Q4 2022 Booz Allen Hamilton Holding Corp Earnings Call
Good morning, Thank you for standing by and welcome to Booz Allen Hamilton's earnings call covering fourth quarter and full fiscal year 2022 results.
At this time all participants are in a listen only mode later there'll be an opportunity for questions I'd now like to turn the call over to MS. Laura Adams. Please go ahead.
Thank you good morning, and thank you for joining us for Booz Allen's fourth quarter and full fiscal year 2022 earnings call. 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, Laura Adams, Senior Vice President and Treasurer, and interim head of Investor Relations and with me to talk about our business and financial results are Horatia, Rozanski, our president and Chief Executive Officer, and Lloyd Howell Executive Vice President.
And Chief Financial Officer.
As shown on the disclaimer on slide three please keep in mind that some of the items. We will discuss this morning are forward looking which may relate to future events or our future financial performance and involve known and unknown risks uncertainties and other factors that may cause.
Our actual results to differ materially from forecasted results discussed in our filings with the SEC.
All forward looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made except as required by law. We undertake no obligation to update or revise publicly any forward looking statements whether as a result of new.
Information future events or otherwise during.
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 fourth quarter.
For fiscal year, 2022 earnings release and slides.
It is now my pleasure to turn the call over to our CEO and President Horacio Rozanski, we are now on slide four.
Thank you Laura and good morning, everyone. Thank you for joining the call.
Before we begin I'd.
I'd like to take a moment this morning to acknowledge the tragic events continuing to unfold in Ukraine.
Sure how booz Allen is responding.
As millions of people flee the country or are displaced the need for humanitarian assistance and protection gross more acute everyday.
In response, we committed to provide aid to the unemployed giving campaign.
And company match.
Our employees' engagement and the campaign has been tremendous and I am grateful for their generosity and compassion.
Yeah.
From a mission perspective.
Our teams in Europe on the U S are supporting our clients across a broad range of areas.
Theyre working around the clock to deliver critical capabilities and insights to our clients.
True to our purpose.
They are working relentlessly to change the world.
I'm thankful for their dedication.
Extraordinary power of their work and the difference that we're making.
14th supporting these missions.
Behalf with the entire leadership team. Thank you.
Thank you for the work you were doing and the sacrifices you are making to serve our clients in the nation.
It's an honor to call you our colleagues.
Do they aren't always our thoughts remain with the Ukrainian people and we hope for a peaceful and just resolution to the conflict soon.
This morning, Lloyd and I are pleased to report our results for fiscal year 2022.
And a year of marked by exceptional volatility Booz Allen committed to a new growth strategy and multi year financials invested in our future.
And manage the business with precision and skill.
I am extremely proud of the work on the impact our leaders and our entire team have made.
Their talent and dedication underpinned the results we shared with you today.
For the full fiscal year bottom line results were excellent.
Revenue growth was also solid but below our expectations set a year ago.
We remain steadfast to our operational priorities throughout the year.
Culminating in growth across all markets he bought the fourth quarter and the full fiscal year.
We are definitely controlled costs to deliver on both our bottom line commitments and invested in our future and our people.
One year into our multiyear investment thesis, we have made strong strategic progress and are on track to deliver against our goals.
Over the next few moments I will set the strategic context for our financial performance and then Lloyd will take you through FY 'twenty two results and therefore 23 guidance in depth.
Yeah.
As we shared with you on Investor Day, Booz Allen believes that the rapidly evolving challenges confronting our nation will accelerate the pace of change in our government's missions and use of technology.
Five to 10 years from now technologies from five G to AI.
I'm from blockchain to quantum.
We'll be ubiquitous across a range of missions.
And because we have been preparing for this for over a decade, we believe who's Alan Cole to strategic first mover advantage.
We have the opportunity to help our clients through their transformation to digital emissions and.
And we are poised to convert these extraordinary opportunity into growth that creates long term shareholder value.
At Investor Day, we introduced volt our growth strategy.
Volt reflects our ambitions and guide us as we build the booz Allen over the future.
And our next era, we will scale Booz Allen to an even greater level of industry leadership.
We will be the premier partner to the federal government continuously bringing innovation to national priority missions faster than the pace of change.
Volt stands for velocity leadership and technology.
These three words are the fundamental principles for how we are transforming to achieve our aspirations.
We have finished with velocity.
Investing ahead of emerging technology waves, and expanding our market positions through strategic acquisitions and partnerships.
We redefined leadership investing in people with the right expertise to lead on scale hyper growth businesses at the mission technology intersection.
And we apply next generation technology.
Creating differentiated intellectual capital on property to address our clients' needs at or ahead of mission demands.
Okay.
Today.
I am excited to tell you that volt is underway.
How should we operationalize this strategy to success factors are clear.
One.
We need to make decisions faster to accelerate our growth.
