Q3 2021 Booz Allen Hamilton Holding Corp Earnings Call
Good morning, Thank you for standard by walking to the Booz Allen Hamilton's earnings call covering the third quarter results for fiscal year 2021.
At this time all participants are in a listen only mode.
Later, there will be an opportunity for questions I'd now like to turn the call over to Mr. Ruben day.
Thank you good morning, and thank you for joining us for Booz Allen's third quarter 2021 earnings announcement we.
We hope you've had an opportunity to read the press release that we issued earlier this morning.
We have also provided presentation slides on our website and are now on slide two.
I'm Ruben day head of Investor Relations and with me to talk about our business and financial results are Horacio Rozanski, our president and CEO and Lloyd Howell Executive Vice President CFO 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's services and other factors discussed in today's earnings release and set forth under the forward looking statements disclaimer included in our third quarter of fiscal 2021 earnings release and in our S.
T SEC filings.
Caution you not to place undue reliance on any forward looking statements that we may make today and remind you that 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 and other reconciliations of our non-GAAP measures for the most comparable GAAP measures in our third quarter of fiscal 'twenty year 2021 slide.
It is now my pleasure to turn the call over to our CEO Rusty own rozanski, we are now on slide five.
Thank you Ruben.
Good morning, everyone. Thanks for joining the call.
Today, low then I will take you through our third quarter results and the dynamics of drove them.
And we will put the results in the context of the successful culmination of our three year investment thesis and the strength of our business in the near and long term.
As you saw in the press release, we had the mix quarter.
Our revenue grew more slowly than expected.
Conversely, our bottom line results profit margin and cash flow are excellent and the ahead of expectations.
Since the beginning of our fiscal year. We have described three macro environmental factors that created uncertainty about our second half.
The outcome of the election.
The status and outlook for the federal budget.
In the course of the COVID-19 pandemic.
Let me talk specifically about how those are playing out on the demand front.
On the supply front and the impact on revenue and profits.
Underlying demand for our services and solutions remains quite strong.
In the third quarter, we saw delays in some procurements in the intelligence market.
Largely due to the pandemic.
And in the civil market, we saw movement to the right on awards and even some pullback on funding.
Which we believe is due to the turmoil surrounding the presidential election.
These shifts in procurements and funding were greater than we anticipated.
The greater than we normally experience during the change in administrations.
We expect these dynamics to be temporary.
With a return to more typical market rhythms over the next six to nine months.
Secondly on the demand side.
Although the reduction in billable expenses in comparison to our third quarter of last year.
We have said previously the billable expenses are unpredictable and.
Not a significant source of profitability.
The third quarter drop off was partially due to COVID-19 and he sent other dynamic that may last for a couple more quarters.
Turning now to the supply side.
There were two factors in play.
The first was the fast return to more historical productivity rates.
During the first half we spoke of the meaningful jumping productivity because of high retention and low use of paid time off.
We always knew that was temporary.
Our expectation was that we would see a gradual shift to typical patterns of COVID-19 vaccine is rolled out.
Instead, we saw a quick snap back to more normal, albeit lower productivity levels in November.
Early indication is that our fourth quarter productivity levels may remain closer to historical norms.
Also in the third quarter the.
The combination of lower than the size of recruiting rates and the strategic divestiture of a small defense contract led to a sequential decline in head count.
That's the productivity declined in the first half we were comfortable with slower head count growth.
But with the snap back to normal levels, we need to accelerate recruitment.
We have already ramped up and expect to see improvement in three to six months.
Shifting to our other of key metrics, let me highlight the strength of our margins bottom line and cash flow.
While the reduction in billable expenses helps margins are over performance of the bottom line on the cash flows is primarily driven by a strong execution of the business.
Despite the challenges of the past year. Our team has remained focused on the fundamentals that drive our performance.
High quality client delivery smart capture of new business.
Targeted cost management and continue the investment in our Differentiators.
Especially our people.
As a result.
We have made our business leaner and more competitive and.
In house of brand in the market for talent.
And double down on our growth drivers.
All while delivering outstanding value to shareholders and strengthening our balance sheet.
We expect both the headwinds and tailwind I just described.
To be with us for the next few months and that is reflected in our updated full year guidance.
Which lloyd will talk through in detail.
In addition.
Noting our confidence in the business, we are pleased to announce a 6% increase in our quarterly dividend.
And an increase in our share repurchase authorization.
Which will continue to support our ongoing share repurchase program.
