CACI International Inc (CACI) Earnings Call Transcript & Summary

Good morning, everyone. We're going to get started here. I'm Brian Gesuale, senior analyst covering the defense and space markets at Raymond James. Thanks so much for joining us. Really delighted to have CACI here to take us through their story. It seems like this year, there's always something big to uncover at our conference. Last year, you convinced people those didn't matter and then your stock doubled. This year, people want to talk about how structurally different CACI is from its peers, how AI is creating an opportunity and not as much of a threat and really some of these other topics around your product business. So perfect time. We've got the CEO and CFO here, John Mengucci, Jeff MacLauchlan. Really excited to go through a fireside chat, and then we'll adjourn to the breakout. Gentlemen, thanks so much for joining us.

Brian, thanks for having us.

Thank you.

Appreciate it.

So let's maybe just level set, John. Maybe talk about CACI's core skills, key markets you serve and talk briefly about how you've transformed CACI into a very different organization than the one that the public markets first got to know in the start of the century here.

Yes, thanks. Look, thanks, and thank you all for attending this session. So we're -- if you look at our GICS code, we're a government services company. We've been in business since 1962, so a long-term provider of what used to be expertise or labor hours and support to the federal government, predominantly the intelligence community and the Department of War. As Brian mentioned, we've transformed this company since 2012 to really reshape and drive us in a very different direction. And what we focused on was the ability to or the desire to deliver labor hours into this government starting 2012 forward was going to be a commodity play. All you heard about from better buying power and low price technically acceptable, which were the terms that we used in the '12 through '14 timeframe. It was clear that buying labor hours in a non-discriminate manner and taking past performance away was going to be a very low-margin commodity-based business. And it's not the kind of business we wanted CACI to be in going forward. So we very much transform this business over a number of years. We announced in the 2015, '16 timeframe, we were going to move into the technology delivery side. Why did we do that? Because we had 50 years of purchase with Department of War customers who understood that we deliver. And when we put bids in place, we don't walk back from them. So a high track record of delivering, and if I could get these customers to agree that we can move more towards a technology company and less of a labor hour delivery company that would be great for investors, that would be great for this nation. And so here we are 2026, a very different company, $9.4 billion company predominantly focused on free cash flow per share growth. So every question about top line growth and bottom line growth, I start with free cash flow because that's sort of how we measure. We are in 7 different markets. We're in space. We're in cyber. We're in spectrum superiority. We're in digital solutions and a few other markets, and we'll talk a lot, I'm sure, about space and our electronic warfare market as well. We've been in these markets for a number of years, probably just over a decade now. We chose these markets. One is because of the bipartisan support these markets have. We're 90% national security company. 6% of our revenue is in the federal civilian space. That's not by accident. That's myopically intentional. It doesn't mean that citizen services is bad, but it only pays the bills every other year. It's really bipartisanly supported. And it doesn't generate great growth. So folks who want us to diversify into the civilian space, you're talking to probably the wrong CEO and the wrong CFO. We've been down that path. It's really, really dry. It's really, really hard. So national security company is where we branded our ourselves, and it's driving more than respectable top and bottom line growth. It's driving free cash flow. So I'll park it there.

Yes. We're going to double click on a lot of those topics. So let's move on. And before we hit some of those topics, I want to talk about the budget. Two questions for the budget. There's a lot of discussion about an urgency to spend these fiscal '26 reconciliation funds. One, are you seeing that? And what areas are you starting to see that in? And then I do want to get your thoughts on this $1.5 trillion budget for fiscal '27 and how you could possibly get there and what your thoughts are?

