Q2 2020 Earnings Call
Good morning, Thank you for standing by and welcome to Booz Allen Hamilton earnings call covering second quarter results for fiscal year 2020.
I'm all participants are in listen only mode. Later, there will be an opportunity for questions I'd now like to turn the call over to Mr. Nick easy.
Thank you good morning, and thank you for joining us for Booz Allen second quarter fiscal 2020 earnings announcement.
Hope you've had an opportunity to read the press release the be issued earlier this morning.
Also provide a presentation slides on our website and are now on slide two.
Our next easy Vice President of Investor Relations and with me to talk about our business and financial results are Ross Your was asking our president and Chief Executive Officer, and Lloyd Howell Executive Vice President Chief Financial Officer and Treasurer.
As shown on the disclaimer on slide three please keep in mind that some of the items. We will discuss this morning will include statements that may be considered forward looking and therefore subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecast results.
Those risks and uncertainties include among other things general economic conditions.
The availability of government funding for our company services and other factors discussed in today's earnings release and set forth under the forward looking statements disclaimer included in our second quarter fiscal 2020 earnings release and in RCC filings.
We caution you not to place undue reliance on any forward looking statements that we may make today.
And I'll remind you we assume no obligation to update or revise the information discussed on this call.
During today's call. We will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors.
We include an explanation of adjustments another reconciliations of our non-GAAP measures. The most comparable GAAP measures in our second quarter fiscal year 2020 slides.
It is now my pleasure to turn the call over to our CEO Rossier resent ski we're now on slide five.
Thank you Nick.
And good morning, everyone.
Today, we have the pleasure over reporting another quarter of excellent operational and financial performance.
Our second quarter numbers demonstrate once again was allen's institutional strain on our leading position in the market.
September Thirtyth, Mark the midpoint of our current fiscal year.
The three year period over investment theses.
No I are extremely pleased with where we are at this point against both our plan for this year under multi year objectives, We said 18 months ago.
Today, we will summarize the first performance operationally and financially.
Discuss our expectations for the remainder of the year.
As always we put it all in the context of our investment thesis.
Let me start this strategic level.
As you know over the past seven years, we have transformed our firm into one that is more technically capable more innovative and operating in more mission critical areas.
We are showing finds out to get value from technology adoption on a time when they have they need and the resources to do so.
Our aim has been to capture rising demand.
That's driven by fundamental shift from the hardware economy over the past two the software I caught me off today and the future.
This is our vision 2020 strategy I have said before whose alan it seemed to pay off period.
Disciplined execution of our strategy has created powerful differentiation in today's market.
And equally important it has created the position of strength for us.
We lean into the future.
We have the agility.
Alan any investment capacity.
To evolve our firm to meet the emergent demands in the market.
Demonstrated by things like fast changing tech stack.
Any dynamic global strategic environment.
We believe our proven ability to operate at the intersection of consulting technology admission well also anticipating what clients will need next.
Sustain into the future the firm's growth and our consistent record of performance.
This is not the core of our value proposition for all stakeholders.
From employees fines and investors.
All the way to the people who are served by the missions, we advance and the problems to solve.
This position of strength in the market is also the foundation for our core investment theses goal of increasing adjusted diluted earnings per share from about $2 in fiscal year 2018, So Bob Dole or some 30 cents in fiscal year 2021.
The performance we delivered in the second quarter chose will remain on track to achieve our goal.
You'll recall that our plan for this fiscal year.
What's to come out of the gates fast.
Executing a relatively aggressive first half and a more conservative second half.
We said this plan in place last spring.
Because of uncertainty about the federal budget.
And while there has been progress in the budget and appropriations process. We are in the new government fiscal year and still not of the finish line.
But our strong performance in the first half of our own fiscal year.
Just confidence that we will end the year at or above our original guidance for both revenue and adjusted diluted earnings per share.
Turning specifically to the second quarter.
The results were report today are exceptional.
We achieved a double digit increase in organic revenue growth with excellent profitability.
We have another outstanding quarter for hiring I think 600 people to our account base, which brings us just shy of 27000 total.
Bookings were well diversified across our markets and seasonally strong that's the government fiscal year ended.
And that sort of September thirtyth, we set another record for backlog.
As you know we managed to from after single piano.
These fosters agility and collaboration.
Allows us to channel resources stores, the best opportunities.
Through the first half of the fiscal year.
Growth in defense and civil representing roughly three quarters of our business is especially strong.
In fact.
It is ahead of our own expectation.
The need for systems integration digital transformation and insertion of new technologies in areas, such as cyber data analytics and immersive is fueling our continued success.
Shifting to the intelligence market demand is also strong.
<unk> revenue growth is somewhat constrained by they need to source on higher highly likely are now.
And global commercial which represents 3% of our business will probably be flat. This year after three years of growth about 25%.
Still over the medium term, we continue to see great potential for profitable growth in this market.
In sum leaders across our business are managing the business exceptionally well and capturing the right opportunity just at the center appliance missions.
Our teams spread across hundreds of clients on locations worldwide.
