Caci International Inc /De/ Q2 FY2025 Earnings Call

Ladies and gentlemen, thank you for joining us. Welcome to the CACI International Fiscal 2025 Second Quarter Conference call. This call is being recorded. All lines are currently in a listen-only mode. We will provide an opportunity for questions later, at which point instructions will be given. Now, I will hand the conference over to George Price, Senior Vice President of Investor Relations. Please proceed, George.

Thanks, Krista, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning. We are providing presentation slides, so let's move to Slide 2. There will be statements in this call that do not address historical fact, and as such constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night's press release and are described in the company's SEC filings. Our Safe Harbor Statement is included in this exhibit and should be incorporated as any part of this transcript of this call. I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's turn to Slide 3, please. To open our discussion this morning, here's John Mengucci, President and Chief Executive Officer of CACI International. John.

Thanks, George, and good morning, everyone. I appreciate you joining us to talk about our second quarter fiscal year 2025 results and our updated fiscal 2025 guidance. This morning, I am joined by Jeff MacLauchlan, our Chief Financial Officer. Our second quarter results indicate another strong quarter as we progress toward a fantastic year. We achieved revenue growth of 14.5%, an EBITDA margin of 11.1%, and solid free cash flow. Additionally, we secured $1.2 billion in awards, resulting in a trailing 12-month book-to-bill ratio of 1.7 times. As we have mentioned before, quarterly awards can fluctuate based on timing, but the ongoing strength of our business is evident in our trailing 12-month book-to-bill, our pipeline, and our backlog. I would also like to highlight that Azure Summit, which we acquired during the quarter, received a significant award just before the acquisition was finalized, amounting to $300 million for new work with the Navy over the next three years. Even though this award is not included in our reported awards, it is part of our backlog and showcases the value we are already realizing from that acquisition. I'm happy to report that the integrations of Azure Summit and Applied Insight are proceeding well, with both businesses performing effectively. Based on our results and the momentum we are experiencing, we are raising our fiscal 2025 guidance, and Jeff will share further financial details shortly. With the first half of FY’25 now behind us, we are on track and confident in meeting the three-year financial targets we set during our recent Investor Day. Furthermore, we remain well positioned to foster long-term growth and enhance free cash flow per share, driving shareholder value. Looking at the macro environment, we observe three ongoing conditions. There are healthy demand signals and funding streams in the markets we serve, supporting increased spending in key areas by the new administration in a world that remains fraught with danger. As a national security company that derives around 90% of its revenue from addressing complex challenges faced by the DoD, the intelligence community, and the Department of Homeland Security, we are committed to tackling critical, enduring national security priorities, which we expect to remain a focus under any administration. Recently, significant attention has been drawn to the Department of Government Efficiency, or DOGE, initiated by elected officials, the media, and investors. DOGE has several stated goals, including modernizing software, information technology, and networks across the federal government, focusing on interoperability, adopting new approaches to meet rapidly evolving mission requirements in national security, enhancing government efficiency to deliver more for less while also reducing the workforce, and improving financial accountability while cutting down on wasteful spending through budget cuts and substantial regulatory reforms. As we elaborated during our Investor Day, our strategy is specifically designed to succeed in this environment. At CACI, we have consistently been a leader in leveraging software while proactively investing to develop and deliver high-value capabilities more quickly, efficiently, and flexibly. We have an outstanding record of modernizing enterprise-scale software applications and critical networks, as well as providing essential mission systems. This is achieved through agile software development processes that utilize commercial-based DevSecOps and are designed with open architectures. Our technology is therefore more effective, reliable, secure, interoperable, and efficient, utilizing AI-driven models that alleviate operator workload and provide information more rapidly and at lower costs. Today, CACI is executing precisely on these principles. Let me share some significant examples. When discussing the modernization of enterprise-scale software applications, our portfolio includes the three largest agile software development programs in the federal government, along with numerous others of varying sizes. Our agile programs have a solid track record of yielding impressive results, with modernized software, a greater number of releases at a faster pace, enhanced quality, and reduced costs. Our Beagle program with DHS Customs and Border Protection continuously modernizes software applications, enabling border agents to operate effectively amidst evolving requirements. In our FADE program, as discussed at our Investor Day, we are updating data visualization software daily to meet the needs of tens of thousands of analysts on classified networks worldwide, utilizing multi-source intelligence data to carry out national security missions. These initiatives have not only achieved their goals but have also allowed our clients to fund and advance additional technology modernization projects, generating growth for CACI. This same efficiency, quality, and transparency are now being applied to NASA through our NCAPS program, which is progressing on schedule. Regarding critical network modernization, CACI is involved in seven federal government programs, and we consistently secure these contracts by revolutionizing network modernization methods. We are replacing outdated legacy infrastructure with modern software-defined networks that are self-healing, more secure, more scalable, and incur lower long-term costs due to decreased reliance on human intervention. Additionally, we are providing Commercial Solutions for Classified or CSfC and multi-classification access to ensure secure and widespread access from the network cabinet to endpoint devices. Our Spectral Program is also advancing well, exemplifying the application of technology to swiftly address national security needs. CACI is developing the Navy's next-generation shipboard weapon system for signals intelligence and electronic warfare. Spectral is delivering mission-critical systems built with open architectures to avoid vendor lock, using software that can be quickly and dynamically updated over the air in response to threats, allowing the ship to remain operational without needing to return to port. Given the constantly evolving threats in the OPECOM theater, Spectral represents the type of program capable of delivering rapid capabilities for the Navy. Thanks to our distinct strategy and strong performance, we are also taking on additional work from other providers. In our enterprise IT as a service program known as ITAS for the Air Force, we are exceeding expectations and enhancing efficiency for the government. For the first time, both the Air Force and Space Force are utilizing a modern IT service management system to support both services comprehensively. This next-generation program is currently backing close to 700,000 Air Force and Space Force personnel worldwide, with plans for full deployment to support nearly 900,000 Airmen and Guardians later this year. Importantly, the efficiencies generated by ITAS will facilitate the transition of thousands of Airmen and Guardians from IT support roles to more direct warfighting positions. Finally, I want to underscore our contribution to successful financial audits for government agencies. Our work on the Defense Agencies Initiative Program provides a unified financial management ERP system, implemented and supported by CACI as a service across the DoD. At present, six out of the seven DoD agencies that use this system and undergo annual audits have achieved clean audits, and the seventh agency improved its ratings in its first year on the system. Notably, one of the six agencies achieving a clean audit is the United States Marine Corps, which is the only military branch utilizing this system supported by CACI and the first U.S. military branch ever to attain a clean audit. This is how we can enhance financial transparency and accountability within the DoD moving ahead. Successfully executing programs like these builds our credibility with customers, drives growth on contracts, and strengthens our differentiation and past performance, improving our opportunities to win new contracts. Significantly, all these examples align well with the objectives of the new administration. In addition to aligning and excelling in meeting technology and efficiency-based DOGE goals, we have minimal exposure to the civilian side of the federal government, where regulatory reforms are more likely to result in reductions. In fact, only 6% of our total revenue is generated from other federal civilian agencies, which differentiates us significantly from our peers. In conclusion, we have combined the best attributes of our competitors into our strategy and execution: the discipline and structured processes typical of A&D primes, the agility and mission expertise found in government service providers, and the speed, innovation, and software orientation of the commercial realm, all within a 60-plus-year-old company that comprehends the critical national security missions and boasts an unmatched track record of performance in the industry. The outcome is strong financial results, confidence in our three-year financial outlook, and the ability to cultivate long-term growth and free cash flow per share, ensuring our value is recognized under any administration. Now, I'll turn the call over to Jeff.

