CACI International Inc ($CACI)

[Audio Gap] the EVP, CFO and Treasurer. So thank you so much for being here.

You bet. My pleasure.

So to kick off, it's a mix of investors with the industrial conference. Could you just go through an overview of who CACI is key markets?

Yes. So we are -- we are a national security contractor. About 90% of our revenue focused on national security between the Department of War, the various intelligence agencies in the Department of Homeland Security. We are about 60% tology, about 40% expertise. That's a result of a portfolio evolution that we've had underway for the better part of a decade, where we have moved from being a predominantly government IT services type provider to being a supplier of technology and outcomes and driving that portfolio evolution through both turning and managing the portfolio organically and also through a series of acquisitions, where over the last decade, we've done a number of transactions and have used the balance sheet strategically to reposition the company along the lines I just described.

And on that strategic shift to having a bigger technology piece, even though CACI is still in this IT services bucket, could you talk through where those tech pieces are now but end markets you guys serve there?

So the areas where we participate in technology are focused really on a couple of key areas of interest to us. Space is 1 where we recently completed the acquisition of ARKA from Blackstone, which some of you -- many of you will probably be aware of. We completed that in early March. We announced at the end of December. That brings some really exquisite electro-optical and infrared imaging with particular space capabilities to the portfolio. We have recently disclosed their space businesses over $1 billion a year in revenue. About 2/3 of that now will be ARKA. The other keen area of interest to us and 1 where we have several decades of experience is electromagnetic warfare, where we where we use the electromagnetic spectrum, primarily for signals intelligence collection and characterization and as well as a few other areas optical communication terminals and a number of other areas. But counter UAS is a particularly important part these days of our business.

And with that shift, having EW EOIR and COS, how do you guys look at the synergies between the tech portfolio, having software-defined applications and the services piece that still need that expertise.

Yes. We undertook describing the portfolio in terms of technology and expertise a number of years ago, better part of a decade ago as a way that we could articulate the portfolio evolution that we were undertaking. And so basically, it is grounded in the fact that we had a number as a long-term company at the time, 50 or so years old. We had a variety of really deep mission-focused customer relationships. And the strategy was to use those relationships and leverage them into higher margin, higher value contributed technology positions, which is what we've done significantly to a significant degree over the last decade or so.

In those success stories, is there 1 that you point to where this is a contract that we were able to compete for that we wouldn't have been able to previously or new program that we won from having this mindset stress.

Yes. There are a handful, Jordan. And one, I think a particular note would be our TLS Manpack, where we have a brigade combat team SIGINT suite man-packable wearable, where we had $1 million OTA, other transaction agreement for those of you that are familiar with the government's sort of ongoing and evolving procurement philosophy, where were able with a $1 million OTA to invest with a customer and a relatively short order, turn that into a $500 million program of record, which we're performing on now and successfully delivering.

And on the contract changes since you brought it up, what are you seeing that's different now in the new DOW cadence types of contracts, how has it impacted CACI and how you guys are thinking about pursuing new opportunities?

Yes. That's a really interesting thing to stop and talk about a little bit for us. we undertook in this portfolio evolution that I referred to earlier in our remarks here today. We undertook a number of changes based on things that we were seeing and things that we thought deserve specific strategic responses on our part. One of them was to focus on outcome-based technology differentiated solutions. One was recognizing that the speed of conflict in the future could only really be adequately addressed by software centric systems. The speed of the fight was increasing at a rate that really couldn't be addressed by hardware changes. The other thing was for us to bid fewer and larger opportunities, which gave us more of an opportunity to shape and position ourselves in a good place competitively and also to invest ahead of need, which is an important part of our strategy. That is to selectively use our own resources in many cases, to be able to sell commercially. But even in those cases where we're not selling commercially, we're working in preprogram award phases with customers to develop approaches that will later be manifested in the contract. It turns out that those are very, very much aligned with the current administration's procurement strategies. So we find ourselves in a happy spot of having identified and deliberately positioned ourselves nearly a decade ago to a place that is turning out in the current marketplace to be exactly where we would like to be, which has given us a real head start in the current environment.

And on that for new opportunities that are coming, the presidential budget request for '27, it's in the areas you guys are focused on for the last 10 years and now more recently with ARKA, so where do you look at the budget to say this is a great windfall for us or a big opportunity?

