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Booz Allen Hamilton Holding Corp (BAH) Q3 2019 Earnings Conference Call Transcript

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Booz Allen Hamilton Holding Corp  (NYSE: BAH)
Q3 2019 Earnings Conference Call
Feb. 01, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for standing by. And welcome to Booz Allen Hamilton's Earnings Call Covering Third Quarter Results for fiscal 2019. At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions.

I'd now like to turn the call over to Mr. Nick Veasey.

Nicholas Veasey -- Director of Investor Relations

Thank you. Good morning, and thank you for joining us for Booz Allen's third quarter fiscal 2019 earnings announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We've also provided presentation slides on our website and are now on slide one.

I'm Nick Veasey, Director of Investor Relations, and with me to talk about our business and financial results are: Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President and Chief Financial Officer.

As shown on the disclaimer on slide two, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking, and therefore, are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our Company's services and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our third quarter fiscal 2019 earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call.

During today's call, we'll also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our third quarter fiscal 2019 slides.

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

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

Thanks, Nick, and good morning, everyone. Lloyd and I have excellent results to share with you this morning. The numbers show that the people of Booz Allen continue to deliver strong, disciplined, operational performance and outstanding solutions to our clients. We are comfortably ahead of where we expected to be at this point in the year, and as a result, we are able to take two very positive step. Once again, we are raising our earnings guidance by $0.10 for FY '19; and secondly, we are announcing a larger increase in our quarterly dividend than in recent years.

Our performance through the first three quarters demonstrates the strength of the market position we have built under our Vision 2020 growth strategy. It is this differentiated position that forms the basis for our investment thesis and gives us confidence that we will continue to outperform our competitors.

As I have said in the past the payoff period for our strategy is here and we are seeing the very real value it's creating for the firm, our talent, our investors and the critical missions we serve. With this in mind, today, Lloyd and I will take you through our third quarter results, put them in the context of our investment thesis and share how we're thinking about the remainder of the fiscal year.

Going back to last spring, when we first gave you the FY '19 guidance and outlined our investment thesis, you'll recall that we entered the year with a lot of confidence about Booz Allen's future growth, and it carries through to today.

We said that we expected our unique market position to drive substantial increases in earnings, not only this year, but over a three-year horizon. The investment thesis pointed to significant ADEPS growth resulting from a combination of organic revenue growth, margin expansion and capital deployment. And we highlighted option value as the potential for additional growth over the long term, resulting from the new business lines and solutions we are developing.

Approaching the end of FY '19, we are in an excellent position to deliver to our investors what we said we would. Across nearly every metric, our business is performing exceptionally well. We carried almost all of the positive trends from the first half of FY '19 through the third quarter. Total revenue, revenue excluding billable expenses, headcount growth, and profitability were all very strong.

And while book-to-bill came in lighter than in prior third quarters, backlog remains at near-record levels. And we believe it provides us with ample demand to meet our growth objectives. One recurring area for improvement is cash. We continue to work on it and our recent track record of execution across the business gives us confidence that we will get it right. We remain on track to deploy $350 million in capital or more as targeted this year.

All credit for these performance goes to the people of this firm, my colleagues. They are out there every day, identifying opportunities and helping clients solve problems and advance missions, through innovation and technology adoption. It is their commitment to the firm and our clients that is at the root of our unique position in this market.

Shifting now to how we are thinking about the rest of the year, let me address the partial government shutdown. Needless to say, we are pleased that Congress and the White House agreed to fund the affected federal agencies at least temporarily and we are hopeful that they will come to a long-term agreement. The 35-day lapse in funding demonstrated again the real hardship to people and disruption to missions that results when agencies cannot operate as they normally do.

Turning to the impact of Booz Allen's financial performance, it's important to note that the vast majority of our business was not affected because defense, intelligence, health, veterans, energy, labor and other agencies remained open. The effect on our third quarter numbers was negligible because the shutdown hit only the last few days of the quarter and it was during the holidays.

That said, we did feel the effects in January, when several hundred of our people were unable to execute against contracts. Those who could not do client work took training, did bid and proposal work and other activities valuable to our business. This is how we've handled previous shutdowns in order to minimize the financial impact on our people and ensure they are available to return to our clients as quickly as possible. This approach is consistent with our culture and we believe an important differentiator in the competitive market for highly skilled talent.

