CACI International Inc

Second Quarter Conference Call. Today's call is being recorded. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions and instructions will be given at that time. If you should need any assistance during the call, please press star zero and someone will help you. At this time, I would like to turn the conference over to George Price, Senior Vice President, Investor Relations. Please go ahead, sir.

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 two. 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 transcript of this call. I would also like to point out that our presentation will include a 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 three, please. To open our discussion this morning, here's John Mangucci, President and Chief Executive Officer of CACI International. John.

Thanks, George, and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal year 25 results. as well as our updated fiscal 25 guidance. With me this morning is Jeff McLaughlin, our Chief Financial Officer. Slide four, please. Our second quarter results represent another strong quarter on our way to a great year. We delivered revenue growth of 14.5%, EBITDA margin of 11.1%, and solid free cash flow. In addition, we won $1.2 billion of awards which represents a trailing 12-month book-to-bill of 1.7 times. As we've said many times before, quarterly awards can be lumpy due to timing, but the continued strength of our business can clearly be seen in our trailing 12-month book-to-bill, our pipeline, and our backlog. I'll also mention that Azure Summit, which we acquired during the quarter, received a significant award just prior to closing, a $300 million award on the C increment F contract with the Navy for new work over the next three years. While this award was not included in our reported awards number, it is reflected in our backlog, and is a great example of the value we're already seeing from that acquisition. And I'm pleased to report that the integrations of both Azure Summit and Applied Insight are on track, and both businesses are performing very well. Based on our performance and the continued momentum we see in our business, We are raising our fiscal 25 guidance, and Jeff will provide more financial details shortly. With the first half of FY25 behind us, we are well on track and confident in our ability to deliver on the three-year financial targets we laid out in our recent investor day. In addition, we continue to be well positioned to drive long-term growth and free cash flow per share in shareholder value. Slide five, please. Looking at the macro environment, we see three conditions that continue to be true. Healthy demand signals and funding streams in the markets we serve, support to increase spending in these key areas by the incoming administration, and the world continuing to be a dangerous place. Against those conditions, we are a national security company, a company that generates about 90% of its revenue by solving the most difficult challenges of the DoD, the intelligence community, and the Department of Homeland Security. We are focused on addressing critical, enduring national security priorities, which we continue to see as the focus under any administration. Slide six, please. Next, there's been a lot of attention paid by elected officials, the media, investors, and others regarding one of the new administration's key initiatives, the Department of Government Efficiency, or DOGE. Excuse me. DOGE has a number of stated objectives. including modernizing software information technology and networks across the federal government with a focus on interoperability, requiring new methods to address rapidly changing mission requirements in the national security environment, increasing the efficiency of government to get more for less while reducing the size of the government workforce, improving financial accountability, and reducing ineffective or wasteful spending through budget reductions and significant regulatory reform. As we discussed in detail at our investor day, our strategy is purpose-built to be successful in exactly this environment. At CACI, we have been and continue to be the leader in the use of software and investing ahead of customer need to develop and deliver high-value capabilities faster, more efficiently, and with greater flexibility. We have an exceptional track record of modernizing enterprise-scale software applications and critical networks. and delivering critical mission systems. We do that by using agile software development processes that take advantage of commercial-based DevSecOps and design our solutions utilizing open architectures. This drives technology that is more effective, more reliable, more secure, more interoperable, and more efficient, with AI-driven models that reduce operator burden and deliver more information faster at lower cost. Today, CECI is delivering exactly the things I just discussed. So let me give you a few significant examples. Slide seven, please. First, when we talk about modernizing enterprise-scale software applications, our portfolio includes the three largest Agile software development programs in the federal government, as well as many others of various sizes. Our Agile programs have a demonstrated track record of delivering impressive results modernized software, more releases at a faster pace, with