CACI International Inc. FY09 Guidance Call Transcript

CACI International Inc. (CAI)

FY09 Guidance Call

June 26, 2008 8:30 am ET

Executives

Dave Dragics – Senior Vice President Investor Relations

Bill Fairl – Acting President and CEO

Tom Mutryn –Chief Financial Officer

Randy Fuerst – Chief Operating Officer U.S. Operations

Analysts

Brian Gesuale – Raymond James

Jason Kupferberg – UBS

Michael Lewis – BB&T Capital Markets

Cai von Rumohr – Cowen and Co.

Bill Loomis – Stifel Nicolaus

Joseph Vafi – Jefferies & Co.

Alex Hamilton – Jesup & Lamont

Tim Quillin – Stephens Inc.

Laura Lederman – William Blair

Analyst for Joe Nadol – J.P. Morgan

Erik Olbeter – Pacific Crest

Jeff Houston – William Blair

Presentation

Operator

Welcome to the CACI International fiscal year 2009 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. Please go ahead sir.

Dave Dragics

Thank you Connie, and good morning everyone, we’re pleased that you’re able to participate with us today. Last night after the markets closed we issued our fiscal year 2009 revenue and earnings guidance and this morning we want to provide you with more detail on that guidance.

Now is as our practice on these calls, we are providing presentation slides and during our presentation we’ll also make every effort to keep all of you on the same page as we are, so let’s go to slide number 2.

Before we begin I would like to make our customer but important statement regarding CACI’s written and oral disclosures and commentary. There will be statements in this call that do not address historical facts and as such constitute forward-looking statements under current laws. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from what we say today.

And the primary factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's release and are described in the company's Securities and Exchange Commission filings.

Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. Now let’s go to the next slide, please and to open our discussion this morning, here is Bill Fairl, Acting President and CEO of CACI International. Go ahead Bill.

Bill Fairl

Thank you Dave and good morning ladies and gentlemen. I’d like to personally welcome all of you to our call this morning. We appreciate your interest and invite you to join us on future calls. As you may know, I’m serving as Acting President and Chief Executive Officer of CACI until the return of Paul Cofoni.

Paul had successful bypass surgery two weeks ago. I’m happy to report his recovery is going very well and we look forward to seeing him back here at CACI in the near term. Joining me to discuss our results and answer your questions are Tom Mutryn, Chief Financial Officer, Randy Fuerst, Chief Operating Officer of US Operations and by phone from the United Kingdom, Greg Bradford, Chief Executive of CACI Limited UK.

Let’s go to slide number 4 please. A year ago we told you about our plan for growth in fiscal year 2008. I’m delighted to report that as we approach the completion of our fiscal year, we’re delivering on that plan and establishing a great foundation and momentum for fiscal year 2009 and beyond.

Going forward our focus remains on providing our valued customers with timely and essential professional services and information technology solutions for our markets of national defense, intelligence, homeland security and the improvement of government services.

This includes our emphasis on solutions at the nexus of intelligence and security. Now these are the kinds of solutions that led to the interventions at Heathrow, JFK and Frankfurt airports, where law enforcement actions combined with intelligence activity to identify and preempt terrorist attacks.

Now I’d like to take a moment to explain our work at one market area in particular and that is intelligence and the significant role this work plays in both our fiscal year 08 success and our FY09 expectations.

CACI has more than 40 years of service to national security agencies and the intelligence community. For decades we’ve provided these customers with solutions for one of their biggest challenges, that’s extracting real value and meaning from the voluminous and underexploited data that’s already available.

Our distinctive CACI intelligence capabilities clearly differentiate us from others supporting the intelligence community. Our focus on knowledge management and analysis, that’s technical, all source and counterintelligence address an area where the government needs more resources to meet all its requirements.

We offer both a surge capacity and an affordable approach to building and maintaining core knowledge bases for future intel needs. Our knowledge management capability is a particularly distinctive core competency. In the intelligence community we’re leaders in document and media exploitation.

We employ state of the art technologies that are effective across many mission areas and that can work at any IT environment. As we’ve acquired and developed our intelligence capabilities, we’ve continually adhered to a set of standards that the intelligence community recognizes as its own. We have the services, solutions and values our intelligence clients rely on whenever and wherever needed.

I’m proud to tell you that CACI’s steady and rapid growth in the intelligence community along with our distinctive intelligence services and solutions positioned us to partner with the National Defense University, NDU, to address the dangerous absence of the unified national strategy to address asymmetric threats. We recently sponsored a symposium on this with NDU and in the fall will jointly be publishing a recommended national strategy.

Now let’s move to slide 6 please. Our growth strategy for fiscal 09 includes continuing to pursue large prime business opportunities that help our customers sell vigor and more complex challenges. For example, during fiscal 08 we won exciting new prime positions on the multiple-award $12.2 billion Encore II contract with the Defense Information Systems Agency and the multiple-award $1 billion solutions for intelligence analysis contract with the Defense Intelligence Agency.

These are important clients in our growth plan and these awards are the first major prime vehicles we’ve won with them. Now we also intend to stay aggressive and customer centric in winning our re-compete business.