Our skillfully delivering high quality services and solutions.
They are helping transform organizations and advanced innovation.
On the strength of their performance in the first half.
Today, we're excited to announce increases in our fiscal year 2020 guidance for revenue operating cash and adjusted diluted earnings per share as well, that's an off cycle increase in our quarterly dividend.
Before turning the call over to Lloyd to cover the financials.
I wanted to touch briefly on one aspect of the final piece of our investment theses, what we call option value.
I see you know our firm has refocused in recent years on developing premier offerings in artificial intelligence.
Because of the investments we have made.
Today, we have a robust AI services business across many civil intelligence on defense lines.
We are proud to be helping organizations such as the joint artificial intelligence center and other parts of DLD.
Overcome the hurdles in moving AI capabilities from the lab to the field.
Warfighters are eager to operationalize AI in ways that will maximize efficiency speed decision, making and improved command and control.
We expect continued strong growth in demand.
As more and more federal agencies work to integrate AI into their missions.
This is rising demand and our capacity to meet it is boosting growth from the services side of our business.
And we're also developing new AI business lines and exploring ways to monetize for intellectual property.
This is option value because these new approaches have the potential to augment our labor based business model with new revenue models and enhance our financial performance beyond the goal set in our investment thesis.
On this front, whose Alan will hit a significant milestone next week.
Because of our strong partnership with Nvidia.
We will announce the limited release on AI software platform at the Nvidia GTC Conference next Monday.
This is an early access prototype with expectation that our production product release is about 12 months Hall.
We do not expect a significant number of paying clients for at least a year.
Still this is an exciting step towards providing secure emission access to AI solutions for our clients.
And we're optimistic about the potentially holds to feel booz Allen's future growth.
And with that Lloyd.
Over to you for the full results of our quarter.
Thanks, or Osteo and good morning, everyone I'm excited to take you through the details of an excellent second quarter for Booz Allen.
We came into the fiscal year planning for an aggressive first half and that's exactly what we've delivered.
Our ability to plan for potential market uncertainty and execute against a proven strategy gives us confidence that will deliver another fantastic year growth.
This confidence is reflected in our decision to increase the narrow full year guidance for revenue and eight ups and to increase full year operating cash guidance, let's go through the numbers. Please turn to slide six.
Starting at the top line revenue in revenue, excluding billable expenses, both grew by 12.7% compared to the second quarter last year. The increases were primarily due to sustain client demand three consecutive quarters of hiring and retaining phenomenal talent and an extra workday compared to the prior year.
Period.
We believe our success in execution in hiring are supported by our unique market position and high quality services.
We're very pleased with the breadth and quality of the work we're winning.
It's clear that demand for our solutions is diversified and that our strategy to be at the intersection of consulting mission and technology that may Booz Allen and valuable partner to increasingly broad range of clients.
Turning to slide seven book to Bill for the quarter was in line with historical performance at 2.68 times and our trailing 12 month figure is 1.22 times, both excellent outcome supported by strong award environment and robust proposal activity across all markets.
Total backlog as of September Thirtyth was $22.9 billion, 7.2% higher than the end of the prior year period in a new record high for our firm.
Funded backlog at $4.4 billion increased by 4.8%.
Unfunded backlog at $5.4 billion grew 12.3% and priced options increased 6.1% to $13.2 billion.
Head count as of the under the second quarter was up by 1600, importing or 6.5% year over year and as a Ross you said by 600 since the end of June .
Our success in hiring to date ensures that we can continue to execute on our backlog and meet our objectives for the second half of the year.
Moving to the bottom line adjusted EBITDA for the second quarter was $192 million up 17% compared with the same period last year.
Adjusted EBITDA margin for the quarter was 10.5%.
38 basis points year over year.
Our margin performance continues to be driven by strong contract performance efficient management of our business and then ongoing shift towards higher margin technically focused work.
We have become a debt translating industry, leading organic revenue growth into profit.
Even as we support our businesses and our people for the long term.
As is our typical pattern, we do anticipate a lower margin in the second half than in the first due to seasonal increases in Alberta spending roughly flat growth in global commercial that hurts you mentioned in other factors.
That said, we believe we will finish the year with EBITDA margins in the low 10% range.
Second quarter net income and adjusted net income grew by 23.3% and 17.9% to $114.3 million and $114.8 million respectively.
The increases are primarily due to revenue growth and margin expansion.
This translated to a 13 cents increase in second quarter adjusted diluted earnings per share to 81 cents.
Our weighted average diluted shares outstanding declined 2.3 million shares compared to one year ago.
Turning to cash we generated $216 million, an operating cash for the quarter, bringing our total first half operating cash generation to $267 million roughly on par with where we were at the end of the first half last year.
Additionally, due to the success, we've had with the process improvements and cash collection cycle, we anticipate strong cash conversion during the second half, which gives us confidence to increase our full year operating cash guidance.
Capital expenditures for the quarter were $33 million as we continue to invest in facilities infrastructure and technology.