Thank you, John. Good morning, everyone. In the second quarter, we generated $2.1 billion in revenue, reflecting a growth of 14.5%. The organic growth was 8.1% or 14.3% based on underlying figures. Our EBITDA margin for the second quarter was 11.1%, which is an increase of 180 basis points year-over-year, primarily due to changes in business mix and timing. The EBITDA margin exceeded our mid-10s expectations because some software-defined technology deliveries were moved up to the second quarter and some lower-margin material purchases were postponed to the third quarter. Excluding these timing-related elements, the second quarter EBITDA margin would have aligned with our previous expectations. We anticipate that these timing-related items will cancel out in our third quarter EBITDA margin, while our full-year margin forecast remains unchanged. Adjusted diluted earnings per share stood at $5.95, up 36% from last year. Increased operating income more than compensated for higher interest expenses and a larger income tax provision. The second quarter operating cash flow, not including our accounts receivable purchase facility, was $76 million, indicating strong profitability although impacted by higher working capital. Days sales outstanding were 53 days. Free cash flow for the second quarter was $66 million. Moving on to the second quarter net debt to trailing 12-month EBITDA, it was 2.9 times pro forma after the acquisitions of Applied Insight and Azure Summit. We prefer to maintain leverage in the range of 2.5 to 3 times. We are well-prepared to deploy capital flexibly and opportunistically to foster long-term growth in free cash flow per share and shareholder value. We previously increased our fiscal 2025 guidance in the first quarter due to stronger organic business momentum and the acquisition of Applied Insight. We raised it again on November 8 to account for the closing of the Azure Summit acquisition. Given the ongoing momentum, we are pleased to once more raise our fiscal 2025 guidance. We are now projecting revenue to be between $8.45 billion and $8.65 billion, driven by stronger organic growth, which indicates total growth of 13% to 16% on an underlying basis, including 6 points from acquisitions. We anticipate the fiscal 2025 EBITDA margin to remain in the low 11% range as previously communicated at our Investor Day. We expect the EBITDA margin for the second half to be more concentrated in Q4 than in Q3, due to the timing elements discussed earlier. With our improved revenue outlook, alongside a lower tax rate and reduced interest expenses, we are also revising our FY’25 adjusted net income guidance to range between $537 million and $557 million. This leads to an increase in adjusted EPS to between $23.87 and $24.76 per share, reflecting growth of approximately 13% to 18% compared to last year. Lastly, we are raising our free cash flow guidance to at least $450 million. We have emphasized before that we view free cash flow per share as the ultimate value creation metric, and our FY’25 guidance now suggests an 18% growth in free cash flow per share. Our trailing 12-month book-to-bill ratio stands at 1.7 times, indicating strong market performance. Our backlog has surged to $32 billion, an 18% increase from last year, representing nearly four years of annual revenue. These metrics offer robust long-term visibility into our business's strength. For fiscal year 2025, we project that around 95% of our revenue will derive from existing programs, with about 3% from repeats or recompetes, and roughly 2% from new business. Progress in these areas demonstrates our solid operational performance and supports our confidence in our updated expectations for the year. Concerning our pipeline, we currently have $12 billion in bids under evaluation, with around 75% targeting new business for CACI. This notable rise in bids reflects our strong business development efforts and the variable timing of RFP issuances, proposal submissions, and award decisions. We expect to submit an additional $13 billion in bids in the next two quarters, with approximately 70% aimed at new business. Expected submissions are consistent on a sequential basis, showcasing sustained healthy demand in our key focus areas. In summary, we have delivered another quarter of strong results. We observe robust demand from our customers focusing on critical national security priorities. We continue to secure and execute high-value, sustainable work that supports long-term growth, enhances free cash flow per share, and adds shareholder value. I will now hand the call back to John.

