Q2 2023 Booz Allen Hamilton Holding Corp Earnings Call

October 28, 2022

Good morning, and thank you for standing by welcome to the Booz Allen Hamilton's earnings call covering second quarter fiscal year 2023 results. At this time all participants are in a listen only mode later there'll be an opportunity for questions.

I would now like to turn the call over to Mr. Nathan Rutledge.

Thank you operator good morning.

And thank you for joining us for Booz Allen's second quarter fiscal year 2023 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.

With me today to talk about our business and financial results are Horacio Rozanski, our president and Chief Executive Officer, and Matt Calderon, Our 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 and 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 and on this call.

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 results or otherwise.

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 second quarter fiscal year 2023 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.

Nathan.

And good morning, everyone. Thanks for joining the call.

Before diving into the financial results. This morning.

I would like to begin by acknowledging the seamless transition of our Chief financial Officer role.

From Lloyd Howell to Matt Calderon.

<unk> outstanding professionals with Great track Records at Booz Allen.

As we announced last month Lloyd Howell is retiring on December 31.

I am grateful for Lloyds tremendous contributions over his 34 year career with Booz Allen.

And especially his last six years as CFO .

Lloyd greatly advanced our relationship with the Investor community.

Under his leadership Booz Allen learned to define and communicate long term investment parameters and articulate our position as an organic growth leader.

I will Miss Lloyd's voice in our internal discussions on these earnings calls.

I know he will go on to do amazing things in the future.

Our new CFO , Matt Calderon.

<unk> to the role on October one.

Matt has been with Booz Allen for 20 years and has an exceptional record of driving success for our firm.

He began his career at Booz Allen in our own commercial business.

Same business, where I began.

And then transitioned to serve intelligence clients.

He joined my direct team in the early days of vision 2020.

And what's the driving force in making that strategy a reality.

Matt went onto launch our corporate development function.

And in 2017 partnered with Lloyd to lead strategic finance.

Transform our forecasting planning and analysis function.

Most recently Matt served.

Served as our Chief strategy Officer.

All of those experiences have repairs map to step into the CFO role and continue to drive our firm success.

I am personally fortunate to have a leader of mats caliber and experience as our CFO .

Matt It is my pleasure to have you join us on these earnings calls.

Let's turn now to business performance.

Matt and I are very excited to share excellent results for the second quarter of fiscal year 2023.

During this quarter, we continued our strong revenue and EBITDA growth and accelerated both our hiring in business capture.

When we began the fiscal year, we shared with you our plan to build momentum in the first half to mitigate potential for increased volatility in the second half.

We also shared our view that evolved our growth strategy centers on velocity leadership and technology.

Not only our future, but also are present.

This means that we need to move rapidly to implement our strategy in order to meet our multiyear goal of growing adjusted EBITDA from $935 million last fiscal year to one two to one 3 billion.

By fiscal year 2025.

The headline for today is this.

<unk> way through the fiscal year, we believe we are operationally and strategically on track to deliver on our multiyear goals.

And in fact, we expect to deliver above planned financial results in fiscal year 2023.

Therefore, we are pleased to raise our guidance for this fiscal year.

We now expect our revenue growth range to be 8% to 10%.

And adjusted EBITDA range.

To be $975 million to 101 $5 billion.

Matt will cover the numbers and guidance in detail, but first I would like to take some time to frame. These results as part of our larger business journey.

I will first discuss how our FY 'twenty three operational priorities impact this fiscal year financials.

Then I'll cover the broader progress we are making involved with a specific focus today on the technology dimension.

As you can see the numbers for our second quarter of fiscal year 2023 speak for themselves.

While uncertainty from inflation recessionary fears geopolitical conflict and ongoing budget debates remain.

We have generated great momentum.

Which is reflected in the progress we're making against the operational priorities outlined in our May earnings call.

Let me take a moment to summarize that progress.

First.

Our top operational priority continues to be hiring.

Clients that head count has grown four 2% over the past 12 months in a very competitive labor market.

And we are seeing historically strong absorption of new hires into billable programs.

These concurrent improvements are the result of transformative work by our recruiting and business teams under the leadership of our COO Kristine Martin Anderson.

Today I.

Im also excited to share that we have crossed the milestone of 30000 Booz Allen employees.

Our second priority is to continue to win high quality work at the intersection of key missions and new technology.

Our leaders delivered an outstanding quarter of contract awards.

Resulting in record backlog and a 12 month book to Bill of 132 times.

Third.

Our leaders are managing the business extraordinarily well and.

And delivering on the bottom line.

We are effectively managing costs in an inflationary environment.

Evidenced for example by the significant difference in clients that head count growth versus total head count growth.

This provides resiliency and enables investment which is key to fueling future growth.

And fourth we must deploy capital in a way that creates maximum value for our stakeholders and drives our strategy forward.

As we announced earlier this month, we are pleased to have closed on the acquisition of ever watch.

We're excited about the opportunities ever watch create to accelerate our national cyber business.

Building on this strong operational backdrop, we're also making significant progress in implementing volt.

In the next few moments I hope to illustrate how our innovation agenda and differentiated technology solutions uniquely position us to accelerate growth and contribute to achieving our multi year investment thesis goals.

Our clients live in an increasingly complex environment.

Pressured by geopolitical instability global challenges from pandemic to climate change and the increased need to invest in new technology, while at the same time sustaining legacy programs all in they're fraught political and economic environment.

We believe we are uniquely positioned to use innovation to simultaneously help our clients navigate these complex challenges and drive our own financial performance.

Our basic premise is that technology cycles coming waves that are growing in both amplitude and frequency.

Booz Allen's approach to innovation centers on helping our clients translate new technologies into mission success beyond the prototype.

Two full scalability.

We believe this requires three things.

John .

Extensive knowledge of the mission and its requirements.

Two insights and access to new technologies early in their lifecycle.

And three an integrated talent base that can quickly scale to provide solutions and services.

An excellent example of our innovation approach.

Our support for the Department of Veterans Affairs, where Booz Allen plays an integral role in supporting their digital transformation.

Over the past decade, we have invested to grow our technical talent deepened our mission expertise.

And build solutions to help the VA modernize leveraging capabilities like low code No code AI Dev ops agile and cloud.

Through acquisitions, we have continued to gain even greater scale and acceleration.

Following this approach to innovating at the mission technology intersection our VA business is over six times larger today than it was 10 years ago.

More broadly.

<unk> has challenged us to re imagine our innovation agenda.

The comprehensive Chief Technology office.

The role of the CTO is to continuously evolve our scale technology positions.

And anticipate the next waves.

Our ongoing investments in key emerging technologies are already building momentum.

For example.

We are integrating cyber and AI in our cyber praecox platform for their threat Hunter at the tactical edge.

We are anticipating the implications of post quantum encryption.

And we are developing five prototypes that provide dynamic spectrum sharing through an AI sensing application.

Returning for a moment to the VA example, our investments in emerging technology are central to their next set of mission requirements.

For example, we are developing digital twin solutions to innovate the planning and design of hybrid operating rooms.

Using AI powered design and clinical workflow simulations.

Okay.

All of this.

He is only about a small sampling of how our innovation agenda is positioning us for future growth.

These next generation solutions and many more.

Are becoming real today.

We're excited to begin showcasing them more broadly when the helix our re imagine center for innovation opens mid November .

We hope you will visit the physical or virtual versions of the helix later this year.

At closing thoughts.

Our investment in organic growth, our strong balance sheet, our evolving operating mall <unk>.

And above all our exceptional team.

Give me confidence that we are on track to accomplish the ambitious strategic and financial objectives outlined involved and our investment thesis.

I am bullish about the future of Booz Allen.

And with that Matt welcome to the earnings calls over to you to take us through the financial results in depth.

Thank you Horacio and good morning, everyone. It's a pleasure to be speaking with you today.

First I want to Echo Horacio sentiments.

Lloyd did an outstanding job as CFO .

He built a world class team and developed a financial strategy that continues to generate durable value for all of our stakeholders and on a personal note.

Florida has been a true friend and a great mentor to me.

I am excited for the opportunity to lead our finance team.

To work with Booz Allen's outstanding group of leaders to deliver results.

And to engage with you along the way.

As you know, we said that we wanted to come out of the gate with a strong first half of this fiscal year and we did exactly that.

These exceptional results position us to exceed our original plan for this fiscal year, even while ramping up our strategic investment in the back half of the year to fuel ongoing organic growth.

And as Horacio noted our results put us on track to meet our multi year investment thesis objectives.

Now please turn to slide six as I discuss our fiscal year 2023 second quarter results.

I will start by hitting the highlights of our performance.

At the top line.

Revenue grew nine 2% in the second quarter.

<unk> growth across all of our markets and particularly strong performance in our civil business.

We generated $286 million.