higher quality and at lower cost. Our Beagle program with DHS Customs and Border Protection involves a continuous modernization of software applications, enabling border agents to perform at a high operational tempo against ever-changing requirements. On our FADE program, which we discussed at our Investor Day, we are updating data visualization software daily. to meet the demands of tens of thousands of analysts on classified networks 24-7 across the globe as they use multi-source intelligence data to execute national security missions. These programs have not only met or exceeded their objectives, they have also allowed customers to fund and move forward with additional technology modernization initiatives, which then drives growth for CACI as well. And it is this same velocity, quality, efficiency, and transparency that we are now bringing to NASA on our NCAPS program, which is ramping up on schedule. Moving to the modernization of critical networks, CCI is in development and delivery phases on seven programs across the federal government. We are regularly awarded these contracts because we are changing how network modernization is achieved. We are replacing costly, outdated legacy infrastructure with modern software-defined networks that are self-healing, more secure, more extensible, and lower cost over time because they require less human intervention. We are also delivering commercial solutions for classified, or CSFC, and multi-classification access to ensure that from the network cabinet to the endpoint device, the user has secure and ubiquitous access. Our SPECTRAL program continues to progress well and is a great example of applying technology to address rapidly changing national security requirements. CACI is developing the Navy's next generation shipboard weapon system for signals intelligence and electronic warfare. SPECTRAL is delivering mission critical systems designed with open architectures to avoid vendor lock and using software that can be rapidly and dynamically updated over the year. as threats dictate, so the ship stays on station versus having to return to port. With the ever-evolving threat in the DOPECOM theater, Spectral is exactly the type of program that will deliver capabilities at the speed of the fight that the Navy requires. And because of our differentiated approach and good performance, we are taking on adjacent work from other providers. Our Enterprise IT as a service program for the Air Force, known as ITAS, We continue to execute ahead of expectations and deliver increasing efficiency for the government. For the first time, both the Air Force and Space Force have a modern IT service management system in place to provide support across the entirety of both services. This next generation program is currently supporting nearly 700,000 Air Force and Space Force personnel globally. It will be fully deployed to support nearly 900,000 airmen and guardians later this year. Importantly, the efficiencies delivered by ITAS will enable thousands of airmen and guardians to transition from providing IT support to more direct warfighting roles. Finally, I want to highlight our work enabling successful financial audits by government agencies. Our work on the Defense Agencies Initiative Program, or DAI, provides a single financial management ERP system. implemented and supported by CACI as a service across the DoD. Today, of the seven DoD agencies that utilize this system and are audited annually, six have received clean financial audits, and the seventh agency improved its rating in its first year on the system. And notably, one of the six agencies receiving a clean audit is the United States Marine Corps, the only armed service utilizing the system, supported by CACI, and the first branch of the US military ever to receive a clean audit. This is how we can drive even more financial transparency and accountability from the DoD going forward. Executing on programs like these strengthens our credibility with customers, drives on contract growth, and builds differentiation and past performance that enhances our ability to continue to win new work. And importantly, All of these examples align very well with the objectives of this new administration. And beyond how we align and perform against these technology and efficiency-based DOGE goals, we have also minimal exposure to the civilian side of the federal government, where regulatory reform is more likely to lead to budget reductions. In fact, as we showed on chart 5, only 6% of our total revenue comes from other federal civilian agencies. which is a material differentiator relative to our peers. Slide 8, please. In summary, through our strategy and our execution, we have combined the best qualities of our competition, the discipline and structured processes of A&D primes, the agility and mission knowledge found in government services providers, and the speed, innovation, and software focus of the commercial world, all within a 60-plus-year-old company that understands the critical missions of national security and, has a track record of performance unmatched in the industry. The result is strong financial performance, confidence in our three-year financial outlook, and the ability to drive long-term growth and free cash flow per share and shareholder value under any administration. With that, I'll turn the call over to Jeff.