We’ll build on the strong results we saw in fiscal 08 with our hiring program, including our initiative to hire disabled veterans who bring valuable expertise and commitment to our company and our clients. We aspire to be the employer of choice for professionals with firsthand knowledge of government agency missions and requirements and Randy Fuerst will provide more detail on this.

Another key part of our growth strategy is our corporate development and acquisition program. During fiscal 08 our program brought us three outstanding organizations, the Wexford Group, Dragon Development and Athena. Taken together, they generated a combined fiscal year 08 revenue of $195 million.

But more importantly, they’re delivering bottom line results that significantly exceed our expectations and are well ahead of our plan. These acquisitions are focused on the intelligence and security services arena and give us expertise and skill sets that are a perfect fit with our goal to be the center of our clients’ efforts to defeat global terrorism.

We continue to evaluate other acquisition opportunities in which we can leverage our capabilities into new markets and with new clients. Overseeing this growth strategy is our innovative, cohesive and energetic management team. CACI’s senior leadership brings a deep understanding of customer needs from years of experience leading industry and government organizations.

Our executives are ethical and success oriented individuals who exemplify all of CACI. This has led to CACI placing third in the Ethisphere Institute’s Ethic Survey of the 100 largest government contractors and placing second in Fortune Magazine’s most admired IT services companies.

CACI’s culture remains firmly rooted in providing quality client service and shareholder value. We do the right thing in every interaction with customers, shareholders and each other. We are trusted because of our commitment to honesty and integrity.

Now let’s turn to the next slide. In our markets we believe we are in the right place for priority funding, independent of the outcome of November elections. Beginning with our February investor conference in Boston, we shared with you our commitment to financial goals over the next two to three years.

Most important of these is improving annual net income growth to at least 15%. We believe our accomplishment in fiscal 08 have positioned us in line with our commitment and that fiscal 09 will be another year of significant progress towards those financial goals, growing our business and increasing shareholder value.

Tom Mutryn will now provide details in his financial overview and Randy Fuerst will provide and operations update. Now, over to you Tom.

Tom Mutryn

Thank you Bill and good morning everyone. Let’s go to slide number 8 please. First let me update you on our fiscal year 08 outlook. We are wrapping up the year and we will have our accounting completed in mid-August. We currently expect our 2008 revenue to be within the May 1 guidance ranges of $2.375-$2.425 billion and our diluted earnings per share to be in the upper half of our $2.65 to $2.75 range.

We anticipate that our fiscal year 09 will be a year of solid growth on both the top and bottom lines. Our revenue guidance of $2.55-$2.65 billion is 6-10% greater than the midpoint of fiscal year 08 revenue guidance.

Our fiscal year 09 net income guidance of $89.8-$96 million is 9-16% greater than the midpoint of our 2008 guidance range, representing significant progress in achieving our stated goal of 15% annual net income growth within the next two to three years.

Turn to slide number 9 please. Some key assumptions implicit in our fiscal year 09 annual guidance are as follows. We expect that our operating margin will average between 6.7-7% for the full year. We anticipate a year over year increase in the ratio of direct labor to other direct costs.

We expect our effective tax rate to be approximately 39% for the year. We expect that our DSOs will continue to be in the high 60 day range and that our operating cash flow should be between $130-$140 million.

We expect that capital expenditures will total approximately $10 million for the year, consistent with prior years. And I’d like to remind you that our guidance does not include any impact from any future acquisitions.

Typically we experience a sequential reduction in earnings per share from our fiscal fourth quarter to our first quarter and 2009 is no exception. Similar to this year we expect to see steady increases in operating margin and earnings per share as we move from the first quarter to the fourth quarter with favorable year over year comparisons each quarter.

Slide number 10 please. Overall our fiscal year 2009 plan keeps on track to meet our financial goals. The first is to grow net income annually by at least 15% which we expect to reach in two to three years through a combination of organic growth and smart accretive acquisitions.

Our second goal is to increase our operating margin to 8% which we expect to realize over time by increasing our direct labor content, by driving SG&A efficiency and by acquiring high margin companies. Randy will provide more commentary on our progress in increasing our direct labor content.

In summary, we anticipate continued progress in achieving our financial goals. We are seeing signs of margin increases, the business is performing well, hiring continues at a strong pace and our funding and contact awards are all very positive. Most important, net income is expected to increase by double digit and at the same time we should see solid and predictable free cash flow.

Now here’s Randy who will provide further insights into our domestic operations.

Randy Fuerst

Thanks Tom. Let me add my welcome to everyone. This morning I’ll present the highlights from fiscal year 2008 operations that are fitting a solid foundation for fiscal year 2009. Now let’s turn to slide number 11 please.

Fiscal year 08 was an excellent year for CACI contract awards and funding orders. We’re still adding up the figures, but our contract awards should total approximately $3 billion. And our contract funding orders will exceed the record $2.16 billion that we reported last year.

Also, while our fourth quarter does not end until Monday, June 30, we set revenue records in each of the first three quarters of fiscal year 08 as revenue grew both sequentially and quarter over quarter from fiscal year 07.

Our intelligence business continued to grow in fiscal year 08. Intel remains a high value growth area for CACI and is now 34% of our total revenue. We are continually developing and strengthening our integrated intelligence security offerings to the Federal government and we foresee strong demand for these critical services in fiscal year 09 and beyond.