Yes. So I'll spend a little time on the first part of that question. So look, based on what this company does and what we do in the electronic warfare area and the space area, you should expect that the $150 billion additional funding for Golden Dome and $150 billion additional funding for DHS for protection of the homeland. There's some overlap in both of those areas, but different authorities enforce that. So additional $300 billion being spent in the backyard of what we're really good at doing. As for the spending, I don't know if I'd call it an urgency. I think if you look at this administration, everything has to happen yesterday, okay, which I'm a more supporter of than I am unless we need to move quickly. But I do think that if you look at the government shutdown, if you look at just getting budget authorizations put in place, I think that slowed things down. It definitely was not intentional. I also think that the folks who are in charge of Golden Dome understand what this administration's calendar is, and they're probably going to be knocking on the door saying, "Hey, when are we moving forward?" So yes, we have seen some funding. We'll talk more about Golden Dome today, but one of the things that crossed the Golden Dome and the budget lines are left of launch. So if you all are watching what the Golden Dome system is supposed to do, part of that is to protect the nation from on a missile defense side. There's also a counter UAS layer in that as well. And there's a lot of work being done on left of launch. So we're a plank holder in the SHIELD MDA contract. But our focus is going to be space and it's going to be left of launch. So how do you reduce the number of missiles aimed at the U.S. if as and when somebody pushes an awful lot of buttons on a bad Tuesday? So how do you take the flow of those missiles down? How do you use electronic warfare? How do you use knowledge of the signal space around the globe to understand how we can affect potential enemy launches of missiles. So there's money being spent there. There's architecture money being spent. Counter UAS, there are funds, there's RFPs out there. I think you should see that start to come out in the next month to 3 months. Some rather material awards in counter UAS, both from DA DHS and from JIATF-401, which is the Department of War agency that's sort of consolidating all counter-drone purchases. $1.5 trillion, awesome tweet. I think that was on a Tuesday also. Look, here's how we think about budgets. We don't track the $1.5 trillion. We sort of track $9.4 billion company, $300 billion addressable market. We're making sure that those 77 markets have really rich funding streams. The other reason why we chose those markets as well is they are in areas that are inescapable to continually spending more and more money on. So SIGINT, so signals intelligence around the globe that feeds into our EW systems. I don't believe on a Thursday, the government is going to say, let's -- here's an idea, let's stop spending money collecting signals around the globe. It's something you're going to be able to turn on and off. So it's historical levels of funding. We'll see that continue. So $300 billion addressable market, we're really making sure that the markets we're in stay funded. There are so many things that go into the $1.5 trillion. So will we get to $1.5 trillion? Sure. As a public company CEO in natural security, would I enjoy that? More money sooner, better? Yes. But I'm not -- we're not lighting any candles or watching that. So we've got our margins defined.

Yes. Fair enough there. John, you've performed so well fundamentally this last 12 months. Many of your peers have struggled a bit. As I talk to investors and newer people to the story, it's -- the question I get more is how do we think about CACI qualitatively and quantitatively structurally different from that peer group that people typically talk to you about. And people that have been in the markets for a while have seen the government services being mean reverting space. Where a couple of good years on, then you kind of mean revert a little bit and so forth. How do you think about quantifying the structural differences?

Yes. So if you go back a number of years, at least 10 years, when we looked at how do we move this company forward in a different direction. We spent a lot of strategic time. And I always talk about strategy is a place where we come from. We're not a reactionary company. We've been in business for a really long time. 40% of our workforce are veterans. So when people talk about the mission and where the threat is coming from, we understand it better than most. Another element of what differentiates us is, which is highly legal but grossly unfair, is we have 1,400 people embedded with all 5 commands around the globe. So what happened this past weekend, you should bet your last dollar that we have hundreds of people who were in that area of responsibility to understand everything from target planning all the way through effects, all the way through threats, all the way through the technology that can make the next time we have to prosecute something like that better. And we learned on Friday, what happened on Thursday. We learned on Saturday, what happened on Friday. So again, highly legal, grossly unfair that we have 1,400 people that are positioned where we need them to. And that was the crux of how we rebuilt this company going forward. I already shared that having a commodity low-price supplier of people was not in our future. So we did pick the 7 markets that we wanted to be in. We built an infrastructure because we're highly acquisitive to make certain that we could handle FAR Part 15, which is cost reimbursable, cost accounting standard business as well as FAR Part 12, which is what we're all hearing about commercial, right? FAR Part 12 isn't buying from commercial companies. FAR Part 12 is buying commercially. So have companies invest ahead of customer need, let us put some money and mission knowledge on the table and let's work on a model where we can spend our own money, but therefore, the reward is going to be larger, read that in faster revenue and higher margins. So we spend a lot of time focused on that area and how we would come out. We explained that we believe we made an awful lot of changes that we're not as exposed to labor hour contracts. And then DOGE came, right? It was the best independent auditor we could have found that we had no vote on. It was to look at all these contracts, find consulting hours, find companies that are just providing services, maybe they can buy them cheaper or some other way. We sat in this meeting, I think, a year back and said to all of our investors, we did the right thing. We're not going to be impacted by this. The entire marketplace went down. We're tagged with the same fixed code as others. We had just under $5 million of impact over that entire year. Other companies had billions of dollars lost. I'd say we differentiated well, and we had an independent source called DOGE. So I like how we came out of that. We're into this next phase, which is let's find things that we can buy where you're willing to invest ahead of customer need and put your own money on the table, and then we'll buy defense needs in a very different model. It's music to our ears. We were already down that path in the past. So qualitatively, we've done a fantastic job. The entire leadership team has. And then quantitatively, I think you can look at our free cash flow per share. I'll have Jeff talk a little bit about that. But we have put some 3-year targets out there and sort of like where we're sitting, Jeff?