Thank you, John, and good morning, everyone. Please turn to slide nine. In the second quarter, we generated revenue of $2.1 billion representing 14.5% growth as reported. Organic growth was 8.1% or 14.3% on an underlying basis. Second quarter EBITDA margin of 11.1% represents a year-over-year increase of 180 basis points, which was driven largely by business mix and timing. EBITDA margin came in above our mid-10s expectation, primarily due to some software-defined technology deliveries pulled forward into the second quarter, as well as some lower margin material purchases pushed into the third quarter. Executing, I'm sorry, excluding those timing related items, second quarter EBITDA margin would have been consistent with our prior expectations. These timing related items are expected to be offset in our third quarter EBITDA margin, though our full year margin outlook remains unchanged. Adjusted diluted earnings per share of $5.95 were 36% higher than a year ago. Greater operating income more than offset higher interest expense and a higher income tax provision. Second quarter operating cash flow, excluding our accounts receivable purchase facility, was $76 million, reflecting strong profitability offset by higher working capital. Days sales outstanding, or DSO, were 53 days, Free cash flow for the second quarter was $66 million. Slide 10, please. Second quarter net debt to trailing 12 month EBITDA was 2.9 times on a pro forma basis following the acquisitions of Applied Insight and Azure Summit. As we've previously discussed, we'd like to run the business with leverage in the two and a half to three times range. We remain well positioned to deploy capital in a flexible and opportunistic manner to drive long-term growth in free cash flow per share and shareholder value. Slide 11, please. Recall that we raised our fiscal 25 guidance in the first quarter as a result of greater organic business momentum and the acquisition of applied insight. We then increased our fiscal 25 guidance again at our November 8th investor day to reflect the closing of the Azure Summit acquisition. With the continued momentum we see in the business, we're pleased to again be raising our fiscal 25 guidance. We're raising our revenue guidance to be between $8.45 and $8.65 billion, all due to stronger organic growth. This represents total growth of 13% to 16% on an underlying basis, which includes six points of growth from acquisitions. We continue to expect fiscal 25 EBITDA margin to be in the low 11% range consistent with what we communicated to you at our investor day. And we expect EBITDA margin in the second half to be more weighted to Q4 versus Q3 given the timing items I just discussed. As a result of our higher revenue outlook combined with a lower effective tax rate and reduced interest expense, we're also increasing our FY25 adjusted net income guidance to be between $537 million and $557 million. This yields an attendant increase in adjusted EPS to between 2387 and 2476 per share, representing growth of about 13 to 18 percent compared with last year. And finally, we're increasing our free cash flow guidance to at least $450 million, As we have said before, we see free cash flow per share as the ultimate value creation metric, and our FY25 guidance now implies 80 percent growth in free cash flow per share. Slide 12, please. Turning to forward indicators, our trailing 12 months book-to-bill ratio of 1.7 times reflects strong performance in the marketplace. Our backlog of $32 billion increased 18 percent from a year ago, and represents just under four years of annual revenue. These metrics provide good long-term visibility into the strength of our business. For fiscal year 25, we now expect approximately 95% of our revenue to come from existing programs, with approximately 3% coming from repeats, recompete, and about 2% from new business. Progress on these metrics reflects our strong operational performance It underpins our confidence in our updated expectations for the year. In terms of our pipeline, we have $12 billion of bids under evaluation, around 75% of which are for new business to CACI. This significant sequential increase in bids under evaluation reflects our strong business development performance and the sometimes lumpy timing of RFP issuance, proposal submission, and award decisions. We expect to submit another $13 billion in bids over the next two quarters, with around 70% of that being for new business. Expected submissions are consistent on a sequential basis, reflecting continued healthy demand in our key areas of focus. In summary, we delivered another quarter of strong results. We're seeing healthy demand from our customers as they focus on critical national security priorities. And we continue to win and execute high-value, enduring work that supports long-term growth, increasing free cash flow per share, and additional shareholder value. And with that, I'll turn the call back over 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 CCI for where the world is going. It 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 in differentiated capabilities to show our customers the art of the possible. And 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, their 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. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you would like to withdraw that question, again, press star one. We ask that you please limit yourself to one question and one follow-up. For any additional questions, please re-cue. Your first question comes from Scott Mikus with Milius Research. Please go ahead. Morning.

