Q3 2020 Earnings Call
Good morning, Thank you for standing by and welcome to Booz Allen Hamilton earnings call covering third quarter results for fiscal year 2020.
At this time, all participants are in listen only mode.
Later, there will be an opportunity for question and.
I'd now like to turn the call over to Mr. Nick BC.
Thank you.
Good morning, and thank you for joining us for Booz Allen's third quarter 2020 earnings announcement, we hope you thought an opportunity to read the press release that we issued earlier this morning.
We've also provided presentation slides on our website at our now on slide two.
Our next easy Vice President of Investor Relations and with me to talk about our business and financial results are karate Rozanski, 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 are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted 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 todays earnings release, and so forth under the forward looking statements disclaimer included in our third quarter fiscal 2020 earnings release and in RCC filings.
We caution you not to place undue reliance on any forward looking statements that we make today and remind you that we assume no obligations 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 and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our third quarter fiscal year 2025.
It is now my pleasure to turn the call over to our CEO Rasia Rusedski, we're now on slide five.
Nick and good morning, everyone.
Ladies and I are very pleased to share our latest quarterly results today.
So you saw in our earnings release Booz Allen's momentum continues our business leaders are looking to finish the fiscal year strong and we continued to deliver the financial performance laid out in our investment thesis.
Oh the center of our thesis is the expectation, but our from can achieve 66% growth in adjusted diluted earnings per share over a three year period from fiscal year 2018 to fiscal year 2021.
This increase would be driven by a differentiated market position that produced industry, leading revenue growth and increase in profit margin and strong cash generation that supports a value maximizing capital deployment strategy.
It is gratifying to see that our plans and expectations are coming to fruition. Thanks to both the operational performance and the financial stewardship of our talented team.
Because of their efforts to date, we are pleased to announce another increase in our revenue and EPS guidance for the fiscal year unimproved outlook for operating cash and another increase in our quarterly dividend.
Today, we will discuss the full details of our third quarter in the context of that full year and how fiscal year 2020 is shaping up to support that three year goals already investment thesis.
Given that this is the first earnings call calendar year 2020.
I also want to take a moment at the outset to reflect on our firm's transformation.
When we launched our growth strategy eight years ago, we folded vision 2020.
But we never meant to suggest that Booz Allen's evolution would end in 2020.
This strategy was about setting a bold vision for the future and then relentlessly executing against it.
That is exactly.
What we have done.
We have moved closer to the center of our clients mission.
Become more technically capable.
Established ourselves in the innovation ecosystem.
And expanded our portfolio of business, including a successful reentry into the global commercial market.
In parallel.
We have grown on diversify their talent base.
More than holding our own amid fierce competition for tech talent.
We also reinvigorated our purpose on values, we just enriched our employee experience and strengthened our execution.
Our friend committed to vision 2020 during a time when federal budgets were shrinking and our core market what's contracting.
It was not an easy time for our industry, but we knew that if we leaned forward on invested we wouldn't be the first in the industry to return to growth.
And since then we have outpaced competitors because we remain committed to the strategy stayed close to clients and took advantage of one of our greatest strength to suffer.
We're always looking around the next corner to ensure that we're investing in the right capability. Some talent so that would bring clients would they need today and in the future.
This consistently creates opportunity for our business and all stakeholders in it.
Do they were positioned that's the premier technology insertion company, serving the federal government.
This has created the conditions for our continued success and has given us the confidence to commit to multiyear financial goals that clearly demonstrate our strategy is working.
It is important to understand that vision 2020, you solely to the latest evolution in our firm's hundred them five year history.
The environments around us the market we operate in other technologies, we apply our constantly changing.
Our job is to stay ahead of the change we do so by keeping one put a depression and one foot in the future.
Having reached 2020, we're taking a look at everything that created our growth and momentum.
We're asking what more different we may need to do to maintain our edge.
As was true when we develop vision 2020.
Well, we paid all that makes a strong supports differentiation and drives growth.
And we will no doubt do some things differently to get ahead of any challenges and take advantage of emerging opportunities.
I was surprised us I am over our success on their vision 2020. It is even more gratifying to know that we can contemplate what's next from a position of strength.