Yes. I'd also add to that question. Quantitatively, we appreciated following DOGE, the opportunity to buy $150 million worth of shares for $344, which warm the cockles of at least my heart. I would also add to the DOGE evidence, the qualitative point about the government shutdown, because once again, we have an artifact that we could talk about publicly and say, we told you that we've deliberately positioned ourselves in places and activities that we can't practically stop. And the fact that we'd have the revenue that we did in the quarter, $2.25 billion or so when our government customer was closed for half the quarter, which was in line with what we thought, what we communicated, I think, is another kind of point along that path.

Absolutely. The performance has been clear. Let's keep pulling on this product and technology thread. That's where I want to kind of take the rest of these discussions or at least most of them. John, you've made comments that the EW business is approaching $2 billion or about $2 billion. I think about that as largely sitting in your $6 billion technology market. How do you think about the other pieces of that portfolio in there?

Yes. So when we talk about electronic warfare, it's tough for us to segregate cyber from that and the fact that some of the defeats we do in counter UAS areas and then the signals world actually come from space. So we're trying to -- we're being very careful as to roughly the -- just went to $5 billion of technology revenue. How do we share a little bit more? So we put everything into an electronic warfare bucket. And the example is if there's a drone out there flying in, we electronically do something to that drone in a low, no collateral manner. It stops it from operating. And it was a cyber bullet that we actually fed it. Is it cyber market? Is it EW? So I don't want to get into those...

It's growing.

It's growing. It's all we really, really care about, right? So beyond EW, a lot of the digital applications that we build, that we modernize is probably a close second to how the technology part of our business builds out. And then there's a number of space kind of market thing. So it's a very strong portfolio of work. And we've used a lot of our acquisitions to sort of put the foundational elements in it over a number of years, and we can talk through that on a one-by-one basis. So...

Yes, great. I want to dig into the space market for sure, and we're big believers in that strategic industrialization of low earth orbit, which -- so as we talk about this, ARKA is a deal, a transaction that's coming up. Talk about your space business, I want to deep dive ARKA. I want to think about your addressable market and where you sit across the value chain in space?

Yes. So when we got involved in the space market, we were well known for processing signals data from signal-based satellites. So any satellite out there that's collecting signals. When all the information comes down to the various ground centers, we're quite a substantial processor of all that information. So think about a bunch of zeros and ones coming down and how do we classify what the satellite has actually picked up and is this good as a bad signal and the like. So that's sort of all the information processing side. In the '15, '16 timeframe, we had a couple of acquisitions. One was Lucent Government Services. It gave us 2 pieces that are very germane to space. One is cellular and then one is photonics. So you all have listened to the perforation of space a number of years ago. It was how safe is space. We no longer own the final frontier. Everybody else is there. And oddly enough, the way that most satellite builders talked about protecting assets in space and from jamming is to build more satellites because then I can block and I can defend, I can understand it. We thought a better solution would be to move all your data links to optics. High-speed data optics, which unless you have a piece of glass and you've got a jet pack and you're in space and you can hit that link exactly at the right time, you're not going to interfere with that link. So merchant supplier to all aerospace and defense companies that build satellites as well as commercials. So that was our first step. Building this out came ARKA. So ARKA was a company that came up for sale about 5 years back. They were the result of a UTC-Raytheon merger. It was one of those must sells. We looked at the company 5 years back. We just had a lot of other things going on. And so that one went to Blackstone. Blackstone did a fantastic job over the 5 years that they owned it, doing a lot of CapEx adjustments and investments. So where does ARKA play now? We build exquisite sensors on land, air and sea. We don't have a space sensors business. So that filled that capability. It also built out addressable market for Golden Dome. So that's the second large footprint where we see us playing. And then the third part was they had invested in a few ancillary companies to bring into the fold. So how can they use AI? I know we're not going to talk about AI at all today.