This includes new secure and retrofitted space and technology to support and increasingly technical workforce, new business lines and continued growth outside the Washington Metro area.
Please turn to slide eight.
Our strong operational and financial performance serves as the foundation for a patient sufficient capital allocation strategy that aims to deliver both near and long term value for our shareholders.
Since it would this approach we returned $32 million to shareholders through dividends during the second quarter.
We remain firmly committed to deploying our targeted $1.4 billion from fiscal year 2019 to 2021 inline with our investment thesis our capital deployment approach remains disciplined in our priorities unchanged. We continually evaluate all our options to ensure that we are maximizing the value.
Our capital for shareholders in the near mid and long term.
This morning, the company announced the authorization of a 17% off cycle quarterly dividend increase of four cents.
Quarterly dividend of 27 cents per share is payable on December 2nd to stockholders of record on November 14th.
This off cycle increase reinforces our commitment to quarterly dividend growth as a component of our investment thesis.
As you know our normal annual dividend assessments occurs each January and we expect to do that assessment as usual this fiscal year.
As I mentioned at the beginning of my remarks are exceptional first half performance combined with our record backlog and strong head count growth support our decision to increase the narrow full year guidance. Please turn to slide nine.
For fiscal year 2020, we now expect revenue growth to be between nine and 11%.
More than two full percentage points above our original guidance due to the exceptional topline performance and strong bookings in the first half.
We also raising and narrowing our full year eight EPS guidance, given our strong revenue and margin performance to date.
The new ranges $3 for share two $3 than 10 cents per share for the full fiscal year.
This revised range is based on 137 million to 141 million weighted average shares outstanding in a tax rate in the range of 23% to 25%.
Finally, we have a $50 million increase in our guidance for operating cash we now expect full year operating cash to be between 450 million in $500 million.
In closing I'll reiterate that we're extremely pleased with our first half performance. We are executing exactly according to plan and we remain on a strong path.
Heading into the second half of the fiscal year. The entire management team is excited about the success. We continue to have remained optimistic about meeting our multi year financial goals.
Nick let's open the lines for questions.
Daniel Please open the lines.
Ladies and gentlemen to ask a question you will need a press star one on your telephone to withdraw your question press the pound Keith Please standby and while we compile the kunaev roster.
Our first question comes from Joseph Denardi with Stifel. Your line is now open.
Hey, good morning.
Congrats yeah, I think when you when you guys provided the the longer term targets 18 months ago did they were generally more more bullish then folks were expecting and you've now shown.
Halfway through and ability to have kind of multiyear visibility into your business.
Im just wondering if you could talk about.
How that visibility looks over the next few years in the context of less bullish budget environment. I mean, I think thats. The main focus of investors now in terms of can you all sustain this level of growth that you've been delivering.
Maybe just just talk about that a little bit. Thank you.
Sure. Thanks for the question, we feel very good about the market that we're in.
And in particular, we feel good about the position that we have in this market I think I I've been consistent in saying that brought this is not about the overall types of the budget. It's about our clients who have the desire on the will to advance our emissions, especially through restarting technology.
I have the means that the resources to do so and they do and we expect that posture to continue.
Into the future, we expect that our differentiation will continue to carry us to being the leader in organic revenue growth.
Continue to allow us to then drop that to the bottom line through strong margins in the way that we have been doing it and we're confident that given the way our business is operating at our team is driving.
That we see a we believe the picture going forward is quite good.
Thank you and then.
Along those lines I'm sure there was a of an assumption around bookings that was embedded in that three year outlook can you just talked about kind of halfway through.
The extent to which bookings you've realized have been better than what you were expecting thanks for the questions.
You know our booking environment, it's actually quite strong a few so and as Lloyd mentioned, we had record backlog.
Report coming out of the first half of this fiscal year I think again at the risk of being barring within very consistent in saying that we don't feel where demand constraint.
Oh that we feel that are continuing challenges to find the right people with the right skills to deploy that meet declines as quickly as we can.
To fulfill the backlog that's available and that we've been doing particularly well certainly this fiscal year, we expect.
To continue so.
It's a it's a good picture and again, we believe that we can operate in this market with quite a bit of confidence which is why despite some of the current budget scenarios. We have raised the narrow guidance.
We declare the 84 cents increase on our dividend off cycle.
Our headcount is up six on half percent into first half.
Just six months ago, we increased the backend numbers for our investment thesis.
Projection I think these are all signs of confidence in the marketing our capacity to succeed in this market.
Thank you.
Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is no.
Hi, good morning, everyone. Thanks for the time and these results are never Brian harassed dance that you're all day.
Well either your headlines.
[laughter].
That's my first question on the headcount growth, it's grown pretty impressively, but still there is a pretty big delta between that and revenue growth. How do we think about you know is that type of contract increases is that just timing in it well.
Brands and the second half can you talk a little bit about.
Sure.
Historically.
We are growing our headcount.
As planned both sourcing and deploying the talent there is.
A delay in getting those folks deployed in the conversion of what's in our backlog.
So the rule of thumb typically is a few percentage points higher than what we see in terms of our headcount growth percentage.