Well look to the future with a lot of confidence on excitement about what it may hold for our from our people.
Our clients on investors.
My overriding objective and that of our entire management team is to ensure booz Allen continues to outperform.
Let me shift now to an overview our third quarter.
Our team has delivered another quarter of exceptional performance. We continue the revenue on native growth strong profitability and excellent cash generation.
The latest numbers keep us well on track for a great year.
Heading POC, where we thought we would be when we planned this fiscal year.
We said, we expect to the strong first half and a relatively more conservative second half.
Our third quarter hiring a book to bill are consistent with that pattern.
The market continues to signal strong demand for our capabilities, which has fueled growth this year and a robust pipeline of future opportunities I.
As we noted last quarter.
Our goal this year has been more uneven across our businesses and in years past.
Our defense on civil markets, representing three quarters of our portfolio are delivering double digit revenue growth through the first nine months.
Their performance is exceptional.
By contrast, our intelligence business being constrained by the need for clear talent and a couple of Recompete losses, We mentioned previously.
And our global commercial business is still tracking to be roughly flat for the year.
We are proactively addressing those challenges.
And at the same time, we continue to take advantage of the diversity of our business portfolio on the strength of our business model.
Because we operate on a single BNL, we can shift resources on talent to focus on winning the opportunities of most importance to the firm and then delivering them with excellence.
Our pipeline, particularly for large jobs requiring complex technical solutions is expanding.
We have ample demand to support our objectives going forward.
As we approach to finally or of our theses, we have a lot of confidence that we can meet the ambitious three year objectives, we set for ourselves.
Looking at the results from the past seven quarters, what really stands out is the power of our differentiation and operating performance.
Against our core investment thesis subjected 66% eight EPS growth. We are ahead of pace.
Path, we have used to get here relying more heavily on revenue and operating margin growth than we had anticipated.
Means we have significant balance sheet capacity still available.
We also continued to move forward with option value capabilities.
Our new business lines and business models that have the potential over the long term to further fuel growth.
As I said before.
For more than a century Booz Allen has succeeded by keeping one put a depressant.
And one foot in the future.
We intend to continue our evolution on our growth so that we deliver near and long term value to investors and all other stakeholders.
And with that.
I'll give the floor Deloitte.
Thanks, or Osteo and good morning, everyone I'm excited to take you through yet another fantastic quarter of performance at the beginning of the fiscal year. We told you that we would be executing a front loaded plan for the full year to ensure that we delivered another strong performance, even if there had been budget disruptions or.
Our leaders have executed extremely well against this plan and we carried strong momentum into the second half our performance through December gives us the confidence to increase our full year eight ups revenue and operating cash flow guidance for the fiscal year and looking beyond this fiscal year reinforces our view that we will achieve.
The multiyear financial goals of our investment thesis.
Let's go through the numbers, please turn to slide six.
Starting at the top line revenue in revenue, excluding billable expenses grew by 11.2% and 8.3% respectively compared to the third quarter last year. The increases were primarily due to the delivery on sustain client demand and our continued ability to successfully higher and retain talent.
Year over year, we delivered nearly 18% revenue growth in defense our largest market.
Civil also delivered strong results, including revenue growth of 9% compared to the prior year period.
That's where I see you mentioned, our intelligence business remain somewhat constrained by the challenge of finding highly cleared talent.
Its revenue expanded one per cent compared to the prior year period.
Collectively our portfolio of businesses is well positioned to continue delivering industry, leading organic growth as we have done so far this fiscal year. Please turn to slide seven.
Book to Bill for the quarter was in line with historical performance at 0.48 times in our trailing 12 month figure is 1.21 times.
Going forward, we expect a slight increase in volatility in our quarterly backlog as vision 2020 continues to enable the pursuit of larger more complex solutions focused work. In addition to our diversified base of existing business.
Total backlog as of December 30, Onest was $22 billion, 7.4% higher than the end of the prior year period.
Funded backlog at $3.5 billion decreased 5.7%.
Unfunded backlog at $5.3 billion grew 17.9% and priced options increased 5.8% to $13.1 billion.
We are encouraged by these strong demand signals.