Your multiple just went up a point.

I hope so. So using it because you can't spell CACI without AI. So when you go forward, they did a great job of building AI-based models that could process the imagery data that their on-orbit payloads provided. So ARKA, a 65-year-old company building exquisite space-based payloads in EO/IR and space radar. That is not a new thing. They're not a new entrant into this field. Been doing it for a number of generations and do it exquisitely well, 1 of the only 2 companies. If you ask them, they'd say they were 1 of 1.5. So bringing ARKA in gives us a strong space-based sensor. It gives us another heavy business to be a merchant supplier with aerospace and defense company and commercial satellite company primes. And then all of the AI and the agentic AI that they have created and agentic because they are training their models that they have built on real top secret classified payload information coming down from a national security asset. That is very different than training your models on the Internet. There's a lot of doors and tickets and clearances and rooms you need to get into before you can quickly translate, this is a cool commercial license product, let's just throw that into the highest classified levels to go process space-based data. So they are in those rooms and they have an authorization to operate it as well over an 18-month period. The play for us is to take that and bring it into the signal collection side and do that for national security companies and then take their agentic AI models and the frameworks they built and take that across everywhere else where CACI processes information. So space is a great market growth area for us and budgets strongly support space and new ways of collecting and building payloads. So I like our hand there a lot.

Yes, I really -- that was a transaction I'm really fond of. Another area if we think about it, so space is growing really fast. You've built a really nice footprint there. Historically, CACI was heavy Army if we went back 15, 20 years ago. You've made some really good investments with the Navy and have a lot of technology there. Would you take us through those pieces that are building out that naval franchise and what your outlook and how you think about that business?

Yes. It all comes back to electronic warfare, frankly, right? So if I look at the Air Force, Army and the Navy, our large footprint there and our goal over a number of years was to be the EW, the unique and preeminent EW supplier to the Armed Forces, now it's Department of War. So in the -- we did 6 acquisitions in this area over a 7-year period, all different sized companies, and some of them were very, very small founder-owned 50 folks and some were a little bit heavier. But at the end of the day, what we have built is an EW capability that brought us a program called TLS Manpack. This was the first hint a couple of years back of moving to OTAs, other transactional authorities. That's the model where the government wasn't quite FAR Part 15, they're ready to do something different. It's a you put some skin in the game, the government put some skin the game. You get through the requirements process in about 2 months versus 2 years. We had already built potential kits. We showed the customer the art of the possible. We worked through that phase. We got to design and the development done in a 6-month period, and we received $0.5 billion production contract. The Army also was able to cancel a 5-year $5 billion contract with another larger well-known company and set of companies to do the large-scale integration of design, the requirements and everything else that the technical user did not need. So we are the ground provider of EW to all brigade combat teams across the Army. You step forward and take the same EW into the United States Navy. That shows up as technical software-based technology sales. It also drives large-scale production programs. One of those was Spectral. So that is the -- that is for all combatant surface ships. That is the EW system of the future. And I say future because once we have it, we're not letting it go, because it is a dynamic software-based solution, whereas signals and different apertures change and the threats change, it's a software baseline upgrade. There's some hardware with that as well, but it's not the old days of cutting a hole in the hall every 7 or 8 years to provide better capability to it. It is a large-scale system that can handle over-the-air upgrades, which is exactly what you would like to have had this past weekend, if you're a Navy combatant ship commander. So we did a number of acquisitions there, built that framework in and have now won Spectral, which is a multibillion-dollar, multiyear job as well as Azure Summit, which is another acquisition that had the precursor program to Spectral. So if you look at Navy EW at a macro level, Azure Summit won the program from another aerospace and defense company to put all the baseline hardware and some of the preliminary EW capability in. And then CACI comes in with them as an acquired partner and delivers everything in an AI framework. And as a true AI framework, it is thousands of signals hit a Navy ship every second and instead of having operators sort through that sausage making, machine learning and AI have taken the processing and that cognitive overload away and be able to say the highest probability of that signal comes from these 3 devices, 2 Iranian, 1, a Russian. And what you have on board, kinetically and non-kinetically, here's a way to go take those out. So there is a step function growth. So in the EW space, if you look at Army, Navy or Air Force, we're very well positioned there and growing.