We are proud that through all of the challenges of Covid, social unrest natural and man made disasters budget uncertainty and the most difficult election of post election period in our lifetimes Booz Allen is on track to deliver another year of growth and value creation.
And we also know we have some work to do.
For the fourth quarter gets underway the leadership team has prioritized for specific areas.
Converting of rich opportunity pipeline into awards from revenue as quickly as the market permits.
Ramping up recruiting to take full advantage of growth opportunities.
Continuing to reshape our intelligence portfolio to drive growth.
And maximizing value creation from our very strong balance sheet by deploying capital against strategic opportunities such as of recent investment in price point.
The other levers of shareholder value creation.
I'll start of that summary of our near term performance from priorities, Let me take the discussion of upper level and put it in there for context.
My leadership team and I are confident and optimistic about the direction of our business and the meaningful difference our people continue to make in support of client missions.
Covid vaccinations are underway at federal budget is in place and the New administration has hit the ground running.
We view these as important stabilizing forces in the overall economy any of our market.
The President has nominated an experienced team of leaders to execute the business of government.
They have clear agendas and understand the value of using technology to accelerate the mission.
Inside Booz Allen.
Even as we focus on day to day operational excellence, we continue to plan for the long term.
Our overriding objective is to expand and strengthen our unique market position at the intersection of technology mission and consulting.
We do that by staying close to our clients anticipating what they will meet next and investing in the right talent and capabilities to advance missions.
The investments we've made to grow and reshape our portfolio over many years are both driving today's performance and bolstering our prospects for the future.
For example.
We believe we are the largest provider of artificial intelligence services to the federal government with 60% year over of your revenue growth in our AI services portfolio.
The it from a small base.
This is an addressable market that we expect to increase tenfold in the next five years and we are in the pole position to shape it.
We also support key federal agencies that form the epicentre of U S cyber security across.
Across the civil defense and intelligence domains.
With our ranking by Frost <unk> Sullivan as the leading provider of cyber security services in North America.
We view ourselves as uniquely positioned to both help the nation and capture opportunity in this critical area.
The New administration is already signaling renewed focus on cyber in the wake of the solar winds attack.
We're also building scale and depth in five G M.
And the next generation Tech stack.
If I of gene network requires the integration of hardware software Iot devices security analytics and the mission insight.
Which plays to our strengths of our brands in the federal market.
We're standing up a five G lab to support research and development, we have partnerships with leading five G technology companies and we of prototyping integrated capabilities.
These key technology areas and others from edge computing to digital warfare to cloud solutions and open data platforms, the immersive technology and human performance. They all inform our thinking as we develop our <unk> strategy.
We continue to make good progress and look forward to sharing our strategy with you later this year.
Along with an updated multiyear financial outlook.
I'll make one final the important point before giving the floor to Lloyd.
With less than one quarter remaining in the three year time horizon of our investment thesis, we are on track to deliver greater than 80% growth in aid apps.
And already the ambitious 50 per cent goal. We originally set in June of 2018.
Even in the most turbulent times our firm has translated it's differentiated market position into high quality performance and shareholder value.
As expected of an industry leader.
On the strength of this performance.
And with our purpose and values as the Guy we will continue to succeed and strengthen the institution.
Over the short <unk>.
Medium.
And long term.
Moving over to you for additional perspective on the third quarter and our outlook ahead.
Thanks of Osteo and good morning, everyone.
As we approach the end of our 2021 fiscal year a year of unprecedented challenge. We are proud of how well our people have consistently executed when our clients. The most important missions as Horacio mentioned earlier and outlining our 'twenty and 'twenty one annual operating plan, we identified three major.
Your sources of uncertainty.
The November election, the budget outlook and the COVID-19 pandemic.
After an exceptional top line performance in the first half helped by unusually strong staff utilization, we expected slower growth in the second half as PTO trends began to normalize.
We also anticipated the potential for a slowdown in the award activities. Following the November presidential election, we factored these elements into the annual guidance, we provided at the end of the second quarter.
However, we did not correctly, you anticipate the timing and magnitude of the top line impact of those dynamics.
Our cost management efforts to date enabled us to hold the line at adjusted EBITDA.
I'll now run through our third quarter results.
Please turn to slide six.
Starting at the top line revenue and revenue, excluding billable expenses increased 3% and six 2% respectively compared to the same quarter last year.
Revenue growth was primarily driven by solid operational performance indicative of continued demand from our clients tempered by lower billable expenses largely attributable to COVID-19.
Let me give you more color at the market level, starting with the demand side.
