Q3 2022 Booz Allen Hamilton Holding Corp Earnings Call
Good morning, Thank you for standing by and welcome to the Booz Allen Hamilton's earnings call covering third quarter results for fiscal year 2022 at.
This time all participants are in a listen only mode later there'll be an opportunity for questions I will now turn the call over to MS. Laura Adams.
Thank you good morning, and thank you for joining us for Booz Allen's third quarter fiscal year 2022 earnings announcement, 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.
We are now on slide two.
Im Laura Adams, Chief Accounting Officer, and interim head of Investor Relations and with me to talk about our business and financial results are Horacio 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 <unk>.
Charlie 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 <unk>.
Bateman disclaimer included in our third quarter fiscal 2022 earnings release and in our SEC filings. We 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 to the most comparable GAAP.
Measures in our third quarter fiscal year 2022 earnings releases and slides. It is now my pleasure to turn the call over to our CEO Horacio Rozanski, we are now on slide four.
Thank you Laura and good morning, everyone.
I hope that you and your families have been able to stay safe and healthy through the current COVID-19 wave.
Thank you for joining the call.
Today, Laurie and I will share our third quarter results in the context of our fiscal year 2022 guidance and our multiyear investment thesis.
We will also describe the underlying dynamics of our business and the progress we are making on our volt strategy.
To set the context, let's go back to our October Investor Day.
We outlined our volt strategy and associated financial goals.
As a reminder.
<unk> stands for velocity leadership and technology.
It is the strategic program Booz Allen has launched to capitalize on our first mover advantage in helping the federal government transform core emissions through the use of new technologies.
Over the next few years.
We look to grow faster by building scale positions in critical areas, such as national Cyber and digital Battle space.
We are in the early stages of this journey.
But are already making strides and seeing strong progress.
I'll speak to volt.
We have set new multiyear financial goals, but deliver both strong profit growth and continued investment in our business.
Our investment thesis centers on growing adjusted EBITDA dollars from $840 million in fiscal year 2021 to one two to $1 3 billion in fiscal year 2025.
That's approximately a 50% increase.
We expect this increase to be accomplished through.
5% to 8% annual organic revenue growth adjusted.
Adjusted EBITDA margins in the mid teens.
Three five to $4 $5 billion in total capital deployment.
Prioritizes strategic acquisitions.
Our expectations for fiscal year 2022 were consistent with these goals.
Gross revenue growth in the 7% to 10% range and adjusted diluted earnings per share in the range of $4 10 to $4 30.
We also said this fiscal year growth pattern would look different from recent years with slower revenue growth in the first half and significant acceleration in the second half.
As you saw in our press release, our bottom line numbers are on track with our expectations and we are reaffirming our <unk> guidance.
Our revenue growth in the third quarter was lighter than we expected.
And while we forecast strong fourth quarter revenue growth.
Lowering our full fiscal year 2022 revenue outlook to account for a slower pace.
Lloyd will take you through the quarter results and our updated guidance in greater depth.
There were several factors that contributed to the revenue dynamics for the quarter.
On the positive side, we continue to win the right kind of work and hire the right people.
As reflected in our backlog growth and head count increases over the last 12 months.
Conversely, the translation of those positives into revenue growth was slower than historical standards driven by a number of factors.
Clothing, a protracted continuing resolution.
A higher dollar value of awards under protest.
Delayed awards and slower ramp up on sold contracts.
Lower staff productivity due in large part to the omicron variant surging during the quarter.
A lower than anticipated level of expenses.
These dynamics impacted our entire portfolio and some pockets of our defense business were especially hard hit.
In part to the number of large awards delayed on the greater proportion of available expenses in their revenue base.
Looking ahead, we see some of these challenging dynamics continuing into the coming months as a result, we are taking a three pronged approach to proactively manage through this environment.
First we are addressing those business areas, where we see the greatest funding uncertainty.
Second we are continuing to control costs in order to deliver on our commitments to both grow adjusted EBITDA and invest in our business.
And third we are doubling down on areas of significant growth opportunity shifting resources across the portfolio by leveraging our unique operating model and single P&L.
In short, we continue to lean into growth, while managing tightly in the face of greater market volatility.
Before turning the call over to Lloyd let me return to the longer term outlook and the progress we have made in our business so far.
How should we look ahead.
We remain on track to deliver strong growth in adjusted EBITDA for fiscal year 2025.
Supported by continued revenue growth stable adjusted EBITDA margins and strategic deployment of capital.
Our confidence in the future is predicated in our belief that we have the right strategy and the proven ability to execute in both good times and challenging ones.
And several accomplishments from the last few months underscore these points.
First.
We continue to win the right kind of work at the center of National priorities, where innovation can help the government transform the way the mission is executed.
Our clients from the Department of Veterans Affairs to the Air Force are looking to Booz Allen for expertise in areas, such as <unk> AI and the commercialization of new technologies to advance their missions.