Headcount during the quarter grew by about 200 to approximately 27200 or 5.3% year over year. This is consistent with our 5% head count growth target for the year. We're proud the top talent continue to be attracted the booz Allen's unique value proposition.
Moving to the bottom line adjusted EBITDA for the third quarter was $191 million up 6.2% compared with the same period last year adjusted EBITDA margin for the quarter was 10.3% down 50 basis points year over year.
As a reminder, we had an adjustment to our long term disability plan that benefited third quarter fiscal year 2019, adjusted EBITDA margins are strong margin performance. This quarter is in line with our multiyear expectation for margins in the low tens and continues to be driven by strong contract performance efficient management of our business.
Yes, and ongoing shift towards higher margin technically focused work.
Third quarter net income decreased by 15.2% to $112 million, while adjusted net income increased by 10.2% to $113 million.
As a reminder, net income in the prior year benefited from the effects of tax reform.
Increased an adjusted net income was driven by improvements in operational efficiency.
This translated to an eight cents increase in third quarter adjusted diluted earnings per share to 80 cents. Our weighted average diluted shares outstanding declined 1.5 million shares compared to a year ago.
Turning to cash we had a very strong quarter generating $100 million an operating cash. This brings our total year to date operating cash generation to $366 million, 49% ahead of where we were at this point last year.
Due primarily to the process improvements we've made in the cash collection cycle, we anticipate strong cash conversion during our final quarter. This year.
Capital expenditures for the quarter were $31 million as we continue to invest in facilities infrastructure and technology. This includes new secure and retrofitted space and technology to support an increasingly technical workforce, new business lines and continued growth outside the Washington Metro area.
Yes.
Please turn to slide eight.
During the quarter, we returned $61 million to shareholders through dividends and share repurchases.
We remain committed to deploying our targeted $1.4 billion in capital during the period from fiscal year 2019 to fiscal year 2021 as outlined in our investment thesis.
Our capital deployment priorities remain unchanged and we will continue to be disciplined inpatient in order to maximize near and long term value for our shareholders.
As a Ross you mentioned our board of directors has authorized a four cents increase in our quarterly dividend to 31 cents per share payable on February 28 to stockholders of record on February 14th.
This is the second increase in the dividend this fiscal year illustrating the emphasis we placed on quarterly dividends as a component of our strategy to create value for shareholders.
Turning to the balance sheet during the third quarter, we completed the refinancing of our term loan B. This transaction modestly reduced the cost of our term loan while also extending its maturity out to 2026.
While our strong balance sheet gives us ample capacity to meet our capital deployment goal. The exceptional operating performance. We have delivered since we launched our investment thesis means we're on track to achieve our 66% eight EPS growth target through fiscal year 2021, while still retaining optionality to deploy capital in a patient.
And disciplined way.
Concluding with guidance, please turn to slide nine.
For fiscal year 2020, we now anticipate that revenue growth will be between 10%, 11.5% for the full fiscal year.
The increase being driven in part by billable expenses, following near or slightly above 31% for the full year.
We also now expect eight EPS of between $3.05 and $3.15 per share, while we're increasing our operating cash guidance range to $500 million to $550 million.
The new eight EPS range is based on 137 million to 141 million weighted average shares outstanding in a tax rate in the range of 23% to 25%, which does not reflect research and development tax strategies that may result in potential fourth quarter benefits.
Fiscal year 2020 guidance for adjusted EBITDA margin as reaffirmed.
We are extremely pleased to increase revenue a depth and cash flow guidance again because of the outstanding operational performance our leaders have delivered.
We're on track to deliver the continued strong growth we envision this fiscal year end the multiyear goals of our investment thesis are well within reach.
We are executing with discipline and excellence, which gives us a lot of confidence and excitement about the future.
Let's open the lines for questions. Thanks, Daniel Please open the lines.
Ladies and gentlemen to ask the question you will need to press star one on your telephone.
For all your question press the pound key.
The interest of time, we ask that you. Please limit yourself to one question and one follow up have you have any additional questions. You may rejoin the queue. Please standby, while we compile the Q and a roster.
Our first question comes from Sheila Kahyaoglu with Jefferies. Your line is an open.
Thank you good morning, Horacia later Mac.
Good results.