Revenue in defense grew 6% year over year against a challenging third quarter comparable.
I note that revenue, excluding billable expenses continued to grow strongly but our defense business carries the bulk of Booz Allen has exposure to billable expenses.
Were lower than expected in the third quarter due to less travel during the pandemic.
And they were elevated in the prior year period due to the significant material purchases on aircraft programs.
As Horacio mentioned underlying long term demand for our services and solutions remained strong but.
But we did experience lower than expected starts on existing defence contracts and a few larger awards slipped to the right.
We expect the used to be resolved over the next few months.
In civil revenue growth was 7% in the third quarter.
Here, we believe the chaotic post election periods shifted some awards to the rate in.
In addition, there was a pause on a large cyber program due to the funding availability.
We expect the path to have a larger impact on the fourth quarter, but given that it is a critical cyber security program for the customer we believe work will ramp up again longer term land.
Lastly, I would note that we expect increasing demand in civil as the new administration starts implementing its priorities.
Revenue from our intelligence business declined 3% in the third quarter.
Our focused efforts to reshape the portfolio continue and we expect to see stronger performance in FY 'twenty two.
Lastly, Q3 revenue and global commercial which accounted for approximately 3% of our total revenue declined 35% year over year. The drop was driven by our international business based in part on market dynamics, but also due to our own decision to shift our strategic focus.
As to our cyber business in the U S.
In support of that we made a minority investment in Tres point, a digital forensics and incident response company serving clients in the public and private sectors.
We're excited to partner with trace point and see a significant opportunity to cross pollinate with Booz Allen boom digital forensics expertise.
That covers the demand side now.
Now, let me step through the supply side dynamics as well as our expectations for the rest of the year.
In the first half of the year, given the limited ability to travel during the pandemic. Our employees took very little time off from work.
We encouraged our people to take PTO in the interest of their personal health and expected a gradual return to normal productivity levels as a result.
Instead of PTO utilization returned back to historic levels in November and we believe that trend may continue.
We note that the timing around the rollout of a COVID-19 vaccine could habit of material influence on PTO utilization.
Regarding head count while attrition remained low we did not add as much head count in the third quarter as we had planned in part due to our strategic contract divestiture.
Our hiring needs for somewhat lessened in the first half of the year due to unusually strong staff productivity, but we intend to pick up the pace on recruiting this will take us from time to address but we expect to be back on track by early next year.
We ended the quarter with 27566 employees, an increase of 390 or one 4% year over year excluding.
Excluding the impact of the 110 person workforce transferred as a part of the army related contract divestiture. We would have ended the quarter with 1.8% head count growth year over year.
On slide seven you'll see that total backlog increased six 1% to $23 $3 billion funded backlog was up two 8% to $3 $6 billion.
Funded backlog grew 12, 5% to $6 billion in priced options rose four 3% to $13 $7 billion.
Our book to Bill for the quarter was three times and our last 12 months book to Bill was one two times the relatively low quarterly number is attributable to two factors first seasonality following our historical pattern and second the aforementioned delay in awards.
That we continue to expect volatility in quarterly book to Bill as we pursue larger and more technically complex bids.
Moving to the bottom line adjusted EBITDA for the third quarter was $205 million up 7.7% year over year adjusted EBITDA margin was 10, 8%.
Adjusted EBITDA performance was driven by strong execution across the portfolio.
And ongoing prudent management of discretionary expenses adjusted.
EBITDA margin was also impacted by lower billable expenses.
Third quarter net income and adjusted net income grew 29% and 28% year over year to 144 and $145 million respectively.
Diluted earnings per share and adjusted diluted earnings per share each increased 30% to one dollar and three cents and one dollar enforced respectively.
The increases were due to solid operating performance and the release of a large tax reserves stemming from our previous Aquaman acquisition in fiscal year 2017.
This reserve release was factored into our previous guidance.
Turning to cash we generated $233 million in operating cash during the third quarter, an increase of 133% over the prior year.
Cash ended the quarter at 1.3 billions of dollars.
The exceptional operating cash flow was driven by the overall growth of the business continued strength in collections and reduced payables attributable to cost management.
These first three quarters of cash generation represent our strongest year to date performance since our IPO a true.
Truly phenomenal result.
Capital expenditures for the quarter were $16 million.
This year, we continued to prioritize technology and tools that enable a virtual work environment.
Also we are nearing the implementation of our next generation financial system, which will support the company's growth into the future.
Please turn to slide eight.