We’ve also made good progress in increasing CACI’s direct labor content as a result of a four part plan we implemented in fiscal year 08. First, we are bidding our contracts with higher CACI labor content. Our goal is 60% CACI labor content on new bids and we are achieving this goal on many of these bids.

We are performing more work in house, thereby reducing the need for subcontractors. Next, we are focused on acquiring companies with high direct labor content, making accretive acquisitions in high growth areas and with capabilities that CACI subcontracted for in the past.

This is part of our strategy in fiscal year 08. We succeed as a strategic consolidator both because we acquire high value companies and because we have proven expertise in integrating and acquiring our acquired businesses both profitably and productively.

The third part of our plan to enhance direct labor is to broaden our internal capabilities and offer more services directly to our customers. We’re doing this by increasing our focus on unified account management as well as our eight functional core competencies. These capabilities reside throughout the company and they help our clients achieve their objectives by adding value to their operations and enhancing their missions.

Finally, the fourth part of our plan is to grow direct labor through aggressive hiring. Our recruiting and retention program produced strong results in fiscal year 08 and we plan to continue this success in fiscal year 09.

We had especially outstanding hiring results for employees with security clearances of top secret or above. In addition to the talented new employees who joined us through our acquisition program, we’ve added more than 800 skilled net new hires this year. On the retention side, we continued to make CACI an employer of choice by investing in our people and winning exciting new work with excellent career opportunities.

Let’s go to the next slide please. Looking ahead, we believe our solid fiscal year 08 has laid the foundation for a strong performance in fiscal year 09 and we have great momentum going forward. In fiscal year 09 we will win recompletes by staying customer-centric. We will build new business by watching the trend lines and seizing opportunities.

We will pursue acquisitions that bring new and complementary solutions with high direct labor content to both new and existing customers. And we will attract and retain our highly skilled workforce. We are in the right markets, the right solutions for sustained growth throughout fiscal year 09 and well into the future.

Bill, that concludes my remarks.

Bill Fairl

Thanks Randy and thank you Tom for your comments. Let’s move to the last slide, that’s number 13. Our performance in fiscal 08 has been excellent and we expect fiscal 09 to be another year of demonstrable progress towards our stated two to three year financial goals.

Our plan for strategic growth guided by a strong and experienced leadership team and carried out by a skilled and dedicated workforce is focused on our nation’s most urgent and enduring needs. We are meeting our central goal of assisting our clients in their mission critical challenges.

In our markets, we believe there will continue to be priority funding of national defense and intelligence. We also see a growing demand for professional services, systems integration capabilities and other solutions we provide to help the government improve services.

I want to thank our CACI employees for performing with excellence and integrity in achieving outstanding results. Client satisfaction remains our top priority and we remain dedicated to providing valuable and innovative client solutions and delivering shareholder value now and into the future.

And as Paul Cofoni would say, our vision, strong as ever, is to be the best in all we do. And with that, we can open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Brian Gesuale – Raymond James.

Brian Gesuale – Raymond James

I wanted to ask you how do you look at the uncertainty in the macro environment when forming the guidance, maybe more specifically as we look at kind of a lingering supplemental yet to be passed and also the likelihood of the continuing resolution in 09. How do you expect that to effect order flow and funding orders as we move through the year?

Bill Fairl

We do our forecasting, we have a pretty defined process we’ve been using for quite a few years around here. We kind of build it from the bottom up and look at every project basically on its own merits and forecast it. We look at our new business pipeline as well and I think I’ll start here Dave and I’ll ask you to jump in here a little bit.

But I think the key thing for us is looking at FY09 and to your point about continuing resolution and the likelihood of a prolonged situation there is what that really affects is any new start programs once you get into fiscal 09. So we’ve taken that into consideration in our forecasting, tried to think about that.

Dave Dragics

We see a continue resolution from October 1 to January 20, I mean there’s probably more of a probability of that than there is of anything being passed. That being said, if you look at the supplemental, which could be voted on in the Senate today, everybody gets out of town for the recess after tomorrow.

They’ve provided money for the operations in Southwest Asia in that supplemental which should be cover for the Department of Defense, assuming they’re on a continuing resolution for the first four months or three and a half months or so. So it goes back to the old rule, one of our three rules, it’s not a matter of if they’re going to spend the money or pass the budget, it’s a matter of when.

And we think that people here in Washington DC can pretty well do a pretty good job of moving around that. I mean you’ve been able to see that the Department of Defense has been able to go this far with only a $70 billion supplemental passed as part of the Omnibus. But the little political theater, we got down to the wire but it looks like everything is going to be passed. And so it’s business as usual and I think that’s how we look at it as well.

Operator

Your next question comes from Jason Kupferberg – UBS.

Jason Kupferberg – UBS

On the margins here to start off, it looks like the year over year improvement is fairly modest, maybe 10-15 basis points here and you talked about a lot of positives going on, on the direct labor side in terms of your own hiring and some of the acquisitions and obviously the higher mix of intel business as well.