We estimate the impact of the shutdown to be between $0.02 and $0.03 at the ADEPS line and that range is baked into our updated guidance for the full fiscal year.

I want to emphasize that it is no accident we are in a position to raise guidance and increase our dividend after managing the challenges of a shutdown. This is true, because our Vision 2020 strategy has bolstered our differentiation, built our technical capacity, and importantly, has moved us toward more essential missions. It has not only positioned us to outperform when the market is stable and favorable, but also has given us the resiliency needed to maintain momentum during times of temporary market disruption.

Also, our unique operating model as a single P&L and our broad portfolio of business creates unity and agility. It provides opportunities for our people to move from one part of our firm to another as needed, or simply when they want to apply their skills to a new mission or problem set. Finally, and most importantly, I would like to point to the quality of our people. We tackled the challenges of the shutdown as we do all things as one team and when Booz Allen decides to solve a problem, we have a track record of success.

Earlier this week, we announced internally the winners of our annual Booz Allen Excellence Awards. This program recognizes the most outstanding work being done across our business. The awards demonstrate the impressive talent of our people, as well as the breadth of our client base and capabilities. The finalists we recognized are applying technology to transform organizations and create significant mission value, from speeding the approval for much needed generic drugs, to moving a critical DoD collaboration platform to the commercial cloud, to improve intelligence analysis production in support of our war fighters. They are great examples of how Booz Allen delivers solutions at the intersection of consulting, technology and mission, and a great reminder that our people and the valuable work that they do are at the core of our strength as an institution.

Booz Allen is forging ahead with unity, agility, resilience and mission focus. We're executing on contracts, hiring against more than 1,300 open requisitions, and going after opportunities aggressively. We are keeping our foot on the gas as we close out FY '19, and nothing makes that clearer than our increased earnings expectations for the full fiscal year.

With that Lloyd, over to you for the full financial picture.

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Horacio, and good morning, everyone. Today, I'll cover our third quarter performance, but before I begin, I'd like to say how proud I am of the results our people have achieved. Three quarters of the way through our fiscal year, we are ahead of where we expected to be and remain poised to meet or exceed the financial goals we announced at our Investor Day.

ADEPS growth is at the core of our investment thesis, and I'm excited that we are again raising our full year earnings guidance. Given our strong start to the year, we are also narrowing our revenue guidance. We believe Booz Allen's strategy and market position will continue to support the successful execution of our clients' core missions, which is the foundation of our ability to consistently deliver strong shareholder returns.

To reiterate what Horacio said earlier, the government shutdown had a negligible impact on our third quarter, given that it fell during the holidays . But we do anticipate that it will have a small impact on Q4 profitability and revenue, and potentially a more meaning full impact on near term cash collections. I too could not be more proud of how our leadership, and colleagues at all levels reacted to the shutdown. We worked hard to minimize to the extent possible the shutdown's impact on our clients, their missions, our performance and our people.

In my remarks this morning, I will take you through the third quarter numbers and describe how both our excellent performance through the first three quarters and the 35-day lapse in federal funding have affected our guidance for the full year. Please turn to slide three.

Starting at the top line, revenue and revenue excluding billable expenses grew by 13.1% and 12.2%, respectively, compared to the third quarter last year. The increases were due to continued strength in client demand, improved contract performance, an increase in headcount and an extra workday in the quarter. Our growth this year has been well diversified with strength in each of our core markets.

Billable expenses were 30.7% of revenue for the quarter, consistent with our expectations for this fiscal year. Our focus, however, remains on driving growth and revenue excluding billable expenses. The leading indicators there are strong, with a robust backlog and the necessary headcount growth to meet our full year objectives. We remain very much in a growth posture and intend to carry momentum through the fourth quarter into next fiscal year.

On slide five, you will see that book-to-bill for the quarter was 0.45 times, and our trailing 12-month figure is at 1.58 times. As a reminder, the value of contracts under protest is not in our backlog, and therefore, this number does not include a $1 billion award from the VA currently under protest. Our trailing 12-month book-to-bill remains strong and supports our growth posture. Total backlog, as of December 31st, was $20.5 billion, 23% higher than the prior year. Funded backlog at $3.5 billion, also represents a 23% Increase. Unfunded backlog at $4.5 billion is up 7%, and priced options increased 30% to $12.4 billion.