Hi, Ross.
Question for you. The team has executed on vision 2020, as you said in your prepared remarks.
Pretty difficult defense backdrop to start the strategy, how do you think about the changing needs at the customer over the next 10 years with a more positive budget outlook, how do we kind of think about happens evolves over the longer term.
That's a great question to get started thank you Sheila.
First of all like you to I need to start with a shout out to the team.
The work that was on from really 2012, so now to transform the farm and position US asked as the leading tech translator for the federal government.
Has really been outstanding and it's really their success that lower than I are here were percentage.
When you look at our business or the the numbers that were reported this quarter that we report for this year the increased guidance.
All shows that our strategy is working but this positioning the leading technology insertion company.
It's half a lot of momentum.
And it everything we see every sign we see points to the POC double from a readiness and im already patients standpoint.
The trends around technology are going to continue.
And Booz Allen doesn't sound Phil.
We appreciate the fact that the 2020, so not going to be like the 20 pounds.
Great power competition is something we've talked about in the past the digital transformation of the federal government is something we've talked about in the past those sort of the waves that we believe we need to be in front of and continued to invest I handle to make sure that over the next 10 years, we are anticipating the market not just reacting to it on where shaping the market that we offer.
Great in a height said in the prepared remarks, we're doing some work around trying to specify that a little more about but in general terms. We aim to stay ahead of the car.
We aim to continue to be a driver in mission innovation for our clients and we hope to then as a result create this kind of financial results that we do see.
Thank you and maybe as a follow up to that solid financial results revenue up 11%.
At the present Nextel evolves, but operating profit was less than that with the 6% increase can you maybe discuss puts and takes some operating leverage given the business model coupled with maybe hiring needs then investments you need to making the business.
I'll start.
Our operating leverage is remained pretty consistent to what it's been in the past and as we continue to.
Onboard the talent that we.
We need for that to meet the demands of our clients.
Doing success were being successful with that.
So we expected to remain the same going forward.
And.
I feel pretty good about where we are.
Thank you. Our next question comes from Carter Copeland with Melius Research. Your line is now.
Hey, good morning, gentlemen.
Morning Carter.
Just a rasco what I wondered if you might expand a little bit.
Prepared remarks around this concept of technology insertion and that being a theme.
Although you know there's there's clearly a need there the customer has been somewhat stodgy and slow to move to insert technology. So as you think about.
How you you change what you do or help the customer change what they do this era is there a difference you see evolving in your business model in terms of how you invest or how you interact with the customer to really at act that change I just I wondered if you could expand on that for us.
Sure right.
We've been talking over the last few quarters, how about that popped up with more budget stability, our clients, who have the pent up need to insert new technology have actually have the opportunity to begin to do so.
Hey, I'm sure a lot of people on the call either attended or.
Watched the panelists out the Reagan Defense Forum last December for example, what struck me about the more than it doesn't panels that included.
All of the key.
Decision makers.
Indeed, the key policymakers all of the serious industry players all gather together on when you listen to the speeches on the panels.
The one consistent theme was importance of technology I say, that's really a wait to leap for all these great our competition.
And we're seeing that in our business. If you get inside our revenue growth. What has me excited is the numbers are great I don't dispute that one.
Important these what's inside those numbers and our work is totally aligned to this notion already being detect translate or so for example.
We just launched a program, where we're modernizing GPS systems across the course on the Navy.
We're using virtual reality for advanced training for the Army.
We have many AI programs not just in defense from the Jay to the operating units, but more broadly in places like the FDA.
And.
Almost too many dimensions cyber programs that are mission oriented where we're protecting platforms not just networks.
We believe that isn't accelerating trend we believe our clients are eager to continue to do that on the relying on booz Allen because over the last a year for building novation capabilities and their positions to be able to do so so I think that speaks to the sustainability of our market position on it speaks to why.
Why we continue to to outpace the market and gain share.
And the probably also will speak to the resilience of our market position, even with shifting budget scenarios into the future.
Great Thanks and.
Just as a follow up <unk>.
Embedded within the head count.
Growth I wondered if you might speak a little bit to what you're seeing in terms of attrition lately and and if theres any been any change on that.