Two our transformation will require relentless focus and seamless integration.
This is why at the outset, we are taking an important step to address these needs.
I am excited to announce that we have named executive Vice President and civil sector precedent Kristine Martin Anderson has booz Allen's Chief operating officer.
This appointment by the board of Directors is effective June 1st.
Yeah.
Christine is a proven leader who perceive opportunities to meet challenges.
A leading both our health team on our civil market. She has demonstrated the ability to grow and manage technology first businesses.
Developed talented leaders help senior clients transform and integrate acquisitions.
All while consistently delivering strong financial results.
I saw where see all Christine will play a major rolling bolt.
Taking primary responsibility for accelerating firm wide operational performance and the transformation of our business model.
In collaboration with leaders from across the firm.
I've had the personal pleasure of working with Christine for many years.
I look forward to partnering with her more closely in her new role for years to come.
As a result of christine's change your role rich CRO.
Currently chief growth officer has to be named civil sector precedent.
Rich, it's a C suite and innovative business leader, who previously led on scaled the health account to its market leading position.
An accomplished leader in its own right Rich is also an indication of the depth of talent, we are lucky to have in our firm.
I hope, you'll have a chance to meet pristine and rich at future events.
Okay.
Now allow me to share additional details on the progress we are making on vault.
Foundational to our strategy is building businesses at the intersection of mission and technology.
As of April 1st we formally launched two operational business units aligned to mission areas. We believe are critical to our nation and prime for hyper growth.
We have nested digital battlespace inside our global defense sector.
This is where we are innovating to help the department of defense securely drive information through the edge to create decision advantage.
By applying AI machine learning five G and other emerging technologies to the joint Warfighting mission.
The women and men, who defends our country will have superior situational awareness to make better decisions faster.
National Cyber a core element of our national security sector builds on our leading position in the intelligence community.
We have delivered innovative cyber trade craft to these clients for decades and recognize that the cyber domain as horizontal not vertical.
Therefore, we are now extending and expanding our reach into scalable cyber solutions for a broader set of clients across the department of defense and civilian agencies.
Our focus is on cyber network operations and protecting critical infrastructure.
With your organizational launch of these two mission centric businesses, we now have dedicated leaders and technical talent aligned to drive the team forward and deliver on a clear set of objectives.
Okay.
We have also taken the time to re imagine our innovation agenda.
As of April 1st we integrated our I T infrastructure and innovation functions into a newly created Chief Technology office led by Susan Penfield.
This organizational leads the way in scouting the market to select and scale the best New technologies for our clients' mission needs as well as our own.
Okay.
We also continue to make strategic acquisitions and investments consistent with vault.
In March.
We announced the pending acquisition of ever watch aligned to our national cyber priority.
Which we hope to close in the coming months.
We're also continuing to test the leading edge of commercial technology, making small investments to secure access to the next generation of breakthroughs.
And finally also as of April 1st Liberty is fully integrated into Booz Allen and exceeding our expectations.
This acquisition is strengthening our position in digital transformation and accelerating growth in the civil market.
As you can see.
Our volt growth strategy is more than aspirational words.
Vault is both our future and our present and the work is underway.
This is critically important as we strive to meet our FY 'twenty five investment theses goal of adjusted EBITDA growth to $1 2 billion to $1.3 billion supported by above market growth rates stable margins with increased investment capacity and significant capital deployment.
Shifting now to the current fiscal year 2023.
We expect to continue strong growth at the top and bottom lines, while acknowledging significant volatility still exists in the environment.
The U S economy geopolitical conflicts the postman dynamic work environment upcoming midterm elections, and the federal budget beyond the current government fiscal year are all unknowns that we will need to navigate.
Creating headwinds and tailwind we cannot fully predict.
Our four operational priorities are aligned to the factors we can control.
And intended to build momentum in the first half of the fiscal year to mitigate increasing volatility in the second half.
First.
We must hire aggressively to fully capitalize on our record backlog and a robust pipeline.
Second we must continue our track record of winning work aligned to our clients' highest mission priorities.
Third and of increased importance in an inflationary environment.
We will continue to manage the business tightly.
Looking to direct our spend towards talent and strategic priorities, while delivering on our bottom line commitments.
And fourth we must maximize the value of capital deployment activities with a focus on small to mid size strategic acquisitions.
When I consider what we have achieved in fiscal year 'twenty to 'twenty two.
And begin to set my sights over the horizon.
I know our people are and will continue to be the heart of our success.
How should we enter this new fiscal year and execute our strategy.
We focus on empowering our team.
To unleash our full potential and lead the way to a better future for Booz Allen our clients and the world.
And with that Lloyd over to you for a thorough discussion of fiscal year 2022 and our guidance for fiscal year 2023.
