Okay, let's get started. Our next session is with CACI. We've got Jeff McLaughlin , the CFO, Jason Bales, Chief Technology Officer. So, gentlemen, thank you both for joining us today.
Yeah, thank you.
I think before we kick it off, I think you guys had a brief statement to start off.
Yeah, you'll, just in case our general counsel's listening, you'll all appreciate the fact that you may hear a forward-looking statement or two. I'd encourage you to look at our recent SEC filings for discussion of risk factors and related disclosures. Thanks.
Great. Cool. I mean, so maybe just to kick it off, I think probably a lot of people are familiar with it in the room, but for anyone who's not, maybe just kind of a quick overview of the markets you guys serve, maybe a little bit of the business transformation you guys have sort of gone through over the last several years.
Sure. So many of you, as I look around the room, I see more than a few familiar faces. Many of you will not be new to this story, but over the last decade or so, we have very deliberately repositioned the company in our portfolio. We entered the timeframe that I'm referring to with a great deal of expertise business, much of it not differentiated with the attendant margins. We went through a period that some of you will remember where the competitive pressures sort of drove home to us that that was not a position that we probably wanted to be in or stay in.
It was about that time that John Mengucci, our CEO, joined the company at the time as the COO and undertook a couple of changes that would have some pretty profound effects and I think have left us in a pretty strong position that we're in today. The first one was to take advantage of those privileged franchises that we had and relationships, in some cases very longstanding, with customers and use them to leverage ourselves into positions where we could add and introduce technology to those programs and therefore differentiate ourselves and make the business a little bit stickier. It also let us embark on a strategy of bidding fewer, larger jobs, which generally meant that they were longer in duration.
You could see them coming farther away, which gave us an opportunity to build a shaping strategy around that, which let us work closely with customers and invest ahead of need and get ourselves into an advantaged position so that by the time we actually had an RFP, request for proposal, we'd had a significant opportunity to have a fair amount of influence on it. It also gave us an opportunity, as I said, to increase the technology component of the business. As we talk about this, sometimes people tend to think about the two parts of the business as being separate, and they can be, but they're really not. They have been historically and remain closely related.
The expertise business, which by now is even the remaining expertise business we have, is quite differentiated, strongly informs the technology and gives us an advantaged situation in the technology side of the business. Similarly, the ability to bring technology and in particular tools has helped us differentiate the expertise business that we have left. Finally, as we saw some things unfold in Crimea in particular and in some other areas a decade or so ago, it became clear to us that the future of engagement was going to be defined by the ability to respond very quickly, which almost had to be software-centric rather than hardware. The ability to kind of, we call it move at the speed of the fight by using software-enabled tools and technology is also part and parcel of the strategy.
Got it.
Thank you.
No, that's a helpful overview. Maybe following up on that, I mean, for those of us on the outside, expertise versus technology, sometimes tough to differentiate that. I mean, where do you guys draw the line and what makes one bucket versus the other?
Yeah, the simplest way to think about it, because there are people obviously on both sides of the business, but the simple way to think about it and the way we characterize it is inputs versus outputs. When the government comes to us and says, "I want to have 75 intelligence analysts working in this government location and processing imagery and doing analysis on that," that's expertise. The government is defining the inputs. They're defining what level of degree or involvement they want to have in the administration of the program. We supply the people with the skills that they want, and they, to a large extent, participate in the management of it. The technology side of it is where it's outcome-focused, output-based.
When we're responsible for delivering the outcome and we have the ability to determine what tools we use, how many people to use, how to staff it, how to execute on the mission, and we're responsible for the outcome, that's our shorthand for technology.
Got it. Great. Going back to the investor day you guys did late last year, I mean, you gave guidance for high single-digit growth, including some small acquisitions, 11%, mid-11% margins to 27. A lot, I guess, this feels like has changed since December with the new administration. Just how confident are you that you can still hit those, or is there any risk to kind of getting there?
Yeah, thanks. That's a great question. We remain highly confident in the three-year targets that we talked about at our IR day last fall. Similarly, we have affirmed more than a handful of times our guidance for this year, which is, in particular, with respect to margins, is in the low 11s. I think we should also point out we said low 11s for the year, and we expected the fourth quarter itself to be low 11s as well. We remain confident in the guidance we've given for the year and the targets that we talked about last fall.
