I'm Brian Gesuale, covering analyst of Jacobs Solutions. Really delighted to have the company here to present their story. If it's not obvious, we're gonna do a fireside chat appearance. If there are some questions from the audience, please raise your hand and we'll try to get to those as we go through. I have Bob Pragada, Chief Executive Officer here joining me, and Venk Nathamuni, Chief Financial Officer here joining me as well to take us through the story. Welcome, guys.
Thank you.
Thank you for having us, Brian.
Hey, Bob, maybe we level set here, take a few minutes to set the audience and give investors a perspective on your core services that you provide, the markets you serve, the geographic footprint that you have, and really Jacobs' right to win.
Sounds good. So just as an overview, we are in the technical advisory, engineering and program delivery market around three main verticals. Those three verticals are the life sciences and advanced manufacturing world. Come back to that in a second. Second is around water and environmental, and our third is what we call critical infrastructure. Critical infrastructure embodies transportation, energy and power, and our cities and places business as well. And that really came from deep core roots in the engineering space dating all the way back to the 1940s.
I think where, you know, where we play the strongest is some of the biggest technology innovation as well as some of the biggest issues that are facing the planet today, we're right in the middle of providing solutions for our clients on how to deal with those in the form of delivering capital programs, capital projects to solve. In today's world of very fast-growing innovation, that's really driving our business as well. The one other thing I would say on that is that, you know, you think about a classic engineer, and I'm sure we're gonna get to it today, Brian. You notice I didn't use the word consulting, because consulting apparently has now turned into a four-letter word.
We, you know, we have for generations started with the technology of what the facility or what the structure is designed to do or what the outcome is based on, and then and knowing that, work outward, whether it be a molecule or a chip or a structure, and done that really well over the, over the test of time.
Sounds great. Let's dig into some of these themes that you're really at the heart of.
Sure.
Maybe let's start with the advanced facilities. Just about every investor that I've talked to is really curious about your data center positioning and how AI is transforming that market. Would you talk about what Jacobs' role is in this market, how the buying patterns have changed over time, and maybe talk about some of the key metrics and the long-term opportunity that you see for the company?
Right. Probably to level set on it first is kind of what we used to do and now what we're doing.
Perfect.
What we did before, kind of in the generation of the 25 MW, sorry, 50 MW data center, started off with specific needs of data need, data storage needs for a client, then moved to cloud. Now it's going to AI. In that first two, you know, we were the engineer of the white space in that area. Cooling, rack design, as well as how that interfaced with what would be on-site power and water needs in the gray space. kind of think, you know, a $2 million-$5 million type of engagement for a $100 million plant or a $150 million plant.
That has since really transformed into, you know, now the gray space and the white space are merging. Power and cooling requirements needed for advanced node chips in the GPU world have gone through the roof. Our knowledge of not only what's going on at the chip level, but interface with the electrical OEMs, the power needs, as well as now the cooling needs, has expanded our scope in a material way. We're working with every single one of the hyperscalers as well as now the neocloud providers as well. That business is growing, in fact, it's doubling pretty much every year for us. The other is what I call kind of the AI ecosystem. We've been in the design of chip manufacturing facilities for 50+ years.
Our power and water capabilities are, as a vertical, very, very strong. As, and right now we're the primary engineer for the high-bandwidth memory chip manufacturing plants that are occurring in the U.S. today. Same thing with power and water, and now it's culminating in a data center. What we can offer to our client across that entire ecosystem has been pretty powerful.
It's still a relatively small business for you today.
It is.
It's growing rapidly. How do you see that opportunity?
Right now it's 3% of our business.
Yeah.
3% or 4% of our business.
3% of our business that's growing at, you know, 100% over the last couple of years. Just to put some context around the dollar value of our engagement there, as Bob mentioned, you know, this typical simple data center would have been, call it, you know, single-digit millions of dollars. Now we're talking about orders of magnitude, actually two orders of magnitude higher in some of these cases. Over the course of the last three or four quarters, we've announced some really big transactions there with some public companies like Hut 8, but also a lot of the private companies and the neoclouds that are now investing pretty heavily in this space.
Definitely exciting times there, and we're looking forward to hearing more updates on that business as we go forward. Let's maybe run that question back in a different market, talk about pharma and life sciences. Size that market for the audience. Talk about the themes driving growth, where you're ideally positioned and why you win.