Thank you, Jeff. Let's go to Slide 13, please. In summary, we've had a great first half of fiscal '25, delivering strong growth, expanding profitability and solid cash flow. As a result of our performance, we are once again raising our fiscal year '25 guidance. We continue to have high confidence in the three-year financial targets we outlined at our Investor Day in November. We're successfully executing our strategy, winning and executing high-value work for our customers and delivering on our financial commitments to our shareholders. Our strategy uniquely positions CACI for where the world is going and drives us to think differently about how critical national security priorities can be addressed through the combination of expertise and technology. It enables us to invest ahead of need and differentiated capabilities to show our customers they are the potential. Our strategy is something that we have implemented and refined deliberately over many years. We are truly excited about where our company is headed. As is always the case, our success is driven by our employees' talent through innovation and their commitment. To everyone on the CACI team, I am proud of what you do each and every day for our company and for our nation. Thank you. And to our shareholders, I want to thank you for your continued support of CACI. With that, Krista, let's open the call for questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from Scott Mikus with Melius Research. Please go ahead.

Good morning, Scott.

Good morning.

John, I just want to take a quick high-level question, given your experience in the industry. So the CEO of L3 Harris wrote a letter to DOGE with recommendations to make the acquisition process for the government more efficient. So I'm just curious if you had a meeting with the incoming administration. And if you were to make recommendations to them, what would they be and why?

Yes, Scott, thanks. Look, at a high level, there would be three or four things that I would share. I think first off, I do agree that we need to drive and accelerate the modernization of both the IT infrastructure and networks across the federal government but also within DoD and the intelligence community. But those folks need the requisite funding specific to those missions. It's really easy to point to things that aren’t working. It's more difficult to work with those users. Many of them, I am certain, understand the shortcomings of their IT infrastructure and their networks. DoD started off first looking at their networks, which is why we're involved in seven programs simultaneously trying to modernize what those customers need, not only for today's mission but for the future ones. I'd also focus them on the fact that we need to do more sooner to protect the Homeland from threats that could or already have come to our shores. Counter-UAS in the U.S. is very different from outside the Continental U.S. I’d ask that on the regulatory side a national strategy be required with frankly, a singular leader to bring DoD, DHS and law enforcement together and investigate the different priorities. I think we've all probably looked at the hysteria that occurred in New Jersey around drones and other parts of this nation. I truly believe that we want to make a difference. Authorities and who they are granted to will make a world of difference on understanding what those threats are. And I think last, rather than putting a timeout flag on protest, I'd like to look at it from another view, which is maybe spend some money and train acquisition officials to strictly follow the processes they already have to reduce the protesting that is rampant today in the federal government contracting world. Look, there's a lot of acquisition elements in the government that have near unblemished records or tests like we do in the industry. We're continuously doing lessons learned and sharing best practices. I think something that would focus the acquisition community on that because I've been in this marketplace for 41 years. We talked about acquisition reform forever, but some of this is low-hanging fruit. If we can get people better trained, I think that cuts down and frankly, a very rampant habit of people lose a program, and they protest for the sole purpose of continuing revenue within their own shop. And frankly, that's not good form because a lot of us are doing work that needs to be done to protect this nation. So thanks, Scott, for that.