No Carter, we said at the beginning of the year that we expected to grow our workforce by 5%.
We also said that we were going to come out of.
The first half more aggressively than.
Given the uncertainty with the budget at the time.
And we're tracking to that so.
Were up a I think 6.5% Q2.
I, 0.3% this quarter. So we've are performing exactly with.
What we expected and we're also seeing sort of the normal patterns.
Attrition tied to that we're not demand constrained and with the expected.
Head count growth that we're.
On track to deliver that is also contributed to us.
Raising and tightening our guidance.
Thank you. Our next question comes from Joseph Denardi with Stifel. Your line is now open.
Hey, good morning, recording talk a little bit more about the the morning, the headcount challenges.
Within the Intel side of the business has that been getting kind of better or worse of late and what the strategy is to address that thank you.
Sure.
Let me give it a little bit of context, because I think this has announced or that that ultimately has.
Well I mean, if you look at our business as you. So defense our civil are actually ahead of our expectations for the year Intel as Hillary behind our internal expectations on when you deep dive into Intel the dynamic is that early in the year US We reported we lost a couple of Recompetes.
And so to get back to where we wanted to be we actually have to higher ahead of our internal plan in order to get caught up for this fiscal year and take advantage of the demand that we actually believe is there.
Actually higher at our plan rate, we did not get above it and we're very focused right now and accelerating our.
Recruiting efforts, we've already made some changes to the approach there's more to calm and we're going to be working got.
Really hard.
I want to come buying back out to the entirety of the portfolio because it's it's instructive to look at one part of the business and it's important but I think it's important to also not lose there for us for the trees in that we do not run our business.
As divisions or silos, we run it I think the rocking Pcs and so in this particular case the applications and all the.
The demonstration of that is that some of the talent that was in our internal business earlier in the year.
It's actually redeployed to other parts of the business because of the clearance is on the skills that they have and that's actually helped fuel the growth that.
We've seen in other parts of the business.
Which then when you put it altogether takes us do and Lloyd keep me honest I think this is the first time, while where our entire revenue guidance range for the year into the double digits.
So so you know it's really important to look at the totality of the portfolio because one of the things that we've always always being really good out is managing our talent base really on a portfolio basis.
That's helpful and then Lloyd over the past couple of years I think I think investors have had confidence in your ability to sustain the organic growth because of how strong that the book to bill as you talked a little bit about that but it's not as strong as it was.
Are there any major factors to kind of point out in terms of protest or just larger opportunities getting delayed a little bit that's affecting that.
Thanks.
Sure.
We generally don't see ourselves the demand constrained at all in fact.
Looking at our Q3 record backlog up 7.4%.
The 22 billion.
And the 0.48 book to Bill for this quarter is in line with where we were.
Last year.
We're certainly seeing a little bit more volatility quarter to quarter.
Given that as we said in our prepared remarks, we're pursuing larger more technically complex awards, but.
The team's doing great and we're winning on those proceeds as well so.
So for US you his opening comments.
The fact that we've raised insight and guidance.
We see our backlog supporting that.
Thank you. Our next question comes from Cai von Rumohr with Cowen and company your line.
Yes. Thank you very much so horacia you mentioned again.
The key drivers to your market being great power competition, and digital transformation that being the case.
I would think that Intel would be among the highest priorities of your target market is not the case and if not why not.
I don't know that the recently a highest priority I think when you look across the portfolio. There are real opportunity in all elements of it or we clearly see opportunities and Intel we see the demand there and as we've talked before there are some constraints about the level of clearances required to work in that market.
But lots of opportunity here, but if you shift to some of the other things I was talking about before huge opportunities in defense and tremendous need both in terms of right our competition and even some of the most recent.
Oh.
Political turmoil.
Speaks to the need to having the right technology to address those trends and then in our civilian portfolio.
Everywhere from the BA to the FDA to the IRS they need for new technology, they need to modernize hot this is a target rich environment for Fourq technologies Harrison Port technology translation across the federal government and we're on it.
Great and the other thing you mentioned was that you were focusing on going after larger more complex programs. Historically your strength has been that you are on so many idea queues and you've basically been able to win business and smaller bites with greater.