Headcount as of the end of the third quarter was 25,803, up by 1,056 year-over-year, and by 459 sequentially. Hiring during the quarter was strong, and we continue to aggressively hire to maximize our growth potential, putting us on track to meet our targeted 5% growth in headcount for the full year.

Moving to the bottom line, adjusted EBITDA for the third quarter was $180 million, representing a 24% increase compared to last year. Adjusted EBITDA margin on Revenue for the quarter was 10.8%. This margin performance exceeded our expectations and as a result, we are adjusting our full-year forecast.

Our third quarter adjusted EBITDA margin on revenue was driven by some of the same factors as in the second quarter, most notably strong contract performance. An additional factor contributing to our robust profit figure is an $11 million benefit from an amendment and associated revaluation of our long-term disability plan.

Third quarter net income at $132 million was up 76%, and adjusted net income grew 37% to $103 million for the quarter. Both net income and adjusted net income increased primarily due to our revenue growth and improved margins. Net income also benefited from a lower tax rate, driven primarily from the remeasurement of our deferred taxes related to the 2017 tax law, including the approved tax accounting method change that occurred in October.

I mentioned this accounting method change in our second quarter earnings call, but note that we exclude the impact of the remeasurement from our adjusted net income and ADEPS results. Those factors, as well as a lower diluted share count resulting from our ongoing share repurchase efforts, drove a $0.21 increase in third quarter adjusted diluted earnings per share to $0.72. All told, our weighted average diluted shares outstanding declined 3.5 million shares compared to one year ago.

Turning to the balance sheet, I'm not pleased that operating cash for the quarter came in at $9 million. We will continue to focus on improving operating cash collections and DSOs. There were several factors affecting cash and DSOs in the third quarter, including continued delays that the DFAS payment offices, an issue being felt across the industry, and timing of payment on a few contracts clustered in our civil business.

The government shutdown was not a meaningful driver in our third quarter operating cash decline compared to the prior year period. We do, however, anticipate that the shutdown will continue to affect the timing of cash collections in the fourth quarter, and may push up to $100 million of operating cash into next fiscal year.

Given that agencies affected by the shutdown are just getting back up and running, we do not know how quickly they will work through their backlog of invoices and payments. For this reason, we are lowering the bottom of our operating cash expectations for the fiscal year, and now anticipate operating cash to be between $360 million and $500 million for the full-fiscal year. While cash collections may slide temporarily to the right, it has not and will not affect our capital deployment approach. We have ample balance sheet strength and long-term cash generation potential to meet the objectives for capital deployments we laid out for the Investor Day.

Capital expenditures for the quarter were $18 million. We continued to expect CapEx spending of up to $100 million for the full year. As we've mentioned previously, this year-over-year increase in expected CapEx is growth oriented and supports the evolution of our business.

On slide six, you will see that during the third quarter, we continued to execute a disciplined, efficient capital allocation strategy that aims to deliver both near and long-term shareholder value. We returned $110 million to shareholders through dividends and share repurchases, bringing our fiscal year to-date total to $254 million. As such, our stated fiscal year 2019 goal to deploy $350 million is well within reach.

As Horacio mentioned, today, we are also announcing an increase in our quarterly dividend. The Company has authorized a quarterly dividend of $0.23 per share, payable on February 28th, to stockholders of record on February 14th. This increase of $0.04 versus the $0.02 we have announced at this point in recent fiscal years, shows that targeting an approximately 2% dividend yield remains a priority. We are proud of our track record of quarterly dividend growth. Our dividend has increased from $0.10 in 2013 to $0.23 we are announcing today, and we will strive to continue this trend of above market dividend growth.

Consistent with our prudent approach to balance sheet management, we continue to intend to draw down the $400 million delayed draw portion of our term loan A by the first quarter of fiscal year 2020, to take advantage of its attractive interest rates relative to the current environment. This financing will further optimize our capital structure and support our ability to maximize shareholder value through our disciplined and efficient capital allocation strategy.

We continue to aim to deploy a total of $1.4 billion or more over the three-year period in our investment thesis, while maintaining an optimal net debt leverage ratio of about 3 times to 3.5 times.

