Peter J. Arment — Analyst, Baird
Appreciate the call. Thanks.
Colin Canfield — Director, Cantor
Hey, thank you for the questions. We're maybe starting out with the Federal Acquisition Regulation. You mentioned it before, John. Just talk us through kind of where are we at in terms of the reform of the FAR, and how should we expect both the magnitude and timing in terms of impact on any kind of, we'll call it CACI, cost-plus exposure?
John S. Mengucci — CEO, CACI International Inc
Yeah. I mean, we're pretty much in line with the acquisition reform. There's a large number of EOs out there, and there's a large amount of print around driving from cost-plus to firm fixed price. And are we going to completely move from FAR Part 15 to FAR Part 12, or are we going to tuck elements of 12 into 15? We're just going to go 12. I mean, there's a whole bunch of different avenues.
What I like about what has come out and what's great for this company is that there's a new record recognition and understanding of exactly what FAR Part 12 is, right? I mean, I think you're seeing that tied to OTAs.
Look, at the end of the day, I think in items that are not highly specific but could be borne by our own corporate investments and taken to the government in an 80% solution manner, and then do some development work, co-development with government funds and our funds, then offer that into a long run of production.
I mean, I think that's the ultimate best way. We're seeing other long-term cost-plus programs, right, Colin? Those are trying to be moved into some different investment models, which is great. We don't possess any of those. So we're still doing some cost-plus work, but make no mistake, this company was intentionally built to have a FAR Part 12 commercial part of our business and a FAR Part 15. We're able to provide customers either and/or both. And it's really driven the $2 billion of electronic warfare that we've been talking about.
So we are very well poised to support where the government's going. TLS-BCT Manpack, outstanding example. Even RMT, even though it wasn't a specific OTA, they had a lot of investment on our part that then led to a larger production order. So I think we're probably the third or fourth inning of acquisition reform.
But for this company, I believe that our results have shown that we're well aligned, and we're going to drive even greater growth as we go forward. Colin, I'd add to John's point. We really are finding our rhythm here on OTAs. We've seen two and a half times the level of OTA contracting in the last two years that we saw in the previous five years. So it's really a mechanism that we and our customers are well aware of and taking advantage of.
Colin Canfield — Director, Cantor
Got it. No, I appreciate that, Color. And then moving over to ARCA, maybe talk through kind of how you think about the scalability of the related intelligence services that you might gain or kind of grow over time thanks to the acquisition of the Danbury Optics business. Essentially, beyond just manufacturing work, I think back to when you first bought SA Photonics and essentially utilizing the space-based hardware to inform the intelligence business.
Maybe just talk through kind of how you think about that earnings algorithm and then the scalability of it and where there's any kind of roadblocks that we should think about in terms of data conflicts and the like.
John S. Mengucci — CEO, CACI International Inc
Okay. I'm going to unpack that one, Colin. Look, let me just start off by saying that I'll share what we can share. We're going to hold a lot of discussions around financials and backlog and the like until we get that across the finish line and we close. But it suffices to say that it's great for us to be able to share what we see in this company and in the business.
They are a leading developer and supplier of sense and sense-making capabilities. Make no mistake, they are involved in just about every critical national security mission. What I liked about it, similar to this company, they're at the forefront of technology developments, and they've been there since the Cold War. So these capabilities are not new. How they have to deliver is not new.
The architectures that ARCA delivers into literally have acquisition plans that go out as far as planning goes to around 2040. They are right in the middle of long-term growth funding streams for both DOD and classified and aerospace budgets. They're focused on the fastest-growing parts of the market. Their laser warning systems are equipment of record on every platform to which they deliver.
And then talking about the Danbury business to your other set of questions, extremely high technical barriers to entry. It's an environment of constant capability and upgrades. Their contract portfolio, combined with their outstanding record of execution, even in fixed-price environments, does distinguish them with their customers. When I looked at this business, and we've been studying it for quite a long time, the folks at BlackRock continued to invest in this business. Blackstone, sorry. Continued to invest in this business.
They continued to understand that the national security world needed an asset like ARCA, so they didn't hold it for five years. They grew it, and they invested in it. What I like about them is they invest ahead of need. They innovate and execute with agility. They deliver predictability given cost and schedule focus, so they are well set up to the earlier question around acquisition reform.
