Morning, everyone. Next up, we have CACI. So very pleased to have John and Jeff here. I don't know, John, if you have any opening remarks you'd like to make, or you want to forward-looking statements, or you want to get straight into it here.
Jeff, do you want to share anything before we go?
I think we'll assume everyone understands the Safe Harbor Statement, so I'll leave it at that.
I think that's, yeah, I think that's understood. So a lot of headlines out of Washington, enough to keep your head spinning. One day, the defense budget's going up $100 billion; the next day, it's getting cut in half. So what do you, I guess, trying to cut through some of that, what do you see as the, maybe what are you identifying maybe as the top priorities of the new administration? Kind of beyond what we're reading out there every day, what do you maybe see, and how do you think, where your position? How do you think you kind of fit into, ultimately, where this administration might be going in terms of the money that we're going to spend on the defense side of things?
Yeah. So, David, thanks for having us. I haven't looked at this morning's tweets, so if I'm a few hours behind.
I'm sorry not to.
Look, I think every administration comes in with their own goals and what they want to accomplish. I think every administration, since President Nixon came in, with a view that, "Can we clean up government? Can we make government smaller? Can we make it work better for us?" So I'll keep these comments at a real macro level because there's a lot of narrow, deep holes out there. I think where you want your employees to work, you want them in the office or out of the office. I think that's the government's prerogative. They get to make that call.
I think that this administration wants to do more around protecting our borders. It's tough to fight that one. They want to be more efficient. Tough to fight that one. They believe that networks across the federal government should be more resilient. They should be better cyber-protected and all. You won't find a company or a customer saying that that's a bad idea. I think peace through strength is a very strong statement as well. All of that takes money. I think that, being a taxpayer, we want the government to be efficient. We don't want fraud, waste, and abuse.
I'm not so certain, though, that paying a 140-year-old person an extra Social Security check here and there is the astronomical fine that's going to roust out fraud, waste, and abuse. 90% of our company's revenues are in the national security space. We've got 6% exposure to what we would call the traditional federal civilian work, citizen-facing. Why is that? That was intentional. We wanted to have a very low exposure to the federal and civilian world. It doesn't mean they're bad agencies. It's just sometimes tougher business.
So we intentionally, about five to eight years ago during that time frame, took our portfolio exposure down to that area. And why is that? Because budgets are very supportive, and they are well-supported, whether it's Republicans or the Democrats, as it comes to anything around national security. It's very bipartisan support. And that's where we, as a 60-some-year-old company, wanted to find ourselves at. So an awful lot of moving pieces. There's a lot of noise in the system. At days, it's tough to find what the signal is.
But we're navigating our way through it and having an outstanding year and looking forward growth as we move forward.
I'll only say, "DOGE," once or twice. I mean, it's really hard to know if this is good, bad, or indifferent for you guys and your peers. I guess, how would you frame that? I mean, in terms of sometimes I look at this and say, "This might be an opportunity for you guys." I mean, obviously, the risks are what they are. But how are you, I mean, the market's obviously telling us one thing. But how are you thinking about potential opportunities and then the downside risks?
Yeah. Look, clearly, markets don't like risks and don't like uncertainty. I think every time you say, "DOGE," you're saying both words in one small phrase, right? It's tough to sort of pin it down on any given day or any hour. So what does it mean to us? So as a public company, publicly traded, 60-year-old company, understand this mission space extremely well, understand that different administrations come in with different priorities. Is it a noble cause to find fraud, waste, and abuse? Yes. I think that's a noble cause. There happens to be agencies in the federal government that are actually chartered with every day finding fraud, waste, and abuse. You can debate whether those are as effective as they should be.
But I can't do anything about that or some of the agencies that have already been DOGE because we don't support a number of those, meaning we don't generate revenue from that part of the federal government. Done well, it should drive questions. Done well, we should be talking to the folks who are doing the acquiring of goods and services to find out what makes their job easier. But the backdrop I look at all this against is what our customer is faced with. So each and every year, been doing this for 42, 43 years, majority of those years, we haven't had a budget on day one.