If we make the assumption that just a 1 point increase in the direct labor mix gets us somewhere in the neighborhood of 25 basis points or so of margin expansion which I think is a metric you had put out there at the February analyst meeting. Then why would we not be seeing more direct labor pull through in fiscal 09 or are there other factors that are impacting the margin outlook for fiscal 09 besides just the direct labor mix?

Tom Mutryn

As Bill mentioned we build up our plans through a pretty detailed bottom up basis where we look at our current backlog, our funded backlog, our awards, how many people are currently employed under each project and come up with a detailed forecast for fiscal year 09. Clearly in the first and quarter there’s more visibility than in the third and fourth quarter.

But based on that buildup, we see a modest as you say increase in operating margin because of the direct labor mix, the type of direct labor, our subcontractor work as well. At any point in time, a good portion of our work is somewhat set. A lot of our contract awards, a lot of our work is three to five year work and the economics of that work are largely set when we get the award.

It’s trying to turn the battleship, it takes some time to, going to make meaningful progress. The good news is, is that be believe we’re seeing a bottoming out of our margin after a couple of years of decline, we’re turning the corner, we’re seeing a modest increase in margin and we’re moving forward.

And more importantly, the focus on the bottom line is something that we want to continue to underscore. We’re very pleased with the bottom line net after tax improvement this year.

Randy Fuerst

Yes the only thing I would add to that too Jason is that as we’re going through our new bid process, we are staying laser focused on the type of margins that we’re going after. And I think as Tom indicated, we’re focused on it, it’s going to take us a little time to do it but we are committed to it.

Jason Kupferberg – UBS

So just to clarify there before I give you my follow up question, the direct labor mix, I think what was talked about at the analyst meeting was ultimately you’re trying to get it up to the 45-50% range if I’m not mistaken. Where do you see it for fiscal 09? I mean would it only be maybe a hair or so above fiscal 08? I just want to make sure I understand where the expectations are on that.

Tom Mutryn

In my remarks I mentioned that we expect a higher direct labor to ODC mix, I didn’t specify how much higher. I’m going to keep it somewhat ambiguous but we are moving in the right direction.

Jason Kupferberg – UBS

On the funded orders for fiscal 08 I know you mentioned that the full year number should exceed fiscal 07. But can you be a little more specific there because that obviously leaves a pretty wide range open for interpretation and any other clarity there would be helpful.

Bill Fairl

Again part of our detailed planning as we roll into a new fiscal year, we establish a funding plan that we need for the year week by week. And then every Monday morning we come in here and look at what our funding is on kind of a green, yellow, red basis if you will.

We’ve been above that funding plan profile for this entire year and are today as we close out. So and I will also add to you that we build in a little extra funding requirement to kind of if you will sort of have a book to bill ratio that’s greater than one on the funding profile.

And so we’re very pleased with that. We still have to add up all the numbers and typically the last week of a quarter and particularly the last week of a fiscal year there is a lot of truing up on the funding and all that tends to be fairly strong actually.

So the other thing I would remark on that, it’s kind of actually really kind of a good news story because as Dave mentioned, we never did get through our fiscal year here full resolution on the remainder of the supplemental yet the funding remained really, really strong for us all year long. So it’s one of those almost unexpected good guys if you will on this.

Dave Dragics

I think the key point is the funding orders are going to exceed the $2.16 or $2.2 billion which is positive.

Bill Fairl

We’re ahead of our plan for the whole year here.

Operator

Your next question comes from Michael Lewis – BB&T Capital Markets.

Michael Lewis – BB&T Capital Markets

Tom I was hoping that maybe you could walk us through what your cash flow from operations assumptions are and could you provide us with kind of a worst case scenario and what would cause the CFO to come in below the $130-$140 million bogey that you had set throughout the rest of next year.

Tom Mutryn

We develop our cash flow forecast through a couple different methods, triangulating on a number which we feel comfortable with. A relatively simple way to look at is our, following our GAAP accounting, net income of around midpoint of our guidance, $92, $93 million. Add back some large non-cash expenses, stock comp this year, fiscal year 08 was around $18 million and next year, fiscal year 09 we expect it to be comparable.

Depreciation and amortization around $49-$50 million which gets us to around $160 million type of range. We are growing, growth in top line uses cash to the tune of additional working capital. So I’m assuming I’m going to get some additional working capital needs so that gets us to the $130-$140 million cash flow range. That’s one way to look at it and I think that’s a reasonable number.

What are bad things that could happen? There could be a delay in government payment processes. We talked about some delays in our second quarter in December where there was a slowdown in one of the [defas] offices. I know some other companies in our space have experienced some declines in government payment which would increase our DSO and that would have a very immediate and direct impact on our cash flow from operations.

Michael Lewis – BB&T Capital Markets

Does the DSO, do you expect the DSO in 2009, is that in line with what we would likely see rounding out 2008?

Tom Mutryn

Yes it is, its high 60 day range, so we’re expecting a continuation, pretty industry leading DSO and if that deteriorates for whatever reason, that would impact our cash flow.

Michael Lewis – BB&T Capital Markets

Bill for you on re-competes, what proportion of the revenue next year is up for re-compete and also is the cash contract with OSB your largest near term re-compete in the mix right now?