Okay. And then Jeff, a quick question for you, or I guess, John as well. There has been a derating in valuations for government contractor stocks at least in the public markets. Has that change in valuation shown up in the M&A pipeline or maybe caused some companies that were thinking about selling to maybe wait until valuations improved?

Yes. It is, Scott. We have talked about this phenomenon even before the election and the most recent derating. We've seen some moderation in multiples already. If you look at our recent acquisitions, you'll see that we have found ways to take advantage of that. This is almost certainly further tamped them down a little bit. We actively review our pipeline, as I think you know, ultimately. Every transaction kind of has its own particular complexion and set of dynamics. But certainly, we've seen valuations trend down, and this is just kind of the most recent example of that.

Scott, I'd also add, as you look at how we look at M&A today and in the future, I want our capital deployment strategy to remain flexible and opportunistic. We just did two fantastic acquisitions that are going to drive long-term growth. Frankly, we are going to focus on delevering the next couple of quarters as we get into our target leverage range, because I want that to be reloaded, so we can look at other ways of driving our capital deployment, whether that be M&A or share buybacks or continuing to buy down debt. So thanks for your questions.

Your next question comes from the line of Peter Arment with Baird. Please go ahead.

Thanks, good morning. Good morning John and Jeff. Nice result. Hi John, there has been a lot of discussion regarding perceptions of a bloated workforce in the civilian side of national security. If we begin to see reductions in that area, could that present an opportunity for CACI to deploy technology or your software, or to engage in more outsourced work? What are your thoughts on this?

Yes. Peter, when I look into some of these initial goals, it sort of brought me back to the first days of sequestration, where most of us couldn't sell it, and all of us can know how that was going to play out. Look, I think what they did with sequestration was, frankly, took the very quick acts, right? Let's reduce the number of federal contractors in all of our offices and doing work because that immediately saves money. The federal government workforce was sort of untouchable at that point. I don't have any inside track as to understanding what's going to be reduced. I do believe the return-to-office mandate will take some time to take effect. But in my mind, it is sort of an easy connection that as they remove staff that are tied to mission, that is an additional opportunity for us to drive additional growth. But we get time tested every day. Our contracts only last so long. We are open today. We opened for recompete at just about any time for a multitude of reasons. I do believe in the expertise that we deliver to the federal government. So at the end of the day with a lot of assumptions, yes, I believe that there are areas, not only in the federal government area, Peter, but on the DoD and the intel side as well, by bringing more technology in, we can free more folks up. Every time we deliver another AI solution, we can get more done with fewer folks. The government has to make that call whether those folks move on to other work or whether they become an induction.

I appreciate all the information. It seems like you're in a strong position. Just a quick question for Jeff. Can you remind us what your target leverage is and where you want to be before you consider any potential share repurchases?

Yes. We've said 2.5 times to 3 times, and we're just at the top now inside that range. We ended the quarter at 2.9 times. We like to be a little less, but we are in a range now where we have the ability to be flexible and opportunistic.

Thanks, Peter.

Your next question comes from the line of Mariana Perez Mora with Bank of America. Please go ahead.

Good morning, everyone.

Good morning, Mariana.

Thank you for that introduction showing the DOGE impact and how your portfolio is. So it's a question related to that. And how do you think of what's your appetite to actually expand into civilian? If this DOGE initiative will actually be able to be focused on IT modernization, financial management, and all those added efficiencies in a more civilian type of agencies? What is CACI's appetite to go towards those types of opportunities?