Second.
We are making key investments that differentiate our service to clients.
For example last December .
Part of our ramp up of National Cyber, we announced the opening of our carrier grade <unk> lab in Central Maryland.
<unk> offer a state of the art testing environment for secure cyber resilient to <unk> solutions.
Similarly, as we advance our work on digital Battle space, we are significantly expanding our footprint in Honolulu.
This investment deployed into the <unk> region, some of our most advanced capabilities to expand our support of several high priority decline missions.
Third.
We are successfully using acquisitions or strategic accelerators.
Liberty <unk> point continue to deliver the strategic and financial value we expected.
Integration is going well and.
And we are extremely pleased with the upside these acquisitions create.
And in addition, we continue to build our acquisition pipeline.
And fourth.
And perhaps most importantly.
We continue to strengthen our team and ensure we have the focus and resiliency to support our clients.
To manage through a volatile environment.
I am extremely proud of our workforce for achieving complete compliance with our COVID-19 vaccination requirement.
Our purpose and values are at the core of everything we do.
So we believe that prioritizing the health and safety of all our employees is the right thing to do for our institution, our clients and our communities.
Furthermore.
A fully vaccinated workforce allows us to better serve our clients supports safer in person collaboration and is critical to entering a post pandemic phase.
Together.
Always together the.
The people of Booz Allen are forging ahead.
With relentless focus on our clients' missions on our growth strategy.
This is what delivers the consistent results that create long term shareholder value.
And with that I'll give the floor to Lloyd for more details from the third quarter, the fiscal year and our investment thesis Lloyd.
To you.
Thank you Horacio.
Near the end of fiscal year 2022, a year marked by many twists and turns we have continued to build on our underlying fundamentals, which have supported our expectations for our second half performance outpacing first half.
And while top line growth and cash did not deliver at the levels we anticipated.
Our delivering the bottom line results, we need to invest in our business and our people to achieve our long term growth initiatives.
With three quarters, now completed and greater visibility into the fourth quarter. We are seeing some transitory changes at the macro level that are impacting overall market performance.
Expanding on what Horacio said, just as we believe that we were turning the corner on the pandemic impacts and reverting to more predictable business patterns, we were hit by Omicron, which led to another spike and PTO, resulting in staff utilization rate not normalizing as we had anticipated.
This coupled with an overhang effect from the continuing resolution has impacted our ability to convert strong demand into top line growth.
We factored some of this uncertainty into our 2022 fiscal year guidance.
We did not fully anticipate the impact of a second wave on utilization.
We foresee the delays in translating wins into revenue generation.
I will get into more detail shortly when I give updated guidance now.
Now for the details of the third quarter, Please turn to slide five.
At the top line revenue increased six 6% year over year to $2 billion.
Which includes approximately $117 million from inorganic contributions.
Revenue, excluding billable expenses grew six 2% year over year to $1 4 billion.
Revenue growth was slower this quarter for the following three reasons.
First <unk>.
And delays, resulting in slower ramp on new work and existing work.
Second lower staff utilization, resulting from an uptick in PTO taken over the holiday period due in part to a rise in Covid cases, and the inclusion of the new year's Eve holiday and this quarter's results.
And third.
<unk> expenses continued to be pressured by slower travel patterns and the timing of material purchases getting pushed to the right.
Taken together. These factors are largely timing issues that we believe will dissipate as we return to more normal business rhythms.
Now, let me walk through the market level performance.
Starting with defense revenue declined by two 2% year over year, it has been trending down quarter over quarter.
This defense is roughly 50% of our business portfolio and largely comprised of cost Reimbursable work the macro factors and subsequent topline impacts I noted, we are especially impactful in this market.
More specifically to expand on what Horacio said, our army account was hit the hardest by some of these dynamics, where our performance was impacted by budgetary challenges slowness and ramp ups and some losses.
Going forward, our defense leadership is doubling down on addressing these issues by growing head count.
<unk> utilization and aggressively deploying talent to capture the highest value opportunities, including hyper growth initiatives, such as our digital battle space platform.
In civil revenue grew by 25, 3% year over year.
Which five 1% was organic marking our second consecutive quarter of strong double digit growth.
Our results reflect solid performance across the portfolio, particularly in health.
We see strong alignment with the administration's priorities, which are yielding important wins.
<unk> Liberty continues to strengthen our unique market position as we prepare to leverage integrated capabilities in the areas of cloud Dev.
<unk> ops and API development to pursue additional market share across our broader portfolio.
And intelligence.
We recorded our second consecutive quarter of growth at <unk>, 8% year over year. This continued improvement in performance reflects our ability to hire ahead of growing demand and capitalize on our mission expertise and advanced technological offerings to secure key recompete and new work opportunities.
This positions us for multi year growth in key areas, including digital modernization artificial intelligence and high end data analytics.