They are well understanding of cost-plus versus firm-fixed-price. They do have a tremendous backlog that we'll be able to talk about when we get, hopefully, as we get to the end of our third quarter, and we shouldn't ignore the sense-making part of their business. That's a lot of work that they do similar to us in an Agile software development manner. They work on parts of the intelligence data. We work on other parts.
They do some things that we don't do. We do some similar things. But they have differentiated capabilities. They have long-duration contracts. They're involved in very critical national security programs. Nothing speaks larger than this company doubling down again in the space market than this acquisition.
I know it drives our leverage up to 4.3 and such. We have the right buy-down mechanism. At the end of the day, you make bold investments to drive bold growth. And that's what this acquisition is about. And this is why we're very involved in the space market and driving future growth there. Appreciate the questions.
Colin Canfield — Director, Cantor
Thank you.
Seth Seifman — Executive Director, JPMorgan Chase
Good morning. This is Rachel on for Seth.
Morning, Rachel.
John S. Mengucci — CEO, CACI International Inc
Morning.
Seth Seifman — Executive Director, JPMorgan Chase
Digging more on Peter's question, how are you thinking about CACI's addressable market from the reconciliation bill, both for CEOs in general and Merlin more specifically? And how are you thinking about that market growth in the coming years?
John S. Mengucci — CEO, CACI International Inc
Yeah. I knew as soon as I shared that we had a $2 billion slice of revenue in EW, we'll be all looking for growth rates. News flash, I'm probably not going to share what we see. But look, the reconciliation funding will do a lot in the EW area because, as you all know, we consider counter UAS being part of our EW market. It's probably worth spending just 20 seconds on why we answer questions like this, like that, okay?
If we provide a cyber effect to mitigate a dangerous drone, is that cyber or is that counter UAS? The answer is it's all EW. So that's why we lump this in one area. Because we share software baselines, we share talent, we share technology solutions. So the reconciliation dollars is tens of billions of dollars to our addressable market.
We continually assess that, as many on this call know. We're looking at about a $300 billion TAM. We're roughly a $9.4 billion company. Plenty more room to go grow. Even though that reconciliation funding is driving that, the world of counter UAS is going to completely explode beyond what the reconciliation funding needs. We're involved in our national marketplace. You mentioned Merlin.
We've done some outstanding work there. It suffices to say in the counter UAS area, there's no less than about 25 acquisition organizations that have stood up. I actually brought some of my notes. There's eight within DOD, six within DHS. You've got DOT, the FAA, Department of Justice, Department of Energy, Department of State, and Department of Elemental Fee. There's a lot of folks out there. The acquisition infrastructure is just getting set.
We're actively engaging to expand our presence specifically with Gietta 401, DHS, and then Golden Dome. So there's a great spend looking to be done here, and we are extremely well positioned.
Seth Seifman — Executive Director, JPMorgan Chase
Great. Thanks. And then are there any specific items to call out in the civil business? News over the last year plus has been pretty negative about the demand environment, and yet CACI has grown in the mid-teens on average over the period.
John S. Mengucci — CEO, CACI International Inc
Yeah. That's really dominated by our CBP work, DHS work, and the ramp-up on NASA and NCAPS. So it's a little different flavor of civil than you may see in some others, really driven by DHS and NASA.
Seth Seifman — Executive Director, JPMorgan Chase
Great. Thank you.
John S. Mengucci — CEO, CACI International Inc
Yeah. Thanks, Rachel.
Scott Stephen Mikus — Director, Melius Research
Morning, John and Jeff.
John S. Mengucci — CEO, CACI International Inc
Morning.
Scott Stephen Mikus — Director, Melius Research
A quick question. With all the acquisitions you've made over the past 14 years and the announced deal of ARCA, I tend to find that you're shifting more away from services, and you're increasingly becoming defense electronics suppliers, in particular L3Harris.
But just given that the government is actually taking an ownership stake in L3Harris's missile solutions business, do you think that puts CACI and L3Harris's other competitors at a disadvantage when competing for work with the Pentagon, given that the government will own a stake in L3Harris?
John S. Mengucci — CEO, CACI International Inc
Yeah. So awesome question. Look, we see what's going on, and we've read about all of those various engagements. But at the end of the day, we're seeing outstanding demand for our technology that we deliver. We're able to meet that demand. We continue to execute our business well. We continue to invest ahead of need and have access to capital should we need to enhance our delivery capabilities.