Historic never been a one to one.
Okay. Thanks, and then just maybe longer term Rossdale you mentioned, the AI adoption and just accelerating process visa Matt.
Our next that any paying clients in the next year, how do we think about that overall market size you know the adoption of at how quickly do you expect that can you just quantify it a little bit more adolescent little bit of color on customers. That's that you think are attainable.
Let me give you some color.
We think about AI as both a key component of our.
For additional business, our labor base business and asked a huge optum value type opportunity for the future.
And we're seeing success on both of that mine to prepare remarks, I talked about our work at the Jake.
But one of the many places where we are working with clients to figure out how to both create AI solutions, but most importantly take them to the field.
A few months ago, we talked about a win.
HHS on AI.
This is a broad based demand increase that we see across most of our clients were looking to use these technologies to improve mission effectiveness and intelligence.
In operational intelligence or the military and in anything that has to be data component, which at this point is entirely.
Our federal government and we're seeing the near term apply the that in our labor base business.
In parallel with that we've been looking for different ways to monetize our intellectual capital and to take advantage of the fact that we know both these missions how would that mission need tire beyond what is purely labor base and this is what these software platform that will announcing more detail on Monday.
Is it gives our clients access to train malls in a way that is in mission Buddy secure but they can actually bring to bear.
In different ways. That's the piece that has more of a longer term tail to it we're still in the into.
Pre release limited access.
We're working with few clients too.
Okay.
Yes, the proposition to prove that popped propositions, what bounce it and about a year from now we'll go into more of a full production mode. Then we'll begin to see hopefully revenues come from that that's the path, we want to be on but it all fits inside of these option value portfolio, which is one thing it's a number of things and at the right time, we'll come back and talk about.
What that whole a group of initiatives looks like and what the potential financials for them. Our it's it's premature to do that now, but it certainly in our site.
Thank you.
Sure.
Thank you and our next question comes from Cai von Rumohr with Cowen and company. Your line is now.
Terrific. Thank you very much so your bookings this quarter benefited from a billion dollar fee I tops task order protest the cleared could you give us some color in terms of how much do you have in protest of your take away wins and roughly how much are you protesting.
Contracts that may have been taken away from you.
In terms of protests Guy overall as I said in the past.
The environment is heavily protest the environment.
That being said for us we've got minimal.
Amount tied up in protests and.
Other into the other side of the Calais also a minimal amount of protests ourselves.
Okay, and then you can take continue to look for 1 billion foreign capital deployment.
Looks to me like you've Gotta spend close to 700 million between now and the end of fiscal 21 on share repurchase or M&A, you didnt buy that much stock in the first half and.
Your stock prices continued to go up so how should I think about the priorities you're setting out those two options.
Yeah, I mean, we are committed to returning.
The 1.4 billion through.
Slide 21.
And continue to look at all.
Once a share repurchases tuck in M&A, a regular recurring dividend as Ross you mentioned the fact that.
We did it off cycle increase of four cents is.
In alignment with that and the possibility of a special but bottom line is remain patient.
We're going to remain disciplined.
We're always looking for what's the and how to maximize the value for our shareholders in the near mid and long term and we're in a great position.
If you look at our operating performance and the strength of our balance sheet, which we've been working on for a number of years to make as strong as possible.
We feel that being patient being disciplined is ultimately going to return the 1.4 billion.
Thank you very much.
Thank you. Our next question comes from Jon Raviv with Citi. Your line is an open.
Thanks, Good morning, maybe I'll just follow on there for a moment.
The $1.4 billion, you said 18 months ago, it's based on a certain set of numbers over three years clear those numbers are higher so directly asking why isn't the 1.4 billion higher.
We've never a straight line.
Our our projections when we put forward the investment thesis.
Really was the emphasize the growth in eight ships over three years as well as the topline growth of 6% to 9%.
We felt that providing more color around our capital deployment.
Target that would be good.
And as we have also demonstrated in the past.
Where we see the need to make an adjustment.
We'll make that adjustment.
So we're not ruling out that it could be or not.
But we do feel it's important to.
Stay in alignment with the plan that we have which we're very excited about this year.
Appreciate that color Lloyd and then when you when you say tuck in M&A.
No I understand what that means from a strategic perspective, perhaps what does that mean for me from a size perspective. It is there are signs on the attention to what you can call. It Duncan.
Not really I mean, we have always sorta reacted to what's the market.
Making available to us what are the broader financial.
Implications of any particular deal as I mentioned earlier in our patient and disciplined we look at over 100 opportunities.
Every year and given the strength of our.
Organic growth.
We don't need to buy revenue.
So it is very much one of the levers that is at our disposal. It's just not one.
To date that we've pulled a lot.
Thanks very much.
Thank you Sir our next question comes from Gavin Parsons with Goldman Sachs. Your line is now open.
Hey, good morning.
Morning.
I wanted to ask you about just the growth and margin dynamics, there had been typically new contracts coming at a lower margin.
Faster growth often results in dilution.
