge is to grow that, in fact I told him I want it to become 10%, at least 10%, his goal is to make it 10% of our total business over time. I think today if we measured it on revenue its probably 4%. If we measured it on profits, it’s probably more than that, maybe 7% doing it in my head. But it is a, and I’ll tell you something else about that team, that business and that team.

It is a very seasoned, very mature strong management team that has impressed me. When we hit these snags with the economy I didn’t have to fly over there and start giving orders and cracking a whip, they had taken, Greg’s to his great credit and his team’s credit, took the initiative to launch the actions necessary on the cost reduction side and reengineering of the sales offerings to overcome or at least offset the economic conditions.

So I’m, and I think we have an opportunity there to launch from the UK over time, to have a commercial and a regional government business and with an acquisition, recent small acquisition there, also have moved into the central UK government work and I think we have an opportunity to further diversify geographically onto the continent with that business.

You know we won the Scottish census; we’re doing all the technology and processing work for Scotland for their census right now as we speak. And we have a bid in to do the census for Ireland as well. So we are hoping to diversity to other geographies from there as well. We do also some sales in the continent of some of our products as well.

So that’s a long answer but actually view that as an important channel for growth for our corporation going forward.

Operator

Your next question comes from the line of James Harlow – Stifel Nicolaus

James Harlow – Stifel Nicolaus

Just kind of looking at FY09 it looks like estimating operating margin will end up around 6.8% so the guidance you’re giving of 6.5% to 6.9% implies that operating margin could be down year over year, can you talk about some of the factors that are still constraining operating margin improvement.

Bill Fairl

I’m not sure about the fourth quarter calculation there, but that’s our estimate based on our plan going forward here. We’ve kind of developed a real detailed plan if you will. As I’ve said before and I’ll say it again, our number one objective here is to grow our EPS net income so with that in mind we focus mainly on growing our direct labor base and that’s where we generate the vast majority of our earnings if you will.

In fact there’s a 10:1 ratio if you will between what we earn on our labor based revenue and what we get out of our ODCs. So having said that we still, we like our ODCs. And we get a lot of growth out of that and they seem to lead in the future to additional labor based growth and that’s part of the margin calculation.

So this is our forecast that we put together based on a detailed process that we go through and that’s what the numbers tell us and we like our earnings growth. That’s our number one objective.

Paul Cofoni

And I think Bill hit it exactly on the head there, I would add two things. One, I think our margins actually reflect that they bottomed here and may be starting to trend back up slightly. But they’re not continuing to erode number one. Number two, what Bill said is important. We are focused first on earnings per share, second on organic growth.

We are however always working on the margin issue. This is a $2.7 billion enterprise that is not going to turn on a dime on margin. All the initiatives we have going on on margin are having an effect but you can imagine that it will take a number of years to have any material impact on that and having said that I have to qualify it by saying if along the way we get another exciting opportunity for an S3 like program, we are not going to let a margin, a derivative calculation prevent us from doing the right thing strategically.

Because its EPS first, organic growth and we will always continue to work on margin improvement.

James Harlow – Stifel Nicolaus

And lastly just a few more days left in the quarter and there’s a kind of a $0.07 range, what are the factors in just the last few days that would swing that one way or the other.

Tom Mutryn

There’s always a variety of [inaudible] reserves, tax rate associated with our deferred compensation plan, timing of award fees, determining that our June labor results are, so it could be normal fluctuation of trying to forecast businesses, so I think we narrowed the range and I think the range should provide sufficient information for you folks to do your job.

Operator

Your next question comes from the line of Matthew Cruz – Noble Financial

Matthew Cruz – Noble Financial

On your fiscal 2010, what’s the assumptions for stock compensation expense?

Tom Mutryn

It will be somewhat comparable to what it has been for the last couple of years. I think the number for the full year is approximately $20 million.

Matthew Cruz – Noble Financial

Another question on fiscal 2010 guidance, could you break down on the revenue side what you would consider continuing business versus business you have to recompete to win and what are the new opportunities that you need to win to get into the range.

Paul Cofoni

We don’t have that kind of detail but Bill could maybe give you a little color on it.