Adjusted EBITDA in the quarter.

A 6% improvement over the prior year with an adjusted EBITDA margin of 12, 4%.

This translated to $1 34.

Adjusted diluted earnings per share.

And lastly.

We deployed $87 million in capital in the quarter exclusive of the <unk> acquisition, which closed after quarter end.

I will now cover the details of our second quarter performance in greater depth.

As previously mentioned for the second quarter, our revenue grew nine 2% year over year to $2 $3 billion.

Revenue, excluding billable expenses.

Grew 10, 1% year over year.

<unk>, one 6 billion.

These results reflect another exceptional quarter of organic revenue growth.

Driven by the ongoing strategic repositioning of our business.

Strong demand for our solutions.

Head count growth.

And higher staff utilization compared to the prior year's quarter.

Our topline performance was supported by revenue growth across all of our markets.

In defense.

Revenue grew approximately 2% year over year in part due to lighter billable expenses.

That said in defense, we saw strong hiring throughout the quarter and a number of meaningful wins that we expect will provide good momentum for the back half of our fiscal year and beyond.

In civil.

Revenue grew by approximately 18% year over year highlighted by particularly strong results in our health account.

Our civil performance reflects the power of two pillars of our strategy.

<unk> strategic position at the intersection of mission and technology.

And using targeted acquisitions to accelerate our technical capabilities and organic growth.

Our intelligence business grew by approximately 9% year over year.

Building on this team's hiring and portfolio shaping efforts of the past year.

And finally and global commercial revenue grew by approximately 25% year over year.

In the quarter, we completed the divestiture of our commercial business in Mena, which was a solid but noncore asset I'm pleased that we've found a good home for our clients.

And employees in the region.

Now please turn to slide seven for details on our demand signals.

Net bookings for the quarter were approximately $5 5 billion.

Which translates to a quarterly book to Bill of two four times and a trailing 12 month book to Bill of 132 times.

Total backlog.

Grew approximately nine 8% year over year.

Resulting in our largest ever backlog of $31 $8 billion.

We saw growth in all three portions of our backlog.

Funded backlog grew 11, 3% to $5 5 billion.

Unfunded backlog grew eight 9% to $10 4 billion.

And priced options grew nine 8% to $16 billion.

These outstanding results once again demonstrate that we are not demand constrained.

We continue to win the right type of work to meet both our financial and our strategic aspirations.

Pivoting now to head count.

We had an increase of approximately 800 client serving employees in the second quarter, even after taking into account the roughly 100 employees that exited with our Mena divestiture.

This performance was outstanding.

Particularly in light.

Of what remains a tight labor market.

Our client serving head count is now up approximately 1100 employees or four 2% year over year.

This sets us up very well to continue our top line momentum in the near term.

As I mentioned earlier.

At the bottom line, we generated $286 million of.

Adjusted EBITDA in the quarter, which is up 6%.

Year over year.

We ended the quarter with an adjusted EBITDA margin of 12, 4%.

Which is down 40 basis points year over year, but slightly ahead of our expectations.

Our margins continue to benefit from strong contract level execution.

A slight mix shift towards higher fee generating work.

And our ongoing strategic cost management efforts.

Based on our strong operating performance and the gain from the sale of our Mena business, partially offset by higher interest expense net income increased 10, 3% year over year to $171 million.

Adjusted net income was $178 million up four 5% year over year.

Diluted earnings per share increased 12, 3% to $1 28.

From $1 14.

In the prior year period, and adjusted diluted earnings per share increased six 3% to $1 34.

From $1 26.

Turning to the balance sheet, we closed the second quarter with a cash balance of $757 million and a $1 billion untapped revolver.

In September we closed on the ninth amendment to our credit agreement.

This allows us to continue to optimize our capital stack, including increasing the weighted average maturity of our debt.

Free cash flow for the quarter was $257 million. The result of cash generated from operating activities of $273 million.

$16 million of capital expenditures.

Turning now to slide eight.

During the second quarter, we returned $87 million of capital to shareholders through $30 million of share repurchases and $57 million and quarterly cash dividends.

Net debt at the end of the second quarter was approximately $2 1 billion and our net leverage ratio was approximately two one times EBITDA.

As previously mentioned.

After quarter end, we closed on the acquisition of ever Watch. This acquisition is a Prime example of a strategic accelerator that will allow us to bring technical and business model innovation.

To our clients.

We are thrilled to welcome they ever watched came aboard.

Our intelligence market team is eager to work with them to expand our deep pipeline of opportunities.

And to better serve critical national security missions.

We anticipate.

That this transaction will be accretive this fiscal year.

Finally today I am pleased to announce that our board of directors has approved a quarterly dividend of <unk> 43 per share payable.

Payable on December 2nd to stockholders of record on November 15th.

I will now address our revised guidance for the full fiscal year 2023.

Please turn to slide nine.

At the top line, we are increasing guidance for revenue growth to be between 8% and 10%, which includes inorganic growth of between 1% and 2%.

This is due to our strong first half performance as well as the hiring in bookings momentum that our team has built we anticipate that revenue growth will moderate slightly in the second half as compared to last fiscal year, which included a seasonally high billable expense mix.

We are very pleased with the underlying momentum in our business.

Similarly.

We are raising our adjusted EBITDA guidance to a range of $975 million to 1.015 billion.

We are also increasing our adjusted EBITDA margin outlook, which we now anticipate will be in the high 10%.

Two lower 11% range.

These increases are based on our revenue outlook typical seasonal spending and margin patterns.

And our intent to invest more heavily in the back half of the fiscal year to drive sustainable organic growth.

We are also increasing our <unk> guidance.

To a range of $4 25.

Two $4 50.

This increase in <unk> guidance is driven by our strong operating results, partially offset by a modest increase in interest expense.

We still.

Capital expenditures to be in the range of 90 million to $110 million.

As we continue to invest in infrastructure and technology.

Finally, as shown on slide 10.

Due to the expected increase in profitability.

We now expect our operating cash flow, excluding taxes to be between $875 million and $950 million.

Earlier this month, we received a partial tax refund for our prior strategic tax planning initiatives.

As a result, our.

Our expectation for net cash taxes to be paid this fiscal year has decreased to $315 million, including both our normalized tax rate and.

And the impact of section 174.

This brings our anticipated operating cash flow inclusive of taxes.

Between $560 million.

$635 million for the full fiscal year.

In closing, let me Echo Horacio again.

Say, how proud I am of our strong performance during the second quarter.

This performance was only made possible by the hard work and dedication of our now 30000 employees.

As a result.

We remain on target to execute against our strategic and financial objectives.

Allowing booz Allen to continue to create superior shareholder value.

With that operator, let's open the line for questions.

Thank you.

As a reminder to ask a question you will need to press star one one on your telephone please.

Please standby, while we compile the Q&A roster.

Our first question comes from Gavin Parsons with Goldman Sachs. Your line is open.

Hey, good morning, and congrats on the new role.

Thank you.

Good morning, Kevin.

You talked about uncertainties into the second half of the year, who are a little ways into continuing resolution right now.

It seems like last year that CR was particularly disruptive.

Talk a little bit about what the environment looks like today and if you have any improved visibility kind of relative to first half I'm, sorry first quarter.

Sure.

Thanks for the question.

Obviously, we feel great about the results.

Our second quarter on the entire first half.

It's consistent with the plan, we outlined at the beginning of the year of trying to build momentum in the first half in anticipation of potential volatility in the second half and we continue to look closely.

Those factors were 11 days away from an election.

There's a.

As you pointed out we're under a CR, we're very mindful of all of that.

And that's built into our guidance, but as you saw our guidance. We are at this point expecting a strong first second half and a strong full year, if I get underneath that.

Man for the work that we do is very strong.

And you'll see that in our numbers our talent base is growing nicely and accelerating.

This milestone of 30000.

Alan people.

I've been here a long time would have been unbelievable to me a few years ago, but we're here on the quality of the talent is exceptional.

We are well positioned.

If I could capture the way we look at the future is we have strong organic growth momentum really across all elements of our business. We're investing in the things. We said, we would invest under volt to.

To see growth beyond what's what's the near term horizon.

And we're on track to deliver against our investment thesis, which is the commitment we made to all of you. So I'll.

As I said, we we.

Understand the volatility in the environment that we're playing close attention, but right now we feel very good.

Okay, Great and then in terms of your investment in new technologies and innovation a couple of years ago.

Conversation I think focus a lot more around some of these call option initiative investments and I think today, it's evolved a little bit more towards the new technologies conversation, which you gave a lot of detail on the can you talk a little bit just about how that strategy has evolved.

Sure.

When we were working through what we call option value as part of our.

Set of initiatives over the last four or five 4%.

Five years, we've really learned a lot about our ability to both create technology and integrate partner technology into solutions and we saw really some strong.