Thank you Horacio and good morning, everyone. We are pleased to share our fourth quarter and full year results for fiscal year 2022.
Our performance highlights our strong business fundamentals and demonstrates our ability to meet expectations and accelerate growth as we exit fiscal year 2022 with broad based momentum across all aspects of our business.
Before walking you through our results I want to frame the conversation in the context of our investment thesis, which is centered around growing adjusted EBITDA dollars by 50% through fiscal year 2025.
To achieve this objective we define long term financial targets at our Investor Day that will guide us first 5% to 8% annual organic revenue growth.
Second adjusted EBITDA margins stabilizing in the mid teens, and lastly, deploying between three five and $4 $5 billion in capital S.
As you see our results exemplify our team's disciplined and deliberate actions to execute against these long term objectives to drive superior shareholder value in the face of operational challenges, we have navigated over the past couple of years.
Let me open with a few highlights from our fourth quarter results for fiscal year 2022.
Revenue growth of approximately 13% compared to the prior year period represents our strongest quarter of growth since before the pandemic.
Specifically, we reported growth across all of our markets with double digit growth in three of the four markets underpinned by our fourth consecutive quarter of mid single digit head count growth as we capitalized on strong demand signals, resulting in a record fourth quarter book to Bill of 1.66 time.
Yes.
Adjusted EBITDA margin was nine 2% a decrease of approximately 60 basis points in the quarter.
Though still contributing to 50 basis points of expansion for the full fiscal year.
This marks an exceptional year of margin performance, we maintained strong contract execution and recognized cost savings throughout the pandemic, allowing us to make strategic investments in our business and people.
Lastly, we delivered strong operating cash flow of $255 million in the quarter, an increase of 418% over the prior year. This resulted in a free cash flow conversion of 197% of adjusted net income, which further expands our capacity to strategically deploy.
Capital against our long term growth objectives.
Let's now turn to our full fiscal year 2022 results. Please turn to slide six.
At the top line revenue increased six 4% for the full fiscal year to $8 $4 billion, which includes $340 million from inorganic contributions.
Revenue, excluding billable expenses also grew six 4% year over year to $5 $9 billion.
Our organic top line growth was driven by successfully executing on the strong demand for our differentiated solutions supported by sequential improvements in staff utilization.
Let me give some color on the market level performance for the full fiscal year.
Starting with Defence revenue grew by two 1% for the quarter compared to the prior year period, and 9% for the full fiscal year.
Although we still have work to do we are pleased with our team's continued efforts to improve on growth and overall performance contributing to a meaningful turnaround this quarter.
To be specific we had several notable wins in the fourth quarter, including our $1 $5 billion E maps to Recompete the largest single task order in our company's history.
This win demonstrates closeness to our clients' mission and dedicating investments to building, leading edge technologies, which is a critical enabler of our digital Battlespace platform as we continued to apply our differentiated solutions and new and meaningful ways.
In civil revenue grew by 33, 1% for the quarter compared to the prior year period, and 20% for the full fiscal year.
Organically revenue grew by 12, 9% for the quarter and five 4% for the full fiscal year, we are especially pleased with our double digit organic revenue growth in the fourth quarter, which highlights the growing momentum across all dimensions of the portfolio and factors a number of exciting new work.
<unk>, including Liberty <unk> 735 billion dollar Dev ops win which further deepens the mission critical work, we do across the VA.
And Intel we have hit an inflection point.
Avenue grew 11, 1% for the quarter and one 5% for the full fiscal year.
This performance reflects the efforts made over the past several quarters to reshape parts of the portfolio to the high end technical work, we want to focus on which is yielding positive results and contributing to exciting new wins.
Lastly, global commercial revenue grew 41% for the quarter compared to the prior year period, which resulted in a five 1% growth for the full fiscal year.
Now on to slide seven for details on our demand signals.
We are extremely pleased with our exceptional book to Bill performance for the quarter and the full fiscal year book to Bill of 166 times is a fourth quarter record, resulting in a full fiscal year book to Bill of 136 times.
Total backlog as of the end of the fiscal year grew 21, 7% over the prior fiscal year, yielding our largest ever backlog of $29 $2 billion.
Funded backlog grew five 7% to $3 7 billion unfunded backlog grew 63, 1% to $9 $9 billion in priced options grew eight 1% to $15 $6 billion.
These outstanding results highlight the market strong demand signal and our ability to shape win and execute on mission critical work aligned to budget priorities.
With a budget in place we are focused on working closely with our clients that they align funding outlays against their priorities. We are optimistic that we will continue to build on our strong demand results by sustaining our historical win rates for Recompete and new work, while continuing to execute on our diverse pipeline of qualified opportunities.
Taken together these dynamics further cement our position as a market leader.
Pivoting to head count as of March 31, we had approximately 29300 employees an increase of approximately 1600 year over year or five 7%.