Sure. I'd say from a service revenue standpoint, it's about a billion-dollar business for us today. We have been in that space. Actually, Dr. Jacobs was a Merck employee when he started the company, back in 1947. you know, we have been on this journey as small molecule manufacturing turned into biologics and large molecule manufacturing. We've been right along that innovation journey with our clients. Now with the use of, here it comes again, the use of AI in drug discovery, new molecules are coming to market at a very rapid pace with capacity needs that have now, you know, doubled and tripled over time.
That coupled with these facilities now, probably more than industrial manufacturing being onshored, here in the U.S., in our focus on, we call it the tier one players, the Lillys, the Mercks, the Pfizers, the, you know, the AstraZenecas and the like, that business is growing at a nice high single, low double-digit rate. We see the protective moat around that because we're in the molecule and understand what's happening and what the utility needs and what the structural needs are gonna be, working very closely with those clients.
Life sciences and advanced manufacturing together constitute about 25% of our revenue and growing at high single digits growth rate.
Yeah, absolutely. Really exciting areas that we're really monitoring closely. Let's look at one in the water space.
Maybe just one more on Brian.
Yeah. Please do.
Brian, on life sciences. You know, they a lot of people think, okay, it's exclusively around this GLP-1 tsunami that's happening. There is a big component that is around GLP-1s. Now GLP-1 is going from an injectable to tableting form. That is a piece of that growth. The other piece is, you know, early-stage innovations that are happening in Alzheimer's, what's going on with antibody-drug conjugates and the ability to treat different forms of cancers. All of that is driving, you know, this growth. Just wanna add that.
Yeah, appreciate the color there. let's move on to water. This is another area where you're having amazing success. take us through the growth drivers again, how your bid pipeline and backlogs look, and talk about your views on water and maybe if there's any regional color you can sprinkle in?
Sure.
That would be appreciated.
Good news is that the growth that we're seeing, and it's kinda high single digit top-line growth, it's global. It's pretty uniform, maybe a little less in the U.S., but pretty uniform across our major geographies, which are North America, Europe, Middle East, Asia and Australia, New Zealand. That's been a positive. Similar to life sciences, it's a business that we've been in for several decades. What's unique is, again, concentrating on the science, we work with our clients across the entirety of the life cycle. Everything from inception of, "I have an issue, I need to figure out a way to solve it," to designing it, program managing it, and then we operate and maintain those plants as well.
Years of underinvestment that's been in that sector, unfortunately, mostly in the U.S., but then the effects of climate. We're seeing the effects of climate hit issues of water scarcity. It's like the extremes, either water scarcity or coastal sea rise and, you know, and too much flooding issues that we're having. We're working with states and municipalities as well as national governments outside the U.S., to solve for these issues, and it's driving growth in our business.
Okay. These were some of the handpicked themes that I wanted to talk about. Maybe tick through the list 'cause you're top one, two or three in every market you serve. Maybe hit some of those and remind people where you're strong at. Then I'd like you to pick out two areas that you think you're particularly excited about that we didn't discuss in those first couple of themes.
Okay. Well, we're kind of moving, you know, past I'm sorry, life sciences, advanced manufacturing and water and environmental. You know, we're seeing nice growth in the critical infrastructure business, specifically in transportation. You know, for us in transportation, the denominator, the available market is pretty huge. Areas that we're in over the course of the last few quarters, we've seen that business grow at a high single-digit rate. And really driven around growth that we've been participating in around sustainable decarbonized transportation, rail, transit, and then in aviation, kind of sustainable airports as well. That's been a global a global phenomenon. That strong business for us.
Cities and places, you know, in the early part of 2025, late 2024, was a business that When I say cities and places, what this is not just building design, but large venues. If you think about the World Expo or the World Cup or the Olympics or these types of large venues, we'll do program management and design of these facilities that a lot of cases have a time requirement to them. Now we're seeing that business grow in the Middle East. that has been something that's been a nice tailwind. Then energy and power, not only as a vertical for clear reasons, grid modernization, and energy transition, but now as a horizontal.