Yes, Mariana. Thanks. Look, in my prepared remarks, we actually talked about a number of those areas. I mean as the government moves towards modernizing more networks, as they look to driving more IT modernization, we're fully in that marketplace today. Long before DOGE, long before the election, we've been that company talking about investing ahead of customer need and also showing the customer the art of the possible, right, so that they could make better decisions as they look forward. I think what will happen in these areas is, as the government today learns more about what other parts of the government are doing, I do think that the DOGE impact, I don't want to quote that, but as the impact of DOGE is understood more across all of the government agencies, their willingness to want to work together and actually do more for less, at the end of the day, is the best solution for this nation. We have an appetite to look at all of that work because we're already in it. We are that company that is driving it in a much more cost-effective manner. We talk about BEAGLE and Agile Software development. Agile Software development with DevSecOps is a game changer. That's why we say software is our superpower because you are able to do so much more for the federal government customer for so much less. Both sides win because every dollar that we're saving them gets pushed into additional scope that wasn't on the original contract that can get added to ours. So we're in a fantastic position today. A lot of these ideas are not new to this company. I'm really proud of the men and women of this company who have taken on that challenge a number of years back, and their fruits are just beginning to pay off.

Thank you so much. And following one if like prior to both of you. There has been investor concerns about what is like appetite for more like commercial terms could mean for like cost-plus contracts, which are like about 60% of your contracts. What are the challenges and opportunities you see if the government were to focus on more like commercial terms, fixed price type of contracts?

Yes, thank you. First of all, we are definitely interested when the government opts for outcome-based purchasing instead of just buying inputs. There are numerous advantages to this, especially as we see a shift towards fixed-price contracting rather than cost-plus arrangements, which is beneficial for us. Our preference lies with fixed-price contracts as they reduce risk. For new and complex projects, it’s rare for companies to agree to a fixed-price setup. However, we are quite familiar with firm-fixed pricing. It's important to note that the majority of our software-defined technology comes from our commercial divisions. We have amassed considerable experience with outcome-based contracts over the last seven years, where we invest upfront, showcase possibilities, and sell that solution as a software-driven product. This approach has positively influenced our margin growth. Jeff, do you have anything to add?

Mariana, I'd like to expand on John's point by referring you to one of his last slides where he discusses the competitors and the profiles of the traditional government service providers and commercial providers. We have intentionally positioned ourselves to encompass the most important and relevant qualities of each of those three types of providers. Thus, as we undergo this transition, we believe we are already in a position to navigate this divide effectively.

Your next question comes from the line of Seth Seifman with JPMorgan. Please go ahead.

This is Rocco on for Seth.

Good morning, Rocco.

Hi, Rocco.

CACI has invested recently in areas, including communications, network, battlefield, and CUAS, where some of these startup-type companies are investing. What gives management the confidence about the abilities coming to grow in those areas despite the new competition?

Yes. Look, I think competition is great. It actually forces everybody to keep their pencil sharp, and you learn new things. Now having said that, we've been doing a lot of what you mentioned for a long time. It's not just delivering the technology and expertise that our customers are asking for. The other three-quarters of the solve is understanding the customer's mission, okay? And I don't give a high-level example, actually a couple of them. Our commercial wireless providers today, I don't know what the percentage is, but not every call I may go through, not every request to get bandwidth and have my Wi-Fi router connect works. There's a thousand reasons why. In the missions that we serve, you don't get to give an excuse why it didn't work. It has to work, and it also has to know inherently how it is going to be used. We don't have a call center when your radio squawks something to get me out of a really bad place. Nobody has a call center to go call into. So there is a lot being said, a lot of other companies are in our space, and I think that's great. On the Counter-UAS side, there are five levels of drones from really cheap commercial ones through nation-state large ones. What's key to this nation outside of CONUS and within the U.S. is being able to find all five levels of drones, not just the plastic ones, not just the simple ones. So what I hear is all true. But when you take the next click down, it drives my appetite even larger because we look at all of these things as software defined because the threat is going to continuously change. We are always going to deliver software-based technology that's based on software. It is based on the premise that this code and theory are going to last in some instances for eight hours. That has to be updated, and it has to get to where all of our devices are around this globe. So the tactical part of the mission is very, very different. But again, new entrants mean new ways to look at problems. It means potentially new partnerships. But I like the hand we hold because we have a workforce that understands, as Jeff mentioned, taking the best of three different types of competitors, understanding software, and how to develop it at a very fast pace with high quality is what's going to change the U.S. protection as we go into other conflicts.

Okay. That makes sense. Then do you view the 6% of revenue from other federal civilian customers at risk from DOGE? Or is that revenue also inflated in your view?

Well, it varies. We identify that because that's the area that seems to be sort of a developing sense that, that may be a focus. But there are some things in there that we think still remain priorities. I mean we have about 1 point of that 6 is with NASA, for instance, which we see as probably being a little bit less exposure. We have some DOJ work there that I think may be less so. The answer is that it varies. But we thought it was useful for people to be able to examine that piece of the portfolio as you form your own opinion about where the risks may be.

Your next question comes from the line of Matt Akers with Wells Fargo. Please go ahead.