Can you talk about maybe whether anything has structurally changed and if you could approach it from maybe a boost specific perspective, but also from a customer standpoint. Thanks sure.
I'll start and then I'm sure Lloyd.
Something out a bit to add jumping.
The the dynamic for US is our work through vision 2020 has become increasingly more technical and increasingly more differentiated and so were more than work that is that the center of our applies missions that is at the center of inserting technology into those missions in a different way and that affords Us Act.
Finally in many cases better margins not worth margins than what we have.
Before that was what we signed up to do through the investment thesis and that's I think what we've seen a that's why margins are up significantly frankly ahead of our own expectations. If you go back 18 months ago, what we thought we would do and what we're doing we're.
We're better I don't know that I can comment on how the rest of the industry.
Hey, Thanks in large part we've talked in the past about the fact that this industry was bifurcated and that we were looking to occupy these place of differentiation work clients need quality work quality really matters and were high quality and high impact on missions gets rewarded and I think that's where we.
Our it allows us to enter these virtual circle of because of that we can invest new capabilities. We can invest in looking for on retaining divest people in this market and then in turn affords us the opportunity to continue to stay ahead.
So I would just add to that the 10.5 Inc. Q2 were ahead of where we were last year in a 10.7 for the first half of this year I think it really points to a couple of things.
Certainly what her US you mentioned in terms of higher margin secondly, technically focused work.
Being at the center of our clients mission.
And it's working you know there is a.
Dynamic that when you look at the percent of our cost plus an increasing.
That margin impact, which is typically a little bit lower has really been offset by our just strong execution on fixed price.
And materials work.
And we have been on a mission to operate increase way at a higher and higher level and.
Our team and our people have done just that.
That's great color and then for us so you're talking about the shift to the software economy can talk about how that expands our addressable market. I mean for example, like your approach to the soldier as a platform when the button possible previously so how does that have opened up new budget areas for your that had maybe previously been reserved for hardware. Thanks.
It's a great question I think the analogy that I would give if you look at the car.
Industry right I mean, the Karl I learn to drive on how to exactly zero lines of code.
It might have had a couple of wires.
The car that I drive now, it's essentially an ipod wheels.
And the same thing is happening across.
The fans across intelligence.
Hey software is becoming the real source of value out and value creation, whether it's in space on the ground underwater.
That's what we're seeing and in that world.
I think thats offer and cyber security becomes a much bigger deal again, not just in the protection of networks, but into protection platforms.
Analytics changes dramatically the way intelligence, both the gets collected on gets disseminated.
And the war fighting.
Changes.
And they says the work.
If I know some of you. So what we were doing at USA, where for example, we're creating data fabrics that allow multiple components agnostic as to who create tend to talk to each other so that is soldier on advice or can have the information that that he or she needs.
From a satellite from a drone from an analyst all coming into the same place we're uniquely positioned to create those types of solutions.
We're uniquely positioned to create open architecture.
Hedge in denied the environment. We believe that this is why we're already winning this has to pay off period for vision 2020.
But this is how we're leaning into the future and I'm just talking now about defense and intelligence I could spend another 20 minutes, telling you the same.
Stories around fraud detection in pressure in the treasury area about data and the value of data across the health or the government health enterprise.
Law enforcement and the importance of all of those things so.
This is a market that I think we'd be preparing for this market is here now and we intend to capture as much opportunity as we can.
Thank you.
Thank you. Our next question comes from Carter Copeland Melius Research your line is no.
Hey, good morning, Janse Morningstar.
So it's going to tease you for another conference call. After a holiday, but then you delivered a treat on Halloween. So I'll I'll tell you just keep keep doing what you're doing.
Well I mean work yesterday, because all of our NAV plans or whether it made a lot more tire. So yeah, yeah, I guess it I guess it worked out that way, but you know you did the Super Bowl and that was hard on Lloyd. So you know just keep doing what you do it.
Right.
Look just a couple from me one I I don't know if you can share the color, but obviously the the civil growth year to date has been very.
Very strong and I wondered if that was attributable to I mean, you hinted at a couple of those things and the response to the last question Churrasco in terms of the law enforcement and Treasury and the health enterprise it but I wondered if you if you might show with some colors in particular.
Agencies, where you may have seen that strength and then as a second question just on the commercial side and the flat growth you talked about there is that just standard kind of lumpiness or are there any you know geographic influences are particular.
Sizable contracts there that the driver or you know the kind of a result, you're seeing there. Thanks.
Sure. Let me go the last one first is how I forgot.
Our global commercial business when a few contracts that wound down and that's what's driving the numbers.
This year, if you remember back a couple of calls ago, when we reported 32% annual growth in commercial I will be consistent doubts or the same way.
The other side would you said business up outside of that maturity a couple of contract going one way or the other will ask you called it Lumpiness will drive.
The short term performance, but the long term drivers of that business, especially our work in cyber remained very strong. We believe were differentiated and we're we're confident that it will continue to be accretive to our overall portfolio.