That really goes to the repositioning that we talked about and the fact that we're focusing on areas that are particularly durable in the current administration's quest for efficiencies, which we embrace wholeheartedly, as well as being responsive to the other administration priorities related to securing the border and related to peace through strength.
Yeah, got it. In terms of the growth there, I mean, can you talk about some of the areas that are driving that? Because one of the pushbacks I get sometimes is O&M maybe looks kind of flattish. We have got a CR this year. We will see what happens in 2026. What enables you to sort of outgrow that? What are sort of the buckets within that market that are growing faster?
Yeah, look, our revenue this year will be a little over, will be over $8.5 billion. Our TAM is a little over $250 billion. You really have to go below the level of the top-line budget and look at the elements of the budget where we have, again, through this deliberate repositioning, put ourselves into areas of the budget that fare well and remain priorities and have our areas of enduring need generally with bipartisan support. Jason could talk some more about this, but the whole idea of positioning ourselves in counter UAS in the electromagnetic spectrum, in SIGINT collection systems, these are important areas given the current geopolitical situation and areas where we see durable need.
Got it. Got it. Can you touch on Beagle? I mean, this is I've talked a lot with clients about this over the last few months, just sort of how the work that you guys do aligns with some of the priorities there.
With DOGE?
With DOGE.
I mean, the long and short of it is if you think about the areas that DOD has been focused on, they're basically areas where we have, again, deliberately over the last number of years de-emphasized. We don't do consulting. We deliver actually outcomes and results. Commodity-like activities, we've cut down to an absolute minimum, not areas that we spend a lot of time. We don't do outsourcing. Even if you think about some of the more recent memos that have come out of the DOD related to reselling equipment and things like that, they're just not areas where we have much, if any, presence.
Yeah. Got it. Okay. One of the sort of thoughts that DOGE could lead to longer term was maybe contract structure, maybe a little bit different. Maybe there's more sort of more fixed-price contracts or sort of value that you guys can create and keep if you're able to perform well on those contracts. I guess, have you seen any indication that your customers are moving more in that direction, or is it too early? If so, what's sort of the upside for CACI?
I would go back to the repositioning that I talked about at the very beginning of my remarks here where we talked about the input versus outputs and being responsible for outcomes has led us in this direction successfully for the last number of years where we have been able to take input-focused customer contracts and engagements and make them output-focused much to customers' pleasure. That has necessitated, or that has enabled us to do a great many of these things fixed price, which has led us both to save customers' money and also give us a little bit of margin advantage.
I would also note that to the extent we're able to save customers' money in this transition, it almost always ends up resulting in incremental volume for us because when they save money, then they go to the next thing on the list that they'd like to have, and it gives us opportunities for on-contract growth and further expansion of our relationship in a way that's mutually beneficial.
Yeah. I guess maybe following up on that a little bit, I mean, there's a little bit of history in the defense industry over the last several years of fixed-price development contracts that folks have maybe bid aggressively and end up taking a loss on them. How confident are you that you can sort of size all these programs correctly and you're not taking on undue risk for companies?
Yeah, we're generally not doing, we are not doing that kind of development. What we're able to do through a program like Spectral, for instance, is break the program down into sort of smaller, more manageable pieces that let us mitigate much of that pricing risk. It also lets us be more responsive to changing context and environment. When a customer sees a particular development or something that they want to change or tweak, it's easily picked up in the next step, which is also the next pricing action.
Yeah. Got it. Okay. I guess maybe on kind of your technical roadmap, so maybe a question more for Jason, but whoever wants to take it. You guys have.
I'm going to take it.
Yeah. You guys have invested in some new technology, new areas over the last several years. That's enabled you to win a lot of new big contracts here over the last couple of years. Can you talk about, are there new priorities that have maybe shifted in the new administration, or where do you sort of see that going?
Right. It's a good question. The reality is our priorities have not shifted regardless of administration. That's because, as Jeff kind of mentioned, we don't focus on kind of the commodity mission capability. We focus on the differentiated mission, the bipartisan national security defense work. These are long-enduring missions that have been there for a while and continue, their threats continue to evolve. Because that's been our focus, our priorities, they don't just shift. They don't shift with an administration. What they do shift with is they shift with the technology advancements, and they also shift with the threat that evolves in the world. As the threat evolves, we evolve with it as well. Jeff mentioned in his earlier statements that our change in strategy over about a decade ago to putting investment ahead of need, right?