Good morning, everyone. This is sitting in for Matt. Regarding the EBITDA margins, we expect to see an improvement in the second half. Can you explain some of the factors contributing to this increase and what gives you confidence in this expectation, considering some of it may be related to timing?

Yes. The item I mentioned regarding the 11.1% in the second quarter will likely lead to a slight sequential decrease in margin in the third quarter, falling slightly below the 11.1%. Based on our guidance for the year, we anticipate that margins will improve in the fourth quarter, likely making it our strongest margin quarter. It's important to view the third quarter as relatively flat in revenue with a slight decrease in margin, followed by growth in both areas in the fourth quarter.

Okay. Makes sense. And then back to the M&A discussion. Obviously, you gave some early takeaways on Azure Summit and the Applied Insight deals. But can you just give us any more insight on how things are progressing on that end? And then just in terms of the pipeline, kind of what your appetite is right now, particularly now that you're just sub-3 times on leverage?

Yes, John may want to add to this. We have previously discussed our specific focus when it comes to acquisition targets, particularly businesses that are founder-operated or owned by a small group of individuals. We keep a list of these businesses and regularly stay in touch with them, as their development often moves at their own pace. This is influenced by their personal plans and priorities, and we frequently maintain communication for years before finalizing a transaction. By saying we are flexible and opportunistic in our capital deployment, we mean that we are assessing the preparedness of our targets along with market reactions and share price opportunities. As John noted, in the coming quarters, we will aim to further reduce our leverage to stay within the range we've shared with you, but we are prepared to act opportunistically as these targets and market forces evolve.

Yes. Let's see. You also asked how those two are doing. I'll start with Applied Insight. They're doing a great job of bringing their technology to bear across our intelligence community book of business, as we continue to move more applications to the cloud. They've given us a great purchase on talking to customers about being able to test and develop modernization to those apps as they go to the cloud in an unclassified manner, so that we can do much more in an unclassified world and then move that up to the classified side. So they're a great bunch of folks. They've done an awful lot for us. Azure, in my prepared remarks, said they just pulled down a $319 million award. We are already seeing the synergies of having both businesses together. This is the acquisition that is on the fastest track to full integration. With another quarter or two, it would be tough to tell where we are helping their business and where they are helping ours. We've watched them deliver with greater velocity. They are moving forward than some of the incumbents on their C-increment F job. Just to lay that out, the way this goes is C increment F and then it's Spectral enabling hits to go on into the ship. They have done an outstanding job of combining our engineering talent, both on the hardware and the software side and meeting with the Navy to actually show how much more nimble we can now be across all of those programs to ensure that we're getting features and software and different signals out to that fleet almost 16 months to 18 months earlier than what we had even planned. That integration is going very well and on their financials, as Jeff mentioned, they are right on top of the plan that drove our business case for that acquisition. So thanks for the questions.

Your next question comes from the line of Tobey Sommer with Truist Securities. Please go ahead.

Thank you. I'm curious about what the mandate to go back to the office five days a week, I don’t know, the government's part, means for CACI in the services industry? So what percentage of your employees are remote or hybrid that maybe Uncle Sam to be working on-prem in the future?

Yes, Tobey, thank you. I want to concentrate on what is within our control, and I’ll share my thoughts on this topic. As I mentioned earlier, during sequestration, the number of federal contractors providing daily support significantly decreased. If you look back seven to nine years, you can see the employee counts and the corresponding decline in revenue. On the contractor side, we make weekly decisions regarding our rates and what adjustments are necessary to maintain general and administrative expenses and overhead rates. We have adopted a strategic focus with zero-based budgeting, emphasizing the importance of making choices. I am uncertain about the impact this will have, as I don’t know the distribution of remote versus in-office workers within the federal government. Within our company, everything is driven at the program level, and we do not have a corporate-level statement due to our support for a variety of customers in multiple ways. Conducting classified work remotely is quite challenging. During COVID, we put in considerable effort to ensure national security while handling classified tasks. We will take a cautious approach and monitor how this situation unfolds. I am confident in our remote work policies, prioritizing customer needs and substantial security. If there is a mutual agreement with the government, then we may have personnel working outside government facilities. That’s about all I can share on that topic, Tobey.

That was helpful. What proportion of the company's revenue is priced on outcomes? And should the efficiency be the mantra of the four-year term? Where's the upper bound on where that could go, as a proportion of the company?

I would say that a significant portion of our technology work, around 85% to 90%, is based on outcomes. This means we have a clear statement of work and specifications that define exactly what we need. While there are some smaller areas where we provide individual labor on an hourly basis for the federal government, most of our work has shifted toward delivering technology solutions. This transition is why our R&D spending has increased and why we invest proactively. We don't just bid on jobs that involve a large workforce in a network operation center; we focus on opportunities that are at least software-based before we take them on. Our company has successfully made this shift. Thank you, Tobey.