Morning, Scott. 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've had a meeting with the incoming administration and if you were to make recommendations to them, what would they be and why?

Yeah, Scott, thanks. Um, look at a high level, um, 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 at 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 of 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 US is very different than outside the continental US. I would ask that on the regulatory side that 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. And I truly believe if we want to make a difference, authorities and who they are granted to will make a world of difference in understanding what those threats are. And I think last, rather than putting a timeout flag on protests, I 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 a near unblemished record of protests, like we do in 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've 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 on, frankly, a very rampant habit of, you know, 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. So there's 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?

Yeah, Scott, you know, we have talked about this phenomenon even before the election and the most recent derating. We've seen some moderation in multiples already. And if you look at our recent acquisitions, you'll see that we have found ways to take advantage of that. This has almost certainly sort of further tamped them down a little bit. You know, 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 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. So, frankly, we're 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 sub-deployment, whether that be M&A, 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 results. Hey, John, so... In the spirit of kind of a Doge question, there's a lot of talk around that they view the civilian side within the national security space to be kind of a bloated workforce. And if we start seeing reductions there, does that become an opportunity for someone like CACI in terms of either deploying technology or your software or just getting more potential outsource work? How do you think about that?

Yeah, Peter, when I listened to some of these initial goals, it sort of brought me back to the first days of sequestration, you know, where most of us couldn't spell it and all of us couldn't know how it was going to play out. Look, I think... What they did with sequestration was, frankly, took the very quick ax, right? Let's reduce the number of federal contractors in all of our offices and doing work, because that immediately saved money. And 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 it's, in my mind, it's sort of an easy connection that as they remove staff that are tied to mission, that that is an additional opportunity for us to be able to drive additional growth. Look, we get time tested every day. Our contracts only last so long. We are open today. We open 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. You know, every time we deliver another AI solution, we can get more done with less folks. And then the government has to make that call, whether those folks move on to other work, or whether they become a reduction.

I appreciate all the color. It seems like you're really well positioned there. And then just a quick one for Jeff. Can you remind us what the target leverage is kind of where you want to be before you resume any potential share repurchases?

Yeah, we've said two and a half to three times, and we're just at the top now inside that range. We ended the quarter at 2.9%. We'd like to be a little less, but we are in a range now where we have the ability to be flexible and opportunistic. So we'd like to be a little bit less levered than we are, but we have a range of options open to us, you know, right now. 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 or what is your appetite to actually expand into C billion if this, like, Doge initiative were actually be able or, like, would be focused on, like, IT modernization? financial management and all those, like, added efficiencies in a more, like, civilian type of, like, agencies? What is the ACI's appetite to go towards those type of opportunities?

Yeah, Mariana, thanks. Look, you know, in my prepared remarks, we actually talked about a number of those areas. Like, you know, as the government moves towards modernizing more networks, as they look to driving more IT modernization, We are fully in that marketplace today. And long before Doge and long before the election, we've been that company talking about invest ahead of customer need and also show 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 show that they can all 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, and we're 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. It'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. And 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, and 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 the following one is probably to both of you. There have been investor concerns about what, this like appetite for more like commercial terms could mean for like cost plus contracts. And with like about like 60% of your contracts under cost plus, what are the challenges and opportunities you see if the government were to focus on more like commercial terms, fixed price type of contracts?

Yeah, thanks. Look, this is, I guess first off, we have an appetite anytime the government buys an outcome versus buying inputs. You know, there's a lot of positiveness, and there's a couple ways this could go down. The more we see firm fixed price contracting versus cost plus, that is a positive for us, and we do have a large appetite for that. Again, cost price versus firm fixed price is an element of risk. Okay, that's what it comes down to. If you're doing something for the first time and it's an amazing engineering feat, I don't know anybody who would take a firm fixed price arrangement. But firm fixed price to us is well known. I mean, I have to remind everybody, the majority of our software-defined technology is delivered by our commercial businesses of this company. So we've been, for at least the last seven years, have a lot of experience with outcome-based contracting, where we do the investment up front, we share the art of the possible, and then where we can sell that solution as an end-item, software-driven part of technology. That's a nice trade for us, and that's been, as you all know, very much behind our margin increases. Jeff, anything?

Mariana, I'd build on John's point by referring you back to one of, I think, one of John's last slides where he talks about the competitors and the profiles of the traditional primes, the government services, and the commercial providers. We have, to the extent that there is sort of an inflection point here in business model and contracting approach, We have very deliberately positioned ourselves to have taken the things that we think are most important and most relevant to the qualities of each of those three types of providers and put ourselves squarely in that spot. So to the extent that we're in a sort of state of transition here, we feel like that's a divide that we're already straddling. Thanks.