So we're under a continuing resolution for anywhere from four to 12 months. So we'll pick the midpoint at eight. So if you were running whatever agency it is inside the national security world, you've got changing threats. You've got changing priorities. You have enemies who are changing their tactics more on a daily or an hourly basis versus a decade basis. How do you attack that with a budget that has one-year spending? You have caps. Appropriations is done by Congress. You maybe have four months out of any given year to do a new program start.
And we want to go look at changing how government works. That's where my expectation was around something like DOGE. We take it up to that highest level and say, "How do we look at the Cost Accounting Standards? How do we look at the Federal Acquisition Regulation? How do we use the regulatory angle and try to pare that back so we can actually move in a more fluid manner because the threats are going to continue to be more fluid? Beyond that, those types of changes, I think that there's a lot of many efforts that are going to be going on out there.
Having better enterprise IT, having more resilient networks, that's all upside for us. There's a lot of talk about outcome-based contracting. Love that. We've been moving a lot of customers towards that over the last five years. It works very, very well. Customers do know how to buy in an outcome-based instead of just buying people. And we've been the loudest in our sector, and we have experienced tremendous growth by driving that new way to actually buy new software applications and the like in a more commercial-like manner. So there's a lot of things that could be done.
The majority of them are all upsides to us. I'll reiterate again, our fiscal year 2025 ends in June. At the summation point, what are the threats that we see? We beat and raised guidance twice. We're going to be done with our year at the end of June. Feel very strong about the overall year. Put three-year targets out, $1.6 billion in free cash flow, and then beat and raised twice. So if we felt that there was a threat in all of this, we probably would have made different calls and different moves. But we like the hand we have. Some things on the edges may be tweaked.
But at the end of the day, I like the hand we have in the markets where we're in. I like what the future for growth looks like.
So you touched on a little bit on the budget process, typical CR four to 12 months. I mean, this time seems even more screwed up than usual. We don't really know what's going to happen with the 2025 budget, budget reconciliation bill, when we're going to get a 2026. But I mean, any kind of high-level thoughts based on all your experience, how this could actually play out? I mean, one day we're hearing about $100 billion-plus extra on the defense side. Next day, we hear the defense budget's going to get cut by 50%, so.
Yeah. Yeah. It's that hourly news cycle. Look, what we did is when we gave our latest guide, which was an upward guide across the board, we assumed that fiscal 2025 would end in a continuing resolution, that we wouldn't get any resolution on the books.
Full year.
Full year, okay? Because it was tough to sort of read any other leaves there. Second, having said that, there is more volume and more signal through the noise around where the 2025 budget comes out. There's some House seats that are open. Those have to be resolved. Maybe that's in the April, May time frame. But there is a lot of around roughly a $300-$325 billion supplemental is what I would call it. Some call it the reconciliation bill. About $150 billion in national defense and $175 billion in Customs and Border, I'm sorry, in DHS. Both organizations that we do an awful lot of work with.
So again, any movement on the budget outside of a full-year CR drives potential growth. And that'll be at least a couple-of-year money and it's being spent in the areas that we're very, very strong in. So again, even in noise, you can find a signal. And we're assuming that we end the entire year in a CR, but we do believe that there is some push going forward. There's also White House support for an increased defense spending and increased border spending. So I think the one comment's getting a lot of juice, right, is maybe we can cut defense spending in half.
I think the precursor, the if part of that statement was, "If we can get the Russians and the Chinese and us to all denuke in 38 days." The 38 days wasn't said. But if we can make that happen quickly, then maybe we could all spend less. There's a lot of things you could probably do if that happened. But I think that in the real world, we're actually facing some pretty large threats and things that we need to take very, very seriously, not outside our borders, but also inside the homeland. But I like how that sets up for this company. I like what our growth potential is.
During Investor Day, Jeff rolled out our three-year plan, and we're on track with that.