During the quarter, we repurchased $27 million worth of shares at an average price of $83.76 per share.
Including dividends and the minority investment we deployed a total of $142 million in the third quarter.
As Horacio noted our share repurchase authorization has expanded.
As of January 26, with the $400 million increase we now have a total authorization of $747 million.
In addition, the company has authorized a dividend of <unk> 37 per share payable on March 2nd to stockholders of record on February 12.
With $1 $3 billion in cash on hand, we continue to view of our balance sheet as a strategic asset.
We remain committed to preserving and maximizing shareholder value through patient disciplined capital allocation.
We see ourselves as well positioned to act quickly on opportunities as they arise.
Now onto our updated guidance.
Please move to slide nine.
Well revenue growth was slower than expected we are proud of our team's ability to manage the business engage the deficiencies amid the many macro environmental challenges of this fiscal year.
Margins and EPS and cash flow are all trending above our expectations.
In our view this speaks to the strength and resilience of the Booz Allen business model.
In the fourth quarter, we are focused on fundamentals.
We plan to continue investing in our people and our long term growth initiatives.
We will continue to recruit aggressively to sustain long term organic growth and intend to reward our people for their strong execution through the first three quarters.
We are also nearing implementation of our new financial system, which will further support our business leaders.
Our revised guidance reflects these efforts in addition to the third quarter performance and trends I just outlined.
Let me run through the numbers.
For the full fiscal year revenue growth is now expected to be in the range of four 8% to 6%.
Our revised range reflects the $150 million to $250 million of revenues tied to the second half of uncertainties, we outlined earlier the.
The election, the budget and COVID-19 they.
They break down as follows.
Perry of programmatic shifts of $50 million to $100 million.
$50 million of risk tied to a material incremental step down in staff utilization.
And lastly, lower than forecast billable expenses of $50 million to $100 million largely from lower of pandemic related travel.
For your models. We also note that fourth quarter working days will have a difficult year over year comp because last year was the leap year.
We expect adjusted EBITDA margin for the year to be in the mid to high 10 per cent range.
We have raised the range for adjusted diluted earnings per share by 10 two.
To between $3.70 and $3.85. The aid of guidance is based on the 136 million to 140 million weighted average shares outstanding and a tax free in the range of 20% to 23%.
When the operating cash we have raised the range by $25 million to between $625 million and $675 million for the full year.
And finally, our outlook for capital expenditures is unchanged at 80 million to $100 million.
Before opening the line for questions I'll briefly touch on our investment thesis.
We have confidence in exceeding 80% Egypt's growth over the three year period. This growth is supported by 6% to 9% annualized revenue growth since fiscal year of 2018 at mid to high 10% EBITDA margin in fiscal year 2021.
We also are proud of our option value initiatives over the period and our progress towards one $4 billion in capital deployment.
I am pleased to say that we are well positioned to exceed our three year, Egypt growth goals organically, while retaining the strongest balance sheet in the history of the company in spite of the turbulence of the last three years.
As we move towards our next the investment thesis I believe that the people of Booz Allen will rise above the challenges that emerge in order to continue meeting the high standard our shareholders of come to expect.
We remain confident in the long term trajectory of the business and focus on maintaining our role as the industry leader.
With that Reuben, let's open the lines for questions.
Thanks, Mike Operator, please open the lines.
Yeah.
Ladies and gentlemen to ask a question. Please press Star then one.
If your question has been answered any of us to remove yourself from the Q rest of the county are for.
First question comes from Carter Copeland of Melius Research Your line is open.
Hey, good morning, gentlemen, and I hope you're all well.
Good morning.
To just just two quick ones for me one of these it seems sort of strange to ask but given the importance on the top line I guess, it's important to know how it works on the the P. T O impact to the extent, there's you know the unused P. T O for the the staff on the year and you roll that forward to next year I.
Youre not guiding for next year, yet, but how should we think about is there a is there an impact of of shifting some of that productivity impact into the following year that we should be mindful of as we think about next year's growth.
Yeah I'll start.
Carter.
There were three main reasons for slower growth in Q3, and one of those is definitely tied to.
The lower productivity than what we were running in the first half.
You look at the reasons for that not only is it higher PTO driven by lower available labor, but also lower staff utilization.
We definitely saw it snapped back with productivity faster than what we expected we think as things normalize.
It'll go back to as we said in our prepared remarks, our historic levels and we think that will occur.
Occur over the next couple of quarters.