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

Good morning. This is Rocco on for Seth. Morning, Rocco. 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 ability of companies to grow in those areas despite the new competition?

Yeah, look, I think competition is great. It actually, you know, forces everybody to keep their pencil sharp, and, you know, you learn new things. Now, having said that, we've been doing a lot of what you mentioned for a long time, and it's not just delivering the technology and expertise that our customers are asking for. You know, the other three-quarters of the solve is understanding the customer's mission, okay? And, you know, I don't give a... A high-level example, actually a couple of them. You know, our commercial wireless providers today, I don't know what the percentage is, but not every call I make goes 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. It also has to know inherently how it's going to be used. And 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's a lot being said. A lot of other companies are in our spaces, 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, you know, because we look at all of these things as software-defined because the threat's going to continuously change. So, you know, we are always going to deliver software-based technology that's based on software, that's based on the premise that this code and this theory is going to last, in some instances, folks, for eight hours. And it has to be updated. 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 entrance means new ways to look at problems. It means potentially new partnerships. But I'd like to position, 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, understanding how you develop it at a very fast pace with high quality is what's going to change the U.S.' 's protection as we go into other conflicts.

Okay, that makes sense. Ben, do you view the 6% of revenue from other federal civilian customers as that risk from DOGE, or is that revenue also inflated in your view?

Well, it varies. You know, we identified 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, you know, we think still remain, you know, priorities. I mean, we have About one point of that six is with NASA, for instance, which we see as probably being in a little bit less exposure. We have some DOJ work there that I think may be less so. So I think 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.

Thanks, Rocco.

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

Yeah, hi, guys. Good morning. This is actually Kyle Macular sitting in for Matt. So just in terms of the EBITDA margins, obviously things will step up a bit in the second half. So I guess can you just walk us through some of the factors in that step up and what gives you confidence there, recognizing some of that will be timing related?

Yeah, the mix item that I referred to in the 11.1% in the second quarter will probably should manifest itself in a slight sequential fashion. reduction in margin in the third quarter, a slight reduction from the 11-1. And then if you take our guidance for the year and you solve for the fourth quarter, you'll see that we expect the margin to tick up, and that's probably our strongest margin quarter of the four. So I think that's probably the right way for you to think about it. But you ought to think about the third quarter as being kind of sequentially flat in revenue and a slight contraction in margin, and then increases in both in the fourth quarter.

Okay. Makes sense. And then back to the M&A discussion, you know, obviously you have some early takeaways on Azure Summit and the applied inside deals, but Can you just give us any more insight on, you know, 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, you know, just subbed three times on leverage?

Yeah, John may want to add, will probably want to add to this, but we've talked before for the last several quarters about the fact that our sweet spot in terms of acquisition targets is a little bit specific in that we're often involved with businesses that are founder-operated, owned and operated, or, you know, owned by an individual or a small group of individuals, and we maintain a list and we sort of regularly stay in touch with them, and they all sort of develop at their own pace. You know, they're often... often driven by potential sellers' personal plans and priorities, and we continue to monitor and maintain regular dialogues, in some cases for years, before we eventually have a transaction. So when we say flexible and opportunistic in terms of capital deployment, we're balancing what we see in the ripening of the targets in the pipeline, along with, you know, market reaction and, you know, potential opportunities around share price. So, as John mentioned, over the next couple quarters here, we're going to focus on sort of further delevering to be well within the range that we've given you, but we're ready, you know, at any time to to act opportunistically as those targets develop for as we see market forces.

Yeah, 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. Within another quarter or two, it will be really tough to tell where we're 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. They're seeing increment F job. And just to lay that out, the way this goes, it's seeing increment F, and then it's spectral enabling kits that go on to the ship, and then it's spectral. So they've done an outstanding job of combining our engineering talent, both on the harbor 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 make sure that we're getting features and software and different signals out to that fleet almost 16 to 18 months earlier than what we had even planned. So 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 Toby Summer with Truist Securities. Please go ahead. Toby, your line is open.

Thank you. I'm curious about what the mandate to go back to the office five days a week on the government part means for CACI in the services industry. What percentage of of your employees are remote or hybrid that maybe Uncle Sam will want to be working on-prem in the future?