Well, look, the areas in which we're focused are areas of really current interest that all of us see every day in the news. I mean the current geopolitical environment and the current obvious defense technology shifts are exactly, again, exactly aligned with things that are important to us and our priorities. And they're really reflected in the budget areas that you mentioned. So things like intelligence, sensing and collection, things like counter UAS and use of the electromagnetic spectrum generally for a variety of offensive and defensive offerings are really well aligned with exactly where things are going today. One of the things, I think, Jordan, that we don't probably talk about it for isn't necessarily widely understood is that there's a lot of discussion about the top line budget, and we all know the President's budget request $1.5 trillion. There's a variety of views on how much of that will actually end up being appropriated. It may be that it's something less than that. It may be the whole $1.5 billion. But that's relatively not particularly relevant to us. And the reason for that is the areas of focus that I talked about before and the fact that really there is strong bipartisan support for the parts of the budget that are particularly important to us. And so to the extent the budget ends up a little less than perhaps what was asked, those problems get solved in large platform programs and production rates and things of that sort. No 1 is suggesting that we don't need a counter US strategy, stance. So we feel, again, 1 more way in which we feel particularly well positioned.

And on that, too, with midterms coming up potential for a CR, how do you plan the business around uncertainty of what the funding will look like? And then even if we have flat or no new programs?

So we -- as you might imagine, we spent a fair amount of time managing that and monitoring it. It's notable that it has not affected us in the past, continuing resolutions have sort of come to be a way of life. We can each have our own personal political views on whether that's a good thing or a bad thing, but CRs are with us to stay. It's also worth observing though, related to your CR question, that much of our portfolio has proven to be, again, as a matter of strategy and design to be particularly resilient and durable in the face of budget uncertainty. So just even in the last year or a handful of quarters, we had a huge hit cry about those. We spent a lot of time talking externally about why we didn't expect those to be an issue, and we were going to be relatively impervious to any effects from it. That turned out to be true. It came up again in the context of the budget last year, where we said, look, the things we're doing are deemed critical, overwhelmingly, it's not going to be a big deal, that proved to be true. We heard it even though the DHS is a big customer. We heard it again related to the extended DHS shutdown. We said it's not a big deal turned out to be true. So a really important part of this strategy is that we have put ourselves in places where we really see very limited opportunity to not do these things. The things that we do are among the most important and among the most resilient in terms of budgeting and political support. Strong bipartisan support for many, many of the things that we do.

And on that, even in uncertainty of funding, pursuing less contracts that are larger, have more endurance. Where else in the portfolio would you guys like to start bidding? And is there anything that defines the contracts that you would pursue?

Well, the -- our revenue this year, we're approaching a $10 billion revenue enterprise, the midpoint of our guidance range for our fiscal year this year is $9.5 billion. We have about a $300 billion TAM. So we have lots of wood to cut in the part of the forest that we already live in, and we expect to be -- we see a lot of opportunities to do that in places where we are. ARKA has -- gives us a particularly good example there where we have the ability to use some of the tools that the ARKA team has developed for imagery processing analysis and apply those to signals intelligence analysis. We also have the opportunity now to to pursue a number of multi-intelligent source opportunities by putting imagery in signals intelligence together into single intelligence projects, products that can provide a more holistic view of situations and circumstances in particular places. So there's -- there are a number of areas where we see lots of opportunity in places where we already are with customers with whom we already have strong relationships, and we see excellent growth prospects here in the near term right there.

And just on ARKA 2, could you talk about for your '26 guide, how it impacted, did you guys did bring up revenue, EBITDA margins increased?

Yes. We increased the revenue guidance for FY '26 for ARKA by $150 million -- that's a little bit over a quarter into quarter and a couple of days. I would intent to point out not being a service business. This is not a linear enterprise. The business is growing, but there's also some natural lumpiness in hardware businesses and whatnot. But we increased the guidance for the year by the $150 million of revenue for ARKA. Was that you, did I get your question.

Yes, just the impact Yes. And then to -- you talked about the new capabilities with ARKA. Longer term, how are you guys thinking about synergies that can be unlocked with it? And anything else that can change go to market? Does it increase your international presence?

There are a number of areas where we see opportunities to develop synergies. When we made the acquisition decision, there were no cost synergies or revenue synergies contemplated. We expect to enjoy both of those. We've already, in the course of the integration moved much of the overhead functions to our shared service center in Oklahoma City and have realized some indirect savings. I mentioned earlier the opportunity to apply their tools, the IMD tools to the SIGINT intelligence data as well as the opportunity to provide multi-end data. That's an area where we see some opportunity for revenue synergy that we've not done in the past, gives us the ability to do some exciting new things where we already have customers expressing interest and eager to engage in those discussions.

And then just back on the award environment. now that DHS is funded, are you starting to see things there pick up or other areas that have changed.