Bill Fairl

I’ll give you just a little bit on the recompete aspect which going back to some of our earlier questions and answers as you probably sense really a, always a number one focus area for us winning those recompetes. So our contracts and task orders, they generally speaking there are some exceptions, but generally they have a four or five year performance period on them.

So every year you would expect that maybe say 20% to 25% of your business would be up for recompete. Fiscal year 2009 was right on the lower edge of that if you will. The single biggest recompete that that we had was recompete of ETOSS contracts, now called [TESS] which we won, really excited about that.

Looking into fiscal 2010 it’s again, it’s a little bit down towards the lower end of that 20% to 25% range on our recompetes. Our goal going into the year is always win 100% of these recompetes and Paul talked about the process we’ve employed and matured over our 47 years of business and we’re really proud of our result there.

I mentioned in my comments in the script here that our recompete win rate in fiscal 2009, it’s the best it’s been in the last five years, and when you think about how competitive the environment is out there, that’s really an impressive statement and statistic. So it wasn’t quite 100% but it was darn close to it and really proud of that so we’re going to take that same sort of tenacity into fiscal 2010 and defend these recompetes that are coming up then.

Operator

Your next question comes from the line of Unspecified Analyst – JPMorgan

Unspecified Analyst – JPMorgan

I was wondering if you could break down within the 6% to 9% forecast organic growth the different portions of the business and where are they expected to be in relation to that and specifically maybe S3, intelligence, sort of the national programs portion of intelligence, IT modernization, logistics, where do the different businesses fall out.

Bill Fairl

I don’t think we have that detail broken out at that level. What we do is we build our forecast on individual programs so we don’t have it sliced that way.

Unspecified Analyst – JPMorgan

Would it be fair to say that intelligence is going to grow faster than 6% to 9%.

Bill Fairl

I would expect that to be one of the leading, that’s been our experience over the last few years here, now that is the fastest growing segment of our business so yes, I would expect going forward into fiscal 2010 that the same thing would hold true there.

Paul Cofoni

We also expect our cyber business based on the Administration side priority in cyber and the standing up of leadership and at the White House level on cyber that our cyber business will increase probably faster than the average part of our business. ISR is the big driver, it is the leverage for the war, the counter terrorism activity, intelligence, surveillance, reconnaissance, is the big leverage factor for our nation and we are so strong in that area that that is going to lead in the growth area for us.

Operator

Your next question comes from the line of Tim Quillin – Stephens Inc.

Tim Quillin – Stephens Inc.

Congratulations on the fourth quarter performance. You didn’t change your sales guidance at all for fiscal 2009, so there’s still this $100 million range for fourth quarter but do you expect now to end up at the higher end of that range as opposed to lower.

Tom Mutryn

Typically our philosophy in terms of our guidance is, the analogy I like to use is the middle of the fairway. So our guidance I think based on our expectations of hitting it down the middle of the fairway.

Paul Cofoni

And we did obviously take a look at the revenue when we were providing this revision to guidance and didn’t see the need to change that.

Tom Mutryn

It is somewhat of a wide range at this point in time for the fourth quarter but again I would, the middle of the fairway.

Paul Cofoni

Remember we give annual guidance too, and that’s for the year so we’ve already got nine months in the books.

Tim Quillin – Stephens Inc.

And then I think you had talked about being in cash accumulation mode and you mentioned acquisitions a little bit, it maybe sounds like you’re seeing some potential opportunities and maybe if you could broadly talk about that. I’m also curious if you’re seeing any potential opportunities come up because of bigger primes need to divest some business because of OCI, greater OCI issues now with the Administration’s change in posture on that issue.

Paul Cofoni

I would start by saying broadly we’re seeing two things that are happening. First of all even in the constrained environment we had a pullback and moved to a cash accumulation mode but continued our let’s say early probing activity in terms of acquisitions aimed at smaller opportunities that were strategic in niche areas with likelihood of strong growth going forward. And we have several of those that we are prosecuting as we speak.

And there are two broad factors, and I’ll ask Tom to address them a little bit more, is that we are seeing prices now start to approach the kinds of levels that make sense for us and the pricing is more attractive for opportunities that are out there. Secondly we’re seeing, beginning to see a loosening of the credit market and an improvement in interest rates and so we have not altered our cash aggregation approach for the near-term.