Yeah. I wanted to get to that. So Jeff, I mean, you guys guide high single-digit revenue growth. I think it's higher this year with the acquired revenues, and then it kind of still mid-single-digit beyond. So high-level, what is the budget framework that, and then some of the big program wins that you've had, how much more Spectral NSA? I mean, how much more do they still have to kind of ramp over the course of the, how much of a tailwind are those over the next several years?
Much of the growth, the overwhelming majority of the growth, is really coming out of backlog. The NSA program that you've mentioned has ramped up. And if you think about the profiles we talked about at investor day, that was a relatively quick ramp and then flat. But ITAS, NCAPS, Spectral, the Azure acquisition, which is both growing itself and also accelerating the Spectral growth, those are all in backlog and have over the next two to three years more acceleration getting to rate. So the three-year targets we feel really good about and have very good visibility into.
One of the things that we don't talk about very much, although we've brought it up a few times, but one of the things that I think isn't fully appreciated in that high single-digit revenue growth and mid-11s EBITDA margin is that the $1.6 billion is basically not considered in any of the upside to those numbers. So any capital deployment decisions we make, acquisitions, share repurchases, any activity that we would undertake with that $1.6 billion of free cash flow is also more upside to the three-year targets.
Yeah. Because you've talked about as part of that, I mean, you've got cash flow growing, I think, double-digit. But I think I remember this specifically last year. You really are focused on free cash flow per share. The potential free cash flow per share growth grows obviously in excess once you start considering that capital deployment.
That is sort of where it all comes home to fruition. The rubber meets the road.
Okay. So on the other side, you touched on margins. The margins got an uplift from Azure. Azure brought higher margins. So I mean, you're pretty much at mid-team, sorry, mid-11s now. Yeah. I mean, you got enough. I think first half a little lower.
Low 11s.
Yeah. I mean, great margins relative to your peers. I mean, how do you think about the opportunity with some of these big programs kind of maturing, the opportunity for margins to even step up a little bit beyond that?
So there's kind of a micro and a macro answer to that question. Yes, many of you have noticed that we have heavier margins and revenue in the back half of the year, which is really driven by, which we've talked about before, driven by some specific customers' buying patterns. And their activity in their own cycle leads them to be more active with us in ways that drive back half Q3 and Q4 revenue and margin. So that's sort of the micro issue. We saw a little bit of an attenuation of that in our second quarter where we had some favorable timing into the second quarter.
But in general, you should expect to see our back half heavier than our first half. So that's the micro part of the answer. The broader macro part of the answer is really embedded or really premised on a couple of things. One of them is getting to a full year of Azure and its continued growth and growth as a percentage of the portfolio, and the other is somewhat the same, but more than Azure, we have continued growth in the technology part of the portfolio that gives us some additional margin upside, and so that free cash flow, free cash flow, and then, of course, the free cash flow per share that results from that is really driven by the top-line growth while we're maintaining and modestly expanding the low to mid-11s margins.
Right. And I think all of that drives, right, whether it's top-line or bottom-line growth, it's all going to drive free cash flow. And as Jeff mentioned, the fact that in the last eight to 10 years, we know that we're looking at more technology-based jobs and expertise jobs. All that rolls into controlling what we can control. We actually bid less to win more. It's a little bit different than other companies. Other companies bid everything that moves because they need to get a certain award level. We know what we're really, really good in. We know what is really too shiny of an object.
So it's really the discipline and past performance in this marketplace beats everything. So as you remember that, you don't panic and you bid on larger things. In fewer things, you're putting your best and brightest on winning new work. The fact that we've driven the duration of the programs in our backlog to greater than five years, somewhere around five and a half years, that's a long time to spend with a customer now. We recompete in this market a hell of a lot less than my competitors do.
All that does is takes money that I'm throwing away to rewind last year's book of business every year or every 18 months, and I'm allowing myself to invest that in other areas where we can provide better differentiation, which then helps margins because we're not stuck in a low-price kind of a bidding area.
And Jeff, on the micro side, on the margin side, so if I recall correctly, Q2 was a little bit better than you would have thought. Q3 is supposed to step down a little, and then Q4 is supposed to recover.