Finally, let me summarize our guidance for the remainder of the fiscal year. Please turn to slide seven. The excellent performance through the first three quarters gives us confidence that we'll finish the year strong. Today, we are narrowing our revenue guidance to the top half of our previous range. We now expect full-year revenue growth to be 7% to 8%. This includes an approximately $20 million impact to revenue in January, resulting from the government shutdown. As a reminder, our fourth quarter has one fewer workday when compared to the same quarter of last fiscal year, which will affect our Q4 year-over-year growth.

We are very pleased with our margin performance throughout the first three quarters, it reflects improved contract performance and strong cost management, putting us in a position to raise our expectations for the year. We now expect full-year adjusted EBITDA margin on revenue to be between 10% and 10.5%.

As Horacio noted, we now expect full year ADEPS to be between $2.65 and $2.75 per share. This guidance is based on 141 million to 144 million weighted average shares outstanding and a tax rate in the range of 24% to 26%. All of our revised guidance includes the impact of the shutdown through January and presumes that there are no additional funding lapses in this fiscal year.

In closing, I'll reiterate that we are extremely pleased with our third quarter and year-to-date performance. Booz Allen is on a strong path. The entire management team is excited about the remainder of the fiscal year and the momentum we are creating for delivering on the three-year goals detailed in our investment thesis.

Horacio, back to you.

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

Thanks, Lloyd. Before opening the lines for Q&A, I want to take a moment to recognize and congratulate our colleague Tony Mitchell. Next weekend Tony, who is a 30-year veteran of Booz Allen, and Executive Vice President and the leader of our Justice, Homeland Security and Transportation business, will be honored as Black Engineer of the Year. He is richly deserving of this award, as an extraordinary leader and mentor and a model for young women and men everywhere who aspire to be tomorrow's leaders in technology. I am so proud to call him my colleague and my friend.

What makes this achievement especially noteworthy for our firm is that Tony is only the latest Booz Allen executive to be so honored by the US Black Engineer and Information Technology magazine. Our own Lloyd Howell, is a previous Black Engineer of the year, as our Board Member R. Johnson and Former Executive Vice President, Reggie Van Lee. Dennis Via, an EVP and retired four-star army general who some of you met at Investor Day, received the BEYA Lifetime Achievement Award in 2013.

Booz Allen works hard to attract and retain diverse talent at the executive level and throughout the ranks. We're proud to be named recently by Forbes as one of America's top employers for diversity. We believe varied backgrounds and perspectives make us stronger as a firm and keep us true to our purpose and values. So it is indeed gratifying to claim five Black Engineer of the Year honorees as part of the Booz Allen family. Congratulations to Tony and to all of this year's award winners.

Okay. Nick, let's open the lines for questions.

Nicholas Veasey -- Director of Investor Relations

Thanks, Horacio. Please open the lines, Brian.

Questions and Answers:

Operator

Thank you, sir. My pleasure. (Operator Instructions) Our first question will come from Carter Copeland from Melius Research. Your line is now open.

Carter Copeland -- Melius Research -- Analyst

Good morning , gentlemen, and another great set of results congrats.

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

Thank you.

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Carter.

Carter Copeland -- Melius Research -- Analyst

Just a couple of quick ones. One, interested in the conclusion to the shutdown, what sort of behavior and activity you saw, if it was sort of a return to normal or not. Just wondered if you can give us some color there? And then, secondly, Horacio, I wondered if you might comment on the hiring environment. Obviously, situation there in Northern Virginia got a little bit more complex recently or is intended to, and clearly the job market is tight, but you guys have a lot of backlog to execute on. I just wondered if you give us an update on how you see that evolving here?

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

Sure. Hopefully, I'll remember the second question by the time I am done answering the first one, Carter, but I know you will remind me. On the first question about the shutdown, we are seeing good side that things are returning to normal at an accelerated pace. I think everybody was ready and eager to get back to work. Certainly, everybody in the government and everybody at Booz Allen. So we're pushing hard on that and we're seeing good results.

