CACI International Inc ($CACI)

All right. And we are back at Canter's Global Technology and Industrial Conference. We have the pleasure today of hosting Jeff MacLauchlan, CACI's CFO. I'm Colin Canfield, Cantor's government technology and space analyst. Thank you, Jeff.

Thank you, Colin. Good afternoon.

Good afternoon. So kicking it off right away, we'll start with company growth. How does the team think about the acceleration of defense spending relative to CACI's growth acceleration? Can you perhaps frame it within the context of your targets?

Sure. So an important part of our strategy over the last decade or so has been to deliberately position ourselves in areas of the budget where we were relatively, I won't say completely insensitive, but relatively insensitive to top line budget growth. And so the areas that we've chosen to concentrate on are ones that we very deliberately picked focused around electronic warfare, space, digitization, digital modernization and areas where we did not see great amounts of budget volatility in areas that were largely among the more stable segments of the budget. So that's sort of what it is. In the current environment, there are a number of areas that are enjoying some budget support that are beyond areas where we have planned and are not fully reflected in the targets and expectations that we've been talking about. And specifically, those would be areas in the reconciliation funding around Golden Dome, some Department of Homeland Security upside in that reconciliation bill as well as the increased attention in recent months and quarters around counter UAS, both of which sort of -- which also sort of touches on those other areas. So positioned ourselves in areas that would be relatively stable and with some significant areas where we see strong interest that are beyond our current planning and expectations.

Got it. Got it. So maybe then contemplating on those factors, how do you think about the growth environment beyond your 2027 targets? And what business capture areas are you most focused on that would drive the greatest [indiscernible] acceleration?

Yes. So there are a couple of dimensions to that question. One would be around the heightened interest in counter UAS, which I referred to a few moments ago. Our Merlin product, which is commercially developed and demonstrated in a couple of areas and shown quite well, is a technology solution that's gotten a lot of attention recently, both in the Middle East 9 months or so ago and in the Middle East in the last 10 days or so. So that's been an area of particular interest. And the other area would be similar sorts of -- or another area would be similar interest around Golden Dome and Southern border security. Where we expect there to also be a significant intelligence and sensing dimension along with layered counter UAS as part of the ultimate Golden Dome solution. And then finally, our ARKA acquisition, which we completed on Monday, has some really interesting opportunities and areas where customers are displaying a great deal of interest in our new capability around providing multi-int solutions that involve both signals intelligence, where we have a significant capability today and imagery intelligence where ARKA, of course, is a leading provider. So a couple of really interesting areas that we're really excited about.

Got it. Got it. And then maybe if you can just talk about the optempo environment and discuss where you consider CACI is best prepared for increases in operational tempo over the next 24 months and then compare that to the CACI of 20 years ago in terms of how the optempo dynamics impact.

Yes. So that's a really interesting question and a great place to highlight the journey that the company has been on and the retooling that we have been about in the last decade or so in particular. A key part of our thesis when we began this portfolio evolution, a decade or so ago, was around taking advantage of the deep mission expertise and franchise positions that we have, which is probably best demonstrated by the fact that we have about 1,400 employees around the globe embedded in various combatant commands. This gives us a really great feedback loop and a really important position in understanding optempo in particular, but also ways that we can be further helpful and that we can bring new capabilities to bear on those problems. Relative to change, 20 years ago, the business was really about services, and it was about providing expertise, providing people that we're in position to support operations and do that in a way that was not particularly technically differentiated, obviously, quality support, dependable support on which our customers could rely but a very different kind of support and it was more focused on the provision of service and capability rather than technology and differentiated ability to add value to the real crux of the operations in a different way today.

Got it. Got it. And then maybe contemplating ARKA and the closure there. How do you think about the pro forma product exposure as a percentage of sales and as a percentage of earnings? And then where does CACI see the best risk reward in terms of those products?

Yes. We -- although we obviously increasingly have a hardware component in our revenue base, we really don't think or talk about it as products and there's a reason for that. It's really to keep our organization focused on the fact that when we actually deliver a tangible physical article, it's a vessel for the software. And so our real focus is on ensuring the software-centricity of the technology solutions that we're providing. So nevertheless, obviously, we do provide some amount of actual tangible articles as part of that. We are today on our technology transition about 60% technology and about 40% expertise. That will continue to grow. ARKA will add to that technology component. And we'll see another 6 or 7 points there in addition to the sort of continued growth of that portion of the portfolio. So we look for that portion to continue to grow with the attendant implications to both differentiation and the stickiness of our positions as well as the opportunity to generate more margin, which we can use for further investment to fuel growth and drive free cash flow per share, which is our ultimate goal or realize it as margin.