Yes, it's a little bit soon to know that. I would say that the DHS restart is relatively new, and I'm not sure we're -- I'm not sure I can make a definitive statement about that yet. I would notice though I would note that even in the case of the broader government shutdown, which, of course, has been over now for some time, we have not seen a full return to pre-shutdown activity levels, particularly as it relates to awards. The administrative work of the government bounced back relatively quickly, and we saw a really minimal disruption in invoicing and billing, funding, normal funding obligation those things kind of came back to normal very quickly. But the awards and acquisition progress has been a little bit slower, which I think you've probably seen across the industry, really.

On DHS 2 and with CACI's counter UAS systems -- what opportunities are you seeing there where we start to see new grants and funding coming through, specifically for the World Cup, the Olympics and trying to hard in critical infrastructure.

Yes, there are a number of opportunities. And this actually is a great place to talk about Merlin, our commercially developed Counter UAS system where we very strong demand impulses related to sporting events and World Cup in particular. But also, as you mentioned, critical infrastructure, it's an important part of the counter UAS layer of golden doom. We have a unit on the southern border that's been there for, I think, a month or 6 weeks in a demonstration kind of phase where it's met with great success and is proving its utility and sort of monitoring the border broadly. We've also tested Merlin demoed Merlin in a number of DOW Department of War events over the last quarter or so where it has also done well and been well received, and I think as the whole Counter-UAS acquisition process gathers momentum, I expect we'll see much more activity and much more demand, but again, that's a commercially developed system we invested, developed ourselves and are offering for sale commercially, again, very much aligned with the administration's acquisition priorities.

And -- can you we're seeing so much competition for COS and just UAS systems themselves. Could you just talk about what makes Merlin different and how you are able to apply technology from something like the southern border all the way up to Golden Dome?

Yes. There are a number of things about Merlin, I think, that differentiate and make it particularly interesting. One is the detection range -- we -- many of the competing systems have 2, 3, 4-kilometer sort of detection ranges. We talk about 75 kilometers, and we've actually, in several cases, overachieved on that. That's important for a couple of reasons. It's important because it gives you, obviously much more reaction time. Depending on the target, these can vary a little bit, but at some of the shorter ranges, there may be 15, 20 seconds of reaction time versus 15 or 18 minutes at the detection range that we've achieved. So that gives you 2 things. It gives you, obviously, more chance to more opportunities to select a defeat mode, non-kinetic, which we have a number of solutions or or if the operator were to decide to use a kinetic solution, you have time to do that as well. Obviously, if you have 15 or 20 seconds, you don't have much time to do much at all. The other thing that's important about that detection range is the -- well, there are 2 things, 2 economic advantages to that. One is that because we have a number of non-kinetic solutions to defeat incoming threats, you can avoid using a $3 million or $4 million missile to shoot down a $25,000 drone. It also affords low or no collateral sort of solutions. So you don't have to have a debris field over St. Louis somewhere, wherever the threat is. The other thing that's important about the economics, in addition to the nonkinetic solution being obviously economically preferable is the number of systems you need -- if you think about the concentric circle that you draw around assisted with a 75-kilometer detection range and compare it to the concentric circle you draw around around some of the other competing systems, you quickly see that you need many, many more dozens often to afford a slower range of protection. In addition to that, and finally, Merlin is 1 of the very few systems that handles a full range of UAS threats, meaning Class 1 to Class 5. So if you think about Class 1 and 2 as being the sort of readily available hobbyist type threat drone which can obviously be outfitted with weapons and different things that could make it very lethal. But it's a smaller, generally available device up to Class 5, which are the nation state sort of small aircraft size drones, we can address that entire range and most of the other systems do not focusing only on the smaller ones. So there's a number of points of differentiation that we think make Berlin a pretty exciting alternative in the scenarios that you mentioned.

And if you could -- how does CAS fit into Golden Dome to the extent you're allowed to talk about Golden Dome?

Well, we can talk about it a little bit, but the threats in Golden Dome, there are 2 ways to play here. One is in the sense and detect dimension. And the other is in the actual Counter-UAS. So to the extent that the threat is an incoming missile that's going to be another part of the capability. To the extent the incoming threat, the drone, obviously, the counter drone activity is helpful. The other thing that we do and have the capability to do and look forward to applying here is being able to defeat some of these threats in what we call left of launch. So if you think about the time line, we have the ability to detect RF activity that's associated with pending launches, so we probably can't talk about this in great detail. But if you think about the fact that you have a threat somewhere and you're getting ready to attack with it, -- there are a number of things that start to happen, right? Systems get turned on, sensors get turned on, there are signatures associated with the fact that you're getting ready to to use something offensively. And the fact that there may be an opportunity to defeat the threat before it's even in the air obviously is the best answer evolve. So that could be any 1 of a number of ways with a cyber payload or disabling the system in some way, turning it off -- there are a number of ways to do that. But the sooner you can detect the threat, the sooner you can start to apply some defensive measures to it.