Lastly, global commercial revenue grew 26, 7% compared to the prior year period.
Performance was driven by growing demand in our U S commercial cyber business and contributions from <unk> point.
Where we are seeing strong cross selling momentum in early synergies.
We are now on slide six.
Net bookings for the third quarter were approximately $797 million up 29% over the prior year period.
Translating to a quarterly book to Bill of 0.39 times and a trailing 12 months book to Bill of 128 times.
Total backlog grew approximately 19, 2% year over year to 27 8 billion.
Funded backlog grew 11, 7% to $4 billion.
Unfunded backlog grew 57, 7% to $9 $4 billion in priced options grew four 4% to $14 3 billion.
These results underscore our continued demand and strong alignment to our clients' core missions in the areas of artificial intelligence cyber and digital modernization to name a few.
And further our position as a trusted partner and market leader.
Looking ahead as we continue to pursue larger and more technically complex bids we anticipate that ongoing protests will become part of the normal business cycle.
We are increasingly factoring into our operating plan.
Pivoting to head count.
As of December 31, we had approximately 29500 employees an increase of approximately 1900 year over year or six 8%.
The labor market for Tech and Tech adjacent talent remains highly competitive but we are pleased that we continued to successfully execute on our hiring and retention strategies, a reflection of our appeal as an employer of choice.
This resulted in a third consecutive quarter of mid single digit head count growth.
With our expectations.
Moving to the bottom line adjusted EBITDA for the quarter was $222 million up 8% from the prior year period.
Adjusted EBITDA margin on revenue was 10, 9% compared to 10, 8% in the prior year period.
The increase in adjusted EBITDA margin was driven by three factors.
First profitable contract level performance and mix, which includes inorganic contributions.
Second.
<unk> cost management.
Third our return to billing for fee within Intel, which had a $2 million negative impact on the prior year period under the cares Act.
Tailwind that will taper off after this quarter.
Third quarter net income decreased 10, 8% year over year to $129 million.
Adjusted net income was $137 million down five 5% year over year.
Diluted earnings per share decreased seven 8% to 95 from $1 <unk>.
The prior year period.
And adjusted diluted earnings per share decreased one 9% to $1 <unk> from $1 enforcement.
Both GAAP and non-GAAP metrics were impacted by a higher effective tax rate. Following the release of income tax reserve of $10 2 million in the prior year period related to the <unk> acquisition as well as higher interest expense, partially offset by a lower share count due to our.
Share repurchase program.
Our non-GAAP metrics exclude certain acquisition costs and the noncash gain of $7 1 million from the spinoff of snap attack during the quarter.
Turning to cash cash from operations was $21 million in the third quarter down from $233 million in the prior year comparable period.
Operating cash performance is volatile quarter to quarter and the decline. This period was more pronounced due to some of the factors impacting top line growth.
Coupled with higher disbursements.
As we have done before we are focused on our working cash management and cash collection efforts to continue improving our operating cash performance and reinforce our strong balance sheet.
Year to date, we have generated $481 million in operating cash flow and $430 million in free cash flow.
For a free cash flow conversion rate nearing 100% supporting our strong balance sheet positioning and capital deployment priorities.
Please turn to slide seven.
During the quarter, we deployed approximately $139 million inclusive of $50 million in quarterly dividends and $83 million in share repurchases.
Today, we are also pleased to announce that the board has increased our quarterly dividend by six two.
<unk> <unk> 43 per share payable on March 2nd to stockholders of record on February 11th.
This marks our ninth consecutive fiscal year of increasing our quarterly dividend a testament to our fundamental strength and promise to continue growing our dividend.
Even in a more challenging operating environment.
With one quarter left in this fiscal year, we remain committed to a patient disciplined capital allocation strategy, leveraging our strong balance sheet position to deploy capital in an accretive manner, creating near and long term shareholder value.
As we have said in October our capital deployment priorities remain focused on strategic M&A to enhance growth, while sustaining a healthy dividend and opportunistically repurchasing shares.
Let me now walk you through how the puts and takes from the quarter.
Late into updates to our full year fiscal 2022 guidance. Please move to slide eight.
Despite lighter revenue and operating cash challenges. This quarter. We are proud of our teams efforts to manage the business controlling what we can in spite of another wave of macro environmental challenges. These.
These efforts have enabled margin expansion with solid <unk> performance throughout this fiscal year as we reinforce the strength of our fundamentals and balance sheet in preparation to execute on our investment thesis.
In the fourth quarter, we are laser focused on executing against our operational priorities.
We'll continue to aggressively hire ahead of demand capitalizing on our strong portfolio of new work opportunities to sustain long term organic growth.
We will efficiently manage the business by investing in our people and technology to lead the next wave of innovation.
And lastly continue to build our M&A pipeline and acquire businesses that meet our disciplined criteria.