Got it. Got it. And then as we think about kind of investing in growth, perhaps maybe talk about how the team thinks about R&D and CapEx requirements for the future growth for the technology?

Yes. So our CapEx requirements are unlikely to be very different. We may see a very slight change there with ARKA. We've averaged the last couple of years a little under 1% of revenue in terms of capital expenditure. I think last year, we were 0.9%. That may increase a little, and we may be point or 110 basis points, but it won't be a dramatic difference. We will, however, continue to spend money and invest in developing the technology and in pursuing opportunities and developing capabilities along the model we've talked about, where we take advantage of this privileged access to have a really good, high-quality feedback loop to find targets for investment and to invest in that differentiation that customers need, which is a very, very important part of our thesis. I should also add, we have been talking about this and executing on this for the better part of a decade, and it's interesting in the current administration that we find our customers thinking and talking about it in a way that we have been thinking and talking about it for a while. So it leaves us in a very nice spot.

Got it. Maybe shifting to the ARKA business and the growth profile there. Perhaps maybe you could talk about kind of within the capability set, where are you most excited between space-grade optics communications or call it, the rest of the satellite component portfolio for ARKA?

Yes. So the space grade optics are obviously an important position in an area that we're really excited to increase our value to our customers and a customer set in particular that is already a customer set, but increase our footprint and our presence with that customer set in a way that adds value. What may be most exciting though about this is the ability to take the sense making part of the ARKA business and use it in a really cool way with our signals intelligence collection business. So as a leading processor of signals intelligence, combining with a leading processor of imagery intelligence, we have a very exciting opportunity to add multisource intelligence immediately and early in the process in a way to give broader, more integrated situational awareness to customers and war fighters that use the intelligence, obviously.

Got it. And then maybe taking aside from that, is the plan there for that to be mostly done in a classified setting? Or do you think of partnering with some of the leading commercial earth intelligence players, someone like a Planet Labs for example.

Well, there's a little bit of both. A great deal of the business is classified and that's an important sort of foundational element. But there are some classified opportunities, and we'd certainly be open to exploring ways to do more in that world. But it's difficult for me to imagine that the core of the business, it doesn't remain heavily classified provision.

Got it. Okay.

That's quite a set of notes you've got going there.

I love to write them on stage. The margin profile of the business as we pivot to that discussion, perhaps talk about kind of how you think about the different pathways -- or excuse me, discuss the cadence of the margin progression, between now and your updated -- excuse me, your FY '27 targets and what elements of the business are best positioned to drive outperformance? Where do you foresee the greatest degree of risk?

Yes. So ARKA, of course, will be helpful to that. But the margin improvement in the legacy business that we have underway will continue as well. And that's really a function of increasing efficiency in our execution of the business and an increasingly favorable mix as the technology content grows. And of course, the inclusion of ARKA will not only enhance the aggregate margins in and of itself, but we also see an opportunity to accelerate the mix transition that's already underway there by including ARKA. That's really the important part. Did I miss -- what was the second part?

Where do you foresee the greatest degree of risk?

Greatest degree of risk. That's an interesting question. I'm going to go back to our to our margin theory and management principle to answer that question. Our margins are really an artifact of our growth opportunities and our investment decisions. There's very little operational margin risk that's sort of inherent in the business. And we operate the business, those of you that follow us will know by solving for free cash flow and free cash flow per share in particular. So we really modulate investments and growth opportunities to solve for free cash flow increases. So margin risk, I would say, is more likely to be an affirmative decision to invest in an opportunity-rich environment, which I would have a hard time characterizing his risk, but that would be -- that would probably be the principal margin downside thought about very narrowly. I should also say, by the way, that I don't see that as a very likely outcome where the business is running very well and accelerating. We're generating a good amount of margin, feel adequately positioned to invest in those areas that are the greatest interest to us.

Sure. Okay. Okay. As we think about the longer-term margin aspirations for the business, maybe talk about kind of the pricing tailwinds that you're seeing in privately developed software versus open source integration. So essentially, within your intelligence business, how do you kind of think about customers not wanting to be locked in to commercial solutions and that helping pricing within the open source domain and thus margins.