For a program like Golden Dome where it's layer defense, there are a lot of components that wants to have as many participants as reasonable. How do you decide when you go to market with somebody else and what makes them a good partner? .

Well, we collaborate already with other parts, other parts of the systems and other providers. Look, if you think a little bit about Golden Dome on some level, some aspect of the program is a giant system engineering job, right? I mean, the government has been very clear about the fact that we want to use the things we have. We want to reuse and modify things that are available to us now, both for economic efficiency and also for timing. And then certain things will have to be built or designed for new and hopefully, that's a minimal part of it. But to the extent we're reusing or incorporating existing capabilities, that will require collaboration among all of the participants. I mean the systems engineering part of this is an interesting part of the puzzle. And the detection and the left of launch capabilities, for instance, that I was talking about a few minutes ago are important areas where that utility might apply. I would also point out that we have the ability now to do what we call Tip and Queue, which is take an incoming threat that we've identified, characterized and if it's determined by the operator that the best solution to defeat that is a kinetic solution. We have the ability to Tip and Queue that, we call it, to the -- to a battlefield management, antimissile system of a different someone else's. So I mean the systems all have to interact and work together to provide the layered defense that will be necessary to make Golden Dome successful. .

So interoperability is important for partnerships, what makes a company a good acquisition target for CACI?

So our acquisition program is very much focused on gaps. We don't buy revenue. We don't -- we're not buying for bulk. We're buying to fill technology needs, customer needs, very specific targeted areas of interest. So it's really about expanding our capability and getting wider not just bigger bulkier. And that really changes the answer to your question is going to be that really changes almost as fast as technology does, right? So we will continue to see areas, I think, where we can supplement existing SIGINT and IMiD collection and processing capabilities, new ways to apply AI, any 1 of a number of things, all those -- all those dimensions are important to our ongoing GAAP analysis, we're doing more on us continuously.

And I guess, to Post ARKA, where would you need to see leverage to do another big deal? And what gaps are you guys looking at now?

Well, the keystone of our capital allocation strategy is flexible and opportunistic. So when the right things present themselves, we're positioned to act. I have talked about the fact recently with our leverage at about 4x now trailing 12 months EBITDA that we sort of like to be 2.5 to 3x. That's sort of our comfort range where we think in the current rate environment is the right balance between having the cost of capital benefit of leverage, but still having the flexibility to pop up when something is interesting. So does that mean if some really eye-watering opportunity presented itself and we were 3.5x levered that we wouldn't do it. I mean probably not. I wouldn't rule anything out. But I mean, in general, we'd like to be 2.5 to 3x. And I think in the near term, we're going to be focused on that. Probably we'll talk specifically about gaps of current interest other than to say, as I alluded a few minutes ago that, that gap analysis is ongoing, and it's more or less continuous. We do also maintain a pipeline of potential targets and we meet regularly with those potential targets. And they often sort of ripining at whatever the sellers pace will be. So we're patient and disciplined acquirers.

And then a few minutes left since you talked about how are you guys using AI internally just to be more efficient in developing it for customers? And I think it's always interesting, and you guys were probably 1 of the first actual LLM makers before the broader market was interested I knew about them?

Well, look, AI has been an important part of many things we do for a long time for decades. And it's become has become a little bit more of an item lately. Obviously, we're talking about it more, which is good. But we use AI for a number of things. We use it for everything from matching cash receipts to receivables is freed up a weekend of quarter for Jim and doing the first draft of our earnings call script. So we use it for a number of things. So those are internal uses. Obviously, in terms of our business, it's been a big factor in intelligence analysis, again, for decades. And we've used it for a number of things. The applications are becoming a little bit more sophisticated, and it gives us a really interesting productivity and efficiency benefits. It's a really interesting tool. We're excited to embrace it and use it I would point out just because it's often discussed in terms of being a threat that we actually see it exactly the opposite as being a great opportunity. Some of you will be aware of the fact that we generate and collect as a nation, a prodigious amount of intelligence information. And a big part of the challenge is being able to prioritize and characterize the places to spend actual human time on particular data and information that's collected. So the ability to apply some of these tools to that data is a tremendous advantage, both in terms of being able to look eventually at more data and also to make sure we're looking at the right data. We're looking at the most the most productive and the highest opportunity of finding something of interest and neutralizing threats.

Great. Awesome. 20 seconds left. Thank you so much. I appreciate that.

Thank you, Jordan. I appreciate it. Thanks.

Thank you guys.