<unk> as strategic accelerators.
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.
For the full fiscal year revenue growth is now expected to be in the range of $5 seven.
272%.
At the midpoint, our revised guidance range reflects $100 million to $220 million of revenues.
Tied to the uncertainties, we outlined earlier they.
They break down as follows.
$30 million to $80 million tied to funding delays and resulting slowness and deploying staff unsold and funded work.
$20 million to $40 million tied to an incremental step down in staff utilization due largely to the continuing pandemic and PTO usage.
And $50 million to $100 million from lower pandemic related travel and the timing of material purchase getting pushed to the right.
As a reminder, the <unk>.
Inclusive of the new year's Eve holiday and minor timing differences and the costing of labor related to the implementation of our Nextgen financial management system will become tailwind in the fourth quarter, adding roughly 175 basis points to the top line.
On the bottom line, we now expect adjusted EBITDA margin for the fiscal year to be approximately 11%.
This increase reflects our considerable control over our cost structure and margin levers even in times of uncertainty.
We are reaffirming our adjusted diluted earnings per share guidance to be between $4.10 and $4 30.
The <unk> guidance is based on an effective tax rate of 22% to 24%.
134 million to 137 million weighted average shares outstanding and interest expense of $92 million to $95 million.
We now expect operating cash to be between $700 million and $750 million the incremental step down follows our expectations for lower top line growth and accounts for the $56 million of one time payments in connection with the Liberty acquisition, which we had anticipated.
The fate at being able to make up through a combination of working capital management and operating performance.
As I mentioned, we will remain laser focused on optimizing our working capital to return to the strong level of cash conversion, we have historically delivered.
To position US ahead of future growth initiatives.
And finally, we continue to expect capital expenditures to be between $80 million to $100 million.
As we move towards our investment thesis I remain confident in our team's ability to manage through these times of uncertainty as we have proven our ability to do over the years, we will continue to execute on our near term growth objectives and remain confident in the long term trajectory of the business.
Upholding our role as the industry leader in meeting the high standards, our shareholders have come to expect.
With that over to you Laura.
Thank you Lloyd operator, please open the lines.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Our first question comes from Sheila <unk> with Jefferies. Your line is open.
Good morning, Horacio Lloyd Laura Thank you.
Well I think David Youre adjusting business areas with the greatest funding uncertainty and why do you mentioned efforts within defense and the army specifically.
<unk> remained down 2% in the quarter.
Do we think about <unk>, specifically within that decline and what are the other areas leading to that.
Yes.
Defense decline and how do you think about the return to growth there.
Hey, Sheila good morning. Thanks.
Thanks for the question.
I think to put things in context.
As we mentioned in the prepared remarks.
The volatility in the market driven by both Covid and then some funding issues both with the CR.
And just some slow slowness in terms of getting funding on contracts.
<unk>, our portfolio and particularly affecting our defense business and we're not going to try to predict.
The precise timing on windows issues are going to abate.
You said, we are really working through them.
If I take a step back you know R. R.
I would say as a firm and certainly in our defense business, we are on strategy.
And the fundamentals are actually strong if you look at the work that we're winning.
And you can see the backlog numbers and then the record backlog and the increases in funded backlog.
Tell it really good story about that and the quality of the work underneath out.
It's very very strong.
We're hiring strongly across all of our markets, including defense.
And we are managing through this volatility to deliver on the investment thesis.
So the job for all of Us and in our defense portfolio is first to address these performance issues that we haven't certain pockets of the business Lloyd talked about our army business.
And it's not just been hard hit by some of these dynamics and we are doing that.
We need to control costs, and we are doing that and you'll see that in our bottomline numbers across the entire business to make sure that we are delivering on these adjusted EBITDA dollar targets that we have in our investment thesis and then importantly, we need to double down on growth.
In the defense portfolio. There are some really strong areas of growth are on some of our classified work around some of our space work and around digital battle space and on all things related to the digital transformation of the department both at headquarters.
And at the edge. So so I look at all of that and accepting and managing through the near term volatility I think that in the medium term. We are very much on track to continue to be the leader and to continue to grow.
No that's super helpful. And then maybe one more broadly.
You guys have been the growth leaders in that space, there's no doubt about that but organic growth revenue implied for fiscal 2022 is more in the range of 2% to 4% and below your 5% to 7%.
<unk> to 'twenty five targets. So how do we kind of think about this re acceleration to mid single digit growth.
And then implied high single digit organic growth guidance for Q4, I know you addressed a lot of these during your analyst day too.
Got it.
I'll start and then I'll, yes, I'll start so Sheila as we said in our prepared remarks.
It's a combination of three factors that.
Habits in that 2% to 4% you know the funding delays the lower staff utilization lower billable expenses that being said, we're laser focused on the things that are in our control.
We said that our operational priority was bringing in talent.
That.
Three six year over year organic and six eight year over year overall.