Bill Fairl

In terms of what next year looks like on an average profile, if you think most of our contracts have a four, five year performance period then every year, somewhere between 20-25% of your revenue is going to be up for grabs for re-compete. And fiscal 09 is towards the 20% end of that spectrum, so down towards the lower, typical but at the lower end of it. And Randy as far as the single biggest one next year, what do you have there.

Randy Fuerst

I think we’re looking at Army ETOSS and we think we’re very positioned for that one. That would probably be our largest one that we’ve got to keep our eye on next year. But we feel very bullish about it, we think we’re extremely well positioned because we’re doing great work for that client.

Operator

Your next question comes from Cai von Rumohr – Cowen and Co.

Cai von Rumohr – Cowen and Co.

First a question on margins. If in fact your depreciation is flat and your stock comp is flat and your sales are up, how come there’s not a better opportunity for margins to move up more than 10 or 20 BPs or 30 BPs? If you’re moving toward more direct labor, I mean it would just look like you know you have all those three things are positives year over year, is there something else in the gross margin that would be negative that we’re not seeing that would kind of create more headwind for the margin?

Tom Mutryn

And I’ll get back to what I said earlier, we have a very kind of bottoms up build of our plant to come up with these particular forecasts. The other variable that comes into play is the type of direct labor. Not all direct labor is the same in terms of profit contribution.

We provide a spectrum of services to our government customers and some direct labor is more profitable than others. So we do have some positive headwinds, Randy has articulated a good number of positive factors influencing margin. You articulated a couple other ones. But when we add up all the numbers we come up with a slight positive margin increase.

Randy Fuerst

The one thing I’ll add to that is in our bid pipeline, we can try to forecast when we’re going to bid and win these higher margin jobs. But I’ll be honest with you, in the 28 years I’ve been in this industry, we’ve got this phenomena called stuff moving to the right. You know the government says they’re going to go ahead and come out with this solicitation, we fold it into plan and then sometimes it moves back two or three months. And so we try to model that in terms of our margin improvement as well.

Cai von Rumohr – Cowen and Co.

And then a follow up, task orders as you know I guess the rule has been changed on the ability to protest task orders under IDIQ. What impact have you seen from that change and what impact do you anticipate particularly on some of your larger vehicles like S3?

Bill Fairl

So far we haven’t seen any impact that I’m aware of. And in the S3 environment which is our largest task order contract right now, I really don’t anticipate any impact to us there. We’re pretty close to that client and have a good feel for things. And knock on wood, so far so good. But I don’t see any major impact to us there.

Operator

Your next question comes from Bill Loomis – Stifel Nicolaus.

Bill Loomis – Stifel Nicolaus

Thank you. A couple questions, first, can you just repeat what that re-compete was and what the revenue run rate was, I missed that.

Randy Fuerst

The re-compete is what we call a ETOSS re-compete.

Bill Fairl

That’s with the Army up at Fort Monmouth up there and as you may recall there was a vehicle awarded a couple years ago, two winners, ourselves and Booz Allen and I believe the contract ceiling on that was $450 million. And we win about two-thirds of the work on that.

Bill Loomis – Stifel Nicolaus

That sounds like it’s up early, I thought that was a four or five year program.

Bill Fairl

It was, it was a best seller.

Bill Loomis – Stifel Nicolaus

So you’ve gone through the ceiling and that’s why they’re re-competing it early?

Bill Fairl

Yes that’s what the army wants to do and we’re happy for it. As Randy mentioned, we’re in great position, very close to that client up there. We’ve been working on this for quite a while close to the client. I think we’ll be fine. Not taking anything for granted but we’ve got a great team here and it’s looking good.

Bill Loomis – Stifel Nicolaus

And when’s the expected award date on that?

Bill Fairl

As Randy mentioned earlier, things sometimes slide a little bit but maybe in the second quarter of our fiscal 09.

Bill Loomis – Stifel Nicolaus

And then Tom what’s the organic growth range for your 09 revenue range?

Tom Mutryn

Approximately 7%.

Bill Loomis – Stifel Nicolaus

And you mentioned your contract awards, based on what you said on the slide presentation that implies at least say $800 million in the fourth quarter. So you’ve had pretty good awards, why, is that just starting the base a little lower on the organic growth assumptions in 09?

The combination of the 7% organic growth and insignificant margin improvement going into 09 based on, in spite of a lot of changes you’re marking and progress you’re making. Just it seems, are you setting the bar a little bit lower to start the year off given the budget uncertainties that we’re seeing out there?

Tom Mutryn

Within the guidance there is uncertainty. This year is no exception. Is it greater or less than previous years, it’s hard to anticipate. But there is an election coming up, there is continual debate in Congress. But I’ll get back to what we said previously, we go through a pretty detailed bottoms up planning process.

There’s a good amount of work that we have a high degree of visibility of. People doing work today, some anticipation of increased work, some work tapering off and throughout that budget planning process, when we put our pencils down, we see an organic growth of approximately 7%.

Slightly below our longer term goals of 8-10% organic growth. Hopefully we’ll do better than that but right now we see the forecast in the guidance as being, they have to be [inaudible]. We’re trying to give pretty good solid guidance and that’s the visibility that we have right now.