You know, every single one of our verticals has got some element of energy and power requirement that's driving that facility. We're excited about kind of the entirety of the portfolio. I would not be fully transparent if I didn't mention there is one area, it's our environmental business in the U.S., that over the course of the last year has been a bit soft as deregulation not even deregulation, but lack of clarity on regulation has put a bit of a pause with some of our private sector clients around environmental planning and environmental remediation. We're starting to see the pipeline come back as a lot of clients, interestingly enough, a lot of data center clients are saying, "Look, the regulations are the regulations.
Let's go ahead and commit to those, because that's for the long term." We're starting to see that turn a bit, but that has been a bit soft this year.
Makes a lot of sense. Make it easy for us in the audience to think about the relative strength of the regional markets you're serving. Give us a one to 10 or top to bottom of where you're seeing the most regional strength and maybe where the opportunities are most muted in the near term.
I'd say regional strength, the number one regional strength in both from a critical infrastructure as well as, the kind of the tech manufacturing world is the U.S. The U.S. has been in on a one to 10, I'd call it, I don't know, bank of 10. Yeah. Close to a 10. Europe, interestingly enough for us, has been good, really driven on the backs of talk about transportation and water. Even as manufacturing in Europe has, tech manufacturing, life sciences manufacturing has come down a bit. We've seen the water and the transportation business grow, so probably a five or six right now. Middle East, another 10.
Yeah.
I'm gonna have too many 10s. I gotta do my math here. Really the, the Middle East really driven around not just the big cities and places or the big venues, but also the infrastructure to support them. That's been a positive. Asia's held its own, probably a five or six as well. For us, India is our biggest country in Asia, and what we're seeing in India is, you know, for a long time we had our India platform for the rest of the world, and now we're starting to see, especially in semiconductor, a pivot from Taiwan into other areas, so we're seeing that business starting to grow. Australia and New Zealand has really hung in there for us, really driven on the backs of water, and a bit of transportation too.
It's amazing how all these themes are interconnected. You seem to have a piece of the value chain in each spot.
Yeah.
Let's maybe talk about the structure of the business. PA Consulting, it's a business we really like. You've had an ownership in that business for a long time, but you're gonna own the entirety of it here shortly. Maybe remind people of the transaction details, summarize some of the things that you think that brings strategically to you both revenue and cost synergies, and what some of your objectives as you bring that business into your fold and under the tent, full-time is.
Yeah. Maybe I'll start off with the origins to level set, and then Venk can talk a little bit about now where we go from here. What is PA Consulting? PA Consulting is a technical advisory firm that deals with the science as well as the use of clients' capital in order to drive business transformation. Unlike a more of a playbook or textbook kind of approach à la a McKinsey or a BCG or others, they go at it from, you know, what is this product innovation?
How can you deploy capital in order to get higher growth in those components of your business that are gonna result in that type of growth expectations at the very front end, before the decision's even been made? That's kind of what their bread and butter has been. They do compete against those other firms in the U.K. 80% of the business is U.K. What where the difference is that they also are the exclusive technical advisor for the Ministry of Defence in the U.K. as well. Carlyle owned 65% of the business and went to market in 2021 with wanting to liquidate their position.
We saw it, the congruency to our business from a full asset lifecycle standpoint and made that 65% ownership. 35% stayed with the employees and then figured with separate governance and run independently. Venk and I sat on the board of PA. We started to merge at the top end pursuits as well as opportunistically going to market together, and ran it that way, knowing that at time certain, that we would make a decision whether to roll that over or to acquire the balance of the equity. Maybe kind of moving forward what it means.
Yeah. You know, we announced on January fourth that we are buying the remaining 35% that we didn't already own, and we expect that transaction to close, probably in the next three to four weeks. Our plan is to provide an update in terms of both the revenue guidance as well as margin expansion opportunity at our next earnings call. Suffice it to say that, you know, as many of you in the room know, the PA Consulting business is, you know, best in class in terms of margins, so it'll be very accretive to our overall corporate average, and we'll quantify that exact accretion in the coming weeks.
Equally importantly is the fact that, you know, the growth has really turned around quite nicely over the last several quarters now, and we feel quite comfortable about high single digits growth rate for the PA business in its current form. Also the opportunity for us to exercise a lot more of the revenue synergies that Bob alluded to, not only in terms of what we do here in the U.S., but also in Europe, you know, and especially taking, you know, into account the opportunity that we have in continental Europe, where today, you know, there's a much bigger opportunity for us to expand both the top line as well as the bottom line.