Yeah I guess my question is Lloyd is there a way for thinking mathematically about it is there a way for it to go beyond the normalized because you've got built up balances of P. T. O. The then suddenly need to get burned down if you know what I mean isn't sort of I guess I'm, just asking about what normalized means I suppose.
Yeah, I mean for the balance of this year, we think it's a 50 million dollar.
Range.
Were not at the moment.
Any different than what we said or what we're seeing occur for the balance of this fiscal year.
Okay, and then on the the head count impact of the getting out of the the program the strategic decision to get out of a defense program can you quantify how big that was.
Yeah it impacted.
All 300 of our folks most of which we redeployed onto other programs in our portfolio.
But as we also indicated we expect that it'll continue to grow over time with regard to the divestiture that was of about 120 people tied in our army accounts.
Okay. Thanks for the color of Lord.
Our next question comes from John for vs of Citi. Your line is open.
Thank you and good morning.
So sort of a cent shifting from sales as to the margin rate Lloyd just your thoughts on on on the margin run rate clearly very strong here pointing to higher for the year is that the new sort of based off of what you guys can improve for some of the new efforts that you're making the new lines of business or maybe talk about the pressure perhaps of the some of this COVID-19 rolls off.
And people start the travel again and you start to spend a little more money.
Sure. So we're very pleased with our margin performance year to date.
From our perspective, it's the combination of strong execution of the portfolio as well as prudent management of discretionary expenses.
We didn't get here as you appreciate overnight, it's been a work in progress, but we believe that the things and the dynamics that have contributed to this will remain which is solid contract performance management of them on the levels and also as we made an art made comments in our prepared remarks low.
Of our billable expense.
Going forward, we are going to continue to invest.
Long term in terms of of hiring and rewarding our people and the infrastructure improvements that we mentioned in the.
Investing in capabilities.
So we believe that the mid to high 10 range.
As a sustainable and we're going to continue doing the things that they've got us of disposition.
Hey, John I'll, just add a couple of quick points are the first one is that you know the income.
Some ways that the margin of the margin percentage can.
Can be tied to the volatility of the billable expenses because as you know most of our margin comes from our labor.
Having said that I agree completely with low is that our focus is on EBITDA dollar growth.
And that has to be the solid it's been running ahead of our revenue uneven revenue ex available growth and that is constructed that for the becoming more efficient and we're going to keep all of that.
Yeah.
Thanks very much.
Yeah.
Our next question comes from K volume of Cowen Your line is open.
Yes. Thank you very much to go back to P. T. O do you allow employees to carry P. T O over from one year two of the next or do they use it or lose it.
We have a couple of programs we have of use it or lose it by the end of this fiscal year and then on accrual basis.
It sort of grows with the level and seniority of the individual so a portion of it will go away, but by the end of March.
Got it and then cyber clearly you know as a priority we had the the Russian hack.
And this basically putting 9 billion to update of.
Federal I T infrastructure could you give us some color I mean, you say you are ranked number one by Frost <unk> Sullivan, but.
Obviously, you've got any color you can give us on your business. There for example.
Your position in the Intel business, which isn't covered by Frost and Sullivan.
And you know maybe some metrics like what percent of your employees roughly are involved in cyber and given the focus I apologize for the long question how come we have the slip in the cyber program given the increasing priority.
Let me try and start without I think low it will probably want to chime in on your multipart question Cai.
The the first thing I would say is I.
Our position in cyber or in fact, even stronger in the intelligence community that it is broadly across the government or the commercial sector are they the work that we do in intelligence. It's in some ways the the crown jewel.
All of our side of our programs.
We are very.
I'm bullish on the medium term long term outlook for our entire side of our business.
Including the commercial which is why and we can talk later about the trace point.
The investment as a part of that.
It's actually difficult to break down the specific number of how many people do this and how many people do that which is why we don't do it because we approached fiber from an all of the mission.
The approach you know as we look at the intersections between cyber and cloud cyber and AI cyber on five G cyber and intelligence and so forth.
The it.
What are the specific contract that you were asking about what actually happened is that contract was actually burning at a faster rate.
Dan It was programmed to do.
Because of all of them.
And frankly because of the increasing the attack surface from so many people in the governor of them working from home and the like.
And there was an expectation that the last of administration of what a ramp up of the.
The funding to keep up with that on the last minute. They chose not to do so we believe that is temporary oh.
As you pointed out the the bite of the administration is looking to make investments in cyber we are talking to a lot of our clients.
How about the remediation from solar wind.
And so we see a lot of opportunity in that space and we're pursuing that opportunity.