Yes. That's an interesting question. I think the philosophy that we've brought to this by embracing open source solutions is really part of the -- is really at the core of the answer to that -- we -- our commitment here to our customers is to not present sort of a captive encumbered solution. And so our commitment to approach these problems in a way that's open and collaborative can enable the inclusion of the work of others to the extent it's complementary, is at the very core of our strategy. We are affirmatively as a point of strategy, not about creating closed locked systems. And even to the extent that you see things like some of the recent discussions around Anthropic, we've codesigned systems that will let us change out the frontier level to be able to use the best of the current available options, to adjust different situations and circumstances to changing needs to adjust the government deciding they do or don't want to use a particular solution. We have designed that flexibility and that openness into our technology solutions.

Got it. As you think about kind of your prime or subcontract this margin discussion, how do you think of that trade? And what areas of partnership do you think about -- or I think are producing the best margin outcomes for CACI?

Yes. So we have largely historically been a prime contractor. And that is in our traditional business, legacy business, that's been an important distinction, the access to the customer, the feedback loop that we talk about, that's all an important part of it. There is a changing sub current though in a portion of the business that will increase our subcontract content, but it does it in a way that doesn't violate the things that are important to us about being a prime. And what I mean by that is, specifically, for instance, if you look at ARKA. ARKA is occasionally a subcontractor. They're also occasionally, a term that they use, associate prime, where their particular differentiation and position with their customer makes them not a subcontractor in the typical way that we think about subcontractors. So they want a competitively differentiated position and have enlisted the support and the endorsement of a customer even if -- even in those cases where they may contractually be a subcontractor. So another variant of this model is where we -- in our optical communication terminal business, where we are routinely a subcontractor to a number of space primes. But again, in an area where we're technologically differentiated and our size, weight and power characteristics, of our solution will often make us the supplier of choice on a number of systems. So there are some situations where we have subcontract content growing, but in those 2 particular areas, it's a thoughtful, deliberate point of strategy to enter into those positions in those market solutions.

Got it. Got it. Maybe pivoting off of margins and turning to the macro for a second. Not as relevant, obviously, to CACI, but your insights in terms of the budget have always been typically the front of government technology pack. So maybe in the defense technology pack as well. But maybe talk about kind of the different pathways provided by the [ Haskin ] SaaS and any commentary towards growth from that $1 trillion line item? And essentially kind of how real do you think $1.5 trillion is for '27.

Yes. So this is a situation where I first have to apologize for you being burdened this afternoon with the finance guy. And if our CEO were here or our CTO, both of them from time to time travel with me, you'd get a little probably more fulsome answer. But the short answer is the decisions that we've made and the deliberate positioning we've made in terms of the markets in which we participate and the ways we participate, we expect to be very resilient and durable in this same environment. As far as the $1.5 trillion, I think everyone in the room could have a different political view of the viability of $1.5 trillion for a budget. I would go back and tell you -- remind you that the areas that we've chosen to participate in are generally those areas where we see more durable demand impulse. And we don't see the volatility that you see when you see swings -- big swings in the top line budget. And so think about changes to big platform programs and areas that often are affected by that. We've put ourselves in a position where we're relatively insulated from that phenomenon. I would also point out that we think our TAM is about $300 billion a year. And so the midpoint of our revenue guidance this year is $9.4 billion. That obviously gives us a lot of headroom in the landscape that we see. So.

Got it. In terms of the Federal Acquisition Regulation reform, kind of what is remaining that you think that investors should expect? And essentially, where are customers finding CACI is able to provide the most value in reducing costs and acquisition layers?