This performance exemplifies our ability to successfully execute on our core operational priority.
To attract higher and retain highly skilled technical talent required to meet growing demand and an increasingly competitive labor market.
As we have discussed accelerating head count growth with the right skilled talent is fundamental to our long term growth objectives.
Equally important we are actively working alongside our clients to shape the future of work.
And continue to evolve the way in which we and our clients do business each day to build upon the success we achieved this fiscal year.
Moving to the bottom line adjusted EBITDA for fiscal year, 2022 with $935 million up 11, 3% from the prior year period.
As I mentioned, our adjusted EBITDA margin of 11, 2% reflects an expansion of 50 basis points over the prior year.
For fiscal year 2022 margins continued to benefit from the following four dynamics.
First profitable contract level performance and mix, which includes inorganic contributions.
Prudent cost management, which benefited from lower unallowable and discretionary spend.
Third a continuation of lower than expected billable expenses in what was an anomalous year.
And lastly, our returns are billing for fee largely within our infill market, which contributed $24 million in fiscal year 2022.
Full fiscal net income decreased 23, 4% year over year to $467 million.
Adjusted net income was $568 million up four 9% year over year.
Diluted earnings per share decreased 21, 3% to $3.44 from $4.37 in the prior year period.
And adjusted diluted earnings per share increased seven 9% to $4 in 'twenty one from $3.90.
Both GAAP and non-GAAP metrics were impacted by higher interest expenses over the prior year and a higher effective tax rate due to the timing of strategic tax planning initiatives in the prior fiscal year.
These increases were partially offset by a lower share count due to share repurchases made in line with our capital deployment strategy.
Turning to cash cash from operations for fiscal year, 2022 was approximately $737 million up from $719 million in the prior fiscal year.
As we discussed last quarter, we continue to focus on consistent and sustainable strong working capital management that aligns with our operational performance we.
We are pleased with our fourth quarter operating cash results and will continue our efforts with laser focus to optimize our already strong balance sheet.
Capital expenditures for fiscal year, 2022 were approximately $80 million down 8% over the prior fiscal year, resulting in free cash flow of approximately $657 million and a free cash flow conversion rate of 116% of adjusted net income which supports our.
<unk> balance sheet and capital deployment priorities.
Please turn to slide eight.
Our strong cash flow from operations and solid balance sheet capacity allows us to invest in the growth of our business and maximize shareholder value.
We maintained a disciplined and patient approach throughout fiscal year 2022, leveraging share repurchases of $419 million, our regular recurring dividend of approximately $209 million in capital deployed for strategic acquisitions and investments of $866 million.
A record in our company's history.
Our priority is around M&A, along with optimizing our other levers will become an integral part of achieving our long term growth objectives.
Today. We are also pleased to announce that the board has approved a quarterly dividend of 43 cents per share payable on June 30 to stockholders of record on June 15th.
Turning to guidance, please move to slide nine.
For fiscal year 2023, our guidance outlook is centered around growing adjusted EBITDA to $950 million and $1 billion.
We expect to achieve this by delivering revenue growth between five and 9%, which includes 1% of inorganic contribution from Liberty and trace point.
Achieving adjusted EBITDA margin in the mid to high 10% range, which reflects our long term expectations for an incremental step down in margins and unallowable spend and billable expenses continue to normalize and make strategic investments in our business to fuel growth.
And generating between 850 and $950 million in operating cash flow, which will fuel the investments we need to make in our business and the capital we seek to deploy to achieve our long term objectives.
As shown on slide 10, this guidance does not reflect our expectations for a significant cash tax payments. This year, given the volatility we expect to experience.
Specifically, we expect to pay approximately $550 million if cash taxes in fiscal year 2023, which includes approximately $150 million associated with section 174.
Inclusive of cash taxes, we anticipate our total operating cash flow for fiscal year, 2023 will be between 300 and $400 million.
Additionally, at the bottom line, we expect adjusted diluted earnings per share of between $4 15, and $4 45 as shown on slide 11.
This range reflects strong operating results inclusive of an inorganic contributions incremental depreciation and amortization expense related to investments in our technology and infrastructure and higher interest expense and a higher effective tax rate.
This guidance is based on an assumed 131 to 133 million weighted average shares outstanding of tax rate in the range of 23% to 25% and interest expense in the range of $108 million to $117 million.
And finally, we expect capital expenditures to remain in the range of $90 million to $110 million as we continue to meaningfully invest in our infrastructure and technology.
In closing.
I want to thank our entire Booz Allen team for their relentless dedication to our mission, helping us deliver value for our clients, while continuing to navigate the challenges that came our way throughout the fiscal year.
We have built solid momentum across our markets and as we enter fiscal year 2023, I'm confident in the premium quality of our offerings and the strong fundamentals of our business.