On the broader question about the hiring market, as you saw, we've added about 1,000 people throughout the year. That's the net number and more than 400 this quarter alone, so I'm very pleased with where we are on that. We have to retain that momentum. Frankly, at least through the end of these government fiscal year, because the opportunity is there on the demand side and we're completely focused and poised to do that. The overall market is a tight market. Unemployment, as you know, is low. The types of talent that we're looking for, we've been fighting for a while, you talk about the changes in Northern Virginia, we're monitoring those with interest. But I will tell you we have a vibrant business in Seattle, we hire there quite effectively. So I feel good about our ability to compete for talent and to continue to do what we need to do.

Carter Copeland -- Melius Research -- Analyst

Wonderful. Thanks. I'll let somebody else ask.

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

Great. Thank you.

Operator

Thank you. And our next question will come from Sheila Kahyaoglu with Jefferies. Your line is now open.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hi. Good morning, guys, and thank you for the time. Just on that Carter's last point in terms of maybe the headcount. Horacio, is there any way you could talk about the business mix maybe is shifting? It just continues to surprise me that you could grow revenues and earnings as quickly as you do with headcount only up mid single digits. So is there a mix shift going on in your business, maybe where it's more software, less labor content maybe over the prior year or over the last three years you could talk about?

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

I would answer it this way, I think, as you know, when you look at our investment thesis, the whole notion of option value is to build businesses like that, that is still nascent, that's not affecting the results right now. What's driving the results now and again, we had a great quarter and I love the numbers for this quarter, but when you put them in the context of the year, we're talking about 7% to 8%. That's a combination of bringing on headcount, it is a combination of the fact that salaries are rising, it's a combination of the fact that we're seeing robustness in the pricing model for our services, and I think a lot of that is driven by change in mix around more technical work, closer to the client's mission and all the things that we've talked about around Vision 2020. So that's how the math works. Underpinning that is the strength of the business driven by our strategic repositioning over the last five years, I believe.

Sheila Kahyaoglu -- Jefferies -- Analyst

Okay. Thank you. And then, Lloyd, maybe one for you, as you think about trying to put an initiative to improve working capital, maybe can you elaborate on some of those?

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Sure. As I said in my prepared remarks, Sheila, we're not satisfied with where we are. That being said, we really see this as a timing event. We made great improvement in our second quarter and that was great to see, but it's not a linear process and we appreciate that. We're confident that we're going to get it right. Business is performing really well as indicated by our Q3 results. We often don't see a change in our capital deployment strategy. We expect to make the $350 million that we committed to and are on track for our three-year goal of $1.4 billion. So as I said, we're not pleased with where we are. We've got to right we think plan in place to get the improvement. We remain close to our clients, as well as we are working with the payments offices. So that's what I can say about it.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thank you.

Operator

Thank you. And our next question will come from the line of Cai Von Rumohr with Cowen. Your line is now open.

Cai Von Rumohr -- Cowen and Company -- Analyst

Yes. Thanks so much. Great quarter guys. Your foreign business -- your commercial foreign was up about 40% in the quarter, still small, but a very outsize gain. Can you give us some comment on what's driving that and is it still as profitable?

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

So our global commercial business, the numbers in the Q show we had a very good quarter. If you remember, last quarter was a little softer, first quarter was great. Overall, that business continues on a track where it's been growing north of 20% for a while now and we expect that to continue. The core of that business is our work in cyber security and that we believe we have differentiated proposition. It's clear that market believes that too, and that we're being rewarded for that. So, I would like to see that business to continue to grow in the strong double digits for a while. As you pointed out, Cai, it's a small business, so quarter to quarter, one contract moving in one direction or another will drive the quarter's revenues, but the long-term trend is clear, which is, very strong double-digit growth that we intend to continue to feel.

Cai Von Rumohr -- Cowen and Company -- Analyst

Thank you. And then quickly for Lloyd, you mentioned $20 million revenue impact from the shutdown in January. Do you expect to catch that up and in February and March? And what kind of incremental impact does that have on the P&L? If you look in 2013, I think both CACI and Leidos had decremental margins that we're about twice their normal, what would your detrimental be?

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. It is say, Cai, whether we'll completely make it up. As Horacio mentioned in his previous response, we are off to a good start with the government reopening. We certainly aspire to get back on track as quickly as possible, but the fact that we are changing our guidance to the top half of the previous range, 7%-8% to demonstrate our confidence that we've taken that into account. In terms of margin impact, we raised our range to 10% to 10.5% for the year. We see probably a $0.02 to $0.03 impact from the shutdown, but in terms of where we end up for the year, we're excited about the range and the fact that we've been expanding it. And we think that given our business model and our closeness that we have with our clients, we'll continue to have a strong year.