Progress Reg Dot Gov is a program we've talked about over the years Red Dot Gov is doing great and frankly exceeding our expectations and like that.

We see other upside what I think we learned thus parked evolved.

Is that the best place for us to innovate inside the mission technology intersection working into places, where we have strong mission presence driving really new technology into that I was had a USA a couple weeks ago I know a number of people on this call where they are and I was talking to apply.

And I was watching clients in particular react to some of the things that we're doing around AI and <unk> to bring information to the edge and potentially challenging environments and I tell you the level of excitement. There gave me a lot of optimism that we're on the right track and so when you look at our investments in health on the VA.

That were in our prepared remarks, when you look at our digital Battlespace investments national cyber and the like we think that that's the right path of evolutionary should take everything we've learned over the last few years I'm really pour it into these key mission technology intersections that are prime for hyper growth.

That's very helpful. Thank you.

Thank you.

One moment.

We have a question from Sheila <unk>.

With Jefferies. Your line is open.

Hi, good morning, and welcome. Thanks, Sheila Thank you for those comments.

So maybe if I could.

Asked about other watch just completed that in the quarter. So that's great.

As you think about your continued M&A strategy.

Jonathan to your lung congrats can you maybe discuss how you are.

Thinking about that you also mentioned the success Youre, having at health and Liberty. So maybe you could just elaborate on how youre thinking about the M&A strategy given that change in that.

Thank you.

Yeah.

Thanks Sheila.

Just sort of answer to your question is.

No change in strategy.

Still view M&A as an accelerant I think Liberty is a great example of how.

M&A can not just <unk>.

Catalyze.

Organic growth over time, but bring new capabilities into the fold. This rasia just discussed and.

And we see ever watch very much in the same vein, we're really excited to get the team on board after seven months between signing and close which is something quite frankly, none of us anticipated.

And.

Early returns are are positive our team and their team are working together to think through.

We can take their technical and business model.

Innovation and combine it with us are ours to bring greater value to clients and that's going to accelerate organic growth.

So I.

We have a strong pipeline.

We'd love to follow that playbook, but we're going to remain patient and disciplined.

Great. Thank you so much.

Yeah.

Thank you. Our next question comes from Louie Dipalma with William Blair. Your line is open.

Good morning, Horacio Lloyd.

Nathan and Megan and congrats.

Matt and Mike.

Thanks Louie.

Horacio how do you view the opportunity to more aggressively pursue cyber security consulting for local and state government agencies, there seemed to have been trillions of dollars of.

Fivefold government stimulus part of dedicated to protecting critical infrastructure and you establish the cyber St partnership do you view local and state government as an underpenetrated market for you.

Louie we go back to the question of state and local every few years.

The fact of the matter is Booz Allen does not have a ton of expertise and state and local channels.

Our trace point.

Tim.

So a fair amount of.

A work there and we will we'll continue that we're not seeing.

Sort of what going into that type of white space I'll say major opportunity right now what we see as the major opportunities are to really double down on this mission technology intersections, where we have clear presses clear mission understanding we're bringing in new technology and then the key point that I think is getting missed in a lot of conversations it's weekend scale.

<unk>.

It would.

I don't know if you had the chance to spend time at AOS say, but you see a ton of prototypes.

But prototype to mission impact.

Very long challenging road, and that's where I think we as Booz Allen are doubling down is the ability to not just bring these technologies and ensure client what the technology can become it's actually make that technology real and so while there are opportunities in state and local there is probably opportunities internationally in a number of other places. So we're not I believe youll see.

All of that right now, what we're focusing creating hyper growth and some designated mission technology intersections.

Great.

And.

You guys demonstrated robust hiring during the quarter is that sustainable for.

For the second half of the year, how much seasonality is there for your head Count addition.

So there is always seasonality in Q2 is always a strong quarter for us.

This Q2 was particularly strong because sometimes those numbers include both our summer interns and sort of college hires and the bulk of the hiring in this quarter was actually experienced talent.

So I think that speaks to the robustness of our talent pipeline and our value proposition, which is really critical resources.

That that are so important.

To our business.

Let me give an example, I mean, we always talk about the fact that we're not demand.

Constrained so we have a significant intelligence.

Contract that is probably scheduled to end next fall I think in the September timeframe and as we look at that.

At least some of the work may move to other vehicles vehicles. So we don't hold.

But we have so much demand for the talent that is doing that work now for these exquisite classified.

Clinical talent.

We have.

Opportunities to fill other open reqs across a number of other vehicles and Intel and beyond and that is really the corner of the reality is is being able to deploy unique talent.

To do this work Thats whats actually.

Driving our growth I mean at this point.

The rate limiting step to growth is.

And then sell for example is clear talent not vehicle availability, which I know, we talk everybody talks a lot about and so we're we're feeling good we're feeling like the changes that we've made to our recruiting process and through our employee value proposition.

Our sustainable it is.

Still a challenging talent market out there in quarter to quarter the numbers.

Fluctuate, but I think we're on the right track.

Thanks.

Thank you and our next question comes from.

Cuban with Stifel. Your line is open.

Hey, good morning.

Goodbye congratulations to both Matthew Lloyd.

Thank you.

Yes, thanks for the time.

So previously you highlighted expectations for some medium term margin pressure, which seems to be expected materialize over the next one to two years.

However, it doesn't really seem to be impacting your business. This year with the raised margin guidance can you just talk about what the primary tailwind and headwinds to margins higher from here.

Absolutely.

This is driven by a couple of factors one is the mix of our business, our civil business tends to be a little higher margin than.

And then security and Intel.

And that's that's highly correlated obviously.

Two contract type, that's where more of our fixed price work.

<unk>.

Second factor.

Is billable.

Billable expenses, which in general we call empty calories, but they do impact.

EBITDA margin if not EBITDA itself and then third is cost management, and we're doing really well on that front, both on the <unk> side and whats in the rates.

Okay in terms of.

I'm sorry.

But in the short run we don't really manage our business based on margin.

There's a reason we choose EBITDA dollars from an investment thesis perspective, and we think we're really on track there and we're happy with.

The 6% EBITDA dollar growth, we're demonstrating year over year. So margins are important obviously.

But that's not the primary objective.

Yes.

He was mentioning it seems like maybe youre outperforming there a little bit I guess relative to what the expectations were that we've set out.

Yeah, maybe I think.

We're doing slightly better than we thought this year.

Obviously, that's reflected in our guidance.

And then Matt just a follow up to a comment there on civil performance that you noted was really strong during the quarter I think there was an expectation at least coming into this quarter that Intel would be really strong and I think you saw that on the adult side.

As we start to look for.

Or where do you think the sort of the setup is similar where health and some of the things you're doing on the civil side continue to drive outperformance there at least from sales growth perspective.

Yes, yes, I know I think.

Are we going to see.

18%, 20% growth in civil year over year.

Probably not that'll come down a bit.

Still working off some of the Liberty Accelerant factor, even though it's not in an hour.

It is now an organic growth numbers, but we're still seeing some of the near term synergies there.

But on defense.

Although it showed growth in the 2% range.

If you pull back that really was driven by some year over year.

Comps from a billable expense perspective underlying it's much stronger so I do think youre going to see a little bit of a normalization across the three markets, but we're very excited with the ongoing performance of civil and our health business as well.

Now let me build on that.

Sort of are the market's strategic level.

If you look at where we're well aligned to.

The administration's domestic agenda strong investment in public health, where we have a tremendous business and a lot of upside.

The modernization of the IRS, where we have a long standing presence in a lot of opportunity and increasingly we are focusing on climate and how we can bring technology and AI and those kinds of things to the climate.

A question, but then when you shift over to the National security side.

National Security strategy was just released and it speaks to this is the defining decade. The national Defense strategy, just came out and once again speaks to China.

The patient competitor for the U S and they need to invest in technology in order.

To stay.

Hey ahead of that competition and all of that I think Booz Allen is really has a unique position that we built over the last decade.

The intersection of mission and technology, where we are bringing these very new technologies, sometimes do I'll use technologies between commercial and.

And government.

In a way that they're scalable into these these massive challenges and so it's.

As Matt said I think the numbers are over time going to reflect the fact that we're well positioned on app strength across all of our markets.

Thanks, Rasco and congratulations Matt.

Thank you we have a question from Ty von <unk> with Cowen Your line is open.

Yes, thanks, so much and welcome Matt So.

Good book to Bill My understanding is that you had $2 billion.

In outstanding bids that were expected to be decided in the last week of September did those be bids get decided where are they in your favor and if not what are we looking for in terms of bookings potential in the first quarter.

Im not sure exactly which procurements youre talking about there are some things that we want that are under protest.

So I don't know the specific answer to your question what I will say is this.

For very robust book to Bill.