I believe we have the right team vision and strategy in place to execute on our long term objectives of delivering strong organic growth.
And driving superior shareholder value.
With that Laura lets open the lines for questions.
Thank you Lloyd operator, please open the lines.
Thank you to ask a question you'll need to press star one on your telephone to withdraw your question press the pound key.
In the interest of time, please limit yourself to one question and one follow up.
First question comes from Sheila.
<unk> with Jefferies. Your line is open.
Good morning, Raphael Mike. Thank you for the time.
Congratulations on like the inflection in revenue growth.
You guys had been talking about it for a few quarters now what drove that it seems like things came together all at the same time, whether it was the EMACS contract being awarded the Recompete strong stable growth.
How do we think about that 5% to 9% revenue growth for 2023 in terms of the business segments.
Michael.
Hey, Sheila good morning. Thanks for the question, let me maybe take a step back and frame last year into this year and beyond if that's okay and I'm sure Lloyd is going to want to add.
Two it you know I think we went into last year. We're very pleased with our results are obviously, but having said that I you know that there was a fair amount of volatility in the environment that I don't think we fully captured.
Our guidance a year ago, and so we've been thinking about that and making sure that that we are doing that into this year and beyond as you look throughout the year sequentially we hired.
Really well, we want a lot of work.
And really all of our markets began clicking on the growth posture that we expect them to have and that needs to continue for sure into FY 'twenty. Three if you look at it in FY 'twenty three guidance.
We're trying to do two things one is we're trying to be respectful of the fact that the volatility in the environment that we saw last year will not abate this year and so we need to you know when the momentum in the first half because we expect the second half to be somewhat more volatile to reach this 5% to 9% growth rate, we're really focused on organic growth.
And on organic growth across all of our markets, so not not one versus the.
The other.
And the priorities are what what I mentioned before we need to hire.
We need to win work, we need to continue to manage our cost base. So that we can be sure we have the resources to reward their talent.
And and retain our talent and then we really need to make a smart capital deployment decisions. So that we can actually.
Make acquisitions this year that will propel growth into the future.
Look at it altogether and then maybe to wrap up my part of the answer to this question is to say we're on track on that are on the multi year investment thesis because we are really focused on organic growth and we're able to deliver it.
Sheila Thanks for the question you know as it pertains to guidance.
There are a couple of dynamics that you wanted to stay true and one is that.
We're well positioned we wanted to capitalize on the strong momentum and we wanted to stay true to our investment thesis.
And last October what we said was we were focused on adjusted EBITDA dollars. So as we exited 20 to a range of 952 1 billion says to us that where we are on track.
And when you look at each of the ranges for the components. You'll also notice that it's a little bit broader than what we historically have done and we attempted to take into account all those elements that Horacio mentioned that in previous years, we probably didn't get quite right, we identified them, but not the impact so the five.
Benign and revenue from.
From our perspective is returning to that organic growth objective being the leader in the sector that we had been in the past.
The margin of mid to high tens as I said in my prepared comments really is a reflection of returning to a more normalized environment. Some of the dynamics with billable expense, probably shifting a bit being more of a headwind same with unallowable costs.
And the opportunity to invest in the business areas that we highlighted last October .
Cash you know the operations are generating solidly so our range of $8 50 to 950, excluding cash tax payments, we feel it's really going to give us the flexibility to do what we need to do and you know the cash taxes are really a timing issue I mean this year for 100 of it.
It's really going to be a income tax expenses with a higher tax rate effective tax rate and $1 50 for that section 174 legislation and then lastly, with Adas $4 15 to $4 45, plus a reflection of higher tax rate a bump up in interest expense.
And the diluted shares outstanding and just as a reminder, this is why we're focused on adjusted EBITDA dollars we recognize.
Last year that we were going to have some things impacting the bottom line that we're gonna be outside our control. So we think the guidance is on track that is consistent with our investment thesis and we're off to a good start.
Thank you both for that just one follow up like that 400 million of cash taxes.
You know it seems onetime in nature, what do cash taxes normalize too in terms of the cash tax rate going forward.
Yeah, you know it this year, we're going to have headwinds, we suspect that point in the future it'll it'll come back to us. So we felt that bridging it for everyone today so that.
We don't have to revisit it in the future you'll see sort of what the dynamic is so it's a little bit of a crystal ball Sheila in terms of where it actually will normalize but certainly the upward trend there is an upward trend to it.
Okay. Thank you.
Yes.
Thank you. Our next question comes from Gavin Parsons with Goldman Sachs.
Your line is open.
Hey, good morning, good morning, Kevin.
If I could just stay on the cash taxes for a minute there.
Could you give a little bit more detail just on what exactly is driving that given it looks like that's almost double your GAAP tax rate I mean is that something that you.
<unk> paid over the last few years or are you preparing for the next few years.