Bill Fairl

The other thing I would add to that is that that’s top line growth and we or course highly focused on bottom line growth here and when we look at what our expectations are and our announced range for net after tax growth in fiscal 09, it’s pretty robust. So we’re well satisfied with that and marks great progress towards that two to three year goal of getting the 15% mark there.

Operator

Your next question comes from Joseph Vafi – Jefferies & Co.

Joseph Vafi – Jefferies & Co.

I was wondering if we could, I know in your commentary you talked about some seasonality in margins in Q1. I guess that there’s things like FICCA accruals and the like that are affecting you in Q1. Is there anything else that we should be aware of on the seasonality that drives the change in margin?

Tom Mutryn

A couple factors that suggests a slightly lower margin in our first quarter first has to do with some of our 123R stock compensation expense, whereby our [planned half] provision which alters the accounting such that the oftentimes for individuals, higher expenses than in the subsequent quarters.

The other issue which is impacting our business is the timing of people’s time off and vacation activity. During the summer months, people take vacations and as a result of that, oftentimes there’s less billable hours or days than there is in other months of the year. So that seasonality depresses our first quarter somewhat.

Joseph Vafi – Jefferies & Co.

Just as a follow up to that if we rewound the clock here and looked at Q1 of this fiscal year, was there anything there that, I know margins have improved over the year this year so far, was there anything that was negatively affecting the Q1 margin as we look forward and start to make some compares that we would exclude from that kind of year over year analysis at this point?

Tom Mutryn

Nothing comes to mind, I don’t believe there’s any unusual kind of onetime events that would materially impact the margins. Last year, this fiscal year I think it was a 6.3% margin we had in our [inaudible] quarter

Operator

Your next question comes from Alex Hamilton – Jesup & Lamont.

Alex Hamilton – Jesup & Lamont

I will ask the acquisition landscape question. Valuations seemed to have stabilized a little bit, what have you seen on the acquisition front?

Bill Fairl

We have a really full pipeline right now. As you may recall we brought a gentleman on board just about a year ago named Richer Miller to head our corporate development program and we meet every week to look at all the candidates that are out there. And looking at valuations and we’re still as was mentioned earlier by both Tom and Randy, we’re looking at acquisitions that fit our strategic thrust, our initiatives, where we see the priority funding.

It makes sense for our business and are going to be accretive to us. So our standards are pretty high. They also have a good culture fit with the company and again support our strategic growth initiatives or objectives. Very pleased with our program, what it has delivered in fiscal 08. As I mentioned Wexford, Dragon and Athena to name three of them have just hit the ball out of the park for us.

So that’s the standard that has been set this past year and years prior to that. And against which we measure all future acquisitions. So there’s lots of candidates out there, we’re looking at them right now and as far as valuations go, yes they’ve stabilized a little bit but occasionally you still see some fairly lofty prices paid for things.

Tom Mutryn

I’ll echo what you said Bill, we do have a robust pipeline, we continue to be very selective looking at transactions which work from a strategic, cultural fit as well as ones which have very solid economics. We’re passing on a large number of deals which don’t meet those criteria. We have no qualms about doing that.

In terms of valuations, we sense that the market has stabilized but we haven’t seen too much reduction in valuation at this point in time. Maybe that will come. There’s a variety of buyers who are still active in the space and [inaudible] transpires in our fiscal year 09.

Operator

Your next question comes from Tim Quillin – Stephens Inc.

Tim Quillin – Stephens Inc.

In terms of planned headcount additions, where did you end up in fiscal 08 relative to your goal, I think it was 925 and what’s your goal for organic headcount additions in fiscal 09?

Randy Fuerst

Actually we got real close to that goal this year, right around there. I mean it’s been an exceptional year for us. And quite frankly we see probably the same type of objective for next year, just around that same range. That’s what we think we’re going to need to do to deliver the results.

Tim Quillin – Stephens Inc.

And Tom what’s the interest expense assumption imbedded in your guidance?

Tom Mutryn

Interest expense on a year over year basis should be relatively flat. This is net interest expense, interest income and interest expense combined.

Operator

Your next question comes from Laura Lederman – William Blair.

Laura Lederman – William Blair

Just a few follow ups to questions asked earlier. One is on the acquisition front can you talk about kind of the average size you’re looking at, would you do any large ones and what would large be considered in terms of size? Also following up on the headcount question, can you talk about the trend that you’ve been seeing, obviously you’ve seen improved rates but if you could give us a little bit of color on that? And finally any other re-competes besides ETOSS in terms of size that we ought to be aware of. Thank you.

Bill Fairl

On the size of acquisitions we’ve long taken a two track approach to these things. So we’ll look in the roughly around the $50 million range, maybe a little bit less, maybe a little bit more. I’m talking annual revenue here, areas or companies, properties that are highly focused in a specific area of the market that’s very appealing to us.

When you get into that sized bucket, you really are buying exactly what you’re interested in. You know it’s a specific customer, a specific capability, a specific location so you can be very, very focused, laser focused on what you’re getting there. That’s one track, now you move up to a higher track and I’ll say that starts at around $200 million and can go up from there.

Now you’re getting typically a more mature enterprise that has a broader base of customers, capabilities, location, fills perhaps more of our needs and we’ll go like I say $200 million and up. And then we look at occasionally, there aren’t a lot of opportunities out there for larger deals, larger combinations, more strategic sorts of things.