Cai Von Rumohr -- Cowen and Company -- Analyst

Thank you very much.

Operator

Thank you. And our next question will come from the line of Robert Spingarn with Credit Suisse. Your line is now open.

Robert Spingarn -- Credit Suisse -- Analyst

Hi. Good morning. Horacio, when we look at the 8% revenue growth, and we average the year so far, is there a way to parse that into your normal program growth versus market share capture?

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

It's not really. I think the way we think about it is, we look at our growth rate over time against, call it, the average of our competitors and we are constantly ahead of them by several points and that in our mind is market share growth. So that's the best I can do with that. The market -- the other thing is, we talk about the market as if it's one thing. What I think is important for me to emphasize, I really do believe that we have carved a market for ourselves. At the intersection of mission and technology and consulting, helping clients, I believe that at this point, nobody can do what we can in terms of helping clients, who want to transform their missions through technology.

And a lot of the growth that we are seeing and especially, you've seen some of the large awards that we've talked about in the last few calls, they really relate to that, whether it's the move to the cloud, whether it is improving cyber security across the entire civil domain, whether it is making significant, for instance, scale investments on AI, those are the types of things that three years ago we were keeping on the radar and now are out there, and we are winning more than our fair share of that driven by the strength of the capabilities that we bring.

Robert Spingarn -- Credit Suisse -- Analyst

Is there a way to quantify how much of your $20 billion in total backlog is now from these option value opportunities or at least how that is trended as a percentage of backlog over time?

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

I will say the option value piece is very small. That's not where the upside is. Where the upside is, is in the injection of new technology into the portfolio. And I will tell you, at this point, most of our conversations with clients are around that. As you know, when a client buys, especially a large procurement, the reason -- I'm not trying to be difficult, and it's not that I don't have, I don't want to give you a number. I can't give you a number because you take a very large procurement, say, $0.5 billion, the reason we want something like that is because we are able to bring in AI and AI real to that line.

Now, inside that $0.5 billion, it's a bundle of services, some of which other people can do and some of which is this, but I believe the core differentiator has been around our ability to make this new technology real. And so that's -- so from that perspective, a lot of our portfolio, a lot of our backlog is moving in that direction.

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

The only thing I could really help in terms of quantifying is, we're really excited that 25% of backlog is due to recompete work and 76% is new work, and on top of that, we are maintaining our win rates at historical highs. So, 63% for the new work and then the high 80% for recompete, and I fully agree with what Horacio said, that the option value opportunities are exciting, but we're in the early stages of that.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. Thank you both for the color.

Operator

Thank you. And our next question will come from line of Krishna Sinha with Vertical Research Partners. Your line is now open.

Krishna Sinha -- Vertical Research Partners -- Analyst

Hi. Thanks. Maybe one for Lloyd. Can you parse the -- so, I know you know that the cash flow is a timing issue or that's what you said. But can you just parse that between how much of that $100 million reduction in the operating cash flow guidance is from the shutdown delay and receivables from the shutdown, and how much of it is from those -- that specific civil work timing that you were talking about?

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Sure. I mean, so up $100 million we think is headwind that we're experiencing. And we remain confident that we're going to collect. For example, $30 million of it is due to the IRS coming back online in terms of the IRS refund that we mentioned in Q2. So that $100 million is the headwind. Now, we still maintain it's a timing issue for us. We are confident that we're going to get it, but it is moving to the right, and we are working with our payment offices and our clients to do as best as we can. But that's little bit more of a breakdown to answer your question.

Krishna Sinha -- Vertical Research Partners -- Analyst

And then your margin was better, tax was better, revenue was better. I mean, let's say, the timing issue resolves itself this year, which is bull-case scenario, I mean is there opportunity for you guys to be above the $500 million range just given that the operating drivers have been so much better?

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

No. We don't see being above the $500 million.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay. And then, another one on just margin. Margin performance was very good. Looks like a lot of the beat was driven by cost of revenue reduction. Can you just talk about what costs are being reduced there, is it overhead, is it direct costs? And then, is this margin rate sustainable going forward just given that your long-term guidance that you gave at the Investor Day was sort of for 10 to 30 bps of margin improvement over the three-year time span and you seem to be doing well ahead of that? I mean is this reduction in the cost of revenue going forward, is it sustainable?