Quarter of that is both a number of significant $1 billion plus task orders and our traditional second quarter strength around tactical sales also returning which then puts the.

At 12 months.

Book to Bill in a really good place and puts backlog at record numbers.

So you know at the risk of something like a broken record, we really are not demand constrained or the real opportunity for us is to continue to onboard the right talent in order to make sure that we actualized, although demand into revenue.

Great and second one.

If we look at ever watch I assume the change in organic growth has gone from one to one to two is that you added both the divested took out the numbers for <unk>, which are divested and you add it in the numbers for ever watch a is that correct and b could you give us some more color on.

Ever watch in terms of how much you expected to add to revenues and earnings.

That is correct Cai.

I'm going to hold on giving specific numbers for ever watched probably until next quarter.

Yes, as I mentioned, you just closed two weeks ago. The teams are going through.

Original synergy.

Projections and.

And business case, so we bought it in the overall numbers.

But we'll get back to you on that next quarter.

Thank you.

Thank you and our next question comes from Seth Fleishman with Jpmorgan. Your line is open.

Good morning, this is rocco on for Seth.

Good morning, how does the current rate environment affect your thought process around leverage versus one year ago at the Investor day.

I'm not sure.

The question broke up a little bit I mean.

And repeating it.

Yes, how does the current rate environment affect your thought process about levers versus one year ago at the Investor day.

Oh I got you I.

I heard a burn rate environment I wasn't at current rates, okay. So youre talking about interest rates.

As Matt said, when we were discussing M&A or capital deployment strategy for the moment remains.

Changed we are looking for strategic accelerators that will actually allow us to accomplish volt, our investment theses and accelerate organic growth.

We have some good examples of that in the past, we hope ever watch will be another great example of that as we look forward.

When we make an acquisition we look at three things.

Sequence number one the opportunity to drive organic growth on the long term number to the cultural fit and the connection to our people and then number three the numbers have to make sense and obviously with rising rates.

Races that a bar, but honestly most of the deals that we look at it and pass on.

Never make it to that third question as the first two where we say you know this is not for us.

Thanks.

Quick follow up defense versus it's been a bit more muted than the other end markets what might that loose.

So I'll start I'm sure, Matt will want to I'd actually defense had a good quarter, it's actually a little bit masked by the fact that our available expenses in that business.

Were lighter than they've been in lighter than we expected, but as we always say, we think about billable expenses set the calories because they carry very little.

Great margin and very little EBITDA. So if you look underneath that are the revenues produced by our talent.

We see a real acceleration there.

And as Matt pointed out with new people coming in over the last quarter strongly in and good availability for new hires.

Think there's organic growth momentum there as there is in the other sectors. That's right Ross here and we've run some really high quality work and defense. So I would say it has been shaken loose as Roger had mentioned it was a little masked this quarter.

By some some year over year billable expense comps, but but you'll see over the back half of the year that there is strong momentum in our defense business.

Great. Thank you.

Thank you and our next question comes from Robert Spingarn with Melius Research. Your line is open.

Hi, good morning, and welcome Matt.

Alright. Thank you a couple of quick things back to M&A for a minute and interest rates with the higher rates is private equity backed out of the market a little bit we've been hearing that so less competition from them for M&A.

I'm going to let Matt take that.

I would say that private equity gets backed out particularly in the <unk>.

The mid tier in our market.

Not just buyers, but a lot of the sellers are private equity backed.

I would describe this as a much more cautious market.

Youre certainly transaction volume has decreased given all the uncertainty we know from macro factors to interest rates as Horacio mentioned to the regulatory environment.

Wondering if youre seeing is that there are fewer large auction processes, and it's a world where our relationships and reputation matter.

I think that plays to our strengths. If you look at how we did liberty trace point ever watch Theyre all outside of processes.

They were.

Targets that we identified that we thought met the criteria Ross you outlined and we really took the time to get to know them.

Sure. It was the right fit not just for us but for them. So I think youre going to see more of that.

We're seeing more of that.

Personally I'm, having a different set of relationships with not just strategics, but a lot of private equity.

Buyers and sellers.

So no I wouldn't say that private equity firms or out of the market that hasn't been our experience.

Okay, and then just switching gears a little bit go back to the head count increases.

We talked about it earlier, you're up I don't know two 3% or so year to date and head count depending on how you measure it your topline growth is more than double that.

Even on an organic basis I wanted to talk a little bit about that dynamic Horacio and does it reflect in any way. The fact that the incremental head count is just producing more revenues is that part of it is is this a higher mix increase.

I think theres a couple of drivers here.

One key driver is if you look at the difference between total head count on client staff head count plans that have kept this up four 2%.

We've been as Matt pointed out would be managing costs.

To make sure that with net inflationary environment, we can manage our rates, we are being prudent and we create room to continue the investments we need to do on the volt to secure future growth about four 2%.

You know our client staff growth is really good and especially in a market like this one and is that kind of growth, but over time is always set a sustained are above market.

Growth there.

The second dynamic, which I talked a little bit about on the.

On the key on the prepared remarks.

Is that one of the things Christine has really has all of US focused on is not just on hiring but on the process of going from hiring to somebody getting fully available which is a process that frankly, you should take too long at Booz Allen and we're sharpening that significantly that allows us to get more revenue with a smaller bench, which drives availability, which then.

Drives our ability to invest in talent and our ability to grow and creates a bit of a virtuous circle here and I think thats.

I think that's a sustainable.

Driver in the near term.

We look at the talent market evolution on what we're doing internal and I'll I'll finish with the again I mean 30000 people of Booz Allen is it's an exciting number for us and one that speaks of the success. We've had over the last few years and Ross if I can just add a third factor to the <unk>, you mentioned head count growth and.

<unk>.

Our wages have increased and for the 75% of our contract base or cost plus and TM contracts.

We're for the most part we can pass those through that's driving revenue as well, we see that every year.

When salaries go up and we're certainly seeing more of that this year than we have in the past.

Okay, and just on that note with hiring just with the tech companies like Amazon.

Web services, and Microsoft freezing hiring, especially in the D. C area does that help you.

Good talent in the door.

From my perspective, we're seeing it's a challenging talent environment. There I know there are significant announcements about tons of hires.

Over the last couple of years. So a lot of that we did not to materialize really there is no conversation about maybe less hiring we're not seeing that materialize. The environment is challenging one of the things we said to ourselves under volt is we're probably going to have a tech talent shortage that was kind of lost a decade.

And so we spent a lot of time rethinking on retooling our processes. So that we can be successful hiring people in a constrained environment.

Now over the horizon.

Okay, well it looks like Thats working thanks, so much.

Yeah.

Yes.

Thank you and our last question comes from Colin Canfield with Barclays. Your line is open.

Hey, good morning, and congrats.

Matt.

Can you just level set the EBITDA growth algorithm for us I think the previous set up that we talked about from an organic growth perspective.

Mid single digit hiring growth plus low single digit wage inflation, and then modest margin progression towards that FY 'twenty EBIT target with a placeholder of roughly $150 million to $200 million.

Higher EBITDA.

And how do we think about that kind of versus the slower implied organic head count growth this quarter as.

As well as kind of an accelerating wage inflation environment.

Okay.

So.

I'll take the first part of your question first.

I think that model is the one we're following this rossiya said, we're on track for the investment thesis and not just in aggregate, but I think if you look at the piece parts of how it's playing out organic growth.

Inorganic.

And the like it's playing out how we expected.

Second part I'm not sure I understood the question.

You, it's four 2% year over year consulting staff head count growth and the momentum we see in the business. That's that's right on track with where we want to be and I think it's in line with the model that you articulated.

Okay got it and within that contract what sort of wage inflation should we be considering.

So we've said that we expect wage inflation this year in that three five to four 5% range.

Within that debt down probably a little bit towards the higher end, which is higher than years past, but honestly not.

Significantly higher than in years past.

Got it and just last one last question you mentioned mission tack, a little bit more than the previous scripts can you just talk about how you guys are thinking about acquiring capital intensity and fixed price exposure versus.

Kind of more head count to the nation.

We're really.

Yes.

We're really focused on mission technology intersection of some of our focus on ensuring that our clients.

Have what they need a scalable solutions to solve their problems. Some of that is partnering with people that have amazing technologies products and solutions some of that as things sort of developing on our own in a lot of that is bringing a unique talent base I can actually take something that maybe on a commercial shelf or even custom built for.

The government and make it real into the mission make it adapt it and make sure that you know across different environments, and so forth clients can get real value in these real value point, just one youre going to hear me talk about or run over it because there's always the risk that we become infatuated with some new technology becomes a bit of a buzzword.

Money gets spent and no value gets created and I think for us to continue to be there.

The trusted player that we are in this market our job is to ensure that will bring a technology forward.

We help our clients.

Really get value from that and if you look at our numbers not just this quarter or this half or over really the last decade.

