CACI - NYSE

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Fiscal 2025 Second Quarter Conference call. Today's call is being recorded. At this time, all lines are in a listen-only mode. And later, we will announce the opportunity for questions and instructions will be given at that time. [Operator Instructions] 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 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, any 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. Thank you for joining us to discuss our second quarter fiscal year 2025 results, as well as our updated fiscal 2025 guidance. With me this morning is Jeff MacLauchlan, our Chief Financial Officer. Slide 4, 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-months 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] (ph) 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 2025 guidance and Jeff will provide more financial details shortly. With the first half of FY’25 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 5, 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 6, 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. 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 to 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, CACI is delivering exactly the things I just discussed. So let me give you a few significant examples. Slide 7, 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 24x7 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, CACI is in development and delivery spaces 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. Next, 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 air as threats dictate, so the ship stays on station versus having to return to port. With the ever evolving threats [in the OPECOM theater] (ph), Spectral is exactly the type of program that will deliver capabilities at the speed of the fight that the [Navy flyers] (ph) and because of our differentiated approach and good performance we are taking on adjacent work from other providers. On 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 7 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 U.S. 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 a bunch of reductions. In fact, as we showed on chart five, 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, to 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 in 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 ensure undervalue under any administration. With that, I'll turn the call over to Jeff.

Thank you, John. Hey, good morning, everyone. Please turn to slide 9. 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 2.5 times to 3 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 2025 guidance in the first quarter, as a result of greater organic business momentum and the acquisition of Applied Insight. We then increased our fiscal 2025 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 2025 guidance. We're raising our revenue guidance to be between $8.45 billion and $8.65 billion, all due to stronger organic growth. This represents total growth of 13% to 16% on an underlying basis which includes 6 points of growth from acquisitions. We continue to expect fiscal 2025 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 FY’25 adjusted net income guidance to be between $537 million and $557 million. This yields an attendant increase in adjusted EPS to between $23.87 and $24.76 per share, representing growth of about 13% to 18% 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 FY’25 guidance now implies 18% growth in free cash flow per share. Slide 12, please. Turning to forward indicators, our trailing 12 months book-to-bill ratio 1.7 times reflects strong performance in the marketplace. Our backlog of $32 billion increased 18% 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 2025, 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 and 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 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 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 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. [Operator Instructions] 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 than outside the Continental U.S. I’d 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 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 time out 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 record or test like we do an 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 cause some companies that were thinking about selling to maybe wait until valuations improved?

Yes. It is Scott. The -- 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 is almost certainly sort of 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. So we're -- frankly, we are going to focus on de-levering 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, so -- in the spirit of the kind of a DOGE question, there is 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 being -- getting more potential outsourced work? How do you think about that?

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 I was going to play out. Look, I think what they did with sequestration was, it frankly took the very quick [acts] (ph), right? Let's reduce the number of federal contractors in all of our offices and doing work because that immediately saves 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 they returned to office mandate will take some time to take effect. But it's -- in my mind, it is sort of an easy connection that as they remove staff that are tied to mission that, that is an additional opportunity for us able 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 less folks. And 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 color. It seems like you're really well positioned there. And then just a quick one for Jeff. Is -- can you remind us what the target leverage is kind of where you want to be before you resume 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. So we'd like to be a little bit less levered than we are, but we have a range of options open to us 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 of what's your appetite to actually expand into civilian? If this like DOGE initiative will actually be able – to be focused on IT modernization, financial management, and all those like added efficiencies in a more like civilian type of like agencies? What is CACI's appetite to go towards those type 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. And long before DOGE, 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 so 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] (ph) 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. 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. 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 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, and were 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?

Yes. Thanks. Look, this is -- I guess, first off, we have an appetite anytime the government buys an outcome versus buying inputs. There's a lot of positiveness and there's a couple of ways just to go down. The more we see for a 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 sort of 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 upfront, 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. So Jeff, anything to add?

Mariana, I would -- I'd build on John's point, I'm 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 of government services and the commercial providers. We have -- to the extent that there is sort of an inflection point here and 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 are in a sort of state of transition here, we feel like that's a divide that we are already straddling. Thanks.

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. And 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 WiFi 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 also has to know inherently how it is 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. We don't -- 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's going to continuously change. So we are always going to deliver software-based technology that's based on software. It is based on the premise that this code and this theory is going to last in some instances, folks, for eight hours. And that has to be updated, it has to be 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 means new ways to look at problems. It means potentially new partnerships. But I think the position -- I like the hand we hold because we have a workforce to understand, as Jeff mentioned, taking the best of three different types of competitors, understanding software, understanding 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 that 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] (ph) work there that I think maybe less so. So I think the answer is that it varies. But we thought it was useful to people -- 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.