Yeah, Toby, thanks. So I want to focus on what we can control, and I'm going to go on a small limb here. Because I think it was released yesterday, if I remember right. So I'm definitely not the national expert on it. So with that as a disclaimer. Look, as I mentioned, during sequestration, the number of folks from federal contractors who were providing day-to-day support came down materially. You can see that. And if you went back seven or eight or nine years, you actually see what the employee counts were. You also see where revenue came down. Look, at the end of the day, We on the contractor side, we make decisions every week around our rates and what we need more or less of to maintain G&A and overhead rates. We move to a strategic focus with zero-based budgeting. It's all about making choices. I don't know what the impact is going to look like because I don't know where there's more remote workers in the federal government versus less. But, you know, in our company, everything is driven at the program level. We don't have a, you know, corporate statement. And that's because we support so many different customers in so many different ways. It's tough to do classified work or any work that's in a SCIF from home, okay? But on the other end of that, we did work pretty hard during COVID to find a way to keep the station protected while we were working on classified work. Okay, so I think, you know, we're going to sit and wait and understand how this plays itself out. I'm very confident in our work from home or work remote policies that we have. It's customer first, essential security first. Then after that, if there's an agreement between the government and us, then we'll have people working from a location other than in a government facility. Probably all I can share on that one, Toby.

That was helpful. What proportion of the company's revenue is priced on outcomes, and should 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?

Look, I would say outcome-based is you could take all of our technology work, and you can probably add another – you know, 20 to 30, I'd say probably 85 to 90% is outcome-based. And, you know, that's a different word, right? Because, you know, outcome-based for us is we have a statement of work and a specification that says this is exactly what we need. There are other areas, but very small. As you all will remember, we were an 80% services company and a 20% technology company when we made this switch. There are very few instances where we have taken on providing an individual in a slot on a labor hour basis to serve at the behest of the federal government. The majority of our work has been transformed so that whether we're building satellite ground stations, whether we're doing work in a labor hour type manner, We're actually delivering technology to those customers, and that's been part of the long-term transition that this company made, which is why our IRD spend is up, which is why we invest ahead of customer need, so we're not left to bid on jobs that are purely 200 folks working in a network operation center. We have to see an outcome that is at least software-based before we'll even bid on that work. So this company, different than many others, has made that transition. Thanks, Toby.

Your next question comes from the line of Guantanam Khanna with TD Cowan. Please go ahead.

Yeah, good morning, and 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 quarters, given just the administration transition and You know, all the flag officers that get replaced and the like at the various DOD agencies. Any view on that?

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

Yeah, I mean, the level, I would just add, I agree obviously with that, but I would also add that the level at which, you know, the administrative, you know, work happens here is probably less affected by upper level rotation. You know, it's not an area that we've identified as any particular area for us. Thank you.

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

Yeah, look, we've, we've said that we've learned a lot from the Russia Ukraine war. Um, a lot of people have learned a lot, but we've also said that, um, uh, we, um, 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. And we did talk about the fact that we're already delivering to five high countries. We're delivering to NATO. We're looking at an Eastern Europe expansion. But again, I will continue to say we're 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 FY25 plan, it's de minimis. Right. Thank you.

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

Good morning, guys, and thank you for the question. Good morning, Sheila. Hey, I'm Jeff. Maybe if we could just talk about margins to start off with. You know, I understand the product commitments you guys 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.

Yeah, thank you, Sheila. If you look at the last couple of years, you will notice that we have developed a pattern of having higher margin and volume in quarters three and four than in one and two. And 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, is weighted to the end of our fiscal year. So you will see generally the end of our fiscal 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're not going to short-arm investments. We're not going to do any actual acts. I think we've been very honorable to that. It's very strategic. It's not tactical to us. And, you know, at the end of the day, our value creation model is going to be based on free cash flow per share. And 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, you know, just given the development work there and how Azure is contributing. And I think you mentioned in the Q&A, Azure won another follow-on. Do we think about that as incremental revenues heading into fiscal 26th?