I think sequentially Q2 and three probably are about flat. I mean, plus or minus 10 basis points or something.
Yeah. What's most important is we're going to end the year in the low 11s, which is what we mentioned. We're sort of looking through 2025, looking at a 2026 plan going forward now when we're into the next year's plan.
So, the recent deals that you've done, Azure and Applied Insight, how are they performing relative? I mean, what is the technology they brought? What was additive, and how are they performing relative to your I mean, it's early, I get it, but how are they performing relative to your plan?
They're both ahead of their business plan. John will want to add to this, but they're both ahead of the decision cases that we use to make the acquisitions. Applied Insight focused on within the classified community collaboration. Azure is a really exciting position. It enabled us to accelerate their work on SSEE Inc F , which is the predecessor contract to Spectral, and has enabled us to position Spectral for a quicker transition. We recently achieved a really important milestone, the MVP, minimum viable product, which means we've sort of established a baseline that meets the basic requirements and has let us go forward.
It'll continue to evolve, but it's an important milestone, and our ability to sort of work that back into SSEE Inc F sets us up nicely for transition.
Yeah. I mean, a little bit on Applied Insight. There's only 20% of the federal government is into the cloud today after 15 years of moving things to the cloud. So we can debate and we can snicker whether that makes sense or not. Maybe that's something DOGE finds out, and that's not because people aren't pushing them there. There's a multitude, I would imagine, of different reasons for that. But Applied Insight provides a great framework in a classified space to be able to more easily move things to the cloud. So they've had great impact there.
That's still a burgeoning market, and 80% of it is still gone unserved. On the Azure side, we did Azure and Applied Insight in the same week. I don't remember day roughly.
They were maybe a couple of weeks apart, but they were very close. They were coming together.
Yeah. And we clearly weren't damaged assets or they would not be exceeding the business plan that we put in place, and the Navy would not be so elated by the fact that we're able to push SIGINT and tactical signals protection to the entire fleet of Navy ships years earlier than the last incumbent was not able to be successful with. So I like what their growth rate has been. It's been very synergistic with the rest of our business. And you get a really good multiple when what we do and what they do are very much in common.
So I would like the pace that the integration has don e, and as Jeff mentioned, they're on a nice trajectory as we move into low-rate production and full-rate production in 2026 on Spectral.
Can you talk about your need to hire? And given all the uncertainty that's out there, maybe we've seen one of your peers who hires pretty aggressively, kind of, at least hourly, pull back on hiring? How are you thinking about your hiring needs and kind of the pool of candidates that are out there? Your ability to hire and your want to hire?
Yeah. So we differentiate ourselves in the sector, and 55% of our revenue are technology deliveries. So those folks work directly for us. They're very fungible. We can move them around programs and the expertise on longer duration contracts. So the level of hiring is lesser for us because we don't have to worry about that. Having said that, one out of every two employees that we bring in comes from a referral. So our attrition rates across the sector are at an all-time low. Why is that? That is because if you refer somebody who's an A talent, the odds of you leaving the company in the next three years come down statistically draconianly.
The ability for us to retain that individual who was just referred comes up because someone who knows you, who's been in the company for a while, you're going to have a few bad days before you sort of say, "Maybe this isn't the right fit." So that model works extremely well for us. It means that our talent acquisition group gets to go out there and look at the best and the brightest. When half of our needs are serviced by our own employees, it helps attrition. So that sort of works out very, very well for us. We have not had an issue with attracting candidates.
We have all-time high resumes coming in because below all the noise is actually the work that we do. 90% of our revenue is in national security space. We're in seven key markets that are very well funded. Our new employees know that. Our long-time employees know that, so that you all who are investors have to wade through to get to the signal. The employees already understand what the signal is, right? We've gotten no stop work orders. We've gotten no program disruption letters.