We're winning work.
Our book, our backlogs up 19% year over year.
Latest or trailing 12 months at 1.28 times. So we're winning work that we want to win.
We're having engaged with our clients on topics that are forward leaning, but we do face these challenges and we feel that the path through this volatility is really to focus on the things that are in our control, which is winning work and hiring the best talent.
Great. Thank you.
Thank you.
Our next question comes from Gavin Parsons with Goldman Sachs. Your line is open.
Hey, good morning, good morning, Kevin.
Hey, guys I appreciate all the detail on the revenue headwinds and all the color and everything you've said, but I'm kind of having deja vu to <unk> of last year, and we've had delays in procurements towards slippage pullback in funding et cetera.
Appreciate covenants persisted much longer than any of us thought, but basically been over a year now where you haven't grown organically.
I'm just curious how how do you get confidence that there isn't actually a structural change in customer behavior and the way they're thinking about spending.
Gavin I appreciate the question and here's what I would say first of all you know.
I talked to a lot of clients about this and when.
When I listen to them about what are their mission priorities are what we are doing and how we're aligned to that I feel very strongly that like I said, we're on strategy and the underlying fundamentals.
Our good typically in our business as you know if you take head count growth from some level of.
Wage increase.
That gives you a sense for how much we're going to grow and especially if we're not demand constrained and you can see the backlog numbers were not.
So we have confidence that in the I'll call. It the medium term we are in very good shape.
<unk> two to continue to grow and to be the growth leader.
In the market and we are I think we've come to terms with the reality that there's more volatility and more predictability in some of these some of these variables.
Around COVID-19 and our own funding that perhaps we anticipated, but altogether I go back to the point that Lloyd made which is the underlying fundamentals in the business are strong we're focused on them.
And we're focused on delivering at the bottom line, where we have control over the cost structure and to make sure we deliver on our investment thesis.
Yeah, Kevin I would just add like yourself, but I had a deja vu moment as well because many of the dynamics that we were grappling with a year ago, but we're still grappling with I think.
We expected that in early October things are going to open up again along came over crime.
Definitely had an impact on our workforce.
We expected that this far into this.
The administration that things would start to flow, but were still seeing slowness in ramp up and kicking off things and that's just the environment. We're in now where we're not making excuses like Horacio and I have said, we are focused on the operational items.
Items that are in our control, it's playing out with strong bottom line results, which were very proud about.
But we're gonna have choppiness at the top line and we're just going to keep.
Staying on strategy and executing as well as we have up to this point.
Got it I appreciate that and so it definitely feels like that the need is there and there's a bunch of authorities there too.
Yes.
Maybe on margins just going to continue to outperform there obviously the longer term investor day target is 10 and a half.
Thank you.
You've got tailwind from mix shift and cost containment that you outlined at the Investor day, partially offset by investment growth.
Are you managing to a 10, 5% number or is there upside to that if you can kind of continue to outperform on mix shift and cost containment.
Yeah, we're not we're not managing to mid tens in fact.
We're very pleased with the 10.9.
For this quarter I mean really it speaks to our operational performance, our discipline around cost control and solid fundamentals and we.
I have an expectation of ourselves to continue that going forward.
The race to approximately 11% as the reality of that that we're seeing.
Really good mix shifts in terms of our contract types.
The discipline that we've had.
We're going to stay focused on that as well as the core business fundamentals that we've talked about.
Given the volatility that we're experiencing.
So that's what we're moving to that's why we're confident about around 11 for the full year, but it's really the fundamentals that.
We've been focused on that's gotten us to a 10.9 at this point.
Great. Thank you both thank you.
Sure.
Thank you. Our next question comes from Colin Canfield with Barclays. Your line is open.
Hey, good morning, guys.
So gross disruptions pretty well documented at this point trading services names can you just talk about how this is impacting the valuation of your M&A pipeline, both on kind of a public and private basis.
I'll start.
We are seeing continued growth in our M&A opportunities in the functional areas that we're emphasizing cyber security.
Data analytics system software development.
In engineering and science.
Mid to I.
I mean small to mid size opportunities.
We're having a strong with our strong balance sheet and capacity.
We're not seeing valuations in these particular areas spike, but keep in mind. We're also doing a better job in terms of cultivating the opportunities.
Based on the relationships, we have based on knowing the industry as well as we do.
And I think that has in some ways insulated us from what we see more broadly with some of the elevated valuations should it go into <unk>.
<unk>, but up to this point, we haven't seen a spike in valuations.
Got it and then going back to your comments, sorry to Raphael you mentioned scaled cyber.
Just update us on where Booz Allen Hamilton stands in terms of scale and kind of where scale matters. The most in terms of your underlying business areas.
Sure.
I think you've heard me say this in the past I actually really like our positioning throughout the portfolio.