See, what makes us different is that we got into the market at a time where we expected that because of one of the earlier questions, because of the OpTempo and because of the need to not only protect other countries and other nations and our interests abroad, but also defend our nation, that it was going to require the fact that we would ourselves begin to invest ahead of customer needs. So we are one of those companies.
We have a NAICS, GICS, whatever code you want to call it that makes us a government services company. But it's been a number of years since you all asked me what my bench strength is. It's been a number of years since you asked me what my direct labor numbers were because we're not that company. So I enjoy being compared against others who are trying to make changes to adjust. Okay?
Those are changes you make because change has been presented. We've actually built this company purpose-built in this last instantiation of CACI to be in seven markets with strong funding streams that drive shareholder value in year-over-year growth, regardless if the government shut down or not, regardless if reconciliation budgets are slightly behind plan. Okay? We're not a quarter-to-quarter company. We're a year-to-year, and we're going to be a decade-to-decade company.
We are exactly driving this business and measuring ourselves to make sure we are providing eye-watering technology to the warfighting and intelligence community. That's what makes acquisitions like SA Photonics so important and LGS and Mastodon and ARCA and others that's driving where this company goes. I really appreciate that question. There's a lot of other things that are going on within this marketplace.
We focus on what we can control, and we like to think that we've got an outstanding strategy that moves along with the times. I think if you've been a shareholder in this company the last 10-12 years, you've been quite excited by the way we have navigated different funding forces and moving this company from delivering people to delivering enterprise and mission tech. Thanks for that question.
Scott Stephen Mikus — Director, Melius Research
Okay. And then just a quick question. I wanted to follow up on Merlin. I don't know if I missed this earlier in the call. But are there any ITAR restrictions or obstacles that would prevent you from selling that internationally?
John S. Mengucci — CEO, CACI International Inc
No. The actual system itself, no. There's a software load which has different ways to mitigate specific threats. And as you would imagine, like any weapons system, there are software and hardware provisos of what the U.S. government allows all of us in the defense technology space to be able to deliver.
So there will be some software provisos with that. But when it comes to defending this homeland, which is what Merlin was specifically built for, there are no issues of what we can do in the U.S. between finding and providing exquisite non-kinetic effects to remove this entire drone layer threat to the homeland.
Scott Stephen Mikus — Director, Melius Research
Okay. Got it. Thanks for taking the questions.
John S. Mengucci — CEO, CACI International Inc
Yeah. Thanks so much.
Jeffrey D. MacLauchlan — EVP and CFO, CACI International Inc
Sure.
Tobey Sommer — Managing Director, Truist Securities
Thank you. I was wondering if you anticipate another strong year of defense spending growth in 2027. The president articulated a relatively large indication, and I'm wondering what your thoughts are on the matter.
John S. Mengucci — CEO, CACI International Inc
Yeah. Toby, thanks. Look, I did read the government fiscal year 2027 tweet of $1.5 trillion. A little extra color. I believe it's supported by SASC and HASC, but I'm not clear whether it has support of the appropriators. I think we've got a little bit of time to see this one play out, and I also think it's still early, so we'll have to wait and see what comes from the government fiscal year 2027.
President's budget request, from what I understand, will be a little bit later this year because it usually tags along when the State of the Union announcement is, so we may see it a few weeks off. But look, I've often said this company where I don't focus on the budget top line. Either way, our $300 billion TAM for a $9.4 billion company, I think we have plenty of room to grow.
We have shown that when budgets have decreased and when they've increased. I think we're in the right markets, the right capabilities, and the right customer sets, and at the end of the day, in the national security realm, if the threats present themselves, I've never seen this nation not invest to protect us either abroad or at home.
Tobey Sommer — Managing Director, Truist Securities
Thanks, John. My follow-up would be of the large marquee contract wins that the company has won over the last maybe few or handful of years, how much incremental program ramp remains in front of the company to help support future growth?
John S. Mengucci — CEO, CACI International Inc
Yeah. That's no small amount. I mean, some of the recent contract programs that we've won, we've talked about the fact that the changing profile is such that the early phases of the program are really focused on designing and developing the balance of the program. In fact, we're still seeing growth in ITAS. Earlier in this call, we talked about the fact we pointed out the growing NASA and NCAPS activity, even though those wins were still a couple of years ago.