[noise] aggressively.
Thank you very much.
Our next question comes from Gavin Parsons of Goldman Sachs. Your line is open.
Hey, good morning.
Hello, Good morning.
I wanted to carry through on the separate question, but maybe a little bit more on the the commercial market. It's always been a little surprising to me that the companies haven't utilized you yourselves of other government contractors.
Labour offerings more given that you are the ones who are actually doing cyber for the U S government for the department of defense and the Intel community, presumably you've got some of the best capabilities in the world. So curious if you could talk about that dynamic. If you think that you know that the nation state sponsored type of attacks increase of the commercial opportunity and how that could play out.
Yeah.
We do of Gaba and I think we are as we.
We talked about in the prepared remarks, we're actually shifting our global commercial focus are more back to the U S and much more double down.
On fiber for the very reason I think as the adversaries get more sophisticated.
And the clients get more of a sophisticated the demand for what we do gross quite frankly, when we first got into commercial cyber I think we were so far ahead of many of our clients that it was hard for them to consume.
The the type of cyber services type of capability that we could offer of our clients are moving very fast are catching up.
A lot of them are super sophisticated and so that's why we see a significant opportunity and increase in demand.
The the trace point.
The investment is directly related to our desire to be more involved and incident response, we do a good level of incident response, but that is the business of has evolved towards needing to have a channel.
With the insurance companies for early players, obviously, when when an incident happens and so forth and price point, that's a spectacular job of that and we believe that their ability to access of our channel and our expertise can create a real synergies and acceleration.
Great that's helpful.
And then just coming up on the end of your three year plan.
And they're not guiding forward and I imagine it's difficult to predict what the no the priorities of the for how the priorities of the New administration will play out, but whats your anticipation of what budgets will look like over the next few years and what that means for your your top line growth relative to the last few years of elevated budget growth. Thanks.
I'm sure you know I think it's Ah.
Trying to predict too far out with the new administration interest coming in and everything else. It is beyond what we should do.
Try to do.
You know we are thinking in general that the budgets are not going to grow as fast in the next few years I'll say grew in the last few years.
And so this is why we continue to invest and double down on these key technologies and capabilities.
Of that I've talked about before you know cloud cyber AI five G. Because we believe that the man for those.
Types of services will remain strong and in fact accelerate even as the overall budget gets potentially more constrained than it's been in the past and we believe that on two dynamics. One is because you can actually save a lot of money by implementing these technologies right and two which is what we focus on so far.
You can enhance mission success against some of these very critical missions that.
They're not going away if anything.
Are becoming more important.
Great. Thank you.
Our next question comes from Tobey Sommer with true with your line is open.
Thank you very much.
I was wondering if you could talk to.
The hiring plans and to sort of Reaccelerate your of your head count growth.
And how are you.
All of that May influence continued.
Continued margin expansion.
Part of your for the next.
The three year plan.
Sure I'll start.
You know, we have always prided ourselves on being a people first business.
Our employee value proposition plays into that.
And we clearly are going to accelerate and pick up the pace from where we ended in Q3.
For a couple of ways.
Reasons, we are confident that we're going to get there the.
First as I mentioned is our employee value proposition and the concept of the work that we provide to our clients.
Second we were one of the mechanical point over 30% of our candidate pools come from our existing workforce.
So candidates have familiarity with Booz Allen and understand what we're doing and accelerates the recruiting process and this is critically important because of the labor market as we all can appreciate.
Free competitive pre pandemic and in the midst of Covid. It has remained so.
So we're going to lean even more so on the levers that we've historically done.
And then also income.
The the pipeline as I've mentioned on the margin basis. This investment is kind of put a little bit of downward pressure on where we are currently and this is historically, what we've done in the fourth quarter anyway.
Which is really ramping up our people our bench as we go into the next fiscal year.
But even with that being said, we still are confident we're going to end up in the mid to high teens with margin.
One of the things I just to add.
One last thought on this is the that I think is really interesting.
Interesting and a good way about the the fiscal year that the whereabouts of wind is we have managed to lower our overall cost position, while increasing our investment in people.
And I think that tells you how we're thinking about the business what our priorities are and what we think about for the future.
Thank you for that my second question could you just speak to the the most promising areas in the civil business under the Biden The administration and discuss how your current portfolio lines up against those in May.
Maybe the the areas, where you have to position yourself slightly different in order to capitalize on the thank you.
I'm sure I'll give you maybe a bird's eye view on that are the strongest part of our portfolio of the largest part of our civil portfolio has been our health business and it continues to be.