On the civil side that it's a business that has done well for quite some time they'd be anchor flair for that business has been our health business, which I, we talked a lot in some detail at Investor day, as you'll remember on which has been growing very well and continues to do so.
I asked the question about I thought that's again the type of when it's not just the size of the business and the growth rate inside of it. It's not the business has really moved so these are section of technology and mission.
And whether it is to cyber protection of a major health agency, whether it is our ability to do our child development at scale.
Whether it is helping them do probably detection in a different way and now beginning to implement they API and.
Process automation is those are all the drivers of growth. If you look at these here again health is growing very strongly.
Are we call are fed business, which is really treasury and the associated agencies is having a banner year and our law enforcement and transportation business is also doing very well which is why.
You got to be strong double digit.
For four months, which again, it's exciting it's all right, but the underlying driver so bad that have me excited and optimistic.
Great. Thanks for the color.
Sure.
Thank you. Our next question comes from Edward Caso with Wells Fargo. Your line is now open.
Hi, good morning, Congrats here I'm, a little curious as the market shifting more towards tech and solutions.
Is there a change in philosophy in dollars deployed around I read and also if you could talk about your capex budget the trends and what the forecast is for this year.
You know we continue to do what we do on them.
I'll take the first half the question Lloyd.
Better position to take the second half on the first half we continue to do what we began to do in 2012, when we formulated the strategic innovation group, which is to lean forward into capturing a positions in these new technology.
Where we actually get to understand that technology, you get to building partnerships with the external players oftentimes, we silicon valley and beyond and then bring that expertise at that knowledge to find somebody it's an area of high demand and scenario where are we intend to continue.
If anything you know were our success allows us to open the upper jure beyond the original things we talked about in 2012.
Two areas like Fiveg he.
You know laser communications and a number of other topics Oh that.
Again at the right I will talk about in more depth, but that's.
Lots of core elements of our play and.
Whether it's on prior out or through simply deploying senior seem to understand these technologies.
Being able to a more than our clients. That's that's to gain will play in on the Capex.
Side of it.
No our.
Capex expenditures are really aimed at continuing to support.
The growth, we've been experiencing and to become more technical just as context, we've been improving our facilities.
Allows us to source.
And bring onboard the talent, we want allows us to work in a manner thats more collaborative innovative.
And then infrastructurally.
The upgrade many of our.
He systems human capital financial that will be consistent with that we're likely to be around 120 120 million.
That.
A level that we think it will be consistent with the objectives around our capital expenditures.
Hi, I'm just getting me my other question is around the continuing resolution other already talking of extending its beyond.
November 21.
At some point does that change your outlook, if if we roll on into next year, where the CR or full CR and then I guess that's at the flip question, which is if they miraculously get it done on November 21st would you be more bullish about your second half. Thank you.
You know I'll start you know, we're we're very excited.
The reason there our guidance.
This fiscal year.
And at the very beginning of this year, you'll recall we forecasted.
We wanted to come out of the gates very strong aggressively we did that.
Right decision at the same time, we said it was prudent.
Plan for some uncertainty in the back half. So we had a more conservative approach. So we've already taken into account.
As indicated at the beginning of the year, then with the Razen narrow and the Serafino said.
We believe that demonstrates our confidence this year so the to the broader end of your of your question you know that's going to address that when we get to a logical point.
This year and we're just not at that point, we're very excited about where we are mid year.
And we believe that the raise and narrowing of our ranges is indicative of that.
Yes.
Thank you. Our next question comes from Robert Spingarn with Credit Suisse. Your line is now.
Good morning.
Alright, good morning.
So excellent quarter Marazzi I wanted to dig into AI, a little bit and I wanted to ask if you could be a bit more specific in terms, which are actually referring to are we talking about I guess machine learning computer vision. It just seems like a term that could be unpack the little bit and then maybe you could tie that into what.
You're gonna be announcing [noise].
Within at the end video conference you know to the extent that you can't talk about that and then I've a question for Lloyd up margins.
Sure.
You know, we our focus on really all aspects of making artificial intelligence operational inside emissions and so they starts with building the correct infrastructure to be able to deploy algorithms in a way that if they work.
In the mission or have often setting if you haven't intelligence analysts that has to go way outside of their workflow in order to take advantage of a new tool that may not be fully tested that may not be perfect. Yeah, Oh, the chances of adoption are much lower than the that can happen inside.
The they work flow if you have people working out and denied environments, where they don't have access to communications. How do you put though how do you agree the infrastructure so that that technology can be deployed.
At the edge.
So that's one aspect of it the second aspect of it the actual creation of both the platforms and the algorithms that actually improve these mission sets and the final beat these how do you feel them, how do you actually put him in place or working with the operators. So that they algorithms themselves can be trade I mean, this is dynamic technology, so it needs to be.
Train into place, where it's going to have impact will be fully deployed.
You do that and we're working through that entire chain with a number of clients that are at the leading edge.
On that and that's that's.
You know that did not more is the breadth of our.
Work or in terms of that the announcement on Monday I'll ask if they just don't in on Monday and learn more than.