Yes. Amen. This is something that we have been talking about as well for the last decade or so. And if John were here, he would tell you that he left Secretary Hegseth's A&D CEO meeting, maybe the only one with a big smile on his face. The things we have been talking about are exactly the things that the administration has been talking about and that are finding their way into the FAR revisions that we spent a lot of time talking about. So the ability to invest ahead of need and to bring solutions, not just IRAD bills to customers the ability to sell commercially. And I'd like to remind everybody that when you hear the Secretary talk about buying in this new way. He doesn't say buy commercial. He says, buy commercially. So it's an adverb. And we have spent a lot of time positioning ourselves to be able to sell commercially. So if you look at the acquisitions we've done over the last decade or so to position ourselves to be able to do this, we have created a commercial company within our broader CACI. So we have a portion of the business that is well equipped to sell both in FAR Part 12 and Part 15. So the traditional cost accounting standard defined method of contracting is one that we're obviously comfortable with and fully capable of doing. But we're also fully capable and have a nice amount of business today in our nondisclosed businesses where we're investing, building our own products and solutions and selling them commercially in a catalog type environment. So we are very happy to find ourselves in a situation where the administration is talking about acquisition reform and of course, how that ripples through into their rewrite and tweaking and reinterpretation and use of the FAR, that's very well aligned with exactly what we have been talking about and doing.

Got it. Got it. In terms of the ARKA acquisition and the signaling there, perhaps if you could shed some color on how should investors think about CACI acquiring ARKA as essentially a bet on the growth of classified systems and classified satellite systems.

Yes. Well, look, we obviously have a conviction that space is a very interesting area of growth. It's obviously a contested domain. There will continue to be a need for classified space presence which is very well aligned with -- conceptually with exactly the things that we've been talking about and the other moves that we've made here strategically over the last decade or so. So, thinking about areas of durable need, thinking about areas that have significant differentiated capability that come with meaningful moats, are exactly aligned with what we've been talking about, and this is one more move in the direction that reinforces our commitment to those areas and those qualities in the businesses that we choose to pursue and then in a corollary way that we choose to acquire.

Got it. Got it. Maybe pivoting to capital deployment, as we think about the last 10 years of acquisitions, which technologies do you think have brought up the most amount of value to the table? And where do you think CACI still has remaining capability gaps?

Yes. So look, our increased presence in electronic warfare has got to be at the very core of this. And that electronic warfare capability shows up in a couple of different ways. Our work around the electromagnetic spectrum and electronic warfare shows up in both brigade level tactical SIGINT tools and equipment. It shows up in our optical communication terminal and our secure communications in space, and now it will show up in ARKA. So those areas will continue to be areas of focus. And as we kind of work through the next handful of quarters and get the leverage back in the range that we've communicated, we'll continue to look for areas where we fill in gaps in capability or gaps in customer footprint and continue to execute the strategy that we have been now for quite some time. I'd point out we don't buy volume. We're not interested in acquiring bulk. We fill gaps, as I referred to a few seconds ago. We integrate relatively quickly. We have a shared service center in Oklahoma City, where we do a lot of our back office and administrative work. We're set up to acquire businesses that we can quickly plug in to that framework and execution framework, and we'll continue to do that.

Got it. Maybe in terms of kind of the M&A philosophy, talk about kind of acquisitions for larger assets like Azure Summit or ARKA. And essentially, how do you think about kind of your appetite for increased larger swings versus smaller tuck-ins?

Yes. Well, these -- even though the numbers, the numbers have gotten larger with Azure and ARKA, but they're still really functionally, as the business gets larger, they are also sort of tuck-ins as a sort. I guess, they're larger tuck-ins, but they're still very much focused on what I described as filling areas in gaps, gaps in capability and positioning ourselves better in our differentiated technology sort of offerings, Azure was certainly that. ARKA will also be very much aligned with that strategy as we pursue the multi-int initiative that I talked about earlier and bring that increased capability to the market.

Got it. Maybe in the last 45 seconds here, if you can touch on any key points that you think we missed that investors need to know about.

Yes. I feel a little repetitive when I say this, but hopefully, it doesn't sound that way to everyone. I would only point out that what we're doing here is really very much what we have described over the last decade and the repositioning of the company to use our privileged mission expertise franchises to provide and expand our footprint into differentiated technology is very much what we're about. And some of the acquisition items I talked about related to investing ahead of need and being positioned to provide customers with in a relation -- contractual relationship with output rather than input and to flexibly and opportunistically deploy capital so that we can drive continually increasing free cash flow per share. I mean that's really sort of at the crux of everything. And I think in the last year or so, we found ourselves in a situation where the market, I think, is recognizing some of the things that we have been saying for a long time, which is that the ability to withstand things like DOGE and the government shutdown, and do that in a way that is really minimally disruptive, really, really drives home what we've been doing.

Right. thank you, Jeff, I appreciate the time.

Sorry for running over a little.

Not a problem at all. Thank you.

Thank you.