I think they speak to the fact that we've done that successfully and that we will continue to do that that's our focus.

Got it I appreciate the color.

Thank you.

Thank you and Theres no other questions in the queue I would like to turn the call back to management for any closing remarks.

Thank you operator, thanks, everyone for your questions and thank you for joining us.

I hope, Matt and I did a good job of conveying our excitement about the strength of this business and the progress, we're making on volte and on the investment thesis.

We feel confident about the future.

I keep coming back were 30000.

Strong now and we all look with optimism.

The opportunities that are ahead for our firm for our clients for our people and certainly for our investors.

Let me close with a final point a bit of an advertisement if you don't mind.

Earlier this week, we published our new thought leadership publication and it's called velocity. It is available on our website and it youll hear from Booz Allen and many of our experts about how emerging technologies can be applied to some of the nation's biggest challenges about the critical role in innovation ecosystem plays empowering the digital Revolution.

About how to win the race for technology talent and many more so I hope you'll enjoy reading it and Youll give us feedback.

And with that again, thank you for your continued interest and with that.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly.

As Johan during Q&A, you can dial one one.

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Yeah.

Good morning, and thank you for standing by welcome to the Booz Allen Hamilton's earnings call covering second quarter fiscal year 2023 results.

This time all participants are in listen only mode later there'll be an opportunity for questions.

I'd now like to turn the call over to Mr. Nathan Rutledge. Thank.

Thank you operator good morning.

Discussed in our filings with the SEC and on this call.

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 results or otherwise.

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 second quarter fiscal year 2023 earnings release and slides.

It is now my pleasure to turn the call over to our CEO and President Russia Rozanski, we are now on slide four.

Thank you Nathan.

And good morning, everyone. Thanks for joining the call.

Before diving into the financial results. This morning.

I would like to begin by acknowledging the seamless transition over chief financial officer role.

From Lloyd Howell to Matt Calderon, two outstanding professionals with Great track Records at Booz Allen.

As we announced last month Lloyd Howell is retiring on December 31.

I am grateful for Lloyds tremendous contributions over his 34 year career with Booz Allen.

And especially his last six years as CFO .

Lloyd greatly advance our relationship with the Investor community.

Under his leadership Booz Allen learned to define and communicate long term investment parameters and articulate our position as an organic growth leader.

I will Miss Lloyd's voice in our internal discussions on these earnings calls.

I know he will go on to do amazing things in the future.

Our new CFO , Matt Calderon.

<unk> to the role on October one.

Matt has been with Booz Allen for 20 years and has an exceptional record of driving success for our firm.

He began his career at Booz Allen in our own commercial business.

Same business, where I began.

And then transitioned to serve intelligence clients.

He joined my direct team in the early days of vision 2020.

And what's the driving force in making that strategy a reality.

Matt went on to launch our corporate development function.

And in 2017 partnered with Lloyd to lead strategic finance.

Transform our forecasting planning and analysis function.

Most recently, Matt served as our Chief strategy Officer.

All of those experiences have prepares map to step into the CFO role and continue to drive our firm success.

I am personally fortunate to have a leader of mats caliber and experience as our CFO .

Matt It is my pleasure to have you join us on these earnings calls.

Let's turn now to business performance.

Okay.

Matt and I are very excited to share excellent results for the second quarter of fiscal year 2023.

During this quarter, we continued our strong revenue and EBITDA growth and accelerated both our hiring and business capture.

When we began the fiscal year, we shared with you our plan to build momentum in the first half to mitigate potential for increased volatility in the second half.

We also share our view that volt, our growth strategy centers on velocity leadership and technology.

Not only our future, but also are present.

This means that we need to move rapidly to implement our strategy in order to meet our multiyear goal of growing adjusted EBITDA from $935 million last fiscal year to one two to one 3 billion.

By fiscal year 2025.

The headline for today is this.

<unk> way through the fiscal year, we believe we are operationally and strategically on track to deliver on our multiyear goals.

And in fact, we expect to deliver above planned financial results in fiscal year 2023.

Therefore, we are pleased to raise our guidance for this fiscal year.

We now expect our revenue growth range to be 8% to 10%.

And adjusted EBITDA range.

To be $975 million to 101 $5 billion.

Matt will cover the numbers and guidance in detail, but first I would like to take some time to frame. These results as part of our larger business journey.

I will first discuss how our FY 'twenty three operational priorities impact this fiscal year financials.

Then I'll cover the broader progress we are making on volt with a specific focus today on the technology dimension.

As you can see the numbers for our second quarter of fiscal year 2023 speak for themselves.

While uncertainty from inflation recessionary fears geopolitical conflict and ongoing budget debates remain.

We have generated great momentum.

Which is reflected in the progress we are making against the operational priorities outlined in our May earnings call.

Let me take a moment to summarize that progress.

First.

Our top operational priority continues to be hiring.

Clients that head count has grown four 2% over the past 12 months in a very competitive labor market.

And we are seeing historically stronger absorption of new hires into b level programs.

These concurrent improvements are the result of transformative work by our recruiting and business teams under the leadership of our COO Kristine Martin Anderson.

Today I.

Im also excited to share that we have crossed the milestone of 30000 Booz Allen employees.

Our second priority is to continue to win high quality work at the intersection of key missions and new technology.

Our leaders delivered an outstanding quarter of contract awards.

Resulting in record backlog and a 12 month book to Bill of 132 times.

Third.

Our leaders are managing the business extraordinarily well and.

And delivering on the bottom line, we are effectively managing costs in an inflationary environment.

As evidenced for example by the significant difference in clients that head count growth versus total head count growth.

Please provides resiliency and enables the investment which is key to fueling future growth.

And fourth we must deploy capital in a way that creates maximum value for our stakeholders and drives our strategy forward.

As we announced earlier this month, we are pleased to have closed on the acquisition of ever watch.

We're excited about the opportunities ever watch create to accelerate our national cyber business.

Building on this strong operational backdrop, we're also making significant progress in implementing volt.

Our clients leave in an increasingly complex environment pressure.

We believe we are uniquely positioned to use innovation to simultaneously help our clients navigate these complex challenges and drive our own financial performance.

Our basic premise is that technology cycles coming waves that are growing in both amplitude and frequency.

Booz Allen's approach to innovation centers on helping our clients translate new technologies into mission success beyond the prototype.

Two full scalability.

We believe this requires three things.

One <unk>.

Extensive knowledge of the mission and its requirements.

Two key insights and access to new technologies early in their lifecycle.

And three an integrated talent base that can quickly scale to provide solutions and services.

An excellent example of our innovation approach.

Our support for the Department of Veterans Affairs, where Booz Allen plays an integral role in supporting their digital transformation.

Over the past decade, we have invested to grow our technical talent and deepened our mission expertise.

And build solutions to help the VA modernize leveraging capabilities like low code No code AI Dev ops agile and cloud.

Through acquisitions, we have continued to gain even greater scale and acceleration.

Following this approach to innovating at the mission technology intersection our VA business is over six times larger today than it was 10 years ago.

More broadly.

<unk> has challenged us to re imagine our innovation agenda as part of a comprehensive chief technology office.

The role of the CTO is to continuously evolve our scale technology positions.

And anticipate the next waves.

Our ongoing investments in key emerging technologies are already building momentum.

For example.

We are integrating cyber and AI in our cyber praecox platform for their threat Hunter at the tactical edge.

We are anticipating the implications of post quantum encryption.

And we are developing five prototypes that provide dynamic spectrum sharing through an AI sensing application.

Returning for a moment to the VA example, our investments in emerging technology are central to their next set of mission requirements.

For example, we are developing digital twin solutions to innovate the planning and design of hybrid operating rooms, using AI powered design and clinical workflow simulations.

Yes.

All of this.

Is only about a small sampling of how our innovation agenda is positioning us for future growth.

These next generation solutions and many more.

Are becoming real today.

We're excited to begin showcasing them more broadly with the helix our re imagine center for innovation opens mid November .

We hope you will visit the physical or virtual versions of the helix later this year.

A closing thought.

Our investment in organic growth, our strong balance sheet, our evolving operating model.

And above all our exceptional team.

Give me confidence that we are on track to accomplish the ambitious strategic and financial objectives outlined involved and our investment thesis.

I am bullish about the future of Booz Allen.

And with that Matt welcome to the earnings calls over to you to take us through the financial results in depth.

Thank you Raphael and good morning, everyone. It's a pleasure to be speaking with you today.

First I want to Echo Horacio sentiments.

Lloyd did an outstanding job as CFO .

He built a world class team and developed a financial strategy that continues to generate durable value for all of our stakeholders and on a personal note Lloyd.

Florida has been a true friend and a great mentor to me.

Im excited for the opportunity to lead our finance team.