We are continuing on that however we’re continually monitoring both the loosening of the credit market, improving interest rates, and we’ll adjust this tactic as we go based on those two things.

Tom Mutryn

As Paul mentioned the credit markets are kind of markedly improved from where they were six months ago. Six months ago as most of you know the financial markets were essentially shut down and it was virtually impossible for corporate America to access capital. That has certainly improved dramatically. Still the markets are not as favorable as they had been 12, 18 months ago and they’re also precarious.

Our assessment is there are a lot of large geopolitical economic forces at play and while we have some windows today harder to predict what’s going to happen going forward so there is a level of cautiousness in terms of capital deployment but as Paul said, we’re in very fine shape in terms of our balance sheet, revolving credit facility, nice cash balance, and there are some interesting opportunities with very attractive valuations and so opportunistically we have a nice set of opportunities we’re pursuing.

And hopefully we’ll be able to continue with our strategy of being a leading [inaudible] and the fundamental premise has not changed.

Paul Cofoni

And this cash aggregation tactic that we’ve employed in the near-term is not, we have adequate cash, access to capital right now. That is not a problem. We have plenty of access to capital and good borrowing rates. We’ve locked in. However come May, 2011 we have to renew or pay off our term B loan and that is why we have aggregated the cash and so we have some opportunity to continue looking.

We’ll evaluate the windows and look for stability, a stable period of interest rates as we go. In the meantime we are looking at smaller opportunities.

Bill Fairl

I think you had a question about maybe some of the thought processes of large contractors around the OCI issues and so I’ll just say without commenting in detail the Administration seems to relatively serious about that and so we’re aware that some of them are thinking about their strategies vis-a-vie going forward here and some of them seem to be a little bit further along in those thought processes and so we’re keeping an eye on that.

Operator

Your next question comes from the line of Tobey Sommer – SunTrust Robinson Humphrey

Tobey Sommer – SunTrust Robinson Humphrey

Wanted to ask you a question about the things you mentioned in the press release and here on the call, IT modernization, smart power, and cyber, what proportion of the business do they represent now and how may they grow over time or what proportion of growth are they going to contribute if you want to answer it that way.

Bill Fairl

Well again we don’t slice the growth statistics that way. The smart power, we’ve talked about this before, we’ve been a leader in our symposiums that we’ve been conducting. We’ve conducted three of them now in that area. We’ve also structured part of our business kind of combining some existing business we had with the Coast Guard with some acquisitions we did. That’s an over $100 million business. We call it [ICIS] but it’s about the smart power initiative.

That was some of our work with Department of State and some other areas there. Put that all together and that’s approaching $200 million of our business. So not 10% of the business but in the 7% range if you will. And that’s, its prospects as we look into next year when I think about that aggregation of business there is growing slightly above average for us.

So I’d answer the question that way.

Paul Cofoni

And of course if you look at the market, looking at the broader market in the cyber space we’re all aware that the government has allocated some $17 billion over, to be spent over the next several years to improve the cyber defenses in government and that has not started to form up on a large way yet so that’s still addressable market space that’s there. We have a vibrant cyber business that we think we’ll more than our share of that over time. And in the smart power area, that’s still very formative. Its still, it’s a concept level. However if you look at the budget for the Department of State you’ll see over the last two years the Department of State’s budget has been increased by I think $10 billion.

And much of that increase is being allocated toward this soft or smart power type approaches which involve humanitarian aid and assistance as well as counter terrorism support funds, etc. counter or anti proliferation activity. So all of that is an emerging market but there are real dollars that have been added to the budget to the Department of State where we have a strong presence today and we expect that we’ll do quite well in that space.

Operator

Your next question comes from the line of Brian Kinstlinger – Sidoti & Company

Brian Kinstlinger – Sidoti & Company

There’s been a lot of talk about recompetes, did you mention how much of your revenue is up for recompete this year.

Bill Fairl

By this year you mean fiscal 2010, its towards again it’s that four to five year performance period so think about on average every year 20% to 25% of your business is up for recompete. Fiscal 2010 looks to me like towards the lower end of that, so towards the 20% end of that range if you will.