That's where we're looking at what are the upcoming technologies, how do we roll those in so that changes kind of where we put our investments and where is the threat going in the landscape for us, right? Those are the things that really drive changes in our portfolio. Those threats have been persistent right now, and we still see them. The electromagnetic spectrum is still a huge area that we invest in and will continue to beef up that part of our portfolio. Space domain, right, which is a highly contested area right now with peer adversaries, countries that have the same economic power that we do that are also taking advantage of the space. That's an area that we continue to invest and put a lot of time into.
Trying to gain the efficiencies and the insights that come from advancements in technology like generative AI that is transformational in every part of our lives today.
Yeah. Got it. Got it. I wanted to ask about Homeland Security. This is one of your biggest customers after DOD, one of the few agencies that were sort of requested the budget much higher for fiscal 2026. Just talk about what your exposure looks like, what are the opportunities that you see that as kind of a growth driver?
Yeah, Jason will want to expand on this and has some details on Beagle in particular that I think you'll find interesting. In general, focusing on the priorities, including securing the southern border, has been a great advantage for us. Since January, the early flurry of executive orders, we've been able to very quickly respond to a couple of areas specifically around securing the border.
Yeah. In fact, in February of this year, once the executive order started coming out and really a lot of emphasis started to roll forward, was one of, I think, our highest months for delivering additional software capability, deployment, right? We deploy over 1,000 deployed releases a year to customers in port patrol every year, right? They come to us with this, think of like your agent that's on the line. He's got his tablet and he's got a specialized application. Let's let him do his job. If something changes in his day-to-day routine, he needs that capability to be updated, right? We can turn that really fast because we pull commercial capabilities through commercial processes. We've been doing agile software development for the government for over 10 years. We have the tools in place. We have the process in place.
As the Department of Homeland Security is building up and they need their IT modernization done, we're rightly positioned in there. We can move at the speed of the threat. We can move at the speed that they expect from commercial capability, pull that through. As they need new sensors and effectors, right, for long-range sensing in the electromagnetic spectrum as an example. We know that over the border, people use drones to do things nefariously over the border. We have counter-drone capability that we bring to the table. We also have intelligence. As that mission is increasing and expanding, the stuff that we have done for the intelligence agencies on the other sides of the world and here, we can expand into DHS and the work that they do to be able to give them that larger kind of intelligence picture of everything that's going around.
We have a lot of play and opportunity to take advantage of their growing mission as well.
Got it. Got it. I wanted to ask about international. I mean, it's been a pretty small percentage of your business historically, low single-digit opercentage. Is there an opportunity to expand that at all? If so, kind of what areas could that be?
Yeah, there is. In the technology side of the business in particular, there are a number of SIGINT technology solutions that we've had some acceptance, success, and acceptance within Eastern Europe and Ukraine. Our Spectral program, we fully expect at some point we'll have broader FMS appeal and potential to allied navies. There are a number of areas that we see opportunities. It's worth noting, though, that we're not in pursuing and developing those, we're not building kind of an international marketing organization or anything. I mean, we're following customers and developing opportunities within the capabilities that we have.
Yeah. Got it. I guess, is there a reason historically that has not been bigger? I mean, if I look at the defense manufacturing companies, international is 20%, 25%, 30% of the business. Is it more sensitive to some of the stuff that you do maybe that makes that more difficult, or is there some other reason maybe?
Some of it is sensitivity, and some of it is our size. As an alumnus of a large OEM, I can tell you that the marketing cycle, the sales cycle on airplanes, for instance, is hugely long. I mean, there's a lot of cost associated with building and marketing airplanes. It is a different sort of business model. They're large enough, it's a large enough purchase. It's got a very long tail on it. Obviously, buying the plane is just the beginning. It's got logistics and everything else that make a business case make more sense for building and maintaining that sort of infrastructure. Our foreign opportunity, our international opportunities are generally not that extensive. They're nice margin, but you sell it and it's sold.