Yeah, good. Thank you. Look, Spectral is going very, very well. You know, you have to sort of picture that as a customer that has a lot of funding needs, a lot of open threats. In no pay comm, there's an awful lot of water there. You know, so how does this play? We also won the Spectral program very focused on the fact we were going to work on velocity and accuracy and efficiency as to the signals that these service ships need to worry about the most. And we allow the customer and challenge the customer to change those priorities as we go through this program. We successfully demonstrated a minimally viable product. We got really positive feedback and a lot of customer excitement around it. That was the first step proof of the signal set that was in the original RFP changed quite dramatically by the time the award was made. And without a lot of schedule movement and without a lot of cost movement, we were able to bring a lot of those signals in. We're working towards a production reference article in calendar year 25, which is sort of the full lay down of what will be in the spectral system. At the same time, since Azure has joined us, we really looked at a preliminary delivery of what we're calling spectral enabling kits. And those are intended to sort of lay the groundwork for the larger spectral system. But we want to put the heart and the brain and the infrastructure on those ships as Azure is doing their ink F upgrade to those ships. The bottom line is the programs were guessing very, very well. It's very much in favor within the Navy surface fleet. And your last part of that is, look, there's the $319 million mod that Azure received, which is now all of us together, is the best indicator of why we did this acquisition. Okay, we firmly believed that as we started working together and share what we're doing in software and take some of their hardware and their software solutions, that together we could drive a much more valuable product. And to your last question, drive growth as we get to 26 and beyond.

Right. Yeah, I mean, I think that's covered it. We are, we see a lot of opportunities around our spectral business case. The initial The initial integration and the couple months of work here have really validated internally for us, really confirmed the wisdom of the decision.

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 on Army vehicles, both 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. So we see a nice growth path there. It's another step in proving that strategy is the place where we come from. Can we put our strategy in place? Instead of we can get these three pieces together, here's how we can grow with this market, but also serve our national security customer better. And this is going to be that 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. Hi.

I 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. Yeah, look, thanks for the question. You know, look, we remain focused in the near term on the delivering that we've talked about. You know, but again, you guys are tired of hearing us say this probably. But, you know, we remain committed to being flexible and opportunistic. And 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. And at the same time, we're always looking at every option. So thanks for the questions.

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

John, Jeff, and George, good morning. Good morning, Louie. You, CACI, you are the leading provider or one of the leading providers in counter UAS detection, and you mentioned the New Jersey incidents. Domestic counter UAS opportunities, is that something that you are pursuing and you view that as a viable market for CACI?

Yeah, thanks, Louise. 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 US. What I shared earlier on the call is for, in our opinion, what we need is a singular focus on how we're going to solve this inside of 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're the leading provider of those kind of 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. And we all believe that they pose an absolute threat to this nation. And that's why, you know, I had my five minutes with Doge. We've been talking to the appropriate people at all levels of the DOD and 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 more quicker. And that's the way we can see ourselves getting ahead of some of these incidents that have been in the press. So, yes, it's always been a growth market for us. A lot of that different customers. But 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.

Thanks. 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. And how much work... would it take and has there been any indicators of interest that the Navy is looking to also modernize the other platforms?

Louis, I'm not going to share anything from a marketing BD side, but I appreciate your question and I'll answer it in this manner. I believe that where we are today, a new administration looking at ways to do things differently and funds are not endless. I truly believe that there will be more focus spent 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. So being an open architecture software-based solution, it automatically breaks fender 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. It comes in from an antenna, and it goes through a number of conditionings, and it comes out in zeros 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's two potential ways you can remove that threat, kinetically or non-kinetically. So, yes, we have modularized the system. We have built it on DevSecOps and using spiral development and agile development, which is exactly what everybody's looking for today. The commercial companies do that today on a regular basis. As we've mentioned three times now on this call, we were purpose-built for this type of next move within the federal government. And yes, this solution can be used across DOE and just about every platform they have out there. And we have made moves and beginning to have those discussions and demos and trials in other areas. So this is a five to 10 year franchise win, which is what we shared when we won this job. And I love the fact that we have the combination of Azure with our folks provides 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 Mingucci 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 many of you will have additional follow-up questions, and Jeff McLaughlin and George Price and Jim Sullivan are available after today's call to take additional questions. 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.

Ladies and gentlemen, you may now disconnect.