But those obviously are few and far between. So day in and day out, think of the two track approach, sort of centered around the $50 million business as one track and $200 million and above as the second track.

Randy Fuerst

We actually have a very robust human capital program here at CACI. It’s something that both Bill and I are constantly working with Bob [Bome], our EVP of HR, and what we’re doing is we look across the board from career development even to how we’re on boarding new employees.

The key thing is, being in a people business, it’s all about what is the employee looking for in their own career and putting them in the right job and then they want to say how do I move forward? So we’re putting a lot of flex in that area and quite frankly I think we’re seeing some positive results there.

Bill Fairl

Just to add, I think, I agree with everything you said, I think the focus particularly you and your team there were slightly better this year, fiscal 08 than we were in fiscal 07. Could we be better? Sure. That’s why as Randy mentioned, we’re focusing on it. And I think you may have snuck a third question in there. Major re-competes. And ETOSS tands head and shoulders above the other ones. And as I mentioned, put them all together and we’re looking at about a 20% year.

Operator

Your next question comes from Joe Nadol – J.P. Morgan.

Analyst for Joe Nadol – J.P. Morgan

It’s Seth here for Joe this morning. First I wanted to follow up on an earlier question about the quarterly progression of margins from the fourth quarter of 08 into the first quarter of 09. And if you look back at previous years, you know that decline was about 100 basis points in 08, it was about 70 basis points in 07. I think it was about 90 basis points the prior year. Are we looking at something of that magnitude for 09?

Tom Mutryn

We are providing annual guidance. A couple years ago we were doing quarterly guidance. We decided to get away from the quarterly guidance for a variety of reasons and are providing annual guidance. So we’ve provided in total what our guidance and margin expectations are for the full year, trying to provide some qualitative shaping of the curve.

And given that I don’t want to get into too specifically what our margin expectations are in the first quarter relative to our fourth quarter. But as you know, typically there is a decline due to some indirect costs, some higher indirect costs as well as a lower direct labor declassification pattern. And those are the drivers of that seasonality of our margins and consequently earnings per share.

Bill Fairl

I would add to that that we’re pretty good and able to forecast the revenue that we drive from our direct labor, CACI internal labor. The thing that can be a little harder, can be a little up and down is the revenue coming from the ODCs, some of that can be kind of short notice, short turnaround stuff.

So actually the thing that could swing all of this one way or the other is maybe an unexpected spike in ODCs during a particular quarter that we can’t see right now, that could be bigger than anything else if you will. So we concentrate on forecasting really off of our direct contract labor and that’s the easiest thing for us to see and of course that’s where we earn all our money too. The margins on that are 5-10 times greater than what they are on ODCs equipment subcontractor stuff.

Analyst for Joe Nadol – J.P. Morgan

I wonder if you could go through and tell us, as you think about what things that could happen during the year that could lead to upside from the current guidance. Maybe what a few of those things are and along with that, maybe address sort of, I know that higher award fees led to higher margins in the last quarter and sort of what assumptions are like there and how that effects the margin guidance and maybe that’s some place where there’s some room for upside?

Bill Fairl

Good things that could happen to us, Randy talked earlier about our hiring program for the year. Obviously the quicker you hire people, the more benefit you get out of that. So that could drive it up. Having said that, I think our hiring requirements for next year, they’re like they were this year. And I’ll be extremely pleased when our team meets that same objective in FY09.

Earlier starts to programs, a greater win profile, although our win profile is really high right now, I think the best in the industry out there but we could win them all, every single one of these new starts or new programs that we bid, we could win all of those. How likely is that? As much as I would like to, I think we probably won’t win 100% of all the take aways that we’ve gone after here. But those are good things that could happen.

Randy Fuerst

I think on the award fee front, I mean we model at the beginning of every year when we think the award fees will come in. But to be honest with you, we don’t have any control when the clients get around and convene their award fee panels. We do very good on it, we do very well on our award fees. But as you saw this past year, the timing of that sometimes gets a little bit, it can slide. You know we might anticipate an award fee in the second quarter and it could slide into the third quarter.

Tom Mutryn

And the last observation I will make is, we’re extremely pleased with our projections in net after tax profit. Midpoint of the guidance range, 12.5% increase in net after tax profit. One upside in net after tax profit would be significant growth in some of our subcontractor work, ODC which would add to the bottom line.

That would have the impact of decreasing margin actually. So one positive upside would be a surge or continued very high growth in ODC which helps our bottom line. Unfortunately it depresses margin but we will take that business all the time.

Operator

Your next question comes from Erik Olbeter – Pacific Crest.

Erik Olbeter – Pacific Crest

Two of the programs that we’ve talked about in the past are the S3 contract and then the first contract, can you just give us a sense of what your expectations are on both of those vehicles in 2009?

Bill Fairl

I’ll start with S3. This year I think over about $400 million or so on S3 task order wins in fiscal 08 and I expect that level of activity to continue in fiscal 09 as well. As far as Army first, as you know, we talked about it in our January call, we had that terrific win in our second quarter down at Fort Bliss and I’m pleased to report that six months into that contract, we’ve doubled that contract because of the growing need for that kind of support down at Fort Bliss.