So if you think back to the ramp profiles that I talked about in our investor day, I guess over a year ago now, there were three or four sort of standard profiles, and most of our longer-term wins have been the profile where we don't really sort of reach our max until we're a good three or four years into the program. We have wins from the last several years that are still ramping up. Yeah. Toby, I'd also add a perfect example of that would be Spectral, right?
We're in our third year, I believe, on Spectral. We have just recently done all the paperwork and testing that we needed to submit that would lead to a Milestone C decision, and that is one that once we receive that, that allows us to get into low-grade initial production, which then starts to ramp Spectral. So just one of many examples. Yeah. Exactly. Right.
Jonathan Siegmann — Managing Director, Stifel
Thank you very much.
John S. Mengucci — CEO, CACI International Inc
Bye.
Jonathan Siegmann — Managing Director, Stifel
Good morning, John, Jeff, and George. Thanks for taking my question.
John S. Mengucci — CEO, CACI International Inc
Yeah. Good morning. Sure, Jon.
Jonathan Siegmann — Managing Director, Stifel
Hey, so I thought margins were definitely good news for the quarter and the second time that it's really beaten your expectations. Maybe for you, Jeff, can you talk a little bit about what the drivers are? We noticed our indirect costs are third quarter in a row less than 21% of revenues. Just any one-time things to consider or how to think about the upside here? Thank you.
Jeffrey D. MacLauchlan — EVP and CFO, CACI International Inc
Yeah. Thanks, John. There's a couple of things going on in here. We've talked a little bit about mix. We continue to see favorable acceleration in the technology part of the business, which clearly has positive margin implications.
You also notice the indirect cost number. We're in our fourth year now of doing something that's pretty hard to do, which is reducing indirect cost as a percentage of running the business while we're in a strong growth mode. Organizations have a natural impulse to grow indirect cost in times of accelerating business activity, and we have been really hyper-focused on making sure that we don't do that.
So in absolute dollars, while there is some modest occasional increase in spots that's consistent with what we talk about often, and John has a lot to say about investing at a need, and we're certainly not giving any of those things short shrift.
We're investing where we need to invest, but at the same time, we're resisting the impulse to just sort of let the infrastructure grow as the top line grows. So both the technology revenue component acceleration and the management of the cost structure are both strong drivers of the margin performance that you see.
Jonathan Siegmann — Managing Director, Stifel
Thank you. And then maybe if I could flip one more for John. Recently, we've seen some unexpected displeasure with dividends and buybacks by the government among the contractors. So the majority of the industry prioritizes that, but CACI has only done opportunistic buybacks and prioritized M&A. So the question is: the Pentagon clearly is not supportive of large-scale consolidation, but how does the Pentagon react to the acquisition scale that CACI does? Thank you.
John S. Mengucci — CEO, CACI International Inc
Yeah. I mean, I haven't heard a lot about any blocking us to continue to do smart acquisitions that support the national security infrastructure, which at the same time then, as a product of doing that, drives shareholder value. Look, we've read the EO, and we are supporting it. We believe we're in line with it. We have strong execution. We deliver where we're asked to deliver.
We continue to invest ahead of need for probably seven years is where we've been on that model. There's been a lot of talk about some of the larger players divest us. Do we unwind the current DIB we have today? I don't see that reaching us on the unwind piece. Should that happen, we're a buyer of capability and customer relationships that continue to drive us forward in these seven markets.
And if that were to happen and were to become much more specific, is that an opportunity for us to look at pieces of other businesses that may have a better fit here that allows them to transform the parts of their business that are strongly FAR Part 15 and get into more of an agile commercial model so we can address the nation's needs better? Then that would be additional M&A opportunities for us. But I don't see anything that we're doing today that's in conflict with that EO, and we'll continue to watch where that one goes. Thanks, Jon.
Jonathan Siegmann — Managing Director, Stifel
Thank you. Thank you.
Mariana Perez Mora — Director, Equity Research, Bank of America
Thank you so much. Good morning, gentlemen.
John S. Mengucci — CEO, CACI International Inc
Good morning, Mariana.