Your next question comes from the line of Gautam Khanna with TD Cowen. Please go ahead.

Yeah, good morning. I apologize if you addressed this. I joined a little late. I was curious if you expect any sort of slowdown in the contract award adjudication pace over the next couple of quarters, given just the administration transition and the flag officers that get replaced and the like at the various DoD agencies. Any view on that?

I don't foresee a major delay today. Look, in the uniform service, those folks transition every two to three years. That's the normal, right? That's just the normal course of how they promote and how they train their leaders. There are a lot of distractions if you're a federal government employee. I'm sure there's a lot of distractions today more than you might have had two months back. But I don't see it at this point, Gautam, of that being a major idea here. Some of our awards that we are waiting for in the third quarter, those are going through the acquisition process now, and I just don't see any impact. Jeff, anything?

Yes, I agree with that. However, I would also add that the level at which the administrative work occurs here is likely less impacted by upper-level changes. It's not something we have identified as a significant concern for us.

And just as a follow-up, if there's any sort of reduction in the op tempo Ukraine, Israel, what have you. What is, if any impact to CACI?

Yes. Look, we've said that we learned a lot from the Russia-Ukraine war. A lot of people have learned. But we've also said that we don't have a material amount of business in either of those conflicts today. We are engaged and we are supporting, but that doesn't drive the financial outcome of this company. What will drive the financial outcome in a different manner is looking at international spending around how some of these threats are being received. We did talk about the fact that we're already delivering to Five-Eyes countries. We're delivering to NATO. We're looking at, in Eastern Europe, expansion. But again, I will continue to say we are in the relatively early stages. We’re looking at how FMS or OEM partners or direct commercial sales would work for our software-defined tech business. But today, in our overall FY ‘25 plan, it's de minimis.

Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Good morning, guys. And thank you for the question.

Good morning, Sheila.

Hi, Jeff, maybe if you could just talk about margins to start off with. I understand the product mix that I talked about in Q3. Exit rate does seem to imply Q4 closing in around the 12% mark. Maybe if you could talk about the puts and takes and how we think about that as you enter your next fiscal year to start off with.

Yes. If you look at the last couple of years, you will notice that we have developed a pattern of having higher margin in volume in quarter three or four than in one and two. We have done some work to try to smooth that out a little bit. Some of what you see in the second quarter margin is an artifact of that. But we do have certain customers whose buying patterns and the type of products and services they acquire, solutions that they acquire, are weighted to the end of our fiscal year. You will see generally the end of the year being heavier in terms of margin and volume.

Let me also share that, I guess, one click up. We still see upside potential to margin over the long term. We've been saying that for a number of quarters, but we are not going to short arm investments. We're not going to do unnatural acts. I think we've been very honorable to that. It's very strategic. It's not tactical to us. At the end of the day, our fair equation model is going to be based on free cash flow per share. I know you know well that margin is only one of those dials. So we'll keep focused on free cash flow per share and work on that mix between technology and expertise to continue to drive our margins.

Great. And then maybe if I could ask one, and you guys talked about this a little bit, just if you could provide an update on Spectral and how it's going, just given the development work there and how Azure is contributing. I think you mentioned in the Q&A, Azure won another follow-on. Do we think about that as incremental revenues heading into fiscal '26?

Yes, thank you. Spectral is progressing very well. You should consider that a customer with significant funding needs faces numerous open threats. There is a lot of opportunity there. We won the Spectral program with a strong focus on enhancing the speed, accuracy, and efficiency of the signals that surface ships need to monitor. We encouraged our customer to adjust their priorities as we advance through this program. We have successfully demonstrated a minimally viable product and received positive feedback and excitement from customers. This was the initial step of proof from the original request for proposals, which changed significantly by the time the contract was awarded. Despite minimal schedule and cost changes, we managed to integrate many of those signals. We are aiming for a production reference article in calendar year 2025, which will outline the full features of the Spectral system. Concurrently, since Azure joined us, we are looking at an early delivery of what we are calling Spectral enabling kits. These kits are designed to establish the foundation for the larger Spectral system, ensuring we install the core components and infrastructure on the ships as Azure upgrades them. Overall, the programs are progressing very well and are well-received within the Navy surface fleet. Additionally, there's the $319 million modification that Azure received, which collectively indicates the success of our acquisition strategy. We are confident that by collaborating and integrating our software with their hardware and software solutions, we can create a much more valuable product and drive growth into fiscal 2026 and beyond.

I think that addresses it. We see many opportunities with our Spectral business case. The initial integration and our recent work have really validated our decision and confirmed our confidence in it.

