With the nation's deficit continuing to balloon, the knife is out to slash budgets. One of the items on the chopping block is the defense budget.
The worry over cuts has been hanging over the industry for sometime. I recently had the change to talk to Paul Cofoni, the President and CEO of Defense Information Technology Contractor CACI about the outlook for the sector.
LL: In my interview with The NTU (the National Taxpayers Union) they broke down the cost of the State of the Union and told me the President's cost cutting measures on defense will save $15.6 billion. Do you think Congress will go along with such cuts?
PC: CACI is positioned very well for government spending reprioritization initiatives. We are in markets that are well funded now and that we expect will continue to be well funded. Our strategy focuses on high-priority areas of the government’s most critical needs, such as C4ISR, cyber, and intelligence. Included in our strategic focus is IT modernization and government transformation, where federal agencies are directing considerable funding and resources.
The recent bombing of the Moscow airport and turmoil in Egypt, Jordan, Yemen, and Tunisia reminds us that we live in a dangerous world and instability is on the rise globally. We must remain ever vigilant in areas of national security.
CACI provides vital solutions to our clients’ high-priority national security missions, including preemptive intelligence support services and solutions, and leveraged C4ISR support for our deployed forces. And our IT modernization and government transformation solutions are helping federal agencies enhance their business systems to respond to budget pressures.
Another prominent component of our growth strategy is our mergers and acquisitions program. We recently acquired two companies, TechniGraphics and Applied Systems Research, that have expanded our business with both new and existing clients in the Intelligence Community. These firms enable us to expand our capabilities in the very important and growing area of geospatial intelligence, which our nation relies on as a key part of its arsenal of tools and weapons to counter terrorist threats.
LL: Even though there will be cuts, demand continues for certain defense products and many say what you provide is one of them. What are the technologies and services of tomorrow that despite these overall budget cuts, will continue to grow?
PC: We believe the technologies and services that will continue to grow are in the areas where we are strategically focused, and will continue to be strategically focused. These include providing mission-critical solutions for national, such as our capabilities in C4ISR, cybersecurity, and intelligence, as I mentioned earlier.
It is also precisely during times of federal budgetary pressure that demand increases for the IT modernization and transformation solutions that CACI provides. We are winning business consistently in this area, including a truly breakout contract award in modernizing and transforming business systems for the Department of Homeland Security. This is a complex, large-scale, Tier 1 award, and we are being brought in as a catalyst for change. So we anticipate that federal agencies will also continue to direct considerable funding and resources into IT modernization and transformation.
It is our job is to help our clients solve very complex, high-priority problems in defense, intelligence, homeland security, and IT modernization and government transformation. Those challenges remain top priorities for our government.
LL: Analysts say the tightness in the defense budget is already baked into your stock. Do you think the headwind facing your company as well as other defense stocks is as bad as the markets are projecting?
PC: We are monitoring the mounting deficit spending and pressures on the federal budget. In this industry, headwinds and the macro trends do matter, and we track them very closely. But our job is to manage the performance of CACI to deliver shareholder value. We operate in an addressable market of $400 billion, and we continue to see excellent opportunities to gain market share.
In fact, CACI has just completed a strong second quarter, resulting in an outstanding first-half fiscal year. We achieved record Q2 performance in revenue, operating income, net income, diluted EPS and cash flow. In particular, our robust 26% EPS growth in the quarter is a clear mark of our ability to create value for our shareholders, and we are raising our financial guidance as a result of our solid performance.
CACI has a solid business model and is demonstrating robust growth. Our focus on our specific target markets of C4ISR, intelligence, cyber, and IT modernization and government transformation will offer us very good growth opportunities. With the completion of a solid second quarter, we have demonstrated a strong ability to retain our existing business and secure new business, continue to make new acquisitions to support our capabilities, and continue to deliver shareholder value.
LL: With the budget cuts, there will be more jockeying for the government contracts. How much pricing pressure do you anticipate this will have on margins? Will they go higher?
PC: We are very pleased with our continually improving margins. We continue to expect that our full year operating margin will be at least 6.4 percent.
LL: Where are the growth opportunities for your company?
PC: We will stay focused on our specific target markets for growth. C4ISR, intelligence, cyber, and IT modernization and government transformation offer us very solid growth opportunities.
We also see good growth potential in health care IT, where we recently won two breakout contracts. One is the $91 million Veterans Affairs Virtual Lifetime Electronic Record, or VLER, contract. The VLER program ensures there is continuous medical support for our servicemen and women when they transition from active duty to veteran status. So far, we have received two important task orders on VLER, including one to help the VA build the infrastructure for its Nationwide Health Information Network. That’s sure to be a big project, now and into the future.
We also won the $75 million Virtual Interactive Processing System, or VIPS, contract. This award is to transform military recruiting into a more responsive, efficient, and paperless process, reducing the time it takes to induct enlistees. Here we made our first software delivery well ahead of schedule and are proceeding to milestone reviews for the next release.
Our plan is to leverage these two awards to pursue additional business within the health care IT practice, an area with very attractive growth opportunities.
Of course, as I mentioned before, the mission critical solutions we provide are extremely important to our nation and in high demand. And we believe there will be a continued demand for our IT modernization and transformation solutions especially as federal agencies look to find experts, like CACI, who can help them be more productive and return taxpayer value.
LL: Do you expect consolidation this year?
PC: As I said earlier, we recently acquired two companies, TechniGraphics and Applied Systems Research, which expanded our business with both new and existing clients in the Intelligence Community. Looking forward, we continue to see a robust pipeline of attractive acquisition candidates, whose capabilities are in high demand, and who have high potential for synergistic growth with our base business.
Our mergers and acquisitions program represents is a real core competency for CACI. We have made 50 acquisitions since 1992, and along the way we have learned a lot about what works and what doesn’t. CACI is one of the best strategic consolidators in the business, and our aggressive M&A program is a key element in our consistent growth.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."