There aren’t a lot of big recompetes there in fiscal 2009, as I mentioned we had the recompete of our ETOSS contract, now TESS, we won it. Excited about that, now a $900 million contract. In fiscal 2010 there aren’t any real big ones like that, it seems to be a basket of some still sizable but smaller ones if you will. So a greater number of smaller contracts.

So all the more important and critical that we have this just terrific recompete defense protocol that we’ve set up here and time tested and again I just couldn’t be more proud of the fact of how well that organization is performing.

Brian Kinstlinger – Sidoti & Company

And given the limited number of qualified resources overall in the market in cyber and maybe even smart power, I’m not sure about that as much, when we start to hear the announcements such as you sort of made today without a press release about cyber, is that going to be a lot more direct labor business then typical, or is that going to be 100% direct labor.

Bill Fairl

Not 100% direct labor for us because one of our value proposition elements was bringing the right team together and that’s one of the reasons why we were able to take this deal away from a Tier-1 provider who quite frankly wanted to do it all in-house and that’s not what the client was looking for.

But it does have strong CACI labor growth and in this elements, one of the key elements of that is the cyber aspect. So kind of to your question, would we bring in additional resources in there, what I have found in my experience in this area and in other areas as well like intel if you will and C4ISRs, the best people want to work on the best projects, the most interesting work.

So winning these big deals that have this really exciting elements to them, really seems to attract these terrific resources to get into the organization here. So we’re looking at this not only for the instant benefits of bottom line but also it’s a great element of our recruiting process.

Operator

Your next question comes from the line of Jeff Houston – William Blair

Jeff Houston – William Blair

You mentioned that $0.03 of the 2009 EPS upside comes from commercial legal matters, just wondering if you could provide us more information about what those are.

Tom Mutryn

We’re choosing not to provide any more information on those particular issues. The reason why we highlighted them is because in aggregate they were material so we wanted to provide that level of information but they are out of period, out of the normal type of events, kind of non recurring and they have very little bearing on our future prospects and so again, we felt behooved to provide you the order of magnitude but not any details.

Jeff Houston – William Blair

Just wondering if you could provide us with the annual revenue run rate you expect on that $100 million cyber contract takeaway win.

Bill Fairl

It’s just under $100 million, about a five year contract so we’ll have a little ramp up period here but you could do the division there. That’s roughly, it’s going to be more or less even.

Operator

Your next question comes from the line of Joe Vafi – Jefferies & Company

Joe Vafi – Jefferies & Company

Congratulations here on Q4, just circling back on the Tier 1 contract win, should we be assuming that there will be some significant employee transfers from the previous contractor on that contract over to CACI. It does sound like there’s some ramp up but given the size I would assume that it’s not a Greenfield hire from a ground zero basis.

Bill Fairl

Actually it’s a little bit of a mix. We find and this is no exception that sometime the clients use these sort of opportunities to kind of retool the workforce if you will so, it will be a little mix of some of the existing folks and some new folks as well.

Joe Vafi – Jefferies & Company

And then secondly if we kind of go back to the beginning of fiscal 2009 when you did your guidance call your numbers are coming out pretty strong relative to initial guidance for fiscal 2009 despite the headwinds of the Rabbi Trust and some of the weakness in the commercial market that was unforeseen then. How do you look at this year’s guidance versus last year’s on a visibility basis, year over year comparing the two as we look in to fiscal 2010.

Paul Cofoni

It’s always, our visibility is always clearer when we get to this point in the year, I’d say as Tom used the metaphor about the middle of the fairway we try always to provide guidance ranges with an idea in mind that our best professional estimates of the outcome are towards the midpoint of our guidance.

And so that’s the best I can do there to explain to you where we think we’ll end up. I would say degree of difficulty of this plan notwithstanding any unforeseen major things that we don’t see right now obviously, the degree of difficulty is about equal to what we had in our FY09 plan.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Paul Cofoni

I would like to thank everyone on the call today for your questions and interest in our company. That is very important to us and that concludes our fiscal year 2010 earnings guidance conference call. Thank you all very much and have a wonderful day.

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Source: CACI International Inc. FY10 Guidance Call Transcript
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