To work with Booz Allen's outstanding group of leaders to deliver results.

And to engage with you along the way.

As you know, we said that we wanted to come out of the gates with a strong first half of this fiscal year and we did exactly that.

These exceptional results position us to exceed our original plan for this fiscal year, even while ramping up strategic investment in the back half of the year to fuel ongoing organic growth.

And as Horacio noted our results put us on track to meet our multiyear investment thesis objectives.

Now please turn to slide six as I discuss our fiscal year 2023 second quarter results.

I will start by hitting the highlights of our performance.

At the top line.

Revenue grew nine 2% in the second quarter, reflecting growth across all of our markets and particularly strong performance in our civil business.

We generated $286 million.

Adjusted EBITDA in the quarter.

A 6% improvement over the prior year within.

With an adjusted EBITDA margin of 12, 4%.

This translated to $1 34.

Adjusted diluted earnings per share.

And lastly, we.

We deployed $87 million in capital in the quarter exclusive of the <unk> acquisition, which closed after quarter end.

I will now cover the details of our second quarter performance in greater depth.

As previously mentioned for the second quarter, our revenue grew nine 2% year over year to $2 $3 billion.

Revenue, excluding billable expenses.

Grew 10, 1% year over year.

One 6 billion.

These results reflect another exceptional quarter of organic revenue growth.

Driven by the ongoing strategic repositioning of our business.

Strong demand for our solutions.

Head count growth.

And higher staff utilization compared to the prior year's quarter.

Our topline performance was supported by revenue growth across all of our markets.

In defense revenue grew approximately 2% year over year in part due to lighter billable expenses.

That said in defense, we saw strong hiring throughout the quarter and a number of meaningful wins that we expect will provide good momentum for the back half of our fiscal year and beyond.

In civil.

Revenue grew by approximately 18% year over year highlighted by particularly strong results in our health account.

Our civil performance reflects the power of two pillars of our volt strategy.

Building strategic positions at the intersection of mission and technology.

And using targeted acquisitions to accelerate our technical capabilities and organic growth.

Our intelligence business grew by approximately 9% year over year.

Building on this team's hiring and portfolio shaping efforts of the past year.

And finally and global commercial revenue grew by approximately 25% year over year.

In the quarter, we completed the divestiture of our commercial business in Mena, which was a solid but noncore asset I'm pleased that we've found a good home for our clients.

And employees in the region.

Now please turn to slide seven for details on our demand signals.

Net bookings for the quarter were approximately $5 5 billion.

Which translates to a quarterly book to Bill of two four times and a trailing 12 month book to Bill of 132 times.

Total backlog.

Grew approximately nine 8% year over year.

Resulting in our largest ever backlog of $31 $8 billion.

We saw growth in all three portions of our backlog.

Funded backlog grew 11, 3% to $5 5 billion.

Unfunded backlog grew eight 9% to $10 4 billion.

And priced options grew nine 8% to $16 billion.

These outstanding results once again demonstrate that we are not demand constrained.

We continue to win the right type of work to meet both our financial and our strategic aspirations.

Pivoting now to head count.

We had an increase of approximately 800 client serving employees in the second quarter, even after taking into account the roughly 100 employees that exited with our Mena divestiture.

This performance was outstanding.

Particularly in light.

What remains a tight labor market.

Our client serving head count is now approximately 1100 employees or four 2% year over year.

This sets us up very well to continue our topline momentum in the near term.

As I mentioned earlier.

At the bottom line, we generated $286 million of adjusted EBITDA in the quarter, which is up 6%.

Year over year.

We ended the quarter with an adjusted EBITDA margin of 12, 4%.

Which is down 40 basis points year over year, but slightly ahead of our expectations.

Our margins continue to benefit from strong contract level execution.

A slight mix shift towards higher fee generating work.

And our ongoing strategic cost management efforts.

Based on our strong operating performance and the gain from the sale of our Mena business, partially offset by higher interest expense.

Net income increased 10, 3% year over year to $171 million.

Adjusted net income was $178 million up four 5% year over year.

Diluted earnings per share increased 12, 3% to $1 28.

From $1 14.

In the prior year period, and adjusted diluted earnings per share increased six 3% to $1 34.

From $1 26.

Turning to the balance sheet, we closed the second quarter with a cash balance of $757 million and a $1 billion untapped revolver.

In September we closed on the ninth amendment to our credit agreement.

This allows us to continue to optimize our capital stack, including increasing the weighted average maturity of our debt.

Free cash flow for the quarter was $257 million. The result of cash generated from operating activities of $273 million.

<unk> $16 million of capital expenditures.

Turning now to slide eight.

During the second quarter, we returned $87 million of capital to shareholders through $30 million of share repurchases and $57 million and quarterly cash dividends.

Net debt at the end of the second quarter was approximately $2 1 billion and our net leverage ratio was approximately two one times EBITDA.

As previously mentioned.

After quarter end, we closed on the acquisition of ever Watch. This acquisition is a Prime example of a strategic accelerator that will allow us to bring technical and business model innovation.

To our clients.

We are thrilled to welcome the ever watched came aboard.

Our intelligence market team is eager to work with them to expand our deep pipeline of opportunities.

And to better serve critical national security missions.

We anticipate.

That this transaction will be accretive this fiscal year.

Finally today I am pleased to announce that our board of directors has approved a quarterly dividend of <unk> 43 per share payable.

Payable on December <unk> to stockholders of record on November 15th.

I will now address our revised guidance for the full fiscal year 2023.

Please turn to slide nine.

At the top line, we are increasing guidance for revenue growth to be between 8% and 10%, which includes inorganic growth of between 1% and 2%.

We are very pleased with the underlying momentum in our business.

Similarly.

We are raising our adjusted EBITDA guidance to a range of $975 million to $1.015 billion.

We are also increasing our adjusted EBITDA margin outlook, which we now anticipate will be in the high 10%.

So lower 11% range.

These increases are based on our revenue outlook typical seasonal spending and margin patterns.

And our intent to invest more heavily in the back half of the fiscal year to drive sustainable organic growth.

We are also increasing our EPS guidance.

To a range of $4 25.

Two $4 50.

This increase in <unk> guidance is driven by our strong operating results, partially offset by a modest increase in interest expense.

We still expect capital expenditures to be in the range of 90 million to $110 million.

As we continue to invest in infrastructure and technology.

Finally, as shown on slide 10.

Due to the expected increase in profitability.

We now expect our operating cash flow excluding taxes too.

To be between $875 million and $950 million.

Earlier this month, we received a partial tax refund for our prior strategic tax planning initiatives.

As a result.

Our expectation for net cash taxes to be paid this fiscal year has decreased to $315 million, including both the normalized tax rate and the impact of section 174.

This brings our anticipated operating cash flow inclusive of taxes.

Between $560 million.

$635 million for the full fiscal year.

In closing, let me Echo Horacio again, and say how proud I am of our strong performance during the second quarter.

This performance was only made possible by the hard work and dedication of our now 30000 employees.

As a result.

We remain on target to execute against our strategic and financial objectives.

Allowing booz Allen to continue to create superior shareholder value.

With that operator, let's open the line for questions.

Thank you.

As a reminder to ask a question you will need to press star one one on your telephone please.

Please standby, while we compile the Q&A roster.

Our first question comes from Gavin Parsons with Goldman Sachs. Your line is open.

Hey, good morning, and congrats on the new role.

Thank you.

Good morning, Kevin.

You talked about uncertainties into the second half of the year.

Always into continuing resolution right now.

It seems like last year that CR was particularly disruptive that can you talk a little bit about what the environment looks like today and if you have any improved visibility kind of relative to first half I'm, sorry first quarter.

Sure.

Thanks for the question.

Obviously, we feel great about the results.

Second quarter on the entire first half.

Those factors were 11 days away from an election.

There's a.

As you pointed out we're under a CR.

We're very mindful of all of that.

And that's built into our guidance, but as you saw our guidance. We are at this point expecting a strong first second half and a strong full year, if I get underneath that.

Man for the work that we do is very strong.

And you'll see that in our numbers our talent base is growing nicely and accelerating.

This milestone of 30000.

Alan people.

I've been here, a long time, where they've been unbelievable to me a few years ago, but we're here on the quality of the talent is exceptional.

We are well positioned.

To see growth beyond what's what's the near term horizon.

And we're on track to deliver against our investment thesis, which is the commitment we made to all of you. So I'll.

As I said, we we understand the volatility in the environment that we're playing close attention, but right now we feel very good.

Okay, Great and then in terms of your investment in new technologies and innovation a couple of years ago.

Conversation I think focus a lot more around some of these call option initiative investments and I think today it's.

<unk> is a little bit more towards the new technologies conversation, which you gave a lot of detail on can you talk a little bit just about how that strategy has evolved.

Sure.