Overall, and it's a great strategic fit, you know, we talked about the concept of running the entirety of the asset life cycle all the way from consulting to design to, you know, implementation and so forth. This really fits very well with that overall strategy, and we're already seeing some tremendous traction across the globe. I will quantify the numbers, but suffice it to say that it's a really good combination for us.
We're excited to hear about the margins going forward, and it seems you've really structured that business, to really have some nice utilization and growth coming out of it, really profitable growth.
Yeah.
One of the questions I get a lot, and I think you've done a lot of work on this, is the retention of some of those people.
Yeah.
Maybe just give us a little bit of view on your retention strategies there.
Well, maybe one clarifying point. Yeah, it is a big topic, big point of awareness. Of the proceeds, a little under 50% of those proceeds will be going to non-employees. A lot of the employees during the Carlyle to Jacobs inflection point or liquidity event rolled over their proceeds into the next round. That's kind of point one, which is great. The second point I would say is that we do have retention programs in place as a part of the consideration for now what we know to be the real kind of core of PA. Great thing in this transaction is that we've had a five-year head start, so we know the business really, really well.
Where normally, if you're making an acquisition, you're then, post-acquisition, learning about where's the real talent within the company. We know all the talent, so we've been able to be very, very targeted there. The third part I'd say is that now, unlike, in, you know, the first five years, there was a PA equity component, and PA drove the Jacobs performance and equity, but weren't incented by it. Today, those will now be aligned. The, what, the kind of the partner motivator of being tied to the performance of a company.
Right.
It was PA, now it's gonna be the entirety of the enterprise.
No, sounds exciting. Maybe, you know, Bob, so much transformation since you took over as CEO, from the spin of CMS, to consolidating PA here, shortly. You gave a three-year outlook. Can you maybe update us on how you think about update's the wrong word? Give us the confidence in that three-year outlook. What's maybe ahead of schedule, behind schedule? How some of these transformative things kind of give you confidence in what your outlook has been?
Yeah. I think that outlook came in in February of 2025, so exactly a year ago. Good news is that on the top line, on the margin expectations and where we see our business going, we're ahead of plan, as well as even on the free cash flow margin, as well. The confidence that we're, that continues to build as we look forward is our backlog growth. Last quarter, you know, we posted some numbers that.
They were gaudy.
Yeah. We were-
They were gaudy.
We were a little nervous even saying those numbers because we were afraid that the 2.0 book-to-bill would be something that turned into an expectation. We did have a, we had a really nice quarter. On a trailing 12-month basis, that 1.4, you know, gives us confidence that we're gonna continue to meet, and hopefully exceed the next three to four years.
Brian, if I can just add to that. You know, we laid out a plan for the next five years one year ago, and we talked about 6%-8% revenue growth. The last three, four quarters, we've grown at 6%, 7%, and then most recent quarter, 8.2%. We raised the guidance for the full-year, to 6.5%-10% growth rate, and then also expanded our margin target. You know, if anything, we feel really good about the top line growth acceleration as well as the margin expansion story.
I wanna talk a little bit, maybe hit on that margin and free cash flow. That's been a really big source of strength.
Yeah.
We think the outlook is really positive there. We think you're fairly early innings still on that. Can you maybe just talk about the key levers for both of those going forward and how far you think you are in that expansionary process?
Yeah. I think we, just for context, in fiscal year 2025, we did about 110 basis points of margin expansion, and we've guided for another 50-80 basis points of margin expansion every year. That does not even include the PA Consulting contribution, which we'll quantify in the coming weeks. At a high level, multiple drivers of that margin expansion for us, the number one being operating leverage. We made a commitment that as we grow the top line at call it 8% to 8.5%, that we'll grow the OpEx at a substantially lower pace. We'll continue to exercise that discipline. There are multiple aspects of our gross margin expansion story.