And what’s really exciting to us about that is that we can see as we look into FY09 kind of a series of these task orders, similar sort of task orders to provide the same sort of services coming up at other army facilities. So we had a great success on that and we think that’s going to provide us with a blueprint as these additional tasks come out.

Randy Fuerst

I can’t add much more except to say that when you have an award like Fort Bliss and we’re executing on that thing very, very effectively, that kind of serves as a blueprint for future jobs that we might see out under our Army first. So we’re bullish on the pipeline there, we’ve got some bids we’re going after and we do.

Bill Fairl

I want to go back to your question for a moment about S3 and it’s a point I’d love to make so I’ll take this opportunity and that is that we talk a lot about ODCs and margin and all that and the S3 vehicle, we’re well over $1 billion in awards on that in the two years that we’ve had it. Initially when we get those tasks they start out with a very high ODC subcontractor utilization mix on them.

But as we work the vehicles, we work with our clients, new task orders come out, we’ve been able to grow our direct labor up there, therefore grow our bottom line dollars. That is one of the two fastest growing profit centers in terms of real dollars inside of this company right now and it’s due to that S3 vehicle. So I’ll go back to Tom’s point, sometimes the ODCs come with it, but good things happen with that.

Erik Olbeter – Pacific Crest

My next question really goes back to a recent rule that came out of [defar], talking about subcontractor work or pass through sales which asked for any new work moving forward that the government take a hard look at any contract where more than 70% of the work was going to be performed by subs and really just requiring contracting officers to justify the premium that’s paid to the prime in that case.

Have you heard anything about this? Is this something that is being talked about among your customer set and do you foresee this being any sort of problem as you continue to operate or go after ODCs?

Bill Fairl

I haven’t heard much about it, I mean I’m aware of what you’re speaking about here and the potential impact to us but right now I don’t see much impact to us right now. We’re quite competitive when it comes to providing the government with access to our subcontractors. I don’t anticipate that we would have any issues or problems with this at all.

Dave Dragics

I haven’t seen anything. It’s a proposed regulation which is out for comment at this point but I haven’t seen any kind of feedback on it or any commentary.

Operator

Your next question comes from Jeff Houston – William Blair.

Jeff Houston – William Blair

I wondered if you could comment about your intelligence community work. It currently represents about 30% of your business, just wondering where you might take that over time? And then separately I wondered if you could give some color around gross margin for 09? Thank you.

Randy Fuerst

On the intel side, quite frankly we’ve got a great leadership team there underneath Jake Jacoby. And you know as Bill mentioned, one of our awards this past year was the DIAC contract. We’re seeing a lot of activity on [see a] and we anticipate to be bidding more analysis type work for DIA, that’s a major focus area for us and so I expect growth there. We’re also doing very well in our work for [N Jip] down in Charlottesville.

I had a tremendous re-compete win right down there and so we continue to be very bullish about the opportunities that present themselves in Charlottesville, particularly in regard to that area as a [brack] area for additional DIA work. So I think we look very good there.

And then as well up in NSA, we were one of the prime award winners on the [Axis] contract. And that pipeline of task orders is also very robust. So I think you’re going to see, those are a couple of primary focus areas for us as well as the knowledge management area that Bill highlighted in his color.

Tom Mutryn

In terms of gross margin, we expect gross margin to somewhat parallel our operating margins to be up a tad or a bit on a year over year basis.

Operator

Your next question comes from Tim Quillin – Stephens Inc.

Tim Quillin – Stephens Inc.

Tom as far as the interest expense. Shouldn’t it come down a tad with the cash flow you’re generating and the pay down in debt? Thanks.

Tom Mutryn

What we had last year if you recall at the beginning of the year, a relatively healthy cash balance. We did the convertible, we have some cash on our balance sheet, earning interest expense, we deployed that through our acquisition program. So we had pretty large fluctuations in cash balances during the year.

So on a year over year basis, while we will have a cash balance it’s going to be quite a bit less than last year and we also have a different interest rate environment. Our convertible interest rate is largely fixed. Our interest income on our portfolio was down quite a bit as well as our variable interest expense. So several puts and takes, but net-net we expect net interest expense to be relatively flat.

Dave Dragics

I might add, the term loan that we have since the acquisition of Defense Intelligence Group only calls for 1% amortization per year until the last year, so we’re not there yet. That’s a seven year term.

Operator

Your last question comes from Cai von Rumohr – Cowen and Co.

Cai von Rumohr – Cowen and Co.

Cyber security, what is your position in that sector and what is your interest in expanding any activities you might have in that sector?

Randy Fuerst

Cai, I’ve got to tell you, cyber security, it’s one of Paul Cofoni’s key focus areas as part of our strategic tasks going forward. And I’m happy to tell you that we’ve assembled a special task force team across the company to really take a look at our capabilities and as I speak, we are in the process of putting together a couple of major bids in that space as a prime. So it’s key to us, we see it as a continuing strategic market area and I think there’s going to be some upside in the market there in the years to come.

Operator

There are no further questions.

Bill Fairl

Thank you kindly for your help today and I’d like to thank everyone on the call today as well for questions and interest and that concludes our fiscal year 2009 guidance conference call.

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