When we were working through what we call option value as part of a set of initiatives over the last four years four or five years, we've really learned a lot about our ability to both create technology and integrate partner technology in.

Into solutions, and we saw really some strong <unk>.

Progress Reg Dot Gov is a program we've talked about over the years Red Dot Gov is doing great and frankly exceeding our expectations.

And like that.

We see other upside what I think we learned thus far to volte.

Is that the best place for us to innovate inside the mission technology intersection working into places, where we have strong mission presence driving.

Really new technology into that I will say a couple of weeks ago I know a number of people on this call where they are and I was talking to clients and I was watching clients in particular react to some of the things that we're doing around AI and <unk> to bring information to the edge and potential.

Really challenging environments and I tell you the level of excitement there gave me a lot of optimism that we're on the right track and so when you look at our investments in health on the VA that were in our prepared remarks. When you look at our digital Battlespace investments national cyber and the like we think that that's the right path of evolutionary should take everything we learned over the last few years.

Really pour it into these key mission technology intersections that are prime for hyper growth.

That's very helpful. Thank you.

Thank you.

One moment.

We have a question from Sheila <unk>.

With Jefferies. Your line is open.

Hi, good morning, and welcome to Sheila Thank you good morning.

So maybe I could just.

Otherwise you've completed that in the call.

So that's great.

As you think about your continued M&A strategy and how it Jonathan to your lung. Congrats can you maybe discuss how are you.

Thinking about that you also mentioned the success you are having at health and Liberty. So maybe you could just elaborate on how youre thinking about the M&A strategy given that change in that.

Thank you.

Thanks Sheila.

To answer to your question is.

No change in strategy.

View M&A as an accelerant I think Liberty is a great example of how.

M&A can not just <unk>.

Catalyze.

Organic growth over time, but bring new capabilities into the fold. This rossiya just discussed and.

And we see ever watch very much in the same vein, we're really excited to get that the team on board after seven months between signing and close which is something quite frankly, none of us anticipated.

And.

Early returns are are positive our team and their team are working together to think through.

We can take their technical and business model.

Innovation and combine it with us ours to bring greater value to clients and that's going to accelerate organic growth.

So we.

We have a strong pipeline.

We'd love to follow that playbook, but we're going to remain patient and disciplined.

Great. Thank you so much.

Yeah.

Thank you. Our next question comes from Louie Dipalma with William Blair. Your line is open.

Good morning, Horacio Lloyd.

Nathan and Megan and congrats.

Matt and Mike.

Thanks Louie.

Horacio how do you view the opportunity to more aggressively pursue cyber security consulting for local and state government agencies and there seems to have been trillions of dollars of.

Federal government stimulus part of dedicated to protecting critical infrastructure and you establish the cyber St partnership do you view local and state government as an underpenetrated market for you.

Louie we go back to the question of state and local every few years.

The fact of the matter is Booz Allen does not have a ton of expertise in and state and local channels.

Our trace point.

<unk> does a fair amount of.

A work there and we'll we'll continue that we're not seeing.

Sort of going into that type of white space I'll say major opportunity right now what we see as the major opportunities are to really double down on this mission technology intersections, where we have clear presence clear mission understanding we're bringing in new technology and then the key point that I think is getting missed in a lot of the conversations it's weekend scale.

<unk>.

It would.

I don't know if you had the chance to spend time at AOS.

You see a ton of prototypes.

But prototype to mission impact.

Very long challenging road, and that's where I think we as Booz Allen are doubling down is the ability to do not just bring these technologies and show our clients what the technology can become it's actually make that technology real and so while there are opportunities in state and local there's probably opportunities internationally in a number of other places. So we're not I believe youll see.

All of that right now, what we're focusing creating hyper growth and some designated mission technology intersections.

Great.

And.

You guys demonstrated robust hiring during the quarter is that sustainable for.

For the second half of the year, how much seasonality is there for your head Count addition.

So theres always seasonality in Q2 as always.

<unk> quarter for us.

This Q2 was particularly strong because sometimes those numbers include both our summer interns and sort of college hires and the bulk of the hiring in this quarter was actually experienced talent.

So so I think that speaks to the robustness of our talent pipeline and our value proposition with is really critical resources.

That that are <unk>.

So important.

So our business.

Let me give you. An example, I mean, we always talk about the fact that we're not demand.

Constrained so we have a significant intelligence contract that is probably scheduled to end next fall I think in the September timeframe and as we look at that.

At least some of the work may move to other vehicles vehicles. So we don't hold.

But we have so much demand for the talent that is doing that work now for these exquisite classified.

Technical talent.

We have.

Opportunities to fill other open reqs across a number of other vehicles and Intel and beyond and that is really the corner of the reality is is being able to deploy unique talent to.

To do this work Thats whats actually.

Driving our growth I mean at this point.

The rate limiting step to growth is.

And then sell for example is clear talent not vehicle availability, which I know, we talk everybody talks a lot about and so we're we're feeling good.

We're feeling like the changes that we've made to our recruiting process and through our employee value proposition.

Our sustainable it is.

Still a challenging <unk> market out there on a quarter to quarter the numbers.

Will fluctuate, but I think we're on the right track.

Thanks.

Thank you and our next question comes from.

Subaru with Stifel. Your line is open.

Hey, good morning, I'll Echo my congratulations to both math Floyd.

Thank you.

Yes, thanks for the time.

So previously you highlighted expectations for some medium term margin pressure, which seems to be expected materialize over the next one to two years.

However, it doesn't really seem to be impacting your business. This year with the raised margin guidance can you just talk about what the primary tailwind and headwinds to margins also here.

Absolutely.

This was driven by a couple of factors one is the mix of our business, our civil business tends to be a little higher margin than.

And then security and Intel.

That's highly correlated obviously.

Two contract type, that's where more of our fixed price work.

Yes.

<unk> factor.

Is.

Billable expenses, which in general we call empty calories, but they do impact EBITDA.

EBITA margin if not EBITDA itself and then third is cost management, and we're doing really well on that front, both on the <unk> side and within the rates.

Okay in terms of.

Oh I'm sorry.

But.

But in the short run we don't really manage our business based on margin.

There's a reason we choose EBITDA dollars from an investment thesis perspective, and we think we're really on track there and we're happy with.

6% EBITDA dollar growth that we're demonstrating year over year, so margins are.

And obviously.

But thats not the primary objective.

Yes.

Messaging it seems like maybe youre outperforming there a little bit I guess relative to what the expectations were that we've set out.

Maybe I think.

We're doing slightly better than we thought this year.

Obviously, that's reflected in our guidance.

Intel will be really strong and I think you saw that on the adult side as.

As we start to look forward do you think the sort of the setup is similar where.

And some of the things you're doing on the civil side continue to drive outperformance there at least from sales growth perspective.

Yes, yes, no I think you are.

You're going to see.

18% to 20% growth in civil year over year.

Yeah, probably not that'll come down a bit we're still working off some of the Liberty Accelerant factor, even though it's not in an hour.

It is now an organic growth numbers, but you were still seeing some of the near term synergies there but.

But on defense.

It showed growth in the 2% range.

If you pull back that really was driven by some year over year.

Sort of other market strategic level.

If you look at where we're well aligned to.

The administration's domestic agenda.

Strong investment in public health, where we have a tremendous business and a lot of upside.

The modernization of the IRS, where we have a long standing presence in a lot of opportunity and increasingly we're focusing on climate and how we can bring technology and AI and those kinds of things to the climate.

A question, but then when you shift over to the National security side.

National Security strategy was just released and it speaks to this is the defining decade. The national Defense strategy, just came out and once again speaks to China.

The patient competitor for the U S and they need to invest in technology in order.

To stay.

Stay ahead of that competition and all of that I think Booz Allen is really has a unique position that we built over the last decade.

The intersection of mission and technology, where we are bringing these very new technologies, sometimes do I'll use technologies between commercial and.

In government.

In a way that they're scalable into these these massive challenges and so it's.

As Matt said I think the numbers are over time going to reflect the fact that we're well positioned on app strength across all of our markets.

Thanks, Ross, Joe and congratulations Matt.

Thank you we have a question from Cai von <unk> with Cowen Your line is open.

Yes, thanks, so much and welcome Matt So.

Good book to Bill My understanding is that you had 2 billion.

Im not sure exactly which procurements youre talking about there are some things that we want that are under protest.

So I don't know the specific answer to your question what I will say is this too.

Two four very robust book to Bill.

Quarter of that is both a number of significant $1 billion plus task orders.

And our traditional second quarter strength around tactical sales.

Also returning which then puts the.

The 12 month booked.

Book to Bill in a really good place and puts backlog at record numbers. So at the risk of sounding like a broken record, we really are not demand constrained or the real opportunity for us is to continue to onboard the right talent in order to make sure that we actualized, although demand into revenue.