Speed than some of your competitors, how does the move to kind of chasing a bigger elephants.
Really kind of fit with where historically your strength of spend.
We're actually not moving to chasing bigger elephants asset to use your words, what we're doing the.
The core of this business is still very vibrant around this mid size programs that are continued to grow rapidly that creates tremendous value for the client on that have all of the economic benefit that we've always.
Like I think that the other reality access you get closer to the center of the clients mission you do technically more complex work.
Some of it is competing in this larger.
Contracts and we have become quite go that going after them and capturing billion dollar programs, but this is an add on to create balancing that portfolio is not a replacement for what we're doing and that's why you're seeing the growth that you're seeing.
Thank you. Our next question comes from Gavin Parsons with Goldman Sachs. Your line is now up.
Hey, good morning, everyone.
Morning.
I wanted to follow up on Carter's question earlier, just when you're talking about the emphasis on technology and kind of the shift to software defined I'm curious if you see any any bigger opportunity to participate in would have traditionally been hardware programs are platforms.
Whether it'd be something like a b 21, or GBSD, whether that be in partnership or even competition with traditional hardware products.
We actually are already in many of these programs and have been four years on what's happening is our role it seems to be evolving inside of programs to delivering some of these.
More technically oriented work worse before we might have been more on the program management side.
So I see that trend continuing on intensifying asked again, a lot of the value moves from hardware to software things like open architectures become of greater interest.
To the government cyber security of these platforms becomes a more important element that the government is investing in so we see opportunity in part the continuing to participate any pockets scaling our presence in some of these programs.
Got it.
And then on working capital and even after you raise free cash guidance here I think it's still implies around 90% conversion on net income some it looks like that still has a pretty big working capital dragging. It this year and correct me if any of those metrics im wrong, but if revenue growth stabilizes as opposed to the acceleration you've had over the past few years does that mean.
A lessening working cap Dragon do you see better free cash conversion going forward as a result thanks.
Yeah, I mean, we don't see it that way I mean with a strong balance sheet that we have a the fact that you know now we're raising our guidance around operating cash we feel we've got you know.
The ample capacity to meet our operating needs as well as.
Our capital deployment needs.
Thank you. Our next question comes from Jon Raviv with Citi. Your line is no.
Hey, Thanks, Good morning, everyone on the trying to Kevin's question, a little bit it little bit different way.
With the blurring overlying seemingly between hardware and software if you will and plus the customer always talking about software software and technology. As you mentioned her US you know at Reagan.
To what extent do you sense that maybe some of the hardware companies are feeling like they be left out and maybe they are investing or trying to hire we're trying to acquire assets in this space still most perhaps catch up in the Super spec.
I'll, let them talk about their businesses I think what I can tell you from our perspective as we see growing opportunity.
Again.
There's no doubt that there is the digital part of these value change is growing in both value opportunity and probably profitability.
And that's why we've been so interested in driving that into our traditional business and doing the kinds of programs that I described before and that's frankly also why our option value opportunities are interesting as they are because we believe there's a seen their work that's actually going to continue to grow continued.
Do I value things like Marazzi, our new needs in the market that nobody is addressing bite off and so.
I think there's really this is what is I think going to fuel our potential opportunity going forward.
If freesheet then you sent me up for my follow up on the option value I know, it's you know.
Hard to answer sometimes but how much of the uplift for seeing this years from option value or do you think theres still a lot of prime growth and things like much in district defendant unrest dot Gov. Thank you.
Yes.
I'll start John .
Those initiatives the bridges back to the main business as well certainly Oh, what we're doing with Matsui up is that application to back into what we're doing in or in so in defense businesses.
Still too early for us to parse.
The degree to which but.
Certainly our business leaders, the merit as well as the potential.
For these initiatives as it relates to the view this oh, we look at an owner portfolio basis.
And as that portfolio continues to grow and strengthened we'll have more to say about that.
Thank you. Our next question comes from Matt acres with Barclays. Your line is now open.
Hey, good morning, guys. Thanks for the question.
I wanted to touch briefly on the Intel headwinds that you mentioned earlier I guess some of these recompete.