We did handle the executive order on DEI rather swiftly, so everything that could potentially happen has not happened, and that's not by accident because strategy is a place where this company comes from, and we control what we can control, and we stick with absolute business fundamentals. Our employees also see that in all this noise, we've had the first two quarters. We've exceeded all of our goals. We've beat and raised twice. We're on our way to a really solid year. We continue to win business, and will we win that at a choppier manner the next couple of quarters? Perhaps.
But we're not a quarter-to-quarter company. I don't have to win a job by March 30th to start generating revenue in the April, May, and June quarter. We're just a totally different company within the sector. So I don't need to win a large existing job to meet next quarter's revenue. In fact, 95% of our revenue is already in-house. 2% is tied to new business, and 3% is tied to recompetes. If the recompetes don't happen, we continue to hold that work. So we're sitting here in early February, 98% of our revenue for 2025 in a beat and raise model is already in-house.
So it's tough for us to find a threat model that completely disrupts that.
What about 2026? How much is kind of in the book already for 2026?
Yeah. Nominally, it's usually an 85% is in book and 5% is based on new business revenue. Jobs we win in the current year that has to generate revenue for us, and about 10% is recompete. It's a slightly lighter recompete year for us, David.
2026 is 2026.
Yeah. Now, we can look at the budget and say, "So where's the 2026 budget going to go?" I'm not looking at the $2 trillion or $3 trillion level. I look at our seven markets and where those narrow deep funding streams are. And I'm very confident that we're not going to stop desktops from being at everybody's desk in the federal government. I'm pretty certain we're not going to stop collecting desks.
You more desktops.
Yeah. And doing signal collection. I'm quite certain we'll do more versus less network modernization programs. So at the level of budget that matters to us, we're very well funded. And we're already working on our FY 2026 plan.
Okay. A couple of other things I want to ask, but I want to make sure I get to capital deployment and where your stock price is. And so you've historically been a very acquisitive company. You've done share repo, but have certainly tilted more towards M&A. You've done a bunch of M&A. Balance sheet's a little, I think, a little bit more levered than where you typically want to sit. You talked about restarting open market repurchases. So how are you kind of thinking, given where the stock price is, your leverage is, how to kind of, how are you thinking about that?
You answered your question.
No. I'm just throwing it all out there. See what you bite on.
So we say historically we're comfortable. We like running the business 2.5 to three times. We're recently a little under three. We have also said at different times that we would be comfortable stepping up for short periods to 3.5 times for things that were compelling value.
Your own stock price?
Typically we've said that about acquisitions.
Yeah. That's why.
Today, though, for a variety of reasons, it's really our shares. So we keep a close eye on our pipeline. We don't have anything of interest that is likely to mature in the next couple of quarters. So when we looked at that and we looked obviously at the share price, the best application of capital at this point really is us. So you will all know, or many of you will know, we have about $337 million of authorization left from an earlier authority. And our trailing 12-month EBITDA is a little over $900 million. So if you take this half a turn or so, it's 450.
So we're sort of not giving obviously explicit direction, but that will kind of bookend it for you. You should be thinking of a $300-$400 million kind of activity here.
Got it. That's helpful.
We are in the market today buying shares.
Let's get to the audience participation questions if we could. There's one more I want to ask if we have time, but let's get this for sure.
Okay.
Did everyone answer?
Everyone answered.
Never seen that before, but okay.
Got to look for the signal through the noise.
That's what we're trying to provide here.
Yeah.
Does it tell you how many are respondents?
`No. Turn on this thing .
100% was three people.
38.
Okay. Next question, please. Might be three people or four people.
Yeah. I'm feeling four.
Accurate. Wait for this question every year.
You like this one?
Yeah. Interesting.
We froze it two seconds.
Yeah. Froze it.
Here we go. Okay.
Four times levered, maybe.
Interesting question.
No, that's fine. Cool. We'll consider that bad info. Next one. Maybe on EBITDA, not on earnings.
Right. Right.
Hourly tweets.
Yeah. There should be a category on here.
Try to ignore it.
Yeah.
Okay.
Good.
John, Jeff, I appreciate the time. Always good having you.