We we saw during the Obama year of significant.
The investment by the country and the significant agenda against health care access we expect some version of that to Reaccelerate.
On the other biting the administration of that's an area, where again I think booz Allen is in the very good position to assist our clients should things.
Moving that direction, our citizen services business is.
Going to be underpinning the overall digital transformation.
All of our civil government, which is also something that's being talked about not just from my side of our perspective, but from the ability to move online.
Many of the services the that we are citizens.
The man, but are now expecting to see.
Online, we need to think take the step back and think about what role. We think we can play if there's a significant environment agenda that has.
We have a digital play into that we need to consider whether we need or want a brother.
Play in that area, but that is again.
On the reconsideration and how should we think about our strategy.
These are the kinds of questions, we're asking ourselves, but I keep coming back to we don't want to underpin all of infrastructure. All the technology, we want to leverage new technology into some of these areas of expansion and continue to be viewed by all of our clients as the people who insert new technology, new thinking commercial best practices.
Into their missions.
Yeah.
Thank you very much.
Sure.
Our next question comes from Joseph de Nardi of Stifel. Your line is open.
I think the good morning.
Lloyd could you speak to M&A a bit maybe the nature of your pipeline is that still a priority for capital deployment.
What would you characterize the pipeline as smaller opportunities or larger and then maybe just kind of your level of comfort in using equity chip.
The finance anything there. Thank you.
Sure.
We believe the as we've said.
Our balance sheet of certainly the strategic strategic assets, coupled with our strong generation of cash really puts us in a good position to not only pursue M&A opportunities, but also as we did this quarter the uptick with the dividend.
And the increased authorization with our share repurchase program.
Specifically regarding M&A, our pipeline has been growing consistent with the capabilities of our osceola of long talked about.
The software systems development.
Digital.
Data analytics, and we're looking at a variety of opportunities.
And the different ways to deploy that capital as we did with the trade point of investment.
You know these are all of different maturation points.
Increasingly these are opportunities that we've cultivated which has been really good and consistent with all of the individual market strategies and where we think.
The increased demand sort of come with our clients.
We as you know we have a pretty high bar, we have historically done look for capability tuck ins I would characterize them as that's very much consistent with what we've always said of.
But I'm very pleased with the the volume and remain confident that the inorganic contribution will pick up over time.
Okay. That's helpful. And then Horacio can you just update us on the the classified Intel.
Or customer set there maybe how that's going with the semi of recent leadership changes at this point and visibility you have into.
That customer again being a driver of growth for you all thank you.
Sure.
It's always difficult on these calls to talk about of Intel of business in any detail, but let me say the following the there's we.
We are seeing more pickup in both.
Proposal of opportunity and even some interest really interesting of warrants, albeit small.
Again, it's again the use of technology to help drive those missions I think if we had fallen behind the little bit on that part of the business is we we're not implementing or absorbing these new technologies into that business as quickly as we were on our defense and our C of O of your portfolio.
And that has changed.
A bit of an overhang for with some old contracts that you know frankly, we were going to be out of one way or the other and so the numbers as you see them right now reflect that mix shift.
That is working its way.
Through the system, but I am very optimistic about where that business is going I think once the awards that we are expecting finally stopped moving to the right and get awarded.
I think of the next year, we're going to see that business I'd like to see for sure see that business return to a healthy growth rate.
It's a good business and it we.
We we do some really are just.
The extraordinary.
Work, there for our clients and our clients value it which is really where it all begins for us if our clients value we need to figure out to do more of it how to do better and how to grow the business over time.
Thank you.
Sure.
Our next question comes from Louie Dipalma of William Blair. Your line is open.
Her ICL lighting, Ruben and good morning.
Money one of the way.
Hum harass yeah, you had demonstrated a L. D of leadership in data analytics. In addition to AI and in 2018, you announced that you won a very strategic $885 million he maps contract for machine learning and data analytics.
We have heard that there will be a EMACS sequel.
Contract that is significantly larger than the existing <unk> contract something in the one $5 billion range and.
I was wondering because I thought that your existing E maps contract had a five year duration of are they re competing your existing contracts.
Contract and as you know the D O D now happy and satisfied with your existing performance with.
You know machine learning data analytics and AI in general.
Thanks.
Well, let me answer the the sort of the last question for US I'll work my way back to the front of your question the.
The answer is yes.
Across all of our work we continue our leadership on AI on data analytics and machine learning.
And on being able to deliver those kinds of capabilities.