Yeah, you're exactly right in the past, we underpaid and again back to my answer to Sheila I expect it to come back. So it's really a timing issue we've had.
A pretty strong strategy around taxes over the years.
And payments comparatively lower than the last two years due to the implementation of our strategic tax initiatives. So we do expect normalization as the benefits from our ongoing initiatives are recognized.
Got it and I know you said, it's a bit of a crystal ball, but is this the cumulative amount of underpayment or do you think you still have some to go in the future.
So more to go in the future but.
It is what it is right now.
Okay. Thank you that's helpful and then maybe on head count growth.
<unk> is not typically the strongest hiring quarter, but maybe if you could discuss.
Why head count didn't grow sequentially in the quarter and what you're assuming for head count growth in fiscal 'twenty three.
Why don't I start I mean, obviously this is our top operational priority is to attract and retain.
The right people in the business and we feel we're doing very well against that.
If I'm not mistaken, we're at 5.77% over year over year head.
Head count growth for FY 'twenty two you know, we always started they get that mid single digit.
Head count growth and to meet our organic growth requirements are we will do the same thing in in 'twenty three the Q4 number. So as you pointed out first of all that's not typically are our strongest hiring quarter, but the other thing.
As we continue to control costs and make sure that we're doing the right thing there.
You know they'll say well you don't see in the numbers just a shift from our non billable staff available stop that happened throughout the quarter as we hired more in one area and we manage down some costs in the other area.
Okay. Thank you both.
Yeah.
Thank you. Our next question comes from Louie Dipalma with William Blair. Your line is open.
Yeah.
Good.
Good morning, Horacio Lloyd, Laura and Megan and congrats Christine on your appointment.
Thank you. Thank you for that we're very excited about that.
Yeah.
For the <unk> Recompete is the ceiling double the previous ceiling and what's the original contract.
Expected to end in 2023.
The ceiling is expanding greatly I haven't done the math precisely, but I think there's at least a half a billion dollars of new ceiling.
In there as the you know the the the mission the scope continues to expand and frankly the impact of our work.
It makes our clients are you didnt want more Oh. So you know we were expecting this to be a down earlier in the year, but it's a we're poised to ramp up there I think it under lines are why we are confident that the growth of our defense business.
Yeah.
This year and again, it's obviously a financially important but it's also a strategically important because this is the type of work we want to do at the center of the mission.
Driving a bold mission priorities and technology into core key missions are that.
That that are going to need that aren't going to be transformed by it and I think we've pointed out there's maybe the largest largest single task order in the history.
Of Oh Booz Allen So we're excited about that.
Great Horacio and it seems.
Yeah.
Investing significantly.
This area, you established partnerships with <unk> and and reveal.
Following the successful re no all of those.
Wondering how are your other data analytics programs for breast.
Things such as.
During your analyst day, you highlighted.
Jack Rainmaker with the army and you've also.
I'll, let Ed your Advani.
For them that you co developed with the D O D. I was wondering.
Broadly how all of your.
Initiatives with AI are progressing thanks.
Thank you for remembering what we've talked about in Investor day, with such clarity Louie, sometimes it's hard to tell if people are going to remember everything we talk about so I'm I'm really appreciative of our.
Your attention to two all of these are you know I think this all falls into the real break generally speaking or digital battle space and the work that we're doing to knit all of these legacy systems and new technologies in the department.
To give a the warfighter a.
A decision advantage.
And that's you know I found out is more of a headquarters play them that rainmakers. The data fabric that is supposed to go headquarters to the edge a lot of the work that we're doing in digital battle space is around building the IP and I see that will allow us to have a unique position in this notion of creating the data fabric that connects all of the systems and gifts.
The war fighter what they need from a data perspective, and then on top of that we want to make sure that we're building the AI tools resources algorithms to make that information valuable real time are a couple of small investments that you described are all under the rubric of the work that we're doing the C. T O.
<unk> office to make sure that we're really scanning what's happening in the commercial markets. What are the new technologies, the new thinking and how do we make sure that D. O D has access to that real time. So we're talking about one is a company that does a synthetic.
Data because as you know you need that to build these models and to train them all those faster where algorithm compression. So that we can actually pushed out to the edge and and the like so.
We're obviously very bullish that this is one of the areas. We're talking about for volt for hyper growth that will fuel not just 'twenty three 'twenty four 'twenty five and well beyond.
Sounds good thanks Raphael thank.
Thank you.
Thank you. Our next question comes from Matt Akers with Wells Fargo. Your line is open.
Yeah, Hi, good morning, Thanks for the question.
I guess a couple more on the revenue kind of walk year over year.
Possible to size.
How big are the Middle East North Africa.
This was in and I guess for ever watch.
Can you say, how big that was and it did.
To verify you you're not including that in the guidance yet or are you.