Great and second one.

If we look at ever watch I assume the change in organic growth as you rank from one to one to two is that you.

You added both the divested took out the numbers for me, which are divested and you add it in the numbers for ever watch a is that correct and b could you give us some more color on ever watch in terms of how much you expected to add to revenues and earnings.

That is correct Cai.

Hold on giving specific numbers for ever watched probably until next quarter.

Yeah as I mentioned, you just closed two weeks ago. The teams are going through.

Our original synergy projections and.

And business case, so we both in the overall numbers.

But we'll get back to you on that next quarter.

Thank you.

Thank you and our next question comes from Seth <unk> with Jpmorgan. Your line is open.

Good morning, this is Ross on for Seth.

Good morning, how does the current rate environment affect your thought process around leverage versus one year ago at the Investor day.

I'm not sure.

The question broke up a little bit I mean that.

Mind repeating it.

Yes, how does the current rate environment affect your thought process about leverage versus one year ago at the Investor day.

I gotcha.

I heard a burn rate environment I wasn't at current rates, okay. So youre talking about interest rates.

As Matt said, when we were discussing M&A or capital deployment strategy for the moment remains.

Unchanged, we are looking for strategic accelerators that will actually allow us to accomplish volt, our investment thesis and accelerate organic growth.

We have some good examples of that in the past, we hope ever watch will be another great example of that as we look forward.

When we make an acquisition we look at three things.

Sequence number one the opportunity to drive organic growth on the long term number to the cultural fit and the <unk>.

Connection to our people and then number three the numbers have to make sense and obviously with rising rates.

That that races that a bar, but honestly most of the deals that we look at it and pass on.

Never make it to that third question as the first two where we say you know this is not for us.

Thanks, and then as a quick follow up defense versus it's been a bit more muted than the other end markets what might sort of shift that loose.

So I'll start I'm sure, Matt will want to I'd actually defense had a good quarter, it's actually a little bit masked by the fact that our billable expenses in that business were lighter than they've been in lighter than we expected, but as we always say, we think about billable expenses center calories because they carry.

Very little.

Profit margin and very little EBITDA. So if you look underneath that.

The revenues produced by our talent, we see a real acceleration there and as Matt pointed out with new people coming in over the last quarter strongly and good availability for new hires.

We think there is organic growth momentum there as there is in the other sectors. That's right Ross here and we've run some really high quality work and defense. So I would say it has been shaken loose as Roger had mentioned it was a little masked this quarter by.

Some some year over year billable expense comps, but but youll see over the back half of the year that there is strong momentum in our defense business.

Great. Thank you.

Thank you and our next question comes from Robert Spingarn with Melius Research. Your line is open.

Hi, good morning, and welcome Matt.

Alright, Thank you a couple.

Quick things back to M&A for a minute and interest rates with the higher rates is private equity backed out of the market a little bit we've been hearing that so less competition from them for M&A.

I'm going to let Matt take that.

Yeah, I would say that private equity gets backed out, particularly in the mid tier and our market not just buyers, but a lot of the sellers are private equity backed.

I would describe this as a much more cautious market.

Youre certainly transaction volume has decreased given all the uncertainty we know from macro factors to interest rates as Horacio mentioned to the regulatory environment.

I think youre seeing is that there are fewer large auction processes and it's a world where our relationships and reputation matter and we really think that plays to our strengths. If you look at how we did liberty trace point ever watched theyre all outside of processes.

They were.

<unk> targets that we identified that we thought met the criteria Ross you outlined and we really took the time to get to know them.

We made sure it was the right fit not just for us but for them. So I think youre going to see more of that.

<unk> seen more of that.

Personally I'm, having a different set of relationships with not just strategics, but a lot of private equity.

Buyers and sellers.

So no I wouldn't say that private equity firms or out of the market that hasn't been our experience.

Okay, and then just switching gears a little bit go back to the head count increases.

We've talked about it earlier you are up I don't know two 3% or so year to date and head count depending on how you measure it your topline growth is more than double that.

I think theres a couple of drivers here that the one key driver is if you look at the difference between total head count on client staff head count client side has got this up four 2%.

We've been as Matt pointed out would be managing costs.

To make sure that would net inflationary environment, we can manage our rates, we are being prudent and we create room to continue the investments we need to do on the volt to secure future growth about four 2%.

You know our client staff growth is really good and especially in a market like this one and is that kind of growth that over time is always set a sustained are above market.

Growth.

Second dynamic, which I talked a little bit about on the.

On the key on the prepared remarks.

Drives our ability to invest in talent and our ability to grow and creates a bit of a virtuous circle here and I think thats.

I think that's a sustainable.

Driver in the near term.

We look at the Donlin market evolution on what we're doing internal and I'll I'll finish with the again I mean 30000 people of Booz Allen is it's an exciting number for us and one that speaks of the success. We've had over the last few years and Ross if I can just add a third factor to the <unk>, you mentioned head count growth and.

<unk>.

Our wages have increased and for the 75% of our contract base or cost plus and TM contracts.

Yeah, we're for the most part we can pass those through that's driving revenue as well, we see that every year.

When salaries go up and you were certainly seeing more of that this year than we have in the past.

Okay, and just on that note with hiring just with the tech companies like Amazon.

Web services, and Microsoft freezing hiring, especially in the D. C area does that help you.

Get talent in the door.

From my perspective.

We're seeing it as such.

Challenging talent environment, there I know there are significant announcements about tons of hires.

Over the last couple of years. So a lot of that we did not see materialize really there is no conversation about maybe less hiring we're not seeing that materialize. The environment is challenging one of the things we said to ourselves under volt is we're probably going to have a tech talent shortage that was kind of lost a decade and so we spent a lot of time <unk>.

<unk> on retooling our processes. So that we can be successful hiring people in a constrained environment.

Over the horizon.

Okay, well it looks like Thats working thanks, so much.

You.

Yes.

Okay.

Thank you and our last question comes from Colin Canfield with Barclays. Your line is open.

Hey, good morning, and congrats.

Matt.

Can you just level set the EBITDA growth algorithm for us I think the previous set up that we talked about from an organic growth perspective.

Mid single digit hiring growth plus low single digit wage inflation, and then modest margin progression towards that FY 'twenty EBIT target with a placeholder of roughly $150 million to $200 million of acquired EBITDA.

And how do we think about that kind of versus the slower implied organic head count growth this quarter as.

As well as kind of an accelerating wage inflation environment.

Okay.

So.

I'll take the first part of your question first.

I think that model is the one we're following this rossiya said, we're on track for the investment thesis not just in aggregate, but I think if you look at the piece parts of how it's playing out organic growth.

Inorganic.

And the like it's playing out how we expected.

Second part I'm not sure I understood the question.

You with four 2% year over year consulting staff head count growth and the momentum we see in the business. That's that's right on track with where we want to be and I think it's in line with the model that you articulated.

Okay got it and within that contract what sort of wage inflation should we be considering.

So we've said that we expect wage inflation this year in that three five to four 5% range.

Within that debt down probably a little bit towards the higher end, which is higher than years past, but honestly not.

Significantly higher than in years past.

Kind of more head count to the nation.

We're really.

Yes.

We're really focused on mission technology intersection on something we're focused on ensuring that our clients.

The government and make it real into the mission make it adapt it and make sure that you know across different environments, and so forth clients can get real value on these real value point, just one youre going to hear me talk about well run over because there's always the risk that we become infatuated with some new technology becomes a bit of a buzzword.

Lot of money gets spent and no value gets created and I think for us to continue to be.

The trusted player that we are in this market our job is to ensure that will bring it technology forward.

We help our clients.

It really get value from that and if you look at our numbers not just this quarter or this half but over really the last decade, I think they speak to the fact that we've done that successfully.

That we will continue to do that that's our focus.

Got it I appreciate the color.

Thank you.

Thank you and there is no other questions in the queue I'd like to turn the call back to management for any closing remarks.

Thank you operator, thanks, everyone for your questions and thank you for joining us I hope, Matt and I did a good job of conveying our excitement about the strength of this business and the progress we're making on Volte I know the investment thesis.

We feel confident about the future.

I keep coming back were 30000.

Strong now and we all look with optimism.

The opportunities that are ahead for our firm for our clients for our people and certainly for our investors.

Let me close with a final point a bit of an advertisement if you don't mind.

Earlier this week, we published our new thought leadership publication and it's called velocity. It is available on our website and Youll hear from Booz Allen and many of our experts about how emerging technologies can be applied to some of the nation's biggest challenges about the critical role in innovation ecosystem plays empowering the digital Revolution.

About how to win the race for technology talent and many more so I hope you'll enjoy reading it and Youll give us feedback and with that again. Thank you for your continued interest and with that.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2023 Booz Allen Hamilton Holding Corp Earnings Call

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