Hi guys. Good morning. This is [indiscernible] 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 what gives you confidence there, recognizing some of that will be timing related?

Yes. The mix item that I referred to in the 11.1% in the second quarter will probably -- should manifest itself in a slight sequential 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 saw for the fourth quarter, you'll see that we expect the margin to tick up, and I think 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. 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 -- 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 are often involved with businesses that are founder operated, owned and operated or 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. They're often driven by sellers -- 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 market reaction and potential opportunities around share price. So as John mentioned, over the next couple of 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 are ready at any time to act opportunistically as those targets develop or as we see market forces.

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 unclassed 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. They are -- 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 really 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. And 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, then it’s Spectral. So they've done an outstanding job of combining our engineering talent, both on the [harbor] (ph) 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 months 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 was -- 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, 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 in -- if you went back seven years or eight years 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 to maintain G&A and overhead rates. We moved to a strategic focus with zero-based budgeting. And it is all about making choices. I don't know what the impact is going to look like because I don't know where there is more remote workers in the federal government versus less. But in our company, everything is driven at the program level. We don't have a 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 anyone that's going to skip from home, okay? But on the other end of that, we did work pretty hard during COVID to find a way to keep this nation protected while we are working on classified work, okay? So I think we're going to sit and wait and understand how this plays itself out. I'm very confident in our work-for-home or work-from-remote policies that we have. It's customer first, substantial 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 the government facility. Probably all I can share on that one, 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?

Look, I would say, outcome-based is you can take all of our technology work, and you can probably add another 20 to -- I'd say probably 85% to 90% is outcome-based. And that's a different word, right? Because 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 a 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] (ph) 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’ve even bid on that work. So this company, different than many others, has made that transition. Thanks, Tobey.

Your next question comes from the line of Gautam Khanna with TD Cowen. 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 of quarters, given just the administration transition and -- well, 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 is 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 mean the level -- I would just add, I agree with obviously with that. But I would also add that the level at which the administrative work happens here is probably less affected by upper-level rotation. I don't -- 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 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. And 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. Thank you.

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. 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 in volume in quarter three or 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 the year being -- 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 are not going to short arm investments. We're not going to do unnatural acts. And I think we've been very honorable to that. It's very strategic. It's not tactical to us. And at the end of the day, our fair equation 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, 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 '26?

Yes. Good. Thank you. Look, Spectral is going very, very well. You have to sort of picture that a customer that has a lot of funding needs, a lot of open threats. [Indo Paycom] (ph), there's an awful lot of water there. 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 is to the signals that the surface ships need to worry about the most. And we allowed the customer and challenge the customer to change those priorities as we go through this program. We are now -- we've 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 single set that was in the original RP, 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 large Spectral system, but we want to put the heart and the brain and the infrastructure on those ships as Azure is doing their [InkF] (ph) upgrade to those ships. The bottom-line is the programs we're 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 believe 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 can drive a much more valuable product, and to your last question, drive the growth as we take the '26 and beyond.

Right. Yes. I mean I think that's covered it. We are -- we see a lot of opportunities around our Spectral business case, the initial integration and the couple of months of work here have really validated internally for us, really confirmed our 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 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. So 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 instead of we can get these three pieces together, here's how we can grow with this market but also serve our national security customers 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. 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, thanks for the question. Look, we remain focused in the near-term on the delevering that we've talked about. But again, you guys are tired of hearing us say this probably, but we remain 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. And at the same time, 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 -- CACI, you're the leading provider or one of the leading providers in Counter-UAS detection, and you mentioned the New Jersey incidents. Are domestic Counter-UAS opportunities, is that something that you are pursuing? And do you view that as a viable market for CACI?

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. And I -- we all believe that they pose an absolute threat to this nation. And 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 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 growth we don't talk about because we do it for 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.

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 like has 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 looking at ways to do things differently and funds are not endless, I truly believe that there will be more folks spend 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 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 it goes through a number of conditionings and it comes 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'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 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 3 times down the line, this call, we were purpose-built for this type of next move within the federal government. And yes, this -- and this solution can be used across DoD and just about every platform to have out there, and we have many moves and beginning to have those discussions and demos and trials in other areas. So this is a five-year 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 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 listen 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. And 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.