CACI's outlook on the government's commercial acquisition push

Like other companies in the market, CACI International’s outlook for the future includes keeping close tabs on the government’s work to overhaul the Federal Acquisition Regulation and buy more commercial offerings as a result.

That change means agencies would also make the purchases in a more commercial-like manner, including an increase in firm-fixed-price contracts and a decrease in cost-plus.

During CACI’s fiscal second quarter earnings call with investors Thursday, chief executive John Mengucci laid out his view on how contractors and customers alike can make that change happen.

“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 think that's the ultimate best way,” Mengucci said. “We’re seeing other long-term cost-plus programs, 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.”

Mengucci’s 80% solution comment is akin to remarks given by Defense Secretary Pete Hegseth in his Nov. 7 address to industry, where he indicated the Pentagon will be more willing to buy an “85% solution” and then iterate it to 100% over time.

Exact figures aside, the vast majority of leaders across public sector agree with the sentiment that the government has to adopt and field modern technologies faster than before.

As Mengucci pointed out to analysts, the U.S. military’s increase in its operational tempo over recent times means CACI’s customers want that tech at the speed of their missions.

Here is how Mengucci explained it in the context of electronic warfare, a cornerstone tech in CACI’s strategy:

“We can talk about exquisite EW differentiating rogue drones from friendly ones and mitigating risk, I'd like to say welcome to EW. Enemy changes their tactics and their technological footprint, welcome to EW. Getting 20 helos in and out of a country without any issue, welcome to EW.”

Speed and resiliency of systems are two cornerstones of an elevated “OPTEMPO” environment. The current iteration of CACI’s strategy centers around software, which by design is meant to be fielded and changed quickly depending on user needs and the state of the world.

Mengucci said that in the case of sensors, one of them detects a new signal and then notifies other sensors of what was found. That includes every feature of the signal and options for mitigating it.

“We've been really clear that we build enhancements and mitigations almost instantaneously. It demands optionality,” Mengucci said. “Whether you're looking at handhelds, backpack, mobile, fixed, short-range, long-range solutions, they all come with a common software baseline.”

Today’s environment also sees many customers demanding to have options for acquiring the tech in a more commercial-like manner as outlined in FAR Part 12, Mengucci added.

As part of its longer-term tech pivot, CACI has also sought to structure its company in a way that aligns with both FAR Part 12 and the Part 15 section that governs negotiated contracts.

Mengucci estimated technology content now represents close to 60% of CACI’s overall revenue mix, a sharp increase from the services-dominated profile from 10 years ago.

Investing ahead of customer demand is both an attribute CACI likes to tout for itself and simply the way commercial tech companies operate. Mengucci offered up the example of CACI’s work on the Terrestrial Layer System-Brigade Combat Team Manpack, an Army program for developing and fielding a dismounted electronic warfare system.

CACI and the Army signed an Other Transaction Authority agreement that started with initial development work to create an 80% solution, which Mengucci said was set up for the Army to “see where you can go with that.”

If done right, OTAs can help create that kind of pathway from development to fielding. But as Mengucci said, companies have to take on more of the financial risk.

“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,” Mengucci said. “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.”

Fiscal second quarter revenue of $2.2 billion was 5.7% higher than the prior year period, while the organic growth rate was 4.5% after excluding acquired sales. Profit of $262.6 million represented a 12.8% year-over-year increase in EBITDA (earnings before interest, taxes, depreciation and amortization).

CACI also received some welcome news to start the first month of its fiscal third quarter. On Jan. 16, the Government Accountability Office denied a protest from Accenture’s U.S. federal subsidiary involving a potential $1.6 billion Transportation Command contract awarded to CACI in August.

Mengucci said CACI is now starting to ramp up on that program and offered more details on the work, which centers around building a new cloud-based platform for managing transportation and logistics operations.

CACI will lean on SAP technology to stand up the future Joint Transportation Management System, which Mengucci said will “consolidate a large number of disparate legacy systems.”