Are those mostly behind us or is there anything big kind of watch out for the future and then you on a head count side, we see all these headlines of security clearance backlog running down is that maybe help you grow faster going forward or is it more just a matter of kind of finding the right talent.
On the first part of your question I, our room when rates continue to be very strong.
Sadly, we don't went 100% of everything but I actually think there's goodness in that in that we're okay leaning forward into work that would be hard for US again, we're still getting.
Some of it I think that's what drives growth and an opportunity and I'm proud of the team for.
Taking swings up some of those things.
On the glamorous reform thing.
I, we've been part of a conversation with policymakers and with clients on this topic and we are glad to see that progress is being made at the.
The macro level.
Our level, it's still too early to see any real movement, there say marginal improvement to some of the times or clear as a crossover some things like that but on the whole and on domain.
We still haven't seen.
A easing of Oh about supply.
But as I said before the key for US is ultimately going to be how were revamping their way were recruited into those markets and we're still growing our headcount that the anticipated 5% for the year. So we're feeling pretty good.
Okay. Thanks, and then I guess, if I could just briefly on margins EBITDA margin I thought.
And then the quarter given that second half for you guys is typically a little bit weaker.
But then I think your guidance implies a pretty big kind of sequential decline in the fourth quarter. If you could just kind of talk about the dynamics there between third and fourth quarter.
Right.
At the top though.
We're pleased with our margin performance for this quarter and it's very much in line with our expectations of low turn through F. why 21.
After that we also see us being able to sustain it we're operating extremely well a contract level.
It's broad based we've got systemic improvements in our contract lifecycle from pricing as well as to delivery. So from our perspective, its certainly working closer to clients mission more technically more technical content of the work our execution and so forth there is it.
Michael seasonal pattern or margin.
Performance, but as we have forecasted the year, we expect to be able to low tens and we're on track to do that.
Thank you our next question comes from.
Jason with Jpmorgan Your line is now.
Okay. Thanks, very much and good morning, I'm going to process.
Just to ask another question about intelligence just as we think about the outlook and we think about the actions that you guys are taking their to to win more on this is it's kind of a matter of saw anniversarying. Some of these recompete losses, and so we should look for acceleration in growth there maybe in the you know in the back half of next year.
It's too soon to put a timeline on things like I said before we see a ample demand.
Our win rates overall are consistent with historical.
Our hiring is consistent with historical and we need to accelerated beyond that and we're on it. So stay tuned work I work. This is part of US we cannot as fast as we can.
We'll share more when we know more.
Excellent. Thanks, Thanks, and just finally right on the the the mix in the quarter with the high billable was that kind of attributable to the one thing or.
And what is what are the implication there going forward I think as a percentage of sales. It was that it was fairly high is that just a timing issue in this quarter on a kind of reverts or is your I mean, we forecasted billable I'm sorry, we had forecasted billable expenses to be between 29 and 31% for the year end.
It's a it's a little bit elevated from that largely driven to a subcontractor requirements in our defense.
Business part of the business as well as a odcs related to that given the strong performance in defense.
Expected on our part but.
A little bit elevated outside of the range, we originally forecasted.
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Thank you. Our next question comes from Robert Spingarn with Credit Suisse. Your line is now.
Hey, good morning.
Robert couple of things just.
Lloyd Ross you had mentioned that the commercial business was flat so far year to date.
But I think you've also said that is one of the key drivers for EBITDA margin upside and so I want to reconcile this idea that that's going to improve but the margin.
Maybe contracts in the fourth quarter based on the comments a moment ago.
So how do we think about that and if if commercial doesn't start to accelerate what what are the long term implications for EBITDA margins there if at all.
Sure well I think the first way to pick this up is.
Not only be that we're pleased with our merger performance, we're tracking to a low tens for the year, but you also knows that there's an increase that our costs plus a portion of the portfolio, which is offset by our strong execution on the fixed price and time and material works.
In addition to that our continued sale of the word technically focused work comes with a a higher margin that also contributed to that as we had pointed out in our previous calls regarding commercial after four years of mid 28, the low 30% growth.
You know we are expecting and it's still growing this year, we're expecting for us to return to a stronger growth profile in the future once that happens that will from our perspective contribute or be accretive to what I. Just said regarding our strong operating performance with the federal side of the business.