Two mission.
E maps being one of those examples of our work of the J demonstrates that in so many other places.
I don't want to speak specifically about any one contract on.
On this call, but I will say the somebody is not unusual for contracts Dorado ceiling ahead of their five year <unk>.
Time line and I think that is in some ways of demonstration that there's so much value being created that was originally expect a ceiling that was originally expected to last five years, sometimes you know.
It gets worked through in three or four are again, not because of the because the clients see so much value of that the that the mission set.
Expands and then the Recompete will come along in the Recompete will be larger to.
Accommodate.
Call it the higher burn rate annual burn rate.
In the contract and so.
We have a good number of contracts in our portfolio of some very large ones that actually will get re competed early.
And.
Almost every time, it's because again theres been mission expansion because of the quality of the services being provided and the contract not because of the client is dissatisfied with the services.
Thanks for asking yeah. That's that's all happened that was very helpful.
Sure.
Our next question comes from Seth Eastman.
Of Jpmorgan your line is open.
Hey, good morning, everyone. This is actually Ben on for Seth.
Good morning, Ben.
I guess I kind of wanted to go back to the the kind of the questions about revenue.
The high end of the guidance for this year implies another.
Another quarter of growth at about 3% in Q4, I guess, how should we kind of think about the trajectory of organic growth.
Beyond this year it sounds like some of the issues are going to the last couple of quarters.
Any color you can give on that and then is it still reasonable to think about.
Getting to an organic growth rate that was something closer to the original guidance for this year as you move past some of these headwinds.
Yes, I mean for the balance of the year as we said in our prepared remarks. There are a couple of dynamics that would have to be less than what were expecting certainly the impact of billable expenses, though we have long said, we're focused on revenue ex billable expense.
So that has an impact on revenue as you know.
So of that is not as much of the headwind than what we're expecting.
That sort of helps a lot and then the productivity topic that we talked about where we're seeing of normalization with available labor and PTO usage.
If that were to slow down or other down like we had originally expected we could see that.
Become a contributions of getting toward the high end of the range and then lastly of.
The one that Horacio and I feel we have a fair amount of control on is recruiting.
If we execute and the matter that we expect to.
It will slowly build back up and would also be a.
The tailwind to pushing us to the top end of the range I think it's too early to get into you know looking out beyond the next couple of quarters and as we said we expect this to the building process.
At the appropriate time, we'll we'll give guidance as to what the FY 'twenty two is going to look like.
If you don't mind, let me build on that end and leave you with three thoughts perhaps the first one is as we've discussed Oh.
During this call we view our business is very robust with lots of opportunities in the pipeline.
Timing is a bit uncertain, but we are well positioned to win in the market.
And the medium and long term trends, we believe are in our favor for.
Number two a slow it said, we expect top line performance to be a little choppy for the next couple of quarters.
The potentially into the early quarters of next year, but we have some work to do both of around capturing the opportunities that are out there and ramping them up as quickly as our clients will allow us and hiring aggressively against them and we are all over that.
And then the last point that I don't want to lose is how strong our bottom line performance has been how solid it is even with some volatility of the top line and the expectation that that will also continue overtime.
Great. Thank you.
Yeah.
There are no further questions I'd like to turn the call back over to the ratio.
The asking for any closing remarks.
Thank you everyone for your questions I hope the discussion today gives you a deeper understanding of the dynamics driving our third quarter performance and our areas of focus going forward, both in the near and in the long term.
As an institution that has evolved and succeeded for more than a century Booz Allen is constantly striving to improve.
And we are especially focused on living up to our purpose empowering people to.
The change the world.
So on that note I'd like to close today by calling attention to our recently released environmental social and governance impact report.
It is another way for us to convey our French aspirations.
Our vision and our impact.
Do they are stakeholders have broad expectations for transparency.
Our clients and our investors nonprofits and community partners regulators and suppliers, and especially especially our employees.
They all want to understand the company's values from performance I'll say corporate citizen.
Our 2020 ESG impact report takes a fresh approach to providing that transparency.
It's informed by our stakeholders and it's aligned to the G. III standards. The worlds most widely used standards for corporate sustainability reporting.
It's a snapshot in time and will evolve as we mature of the governance and measurement of our corporate impact.
If you haven't yet seen it the report is called the future can't wait.
And it is available on our website.
I invite you to take a look.
Once again, thank you for your time and your participation. This morning and have a great day.
Ladies and gentlemen, this does conclude the conference you may now disconnect everyone have a great day.
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