Yeah, I'll start I mean on the on the Middle East as it is it's it's it's small it's not going to be a.
Shake up the financials and any kind of way will never watch I really can't give you much more today until we close then.
I am confident that we're going to get there. It's not included in the guidance that I provided earlier.
Got it okay.
And then I guess just.
On debt.
Yeah, and just up a little bit in fiscal 'twenty three.
You guys have a little bit of a variable rate debt is just is there any chance of changing your.
Sort of thoughts on fixed.
Fixed versus variable rate debt or maybe hedging going forward given some of the moves in interest rates here Thats, what were saying yeah I know, it's top of mind for sure today, it's 67% 33%.
Fixed to floating.
We're looking at it in light of interest rate movements and it'll be also be part of how we think about.
Our future financing certainly in the near and the midterm.
Okay got it thank you.
Thank you. Our next question comes from Cai von <unk> with Cowen Your line is open.
Yes. Thank you so much so.
Book to Bill was if you take out the acquired backlog looks like it was about one four could you give us some color on the demand trends you're seeing now and also your funded book to Bill was pretty anemic, not quite as bad as khakis and any trends youre seeing things starting to <unk>.
<unk> to pick up as we go into the current quarter, Yeah I'll certainly.
Stark I am.
As we've been saying for quite some time, even though it may not have felt like it previously.
The overall market and the demand signals.
I've been pretty solid.
Thank God, we did see some program slippage I think others talked about that too.
But it does it with the budget in place, we're seeing a pretty robust RFP season.
As you can see in our disclosure when rates for Recompete still holding at 90% for new work in the low sixty's.
Our dialogues with our clients of both our existing tasking and future tasking.
It's also a pretty robust and you also saw a pickup in priced options, which we see as a leading indicator to our client satisfaction with Booz Allen, but also their confidence about what they'd like to do going forward and then lastly, the pipeline is extremely robust.
Backlog is up 22% year over year, and so we feel good about all of that in terms of the mix of funded and unfunded.
Over the years that sort of ebbs and flows and it's really a function of timing and as clients sort of think about their priorities and maybe shift a little bit.
Average contract size tends to be about five years, and so we've got large increasingly larger and larger our technical work and so we're going to see some of that bump around but I think you nailed. It in your opening question, we really internally look at the trailing 12 months and if it's north of 1.2, we're feeling pretty.
Good and to be at close to one four times that just further tells US we've got strong demand signals yeah. If I can build it and they are just in a couple of directions of what Lloyd is saying.
We've always we've been saying for a while we're not demand constrained. We appreciate the volatility in the environment, which is why we're really focused on the first half of this year.
On building momentum and from a growth perspective I was.
Collecting the other day on the fact that we are fast approaching 30000 people fast approaching $30 billion in backlog.
The number 30 is.
And then something good for us in the long end and it speaks to the growth that we both have been able to generate and we aspire to create under volt and in my prepared remarks I tried today I'll take you through some of the leadership changes organizational priorities and investments that we're making to ensure that the acceleration of organic growth.
That we're talking about in 'twenty three.
Seem to 'twenty, four and 'twenty five.
Thanks, so much so turning to head count and your head count was up but how far what's it up organically and it was down sequentially. So are you, having any trouble hiring and.
I mean, you said youre not demand constrained, but are you supply constrained.
You know I think we've consistently said, it's a tight labor market that remains true today and into the future. We saw at 2.8 organic growth in our head count.
And we're very pleased with that just given the tightness in the market.
As Horacio said, we did have.
Some staff departures, but actually that was a part of a deliberate cost synergies.
So it's sort of nudged it down sequentially. So what are we doing about it got a very aggressive referral program, we are increasingly reaching out.
To our traditional and non traditional sources.
The overall pipeline of candidates has been growing because of our culture and because of the recognition we've gotten.
Wisely, we are seen as an employer of choice. So we remain optimistic that back to targeting mid single digits. This fiscal year that we're going to get increasingly closer to that.
But it still remains a very tight labor market. Yeah. I mean as you know this is this topic of talent is near and Dear to my heart and it's always been a I would say there's three things. We are we're laser focused on.
The first one as Lloyd said, we're controlling calls writ large to make sure that we have the resources to reward our people to retain our people are to compensate it in a very tight labor market.
To we are continuing to invest in our environment than in our culture. You know the people who are now able to return to the office and they're much more flexible way, we're hearing really good things about that and and again the cultural Booz Allen has always been a differentiator in and three ultimately they worked out we are doing keeps people here once people.
Who come here I I opened the call today.
Talking a little bit about the work that we're doing to support the U S government on the on what's happening in Ukraine.
That's the type of work that makes the people working on it proud, but it makes us proud and he makes people want to come to Booz Allen to be part of those missions.
Thank you very much.
Yeah.