Mariana Perez Mora — Director, Equity Research, Bank of America
So my first question is going to be around the Department of Defense wanting to hire more technical talent. They telegraphed that in the past, but then through this Advana transformation memo they put out a couple of weeks ago, they also mentioned that they want to hire more technical talent. What does that mean for CACI? Do you see any pressure to any FTE type of roles, or how are you thinking about that?
John S. Mengucci — CEO, CACI International Inc
Yeah. Thanks, Mariana. Yeah. I think it's January 12th was when that one came out. When we look at the Advana program, I think it's in three different teams. And just like a warfighter data platform team, the applications for the warfighter data, and then a financial management team. We look at that as a great opportunity on the financial management team. If I read the language correctly, it has a lot to do with financial and acquisition readiness systems.
And it's been this drive to drive a clean FY 2027 defense working capital fund and clean FY 2029 pan-agency audit. We're really big on financial modernization. We've got great examples with both the U.S. Air Force and the U.S. Marine Corps, and then we're already passing major audits. So for us, on that pillar, that one reads well.
On the war data platform team and the apps, we already do that across the federal government today. On the hiring piece, it's not a risk to us. We actually deliver technology in those areas. We don't provide FTEs. There may be other government services companies that do, but we're not one of them. We're out there delivering outcomes to customers in those spaces, which is why we don't track just pure FTE deployment.
And this isn't the first time the government's looked to "insource" or bring that kind of work in-house, but that's a good question for them to answer. But it just doesn't present. We don't see any threat from that EO.
Mariana Perez Mora — Director, Equity Research, Bank of America
Thank you so much. And one more trying to assess potential risks. And I think you have done, through the prepared remarks and the questions, a really good job explaining why you're well-positioned to commercial terms, fixed price, OTA.
But on the other side, do you see any risk for any of your existing early-stage programs to get canceled or stop work order or anything kind of like a stop and realign, redesign in order to have that contract or that program be more commercial in terms of 80% type of capability, but also being able to be higher volumes, ramp up faster, or even cheaper? Do you see that risk in any early-stage programs?
John S. Mengucci — CEO, CACI International Inc
Yeah. No. I mean, I don't see any risk. In fact, I like the opportunity of what the government's taken a look at. One example. You have two examples. One would be Customs and Border Protection, our BEAGLE program, and one might be TLS Manpack. If you look at BEAGLE, we approach the customer and ask them, "Why are you buying 400 FTEs when you should be paying a fixed rate for every new upgrade to every app that you have?"
So we were ahead of government thinking on that and worked with a tremendously creative acquisition folks at DHS within Customs and Border Protection to actually put that program in place, and that's driven two other customers, NASA and NCAPS, Transcom, JTMS. They're not buying people. They're actually putting task forces in place to actually deliver outcomes.
On the TLS-BCT Manpack one, look, that was a job that was owned by a major defense contractor. And we went and we approached the Army with a concept of, "Let's put an OTA in place. Let's do some development work. And then let's take our 80% solution and see where you can go with that." So those are both examples of not the government coming to us and asking us to change what we're currently doing. We actually approached them or we were in concert with them on TLS-BCT Manpack.
So the OTA model does work. You have to be willing to invest upfront. You have to have mission knowledge, and you have to have something that the government absolutely needs and wants. And that differentiates us every day, including Sundays.
The one thing we need to understand about OTAs that we're going to see as the government moves more towards that, you're going to see smaller initial awards for the development work, but it's going to lead to a faster, larger production value of awards. So when I think about and I wouldn't call it risk,
Mariana, but when I think about how we look at businesses like ours, we're used to nailing down multi-billion dollar awards. In the pure technology areas where a customer is going to do FAR Part 12, the initial awards are going to be $1 million to $5 million or to $7 million. But much sooner than that, we'll see that actual full-scale production award come out. And that's what you saw with TLS-BCT Manpack, a $1 million initial award and a $500 million production contract.
Jeffrey D. MacLauchlan — EVP and CFO, CACI International Inc
Yeah. The size will not correlate with the strategic significance.
John S. Mengucci — CEO, CACI International Inc
Thanks, Mariana.
Mariana Perez Mora — Director, Equity Research, Bank of America
Thank you so much, for the Color.
John S. Mengucci — CEO, CACI International Inc
Yeah. You bet.
John S. Mengucci — CEO, CACI International Inc
Morning, John.