Across all three of our major market areas, we've deployed our innovation agenda and position ourselves strongly as house players in in all of these key technologies from you know I do we've talked before about the fact that we've been rated as having the largest cyber workforce in North America are the strongest.
AI footprint in D O D.
The work, we're doing about five G. These days as both breakthrough and growing.
And we are looking to invest in areas like they'll pay column as I mentioned in the prepared remarks and continuing to work the intersection of for example, AI five G and cyber which we believe.
We will drive another wave of growth and from a scale standpoint, you know we spent the last really decade, I'm asking a talent base that actually gives us a lot of flexibility to go into these areas and to.
We're really focused on where the growth is.
Is going to be so you know that we.
Lloyd mentioned, our civil portfolio. For example, we stopped very strongly we're very well aligned.
Two the domestic agenda for the country and we look forward to to continue to grow.
Well there.
While we pursue.
Strong growth also in defense and intelligence.
Thank you. Our next question comes from Matt Akers with Wells Fargo. Your line is open.
Hi, good morning, everybody. Thanks for the question.
Can you just touch on your recent spin out of <unk>.
Both <unk> and snap attacking why are those businesses sort of better off.
Outside of Boots and are there any other parts of your business that you're you're sort of looking to potentially buy back.
Sure I'll start.
Thank you.
I go back to volt and this notion of velocity.
And that is informing a lot of our thinking about how we want to manage the portfolio.
Going forward and honestly in in both directions. So.
With Liberty and we trace points, we made two acquisitions that are really good accelerators.
For our growth and they are playing out.
Frankly above our expectations at this point and we're very pleased not just with the financial returns that they're driving.
But with the strategic positioning that they're allowing.
By the same token we looked at the entirety of the portfolio in some of these areas. We created solutions. When we have unique IP. We asked ourselves. If we were the right player by ourselves to capitalize on the growth in those commercial markets.
And we came to the conclusion that those businesses would grow.
Better faster with a different investor base and with partners. We remain involved us minority owners in those businesses because we believe in them.
We're excited to see where that will take us and frankly, we're learning a lot about.
How to both be.
Make venture investments.
And the minority partners in these fast growing entities and then how do we take advantage of all of that IP and those market positions that are getting created to drive growth into the core of our defense Intel and civil markets and again I mean, I think the future is bright on that on that front.
That's great. Thanks, and then I guess, maybe one for Lloyd and just on the free cash flow.
Guidance change.
And I know you mentioned kind of the lower top line, but I think the EBIT.
Kind of dollars guidance is that it's not that different is it more just the collection timing kind of thing or any more kind of detail you could give there.
Yes.
No Matt cash definitely was lighter due to some of the headwinds we talked about revenue, but specifically around cash we had lower collections.
Some of that was just due to revenue.
Revenue being a little bit lower funding delays.
The new year celebration fall in Q3, the same time, we had higher disbursements and payroll expense.
So the incremental impacts about 35 million of collections slip increase in payroll expense.
That being said.
We're still focused on our.
100% cash flow conversion for the year.
It also sort of offer the following context you know this year, we had the Liberty acquisition.
As well as added interests from the June bond issuance.
Its kind of offset.
Some of the operational improvements that we've made and that being said as you heard in my prepared remarks, we're laser focused on this we expect that to improve going forward as we can.
Sort of work through these are these near term.
Headwinds if you will.
Okay. That's helpful. Thanks.
Thank you. Our next question comes from Cai von <unk> with Cowen Your line is open.
Yes, thanks, so much so.
As you probably know.
O&M was down.
3% to 4%.
For the quarter itself so.
Are you seeing any signs that the bookings environment, that's been so slow or changing in any way and secondly.
What about protests how big are they.
And the expectation that some of those things are going to be adjudicated.
Kai I can start I think we as we mentioned.
In our defense business, we have seen some slowdown on some movement to the right.
On some contracts and slower ramp up and our overall.
Protest.
Backlog, if you will or the amount of under protest. Therefore, he is not in our backlog is at an all time high.
Having said that you know things are moving along as I said, you know clients do have the urgency and so I think over time. Some of these will normalize we're certainly watching closely the CR has affected our defense business.
More than.
We would have expected and to a degree I worry about that but I frankly worry about the impact of the CR one mission.
And and then compounded by the Covid PTO and the fact that the omicron drove a again a record number of cases inside Booz Allen.
All of that is is the volatility that.
But we are talking through but I think goes back to the underlying fundamentals.
We are focused on the things our clients are focused on they are our backlog is strong our book to bill for the last 12 months is strong and we're hiring the right people. So we believe that over time. Some of this will normalize and we're going to continue focusing on the things we can control Hey, Cai I would just add.
That for the most part our book to Bill pattern.
It's consistent.
Three nine times for this quarter is comparable to what we saw last year at this point.
Trailing 12 months of one point to eight.
At this point, we feel pretty sure plenty strengthened demand signal.