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

The fact that we are increasing the range to 10% to 10.5% for this year gives us a lot of confidence. And as we said, really due to strong contract performance, as well as we had a long-term disability improvement, as well as some global commercial contracts that were signed, I am not -- I'm ecstatic that we are ahead of expectations, and very pleased with this year's performance. But we're nine months into a three-year journey and at this point, I really don't want to comment on where we will be three years from now. So at the appropriate time, we'll look at that. We remain confident that we're going to reach the upper end for sure, but right now again, just bear with us. We will address that at an appropriate time in the future.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay. Thank you.

Operator

Thank you. And our next question will come from Joe DeNardi with Stifel . Your line is open.

John -- Stifel -- Analyst

Hey, guys. This is John (ph) for Joe. Just want to stick with the margin question. In so far that when you put out your numbers at the Investor Day, you were looking at FY '18 EBITDA of about 9.5%. Is the current run rate sustainable or should we think about that 1% to 3% off that base?

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Again, for this fiscal year, we think we're going to be between 10% to 10.5%. We're not going to address run rates into the next three years, simply because there are a lot of factors that we want to take into account once the year ends up and in consultation with our business leaders we will be prepared to respond accordingly. But right now, again, very pleased with our performance and the fact that we're ahead of expectations for this year, we're very happy about it.

John -- Stifel -- Analyst

Fair enough. The other aspect that we just want to touch on is, what's the best way to think about the growth in billable expenses? We've seen it kind of moderate this quarter. Is it going to follow historical trends or should we think about it staying at the current level next quarter?

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. I mean for the year, we said it's going to fall between 29% and 31%. There is a lot of for us challenges in sort of nailing it to a specific percent, just given contract awards and the content and makeup within those awards, but we feel very confident that for the year, we will end up between 29% and 31%.

John -- Stifel -- Analyst

All right. Thank you.

Operator

Thank you. And our next question will come from the line of Tim McHugh with William Blair. Your line is now open.

Tim McHugh -- William Blair & Company -- Analyst

Thanks. I might try the margin question a little differently. I guess just as we think about this year as you came into it, I know you talked about a couple of things in terms of favorable pricing and performance, but I suspect it's mostly kind of productivity of the people because you knew a lot about pricing coming into the year. Is there something you're doing differently with how you're matching people with engagements, how you're using technology, how you're structuring? And trying to understand if that changes, how we should think about the natural productivity rate --

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you for the question. I mean we have been on a journey to do all of those factors better and better year-over-year. And as Horacio said, we're essentially in the payoff period of Vision 2020 and getting our people deployed, meeting our utilization targets, managing our costs, as well as one-time things that have come through, or hard to anticipate have all contributed to the expense that we seeing this year. And we expect those fundamentals to continue going forward.

So the questions that are posed about beyond this year, we want to continue to see those fundamentals continue, but also ask the question, are there any other things that might contribute beyond just solid operational performance. But you're absolutely right, the basics have kicked in and management team deserves all the credit for making sure that our people are deployed and contributing to the clients in the best way.

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

Let me build on that. This is one of those years were all the stars are aligning, and we're obviously very pleased with that. There are three things that ultimately will drive this, one is the underlying pricing, and as we've said before and we continue to believe, this is a great market, it's a very strong market and we're seeing good pricing for at least our services in this market. The second piece of it is, the underlying performance on contracts. And with a very large business, with a lot of large contracts, you want them all to go great and sometimes they all do and sometimes you're dealing with issues. This year we're dealing with fewer issues than we have in the past, and you are seeing that reflected.

And then the third piece is, when you're bringing on a lot of people, it is how quickly can you put them on projects because there is a natural ramp-up time. And again, part of it is process and part of it is just the nature of how things are working this year. The team has done a fantastic job at getting people billable as close to the hiring point as possible. Obviously, more focus on retaining all three of those well into the future. We want every contract to go perfectly, we want everybody to get billable on day one, and we want pricing to continue to be this robust. And that's the piece we can try to control and the piece we are focused on. I am optimistic that a lot of this goodness can translate into the future, but I think it's too early to declare details and certainly numbers around that.