Okay and then maybe this is related to part of what you just said on the technology side, but the cost of goods sold.
Where the opposite of Billables in the quarter they were very low.
Is that a function of the high billables and the revenues or is there something else there.
No we think it's a part of the high Billables.
Thank you and our next question comes from Edward Caso with Wells Fargo. Your line is now.
Good morning, Congrats my other question around the pace of award activity the company.
Historically is very sensitive to the September government fourth quarter, where the presidential election cycle coming up can you look back in your history and is there going to be more challenges.
For Booz Allen to hit that Spike number in the September quarter. Thanks.
It's it's too soon to start to talk about.
Guidance for next year or any of that so I all you know.
Refrain from that.
Generally speaking, we don't see the outcome of elections until well after the election in our business.
The bigger challenge of your question over the last few years has been the pace at which the budgets get settled.
Yeah and approved and you know so this is it to your budget deal there's.
We'll have to wait and see in the meantime, that's lower than I have offset.
Ample demand for our services.
We're bringing on talent.
Strongly and we have lease for the that's hard to our Crystal ball goals, we expect that the company.
My other question is around the duration of awards just curious if across the portfolio.
The durations getting longer and then sat helping your.
Didn't proposal dollarss stretched farther.
Yes, I think just a short form of the answer is the you know that is you're going to remember a few years back.
Parts of the government decided to try and limit things to three years I think that that was not a good move for the government and he certainly didnt help industry I think we're back to with a more normal historical fine lines and so we've seen.
Length of award to to climb up to sort of historical.
Averages were we're happy to see that and hopefully that will be stable income.
Thank you. Our next question comes from Tobey Summer.
Suntrust. Your line is now.
Thanks, I wanted to pull the aperture back in as you look at what your next set of long term financial goals might be how do you think about.
The kind of peak budget spending growth that at least from a headline perspective versus funding that may be more applicable to the company. Thanks.
Sure you know as we said the onset of our investment thesis.
We expected.
Expected to be in 69% topline growth.
So tens in terms of margin and 66% increase in eight UBS.
Given the uncertainty with the budget going forward.
The best of our abilities.
You know we tried to take that into account so I'm hesitant to look beyond.
The horizon of our investment thesis, we have a work currently underway, where we are evaluating our strategy, we will take that into account, but also keep in mind.
From has performed well in certain in an uncertain budget environments in the past than we expect to do so going forward.
As a follow up I was wondering if you could just give a little bit more color around what your plans are to accelerate growth in the commercial area.
You know, we we have a business as Lloyd pointed out before that that was growing at this very strong double digits. We have a it's a small business is 3% of our overall portfolio and it's less mature than the rest of the portfolio. So it'll experienced more volatility we take few contracts that while down.
But we expect that business to continue.
Its expansion.
Into the future we're optimistic about what we're seeing.
There are already and we're looking at where do we go in action as part of the overall strategic review.
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Thank you as a reminder, ladies and gentlemen that Star then once asked the question.
Our next question comes from Ronald Epstein with Bank of America. Your line is now.
Hi, guys. This is caitlin on for on according to your 10-Q. It looks like you recognized a bad that reversal of about 9.2 million quarter can you discuss the impact this had on earnings.
You know, it's a normal Uh huh.
Part of our operations our financing.
It hasn't had immaterial impact to the to the bottom line.
Okay. Thank you and then can you discuss a pipeline of upcoming recompete contracts and new business opportunities anything specific that we should be watching out for.
Oh no no is the you know the team is doing very well in shaping a future opportunities we don't see anything.
Different than for the normal appoint a where we are in our fiscal year end, given our raizen and guidance you know we remain optimistic of having a strong.
Slide 20.
Thank you ladies and gentlemen, this concludes our question and answer session.
I'd now like to turn the call back over to crossing over is asking for any closing remarks.
Thank you everyone for your questions Lloyd and I look forward to a strong finish to the year.
And we're very proud of what the firm has accomplished a one more time I want to do a shout out to the entire team for an exceptional job.
They are working as hard as ever to continue was else evolution and to sustain our growth by delivering unmatched value to our clients.
Again, thank you for taking the time to be with US This morning and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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