We're still going to see volatility, though some of these larger procurements as they come through depending upon protest resolution timing.
Certainly is moving all over the place is going to continue to impact the traditional pattern of our book to bill but.
We're winning.
Incumbent work at 90% new work and low 60%.
So on the demand signals, we were still feeling pretty good.
Thanks, so much and one on the receivables.
Dsos were high at the end of the first quarter, because you implemented the ERP system. They improved in the second and now they spiked up to about 73 days that is basically.
Our sector high.
Why is it that bad.
What are you doing to make it better and where do you think you can get.
Yes.
I think Matt's question.
We're focused on getting it down.
It's a function of really being diligent and disciplined on collections.
Really continuing to balance that out with our disbursements.
And the team is on it.
Cash will be volatile in this current.
Current environment, but we.
We expect to see improvement going forward so no excuses.
On it and I expect that we'll we'll do better going forward.
Thanks, so much.
Okay.
Thank you. Our next question comes from Matt Sharpe with Morgan Stanley . Your line is open.
Hi, Good morning, gentlemen, Hey, Matt good morning.
On the M&A front, just given the shorter cycle nature of your current.
Business mix and sort of the sensitivities to budget disruption and is there any desire to either acquire companies with relatively deeper backlogs are somewhat longer cycle business models, and then related to that.
The Liberty.
Key acquisition fared in the CR environment and the surge in COVID-19 cases.
So.
I think looking at our M&A strategy, it's consistent with vault and with all the things that we have said you know we're looking to deploy between three and a half in four and $5 billion.
Between now and 2025 with a focus on things that can be strategic accelerators for us.
So are there positions technologies.
Unique opportunities to do move faster to develop things faster.
Liberty and three points were really good examples.
All of that and we're building a pipeline of opportunities that really mirrors that it's either a unique technology or a technology mission intersection that really accelerates when our priorities and especially around either national cyber or digital battle space, we're going to be very diligent and very assertive in terms of our gen.
<unk> that pipeline.
Liberty has done it.
Very well since the acquisition.
It's a good the integration is going well.
The teams have found lots of points of such where we're working together both in the core markets around health and beginning to expand across other parts of our portfolio.
From a.
Colby CR and so forth they reflect the rest of the business and.
They are because theyre more civil oriented they're seeing more of the dynamics that we've seen in the civil market as opposed to the more difficult dynamics. We saw most recently in defense.
But I think there are you know again the rate.
Great teams are a great acquisition for us.
And they're a pattern for us to continue to follow.
They don't have much to add but your question around sort of a backlog there right right through some of the short term cycles.
Obviously, when we're doing due diligence with a variety of areas, we're looking at talent.
Pipeline.
Positioning you name it so it's certainly in the mix, but to <unk> point, we're not leading with that it still isn't on strategy our confidence on integration.
Here its the vault and achievement of our our updated investment thesis, but yes for sure. We're looking at what upside do does the company have.
Their talent and the list goes on and on.
Got it and then I just wanted to touch on our recent win you had with with that fund.
<unk> Zero Trust environment prototype what does the path forward for that program or that contract will look like for booz beyond the prototype phase in and while the word itself was seemingly modest.
Certainly count is a fairly significant step forward for zero Trust, so just any thoughts.
On that contract.
Path forward itself, and then more broadly on zero trust and the opportunity associated with it.
I think I'd say, obviously, we're very pleased.
With both the wind and the opportunities ahead and I.
I think to put it in context Friday it sits right at the intersection of the type of work, we want to do where we're driving leaving.
Leading edge thinking in leading edge capabilities, we have.
Demonstrating leadership in zero trust across both our commercial and our federal.
Markets and that is translating into wins.
Across the portfolio.
We are excited that we're beginning to see that not just in more of the traditional places, where we want that work, but allowing it to.
To expand further so.
<unk>, Oh, sorry, I said.
At the top of the call you know we are on strategy. We're waiting just kind of work that has great opportunity for us to do.
To expand to go forward and to help the department and more broadly the federal government transform emissions through the use of new technology, that's what we're all about.
And that's what we intend to do.
Got it thanks gentlemen.
Thank you. Our next question comes from Seth Sussman with J P. Morgan Your line is open.
Okay, Thanks, very much and good morning, everyone.
I think.
Haven't quite appreciated maybe the the contribution that trace point was making in the quarter and so.
How much the acquisition revenue.
Out from Q2 to Q3 can you kind of break out what was what was liberty versus what was a.
Great point.
Liberty was a little over $100 million, it's ahead of our annualized.
Hey, So you know.
North of 300, probably less than $3 50.
<unk> point added 12.
$12 million.
So we're pleased with how well both integrations are going.
Really winning new work already head of pace, great integration with both companies.
So you know.
Those things I think are definitely contributing to the financial outcomes and contributions per se.
Okay. Okay. Okay.