Exciting markets. We're a big believer in the dollars there and the necessity of that technology. I want to talk about -- one of the things, topics I need to get to is artificial intelligence. Multiple goes up again, I guess. But there's a lot of people that perceive it as a risk as well as an opportunity. It seems with some of the technology business, it's much more opportunity for CACI. But can you take us through your general thoughts of disruption to the market, both positively and negatively?

Yes. Look, at a very high level, when you deliver people, you're delivering inputs to the federal government. And when you're delivering technologies, you're delivering outcomes to them, right? I need this built. I need this process. So when we read a lot of the research reports that came out a couple of weeks ago and it hit the government services market like an asteroid, we were not spared because that's sort of the way some research notes come out, right? And the quants can't tell really good stuff from really bad stuff. And so it just sells. That's sort of the way the world works. In reality, we're a high-tech user of technology innovations, AI included, AI model companies, frontier models, everything we can get our hands on because we are not making money on developing the software. We're not selling the software as an end item. We're selling a solution or an outcome to the federal government. So if somebody comes in and says, I can understand the code you've already written. I can write that next set of code faster, outstanding. It's most likely better margins. It's faster delivery cycles. And the difference between what goes on national security and goes on trying to find the cheapest red golf shirt at the local mall is that that's a singular issue. Find a cheap item at a mall, simple to solve. Go train your model on the Internet data, you can suck in all the information you want. Here's where the cheapest red golf shirt is. The difference is the national security space never runs out of outcomes they have to solve and how you solve them because your enemy changes how they communicate in the electronic warfare world every 4 hours. This model never catches up. It's continually changing. So we are that company that is providing outcome-based solutions to our federal government national security customers. That's never going to stop. So we're a huge user and a huge benefactor of all the AI models. So Anthropic, OpenAI, no way to really talk to here, great, which one you want to use. It doesn't much matter because the framework allows all of those models to come in with a unique partnership with Amazon Web Services, who provides all of those models to us in a cloud-based manner that we can trial each of those models as we're trying to solve what we have to solve for. So it truly was a miss fire against our company that AI was going to be deflationary, I think what it was to our revenue. At the end of the day, if you sell people who write software and you sell the labor hour of software, that would be a deflationary thing, okay? And last time I checked, as technology advances, all we do is buy more technology, okay? So this is a positive thing for us.

Very clear. As we're coming up on time here, I want to talk a little bit about margins. As this technology footprint continues to grow and proliferate, you look like that part of the business looks like a more Agile prime, which typically has a higher margin structure. So how do we think about this a long period of time, how this model evolves?

Yes. You're going to -- you've heard us mention free cash flow a couple of times, and that's really the touchstone here as well. I mean we solve all of our investment decisions, all of our growth opportunities, margin, all solve for free cash flow. So John started our remarks today by talking about our 7 markets. We go through each one of them twice a year, kind of refresh our view, what's new, what's different. Things have gone away, things have become less likely, more likely. All those decisions drive gaps and investments where we're trading off investment versus growth versus margin, solving for free cash flow.

Great answer. There's a lot of topics we couldn't really get to. We're going to talk about counter UAS in the breakout and some of the opportunities there. So join us downstairs, but John and Jeff, thanks so much for joining us today. I appreciate it.

Thanks, everybody.

Thanks.