And in an era of efficiency, this kit that we're putting on a surface ship, it can ride on surface ships. It can ride it on army vehicles built on the ground and in the air. It is built with modularity in mind to make certain that it can be used on other Navy platforms as well. We see a nice growth path there. It's another step in proving that strategy is a place where we come from and we put our strategy in place. If we can get these three pieces together, here's how we can grow with this market but also serve our national security customers better. This is going to be the most recent case of that. So Sheila, thank you.

Your next question comes from the line of David Strauss with Barclays. Please go ahead.

Hi, good morning. This is Josh Korn on for David.

Good morning, Josh.

Good morning, Josh.

Just wanted to ask about capital deployment. And given the pullback in the stock, is there any more appetite for more share buyback than historically going forward? Thanks.

Yes. Look, we remain focused in the near-term on delevering that we've talked about. But again, I always look at every option. We're committed to being flexible and opportunistic. If we're going to get a quarter or half a turn down here on the leverage, get back well into the range that we've said we want to be in. We're always looking at every option. So thanks for the question.

We have time for one more question, and that question comes from Louie DiPalma with William Blair. Please go ahead.

John, Jeff, and George, good morning.

Good morning, Louie.

You are a leading provider in Counter-UAS detection and have mentioned the incidents in New Jersey. Are you pursuing domestic Counter-UAS opportunities, and do you see it as a viable market for your company?

Yes. Thanks, Louie. So we've been in the Counter-UAS market for almost two decades. Yes, we do have solutions and systems in some areas of the U.S. What I shared earlier on the call is for, in our opinion, what we need is a singular focus on how we are going to solve this inside CONUS. There are things and methods that you can use outside of the U.S. that you can't use inside the U.S. for a number of reasons. But today, we are the leading provider of those Counter-UAS systems in the U.S. and internationally. We have almost 5,000 solution sets and sensors out all over the globe. But the CONUS issue is a very important one. We all believe that they pose an absolute threat to this nation. That's why if I had my five minutes with a DOGE, we've been talking to the appropriate people at all levels of DoD, the Intel community. I like where we're at. I like the actions that DoD, the senior levels are beginning to take. But my only comment is, it needs to be more quicker, and that's the way we can see ourselves getting ahead of some of these incidents that have been in the press. It's always been a growth market for us. A lot of that growth we don't talk about because we do it for different customers. At the end of the day, it is a threat and one that we are very much aligned with the government on how we can all go out and solve it.

And John, I think you mentioned, as it relates to Spectral, that it would be possible to use that same system on other Navy platforms. How much work would it take, and have there been any indicators of interest that the Navy is looking to also modernize the other platforms?

Yes. Louie, I'm not going to share anything from a marketing BD side, but appreciate your question, and I'll answer it in this manner. I believe that where we are today, a new administration is looking at ways to do things differently, and funds are not endless. I truly believe that there will be more folks spending on how close is this solution to another problem I have and how do I solve that problem at the same time I’m solving this problem. Being an open architecture software-based solution, it automatically breaks vendor lock. It automatically allows other businesses across this great nation to provide software that can be quickly integrated into what's being put into these ships and a number of other areas. At the end of the day, a signal is a signal that comes in from an antenna and goes through several conditionings to come out as zeroes and ones, and there's a really smart AI machine language-driven brain. We build the AI machine language-driven brain. That's why I talk about AI when I talk about mission. It's great to use AI to find the cheapest blouse in a mall. It's way more important to make certain that this signal is one of these three foreign folks looking to do our folks harm, and here are two potential ways you can remove that threat, kinetically or non-kinetically. Yes, we have modularized the system. We've built it on DevSecOps and using Spectral development and Agile development, which is exactly what everybody is looking for today. The commercial companies do that today on a regular basis. As we've mentioned three times down the line, this call, we were purpose-built for this type of next move within the federal government. Yes, and this solution can be used across DoD, and just about every platform you have out there. We have many moves and we're beginning to have those discussions and demos and trials in other areas. This is a five-year to 10-year franchise win, which is what we shared when we won this job. I love the fact that we have the combination of Azure and our folks provide the Navy in this instance a really nice solution we can deploy quickly. So thank you for your questions.

And ladies and gentlemen, I will now turn the conference over to John Mengucci for closing remarks.

Thanks, Krista, and thank you for your help on today's call. We'd like to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you will have additional follow-up questions, and Jeff MacLauchlan and George Price and Jim Sullivan, are available after today's call to take additional. So everybody, please stay healthy, stay out of the cold, and all my best to you and your families. This concludes our call. Thank you, and have a great day.

Well, ladies and gentlemen, you may now disconnect.