Thank you. Our next question comes from Colin Canfield with Barclays. Your line is open.
Hey, good morning can you just discuss your organic guidance in the context of the multi year growth target cadence.
You said that you're on track to your investment objective, but youre on underperforming the mid to the previous organic growth target of six 5%. So then.
And then as we think out kind of on a multi year period, what sort of hiring you need to accelerate or what what sort of hiring do you need to see to accelerate above this year's organic guide.
Yeah, we're looking at a 4% to 8% range organically at the midpoint of which is significantly north of our exit in 'twenty two.
And to Chi's question, if we're able to hit mid single digits in terms of bringing on the talent.
We think the conversion of our very strong backlog puts us solidly in that space.
So you know momentum is building we feel good about the demand signals that I mentioned earlier.
Going to continue to make our recruiting and onboarding our top operational priority.
Which will put us we believe in those ranges.
Got it and then.
With respect to the 1% inorganic growth contribution. This year can you just talk a little bit about the valuation framework that you're looking at in terms of your capital deployment strategy is there a good payback period to think about or.
Or do you think about you know at your Investor day targets kind of what's the updated inorganic placeholder, we should be considering for adjusted EBITDA.
Yeah, the 1% is a reflection of our past commentary on M&A.
Liberty has been fully integrated.
As of April as well as trace point so.
This year, we saw.
About $340 million of contribution from those guys to.
Our overall performance so on a go forward basis.
We're obviously looking at the financials, but our priority around M&A is it strategically going to accelerate our growth.
Is it do we have a strong cultural alignment.
And then do the financials make sense and in the case of Liberty and trace point both of those were great case studies as to how we get there are we want to be.
Our next question comes from Seth <unk> with Jpmorgan. Your line is open.
Hey, good morning, Thanks very much.
Right right well boy can we dig into this tax issue a little bit more because when I look in the 10.
<unk> 10-K.
Doesn't look like the cash tax payments have been.
Lagging significantly behind the gap.
And then if I think about this year's cash tax payment, let's put aside the R&D issue, which nobody knows if that's going to stick around or not but even putting that aside its like a it's like a 50% tax rate.
And so when you think about like where should it go going forward and it seems like maybe it's still going to be elevated or more.
Moving north or something like that I guess can you help us level set there a little bit more.
Yeah, you know the timing of our past tax strategies has put us.
You know in the 22% to 24% range.
Going forward, we expect it.
It could be at the upper end of that 24%.
So in the past years, we were successful in.
Having you know.
Managing our taxes for the long term and are able to drive the tax rate down obviously pending legislation and things of that sort, where saying it going in the other direction. So I'd take a little pushback a little bit on the 50%.
The tax rate is more in that 23% to 25%, but we've got these additional dynamics as it pertains to the legislation that bumped it up.
Okay, just to just to understand though the tax rate like if we cash taxes would be.
400, if not for the <unk>.
But let's put aside the.
The R&D issue cash taxes would be 400 without that correct correct. Okay.
Yeah, Okay, Okay, and pre tax pre tax income was something like 750 year or so.
Yeah, we've got.
In terms of our operating cash we've got $8 50 to 950, which back to my prepared remarks really to us indicates that the operations are solidly generating what we would expect.
Okay, and so if we think to the out years should should we think if the if the GAAP tax rate is 24 that their cash taxes should be in line and there would be.
Really no changes on the or no inflows or outflows showing on the cash flow statement or the cash taxes might be different.
I think he got it right I mean that is true, but we're also going to see some things come back to us given our strategies that we've had so we really see that the timing of payments is really the dynamic that we're grappling with and we wanted to disclose that to you also that you're able to sort of model it and understand it.
Okay, great. Thanks, Thanks very much.
Thank you and that's all the time, we have for questions I'd like to turn the call back to Horacio for any closing remarks.
Thank you very much. Thank you all for your questions. This morning and for joining US I hope in the last hour. We gave you the additional insight you need to be able to see how well we're doing both delivering financially in transforming strategically.
They're volt, we are undergoing a lot of planned change and I am very proud of that.
But maybe in closing the important thing is also to talk about well it doesn't change and.
I think that does not change at Booz Allen is our purpose and our values.
We're now almost 30000 strong and the people of Booz Allen and are as committed as always to empowering each other and everybody around us to change the world and to live our values.
Out loud.
And that makes being recognized by Forbes as number three among the top 500 best employers for diversity, particularly meaningful.
The diversity of our workforce it reflects our values and.
And it enables us to attract and retain exceptional talent.
I believe that the diversity of perspectives ideas and experiences are key to achieving the ambitions that lowered that I described for you today.
And I am extremely optimistic about the future of Booz Allen.
And in large part because I get to experience the passion and the quality of our people firsthand each and everyday.
So once again, thank you for being with us today and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.
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Okay.
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