Okay, and then and then Lloyd you know we talked a lot about the margin momentum that's coming from mix.
Today, we talked about the software economy, I guess tied to the <unk>. What we just talked about a moment ago are there also efficiencies dropping through or is that just not.
Really the focus point here for margin expansion just in it and what I.
Think about as a variable costs business also with the tight labor market. So is it really simply a mixed driven margin expansion.
No I mean, it you're right I mean, we have.
Been focused on operating as strongly as we can it's what we're experiencing now which we also began to experience last fiscal year as all of our change efforts to operate better and better are kicking in.
So yes for sure.
Theres the mix part of the business and what we do which are Ross you talked about but that our business right now operating.
Very strongly.
Okay. Thank you.
Thank you. Our next question comes from Tobey Sommer Suntrust. Your line is now open.
Thank you.
Give us some color on your commercial business and.
To the extent that would make sense to we've been your comments on AI.
I appreciate that thank you.
You know our global commercial business has you know it's about 3% of total revenue as you know it has to significant components. One here in the U.S., one more focused and the middle East North Africa.
Region, the core of that business on the core of our strength is taking our cyber expertise and know how on deploying that to help especially private sector appliance address the near and longer term issues that they face a unfortunately that is the business that is seeing rising demand and I'd say importantly, because its.
Driven by that perhaps.
In the environment, which continued to increase on its driven by adversaries, who are more and more sophisticated.
So the people that are clients need helping them needs to be equally increasingly sophisticated and booz Allen I believe it's at the top tier.
That stock and so that's that's the business that we're building a work continuously evolving it we're looking for places where cyber intersects with other technologies like by GE like I like everything else.
Yeah, and I think that is going to be the continued sorts of differentiation for us.
Hey, Tom could you expand with what performance was like in in the quarter and then.
Also maybe touch on.
Your head count growth.
ER meaningful difference in the pace of headcount growth spurt sort of junior staff, so out of school versus more senior lateral hires. Thanks.
So you know, we obviously very pleased with their performance in the first half across the entirety of the business.
I'm very pleased with the hiring and the retention in in the first half a year.
We this is again, we had a playbook, which we share with you early that our team executed so far to perfection, which is to try and get ahead of any potential uncertainty around the federal budget by hiring aggressively the first half by putting lots of people to work in the first half.
And and then that gives us the breathing room, who then operate the second half assed, we see the environment.
They've all while at the same time, not just meeting our early commitments for the year about narrowing and Rice I was just said that we have probably four generations of folks that booz Allen.
Certainly at the more junior level.
Summer internship programs. The changes that we have made there has really improved the yield of the candidates, we see but we have a tremendous effort.
Well with sourcing hiring at more senior levels really driven by the requirements the needs of our clients and add more senior level.
We also have an active recruitment underway.
Given their understanding of the various markets and.
The decision makers in the relationships they have.
Thank you. Our next question comes from Matt acres with Barclays. Your line is now open.
Good morning, guys. Thanks for the question running I wanted to touch on cloud briefly so kind of with the jet I'm moving forward I mean number one when could that open up opportunities for you guys to build more stuff on top of the cloud and then kind of on the flip side are you seeing any indications that like the Amazon and Microsoft of the World like could you just become.
More directly with your business like on the hiring or competing for clear personnel for example.
And let me answer the question Holistically, which is part of adoption is one of the major friends.
Across the for the government not ideal d., we expect that to accelerate and I think these contract vehicles are in some ways catching up to that demand I suppose to sort of being ahead of it.
We work closely with all of their major cloud providers, because what they do we cannot do and vice versa. What we do is unique and differentiated any allows.
Cloud to be deployed into mission in a way that is successful and effective and you know we believe that at least for the medium term those other positions and the value chain that we and they.
Well occupied so we were were bullish about the ability again, a lot of what we talked about I.
We spent a lot of time talking about AI on this call.
You need a robust modern cloud infrastructure to deploy those kinds of capabilities. So we see how are the strong cloud adoption across the government benefits.
Whose alan and it's another I think proof point on why we feel were the right place in the market at the right time.
Got it thanks, and then I guess just going back to the long term guidance I mean did the 66% he that's growth.
You're already kind of in the low threes. This year feels kind of conservative how do you guys feel about that and could we get up to that in the near future.
Yeah, I mean, we're.
Very excited about our performance Ah today and.
You know, we never have straight line to our performance, but we have.
You know adjusted as it makes sense.
Halfway through this year, which is tracking exactly as we had planned.
We've raised the narrowed our guidance and we're on track for another very strong year as we get closer to the end of this year will assess an update if we feel that there or any other metrics that need to be adjusted.
Okay. Thanks, guys.
Thank you. Our next question comes from Seth Seifman with JP Morgan Your line is no.
Okay, Thanks, very much and a good morning.
Hi, good morning.
I wanted to ask a little bit about the contract types and I definitely appreciate that it's not contract type that dictates profitability, but the you know the fixed price was kind of flattish year on year in and the first half and you know up only kind of mid single digits on a two year basis, So what kind of accounts for the the mix shift in con.