Tim McHugh -- William Blair & Company -- Analyst

Okay. Thank you. That's helpful. Then, Lloyd, just to follow up the comment about the term A loan, just to be clear as you -- when you draw that down, is that to pay off the term B or will you use that for other purposes in terms of capital deployment?

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. It's not to pay off the term loan B. It would be for other capital purposes.

Tim McHugh -- William Blair & Company -- Analyst

Okay. Thank you.

Operator

Thank you. And our next question will come from Tobey Sommer with SunTrust. Your line is now open.

Tobey O'Brien Sommer -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thank you very much. I was wondering if you could comment on the contract that you have protested, was that in existing recompete or was that a new contract and maybe you could use the opportunity to comment on the protest environment generally? Thanks.

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

So, there's a lot of -- we're very excited about being able to turn on that contract hopefully after the -- prevailing during the protest. It's a great contract. It has -- it's speaks to all of things we were talking about before in terms of bringing cyber security and a number of capabilities at a very high level. So we're waiting. A lot of that work, if not all of it, is new. And again, it's an exciting win not just for financial reasons, but because it's right in the middle of our strategy.

The protest environment continues to be what it is. We would like to see frankly on the part of the entire industry a little more rigor about what gets protested and a little more restrain, but it is what it is. I think we're used to it, I think, as an industry. I think the government is used to it, and they know how to manage it better. And we'll continue to keep on (inaudible) come back.

I mean, I think at the end of the day the reason that I'm optimistic even with everything else that we're talking about is, we have a strategy that works. We have a strategy that creates differentiation and shows real results to our clients. I think that allows us to win the work at the rates that Lloyd has been talking about. I think that allows us to overcome protests when they come. And I think ultimately that allows us to perform the work in a way that it's not just very profitable, but is very successful for the client, which then keeps them coming back. And I think that's the part of all of things that we can control, that's the part we're focused on, that's the part we're excited about.

Tobey O'Brien Sommer -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thanks. Could you share with us your views on what the 2020 budget may hold in store for the industry, particularly given this shutdown and CR extended into mid part of the month? Thanks.

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

I wish I was Tony Romo. I'll offer the call, first of all, for the balance of this government fiscal year, we are very optimistic and excited about the robustness in the business. We would like to see an agreement in Congress that goes frankly ideally through the next election, not just through the next fiscal year. And I remain optimistic that that will take place. Having said that, as we said at the very front of this call, the last government shutdown and our ability to manage through it as successfully as we did and raised guidance in light of it, I think, demonstrates that both our operating model and the quality of our management team is such that we can handle market disruptions better than most.

We don't look forward to it. We are certainly not interested in seeing it, but when it comes, we know what to do, we know how to do it and we know how to succeed in both great markets and more turbulent ones. So, we're going to continue to focus on what we can control, we're going to continue to drive this business aggressively against the investment thesis that we put forward last June, and hopefully, we will continue to have great conversations on calls like this one about how the business is moving along.

Tobey O'Brien Sommer -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thank you very much.

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

Thank you.

Operator

Thank you. And I'm showing no further questions at this time. So, now it is my pleasure to hand the conference back over to Mr. Horacio Rozanski, President and Chief Executive Officer, for closing comments and remarks.

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

Thank you, Brian. And thank you all for your questions. Lloyd and I, look forward to a strong finish to the year and we are very proud of all the Firm has accomplished. We are working as hard ever to assure that Booz Allen's growth is sustainable and that our value to clients and investors is crystal clear. So thank you for taking the time to be with us this morning. And have a great rest of the day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude our program. And we may all disconnect. Everybody have a wonderful day.

Duration: 51 minutes

Call participants:

Nicholas Veasey -- Director of Investor Relations

Horacio D. Rozanski -- Holding Corporation-Chief Executive Officer, President & Director

Lloyd W. Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Carter Copeland -- Melius Research -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Cai Von Rumohr -- Cowen and Company -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Krishna Sinha -- Vertical Research Partners -- Analyst

John -- Stifel -- Analyst

Tim McHugh -- William Blair & Company -- Analyst

Tobey O'Brien Sommer -- SunTrust Robinson Humphrey, Inc. -- Analyst

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