And then.
If we if we assume that those are at a similar pace.
In the fourth quarter.
It implies.
A decent sized step up in the sales excluding those acquired businesses and still have a CR in place for half the quarter and still have.
And omicron situation here.
I think we're starting to see some folks come back to the office.
Including here in New York, but.
I still don't have some of this disruption and so I guess, a kind of what gives you confidence about that as we think about what the base of sales is going to be for 2023 gross and then.
Given just the near term choppiness in the environment.
How should we think about.
Maybe the initial growth rate for fiscal 'twenty three versus the.
Versus the longer term target.
Yeah, I mean, we're not going to get into giving guidance for 'twenty, three but I will say normally at this year, when we're updating guidance guidance narrowing it.
And I think because of many of the factors that contribute to the volatility.
It's a pretty obviously, it's a challenge to do that so with the headwinds that we articulated that we're working on with the range of $5 seven to seven two.
We feel pretty confident that we're going to end up in that range.
And it.
It really points back to what we need to continue to be focused on which is bringing in the talent.
And getting them utilized as fast as possible and I think those fundamentals.
It gives us confidence that we're going to build the momentum in Q4 is going to carryover into 'twenty three.
As to what that range in 'twenty three is gonna be let me get to that in may but at this point.
We're feeling good about our guidance for this fiscal year.
I would just.
Come back to the point that we are very focused on the fundamental side what are the things we can control.
We are trying to drive strong growth in the areas where the opportunities.
Are still there we are hiring.
The right people were winning the right work.
We're managing costs and ultimately we are committed to working hard to drive against our investment thesis and to implement volt.
And I think on that note.
We are you know, we're well positioned to continue to drive growth.
Thank you our last question comes from Robert Spingarn with Melius Research. Your line is open.
Well good morning.
Good morning.
Without asking about fiscal 'twenty, three I thought I'd, maybe take another angle of this but.
Lloyd you said the funding delays were about a $30 million to $80 million pressure.
And the guide down Im.
I'm assuming Q4.
Pressure correctly annualize that.
Or extended is that a fairly good proxy for what happens if the CR goes the full fiscal year.
I wish I wish I could do that but.
I think if anything we've learned over the last few years speculating on that.
Is it isn't a great.
Move.
We're playing the game for what we can see.
And then chipping away at it.
The successes.
We had growth in the second half we are growing.
And it's really back to the fundamentals that are giving us strong bottom line performance.
But this is this is here to stay and we're.
On top of it or the great team as Horacio pointed out in his prepared remarks.
And everyone's.
Colin as hard as they can I'd also remind you that we did share.
Is that we are focused on EBITDA dollar growth as a part of our investment thesis and we believe we are on track to deliver deliver on that.
I'll just take off the eight.
Point that Lloyd is making a we are focused on growth.
And we are.
Driving growth and while we accept the volatility in the market and we're going to work through it.
We're not pulling back from our desire and ability to drive growth, obviously, the CR clears that.
That will be better than if it doesn't but we are a single mindedly focused on driving this business well.
Horacio on that on that note and this is either for you or for Lloyd, but I'm going to imagine you took a close look at the NDAA and the plus ups, there and well maybe they're a little greater for the investment accounts and for O&M.
How do we think about booz is benefit from those plus ups when we finally get them.
You know I think they play to a lot of our strengths.
If you look at it there's elements of that.
That will strengthen our ability to deploy cyber five G.
AI cloud and even quantum so these are all areas that where we believe we built a unique position.
Leadership and this is why we keep coming back to the fundamentals are strong and you know we don't find ourselves in that sense demand constrained.
It's the speed at which these wins get on contract and then we can put people against them.
The near term challenges reside but when you look beyond that we are aligned with the key priorities of the department and are excited to to support them.
Is it an overreach for me to try and ask you to quantify out of that 25 30 billion what piece of that.
Either booz or the government services community can access.
I'm not sure that we can do that and as you know a lot of our work is integrated in a way that it doesn't sit on one specific line item. It really is around our support on these core missions and again, if you look at the missions that are being highlighted under the type of work that we are winning that we are doing.
I would point to the fact that theres, great convergence of both of those.
Thank you and there are no further questions at this time I would like to turn the call back to Horacio Rozanski for closing remarks.
I'll be brief because we went a little over time. Thank you all for your questions and for joining US. This morning I Hope. This discussion gave you a deeper understanding of the dynamics that are underlying our performance and how we are managing through.
Through them and as a result, while we are confident that we can deliver on both near and long term financial goals and Thats driven by three things. We believe we have the right strategy.
We have a track record of performance and most importantly, we do have a great team.
Speaker 1: Have a great day.
Speaker 2: And with that, thank you again, stay safe, and have a great day.
And with that thank you again stay safe and have a great day.
Speaker 3: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Speaker 4: ["Pomp and Circumstance"]
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