Attract as type as this growth has has accelerated.
And it's fundamentally driven by the markets and that clients, we support as well as.
Their preference as to what contract type.
I would like to engage Booz Allen the increase in and cost plus is really driven by.
Our defense a market that's been growing fantastically.
That is they contract type that they.
Typically turned toward.
We've been a responding appropriately.
As it relates to the fixed price.
We see that in our civilian market and obviously in our commercial markets.
Have a very conservative approach to the federal fixed price contracts.
So I don't think theres really anything to read into it other than we're responding to our clients based upon their needs.
Okay. Thanks, and then as a follow up how do you think about sort of moving to your your next set of targets and capital deployment.
You still think of of yield that's kind of the right you know the right metric to look at if you.
The dividend increase today, if we saw another dividend increase early next year could still be kind of below the 2% went just kind of a high class problem to have because that's the the increase in stock prices that that's driving it but you know as you think longer term is in deals kind of the rate target for your cash return strategy.
Yeah, I mean, we.
Hey, when we put out or investment thesis originally.
2% was really overtime.
So we think we're deploying our capital.
In a prudent patient disciplined way, we're pulling the levers that I mentioned earlier in the call.
We feel that this is one that.
Really to your point is somewhat of a high class problem, but really speaks to the confidence that we have in our business and.
The returns that weekend provides to our shareholders.
Great. Thank you very much.
Thank you. Our next question comes from Louie Dipalma with William Blair. Your line is no.
Good morning, harass yellow light a next.
Right.
Cyber security a commercial Fiveg wireless networks is a big theme right now since those networks are currently at the peak days of build out in the U.S. and around the world is that a new.
Both driver for you, whereas the government, leaving protection for those networks up to the wireless carriers themselves.
No I wouldn't put a single thing.
We're focused on but rather out again part of this overall trend work technologies accelerating where these platforms are changing rapidly.
And were securing these platforms is becoming a essential.
This is broadly based broadly known or the path of intellectual property that our clients are dealing with agents around ransomware dark lines are dealing with.
They issues that are clients face in terms of protecting.
Defensive and offensive weapons platforms, a space the second tested domain cyber a second domain to me. These are all be kind done they all speak.
To both.
Right and for us opportunities to serve opportunities to add value to our clients.
And opportunities to continue to honed our skills and drive certainly fiveg is in that mix, but it is not at least at this point a singular.
Area of focus I said is part of this overall picture.
Okay. So it's not disproportionate above any of the other types of platform they are protected.
Not at the moment Gotcha, and one final one I'm digging deeper into your 12% topline growth.
Roughly how much of that growth is coming from like price inflation premier existing contracts as your existing contracts increased in scope.
Versus.
New work that you're winning.
No I would probably be a challenge that.
Get added that specifically, but.
Our win rate in Q2, 62% or new work and 85% for a recompete.
And that is up from the beginning of the year and so that coupled with how we typically.
Submitted proposals with the right.
Wage increases tied to our more technically focused work.
Takes into account pricing as we see it at the time that we make the submission so at this level at my level.
We're excited about our win rate performance.
The topline growth if that's been able to generate.
Okay laden when you're renewing contracts is their general like price inflation upon that renewal.
You know it varies based upon the circumstances.
We obviously take that into account as we're putting together a pricing submissions and.
The government has been receptive to that.
Sounds good thanks.
Okay.
Thank you, ladies and gentlemen that concludes today's Kuni I'll now turn it back to harp seal for closing remarks.
Oh, Thank you and thanks, everyone. This has been a very robust or do you want to recession feel allow me to close this morning, <unk> on a different no I'd like to shift gears and call attention to something that we had booz Allen our very proud of though.
Because earlier this month that especially event, we celebrated the twentyth anniversary of glow.
Our internal business resource group for LGBTQ, plus colleagues and allies.
You know, it's easy to forget given the significant strides towards a quality that our country has made in the past decade, how rare. It was in the late 19 nineties for companies to provide benefits to domestic partners and their children or to establish an affinity group for gay unless been employees under our lives.
But that is exactly what booz Allen did.
And since then we've consistently built on our record those two porphyry quality, which is why our from how score the hundred on the human rights campaign corporate you quality index since 2010.
Our commitment to having every person out our firm come to work as there are true authentic self matters. It matters a great deal.
It matters to those we're recruiting.
Those were new to Booz Allen.
And those who have been here since the earliest days of globe.
And it's also one of the most powerful demonstrations of our purpose and our values.
We firmly believe that the Hungary them Fivea a record of success for this institution comes down to people.
Two purpose and two passion.
We take care of our people.
We empower them to be their best selves and reach their full potential.
That's where our focus was 20 years ago when it courageous group of colleagues founded globe.
And it's absolutely where our focus will remain.
So I didn't want to lead this anniversary pass without publicly acknowledging the globe members.
And all dimensions of our diversity de are central to who we are.
And critical to our continued success.
I know that no. Thanks, again for being with us on the call and have a great day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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