Yeah. Right.
It's not a sticky long-term franchise sort of engagement.
Yeah. Makes sense. Makes sense. I wanted to talk a little bit about capital deployment. I mean, historically, you guys for a long period have very focused on M&A. Now you've sort of, I think, been a little bit more flexible in terms of buying back stock. Could you talk about sort of how you view those two options and what does kind of the M&A pipeline look like?
Yeah. The watchwords for capital allocation for us are flexible and opportunistic. We have, over the last five years, done, excuse me, an extensive amount of acquisitions and share repurchases. I think over the last five years, we've repurchased like 15% of our outstanding shares and made 10 or 12 acquisitions. Our target leverage, we like to be between 2.5x and 3x our trailing 12 months EBITDA. We think that gives us the right sort of debt component in our financing and our capitalization to give us the benefit of debt in our weighted average cost of capital, but also gives us the opportunity to step up and be opportunistic if we want to go up above three for some period of time, short period.
Actually, we have a pretty established track record over the last decade or so of 3x or 4x we've been up to like 3.5, 3.7, and then get back down into the 2.5-3 . We run the business wanting to be in the 2.5 -3 . We're 2.9 right now. As we move in that range where we like to be, we are continually looking at share repurchases and the acquisition pipeline. We're obviously grounded in return analysis, but relative return is also an important part of trading those two off. We will always be monitoring and are monitoring and always monitor our acquisition targets, maintain an open dialogue with two dozen or so companies, largely private, that fit into particular gaps in capability or technology.
In the immediate instance, sellers are not particularly inclined to sell. Valuations have obviously been a little bit volatile. Absent some other reason to sell, to the extent it's elective, people are generally waiting and watching, which I think makes good sense as a buyer as well as as a seller. I don't see any near-term, don't see any near-term sort of compelling acquisition candidates, but we do have a pipeline that's maturing, and I'm confident that we will make more acquisitions. Obviously, that's an important part of our strategy.
I guess from a sort of a portfolio standpoint, are there areas that M&A makes sense to kind of fill in gaps or would it sort of be more focused on when valuations become more reasonable and kind of the financial opportunity makes more sense?
Yeah, very definitely. I mean, you'll appreciate it. I don't want to probably talk about it in any real specifics, but there are a number of technologies and customer positions where we would be quite eager to fill in gaps and bridge existing capabilities to broaden our capability, which is the way we think about it.
Yeah. Got it. Okay. Could you maybe talk about a couple of recent acquisitions you guys have done? Azure, Applied Insight. Now that we've had these for a couple of quarters, just what you're seeing, are they sort of performing up to your expectations? Maybe are there any examples of business that maybe you were able to win because you have these capabilities that maybe weren't before?
Yeah. They are performing to our expectations. Azure in particular has really proven to be a great, great acquisition, both economically as well as strategically. In the case of Azure, I've referred a couple of times to our Spectral program, which is the next-generation SIGINT collection suite for the Navy surface ships. Azure has the manufacturing capability and some important technology related to Spectral. They were on our Spectral team anyway, but they were also the prime for the earlier program, which is a program called SEE Increment F, S-S-E-E, Increment F, where they actually displaced Boeing to win Increment F. The fact that we've been able to operate the programs in a coordinated way has actually let us be able to accelerate and get some of the Spectral capability into the fleet more quickly than we would have otherwise. That's turned out.
We talked last quarter in our last earnings call about Spectral enabling kits, SEK, which is that capability and implementing it on SEE Increment F and moving it into Spectral and getting it out earlier where you can appreciate in Indo-Pacific Command in particular, there's a real need to have all the capability we can as fast as we can.
Yeah. Got it. Got it. Could you talk about space? I mean, clearly like a big spending priority for the new administration with Golden Dome. You guys made an investment with SA Photonics years ago. I think that's starting to ramp up, but just kind of opportunities for that part of the business to grow.
Yeah. SA Photonics is an interesting story. We're moving out of the development phase into production. We'll deliver four or 5x as many optical communication terminals this year as we did last. That is transitioning nicely into the next phase. Golden Dome has presented us with some really interesting opportunities, and Jason is better suited to talk about it in a little detail, but we're very excited about a couple of things we see in Golden Dome.