For those who are not familiar with Jacobs, we have a very robust global delivery model, where we can implement these really highly complex functions and engineering functions in places like Poland and India and Philippines, regardless of where this project originates. That gives us a tremendous margin arbitrage and ability to expand margins. Also more importantly, from a customer standpoint, being able to provide 24/7 customer service. We're still in the early innings of that journey, and we're seeing some good traction in terms of global delivery acceptance, and that's driving a margin expansion in fiscal year 2026 and beyond. The other thing is we talk about our commercial models, how we go to market in terms of how we serve our clients.
Today, the vast majority of our contracts are what we call cost-reimbursement models, but we're also, you know, increasing the mix of what we call fixed-price models as well. The advantage of the fixed-price model is that, you know, once you understand the scope and the risk associated with the project, you can implement a lot of efficiencies that you'll pass on to the client, but also keep some of the efficiencies for ourselves. That's another big driver. Last but not least is what we call mix.
As we look at the entirety of the asset life cycle, going all the way from consulting to design to implementation and operations and maintenance, as that mix moves more towards the high end of the service type, if you will, that also is an added to the overall margin. Multiple levers for margin expansion, and that's on the gross margin and EBITDA margin side. Ultimately, the test of, you know, true efficiency is free cash flow and free cash flow margin. On that front, you know, we made some really good progress already, both in terms of working capital performance, but also in terms of how, you know, we're generating these, you know, free cash flow, revenue, free cash flow numbers and translating them into free cash flow margin.
We're well on our path to get to the 10%+. This quarter, we announced, you know, an update to the guidance that said we're gonna get to 7%-8.5% this year.
Yeah. I've been really impressed with the trajectory of that margin and profit expansion and cash flow. Let's maybe move into kind of net leverage. You know, I feel like this business generates a lot of free cash. You're maybe a little bit underlevered at the moment. You've been returning a lot of capital to shareholders. I want you to go into all of those elements, but also, as I think about PA and being able to put bolt-ons around that, are there properties that would make sense to combine with that that would be complementary, or should we still stick to kind of most of it going back to shareholders?
Brian, a really good point. Just for context, in the quarter that we reported, our balance sheet, you know, obviously in really fantastic condition. We said 0.8 x is a leverage ratio as of last quarter. We did publicly announce that we were gonna take on some debt to finance the PA transaction. As a matter of fact, last week, we raised about $1.3 billion in debt. Really well received by the market, at, you know, interest rates that are substantially lower than what we were paying before. It should lower our interest expense in a meaningful way. Again, we'll quantify that in the next earnings call.
But, you know, our goal and our stated ambition is to stay within the one to 1.5x leverage ratio, such that we maintain our investment-grade rating. As we raise this particular tranche of debt, we will be slightly above that range, but, you know, generating a lot of free cash flow such that over the next three or four quarters we'll be able to come back within that range. A solid, you know, commitment to maintaining our investment-grade rating. On the buyback front and the dividend front, huge believer in continuing to, you know, raise our dividends. Over the last five years, we've doubled our dividends, and in the most recent quarter, we announced a 2.5% increase in the dividend.
In addition to that, we made a commitment last year at our investor day to return at least 65% of our free cash flow in the form of dividends and buybacks. Last year, we did well in excess of well in excess of 100% free cash flow return, and over the last five quarters, we've returned more than $1 billion of cash in the form of buybacks and dividends. This first quarter, we did about $250 million of buybacks. We're already on track to exceed our 65% free cash flow return. Very strong commitment to continuing to return cash to shareholders in the form of both buybacks and dividends.
Great. Last one, as we're closing up on time here. Bob, no follow-up from me. Drop-the-mic moment. Talk to the audience about why they should consider Jacobs in their portfolio.
Exciting business. We're in end markets like we were talking about before we started, Brian. In each of our end markets, the level of innovation that is driving our clients' business is exciting. What's even more exciting is we're in the middle of that science and that innovation. Unlike maybe what would be thought of as a classic engineer, you know, we don't work from a client's requirements and then work from the outward in to where, you know, it's proprietary to the client. We're actually with our client at the molecular level, at the chip level, at the molecule level, and working outward. I think that, you know, whether it be NVIDIA or it be Lilly or it be Micron, or it be any one of the public sector clients that we have, that's something that gets really exciting about the future.
Great. Mic drop. We're out. Thanks so much, Bob, Venk. Appreciate you. Audience, thanks for joining us.