Yeah. Just real quick before hitting that, the SA Photonics is a great example. As Jeff talked about, our M&A strategy, right, is about closing gaps, right? We had optical communications capabilities in the other orbits around the planet, right? So you think in Geo, Mio, Heo, that kind of stuff. We did not have Leo. SA Photonics filled that out. So now we have optical communication terminal capability in all orbits and out into Cislunar and beyond, right? That is a huge part of our portfolio. A good example of how we employ M&A to actually close our portfolio, right? Onto the Golden Dome, right, another example of how we have a portfolio, I think, that is robust and in a good position to tackle the growth priorities of the new administration as they add to the missions that are here, right?
A big part of Golden Dome is protecting ourselves from aerial threats, right? That is a multi-layered approach. It is going to take place in space. It is going to take place in high orbit and low orbit, on the ground, all those capabilities. We have been doing counter-drone activity on the other side of the world for over two decades. Not just the little, I say this to many other people, not just the little drones that Ukraine and Russia, which are important, but also the big nation-state drones, the drones whose wingspan is the size of this room kind of a thing, right? We have been doing that for two decades. The analysts that are constantly watching that threat evolve.
As we recognize we need to kind of put this virtual bubble around the United States of America around here, we're well positioned to bring that capability over so that it's not just the little drones, it's also the nation-state protection of the homeland. We can bring that and slide it right in and fill that part of the layer, the important part of the layer of that portfolio. Long-range sensing, counter-drone capability, the analysts, right, and then the common intelligence operating picture that kind of glues it all together. Those are the things we can slide right over with our portfolio.
Got it. Got it. All right. I have a couple more afternoon. If there's any in the audience, I guess maybe think of the reconciliation bill that's going through Congress now. I mean, big pile of money. I'm not sure we know exactly where it's going to go to with some of your customers, but I guess as you look at that, is there maybe opportunity to do better than I guess this fiscal year is almost wrapped up, but longer-term guidance, could you do maybe a little bit better if that does pass?
Yeah. We certainly expect the reconciliation bill to give us some upside. We do not know the details yet. Obviously, it has got to go through conference, and the House and Senate bills have to converge on a single position. Right there is $300 million or so of multi-year money right in our customer set, which for a company of our size, $8.5 billion or so of revenue, that is a meaningful opportunity. There will be a fair amount of things in there that will not be addressable by us, customs and border protection agents, some of the more commodity-like equipment and whatnot. Certainly, we expect there to be some meaningful opportunity both in the DHS bill and in the DOD bill.
Yeah. Got it. Maybe artificial intelligence, I wanted to bring that up. Some of your competitors have talked about that a little bit more than CACI has, but could you maybe talk about how you're incorporating that in some of these government programs? Also kind of curious how the splits are worse between you guys and some of the commercial companies who are developing generative AI sort of systems. Because it's you.
Yeah. Yeah. Absolutely. One of the things at CACI, the way that we treat artificial intelligence is we treat it as a tool for enabling mission outcome, right? It's not the end state itself. The other thing about artificial intelligence is we've been doing AI for 15+ years, right? When people say AI nowadays, they're talking about generative AI. They're talking about the chatbots. You go online and it's generating content for you. Artificial intelligence has a vast field that does computer vision. We've been doing for geospatial intelligence for a very long time. We've been employing artificial intelligence in cyber capabilities, offensive and defensive capabilities. When it comes to generative AI, that really is transformational, right? Whereas the other AIs we've been providing, they're giving specific mission outcomes and efficiencies.
Generative AI is putting us in a position to transform the business, both our internal operations and just being better in how we be a company and do our work, but also in providing mission outcome that we were not able to achieve before, right? It is really CACI looks at it as a tool. It is a tool to apply across. We currently work with customers today where we are finding ways to put it in to not displace people, but let the people do more important work, right? Software development is a big place that we use it internally, right? Rather than having to worry about what the syntax of this software language is, let the AI do that for us, and we can focus on developing the actual software solution that solves the mission problem.
It's a tool to apply to the problem, and we apply it both inside the company and externally to our customers.
Yeah. Got it. All right. Yeah. I think that covers all my questions. I do not know if anybody in the audience has some, but maybe we can wrap it up there.