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Edited Transcript of BAH earnings conference call or presentation 29-Jul-19 12:00pm GMT

Q1 2020 Booz Allen Hamilton Holding Corp Earnings Call

MCLEAN Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Booz Allen Hamilton Holding Corp earnings conference call or presentation Monday, July 29, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Horacio D. Rozanski

Booz Allen Hamilton Holding Corporation - CEO, President & Director

* Lloyd W. Howell

Booz Allen Hamilton Holding Corporation - Executive VP, CFO & Treasurer

* Nicholas Veasey

Booz Allen Hamilton Holding Corporation - Director of IR

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Conference Call Participants

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* Cai von Rumohr

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Carter Copeland

Melius Research LLC - Founding Partner, President and Research Analyst of Aerospace & Defense

* Edward Stephen Caso

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Gavin Eric Parsons

Goldman Sachs Group Inc., Research Division - Associate

* Jonathan Phaff Raviv

Citigroup Inc, Research Division - VP

* Joseph William DeNardi

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst

* Robert Michael Spingarn

Crédit Suisse AG, Research Division - Aerospace and Defense Analyst

* Sheila Karin Kahyaoglu

Jefferies LLC, Research Division - Equity Analyst

* Timothy John McHugh

William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's earnings call covering first quarter results for fiscal year 2020. (Operator Instructions)

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

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Nicholas Veasey, Booz Allen Hamilton Holding Corporation - Director of IR [2]

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Thank you. Good morning, and thank you for joining us for Booz Allen's First Quarter 2020 Earnings Announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2.

I'm Nick Veasey, Vice President 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 3, 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, 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 first quarter fiscal 2020 earnings release and on 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 first quarter fiscal year 2020 slides.

It is now my pleasure to turn the call over to our CEO, Horacio Rozanski. And we are now on Slide 5.

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [3]

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Thank you, Nick, and good morning, everyone. Thanks for joining the call. Lloyd and I are pleased to share another set of very strong quarterly results this morning.

On our last earnings call just 9 weeks ago, we discussed Booz Allen's outstanding fiscal year 2019 performance and highlighted that we aim to emulate that performance this fiscal year. We also increased the financial goals in our investment thesis, which takes us to fiscal year 2021, having essentially jumped a year ahead on our 3-year time horizon. In sum, we affirmed our confidence in our business going forward.

We also provided clear guidance on how we plan to execute this fiscal year with a relatively aggressive first half and a more conservative second half. The operational and financial performance we have reported today aligns precisely to that plan. The fact that we are delivering on an ambitious front-loaded plan, exactly as we said we would, is further proof of the strength of our institution. We are differentiated in the market. We are effectively managing costs across the business, and our people are serving clients with dedication and excellence.

This morning, I'll focus on these 3 drivers of our sustained momentum. I'll also touch on the federal budget before handing over to Lloyd who will run through the quarter's results and our outlook going forward.

As you know, our investment thesis begins with our unique position in the market. This is the differentiation we have created by implementing our Vision 2020 growth strategy over the past 6 years. Clients know us today as a company that operates at the intersection of technology and mission. By coupling consulting expertise and mission knowledge with technical capability, we are helping them transform their organizations to meet today's challenges and prepare for the future. Demand for the capabilities we have built is strong and growing, and our relentless focus on innovation gives us confidence that we will be well positioned to capture rising demand. In fact, as I detailed in May, we believe demand for our services and solutions will be sustained for years to come by the global strategic environment and the ongoing digital revolution.

Translating a differentiated market position into strong financial performance and value for our shareholders requires exceptional management and efficient execution across the business. Our first quarter results show that on this front, we are firing on all cylinders. Credit for the strong performance goes to all the Booz Allen leaders and our broader team who are serving clients with passion and commitment.

Market-leading organic revenue growth continues to translate to excellent bottom line performance. We're capturing lots of work, attracting and retaining talent and efficiently delivering on contracts. Adjusted EBITDA margin remains very healthy, and solid cash generation and strategic management of our balance sheet continues to support our capital allocation goals. In short, we're running the business with the high standards that investors and clients expect from Booz Allen and, frankly, that we demand of ourselves.

Fundamentally, we're a people business. The high caliber of our work rests on their diverse expertise and the passion for working together on really tough problems. I believe that the opportunity to work in a culture that values its people and provides opportunities to make the world a better place is what draws people to our firm and keeps them here.

There are many things to be proud of in our first quarter numbers, and we are especially pleased to have hit a major milestone. At the end of the first quarter, Booz Allen was larger than it's ever been with 26,384 talented professionals. It's their work across missions, industries, clients and across the globe that quarter after quarter defines both who we are and how we succeed. I couldn't be more proud of the entire team as we celebrate this milestone.

Getting off to a strong start is always important, but it was particularly important this year given that we were coming to the end of a 2-year budget deal. We are encouraged by the progress Congress and the administration are making towards a new 2-year budget deal. While much work remains to ensure that the federal agency funding is approved by September 30, we are pleased that things appear to be moving in a positive direction.

As it relates to Booz Allen, our leaders will continue to execute on our plan for another industry-leading fiscal year, and our Q1 results have increased our confidence that we can achieve the ambitious financial goals we have set for the full year. We are also on track to deliver on the updated financial goals in our investment thesis, centered on 66% growth in earnings per share from fiscal year 2018 to fiscal year 2021.

Lloyd, let me turn the call over to you for a more in-depth look at our financial performance.

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Lloyd W. Howell, Booz Allen Hamilton Holding Corporation - Executive VP, CFO & Treasurer [4]

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Thanks, Horacio, and thanks to everyone for joining us on the call this morning. Our first quarter results have set the stage for an aggressive first half of fiscal year 2020. Our strategy is working, and we are firmly on track to continue delivering industry-leading operational and financial performance.

Let's go through the numbers. Please turn to Slide 6. Starting at the top line. Revenue and revenue excluding billable expenses grew by 10.8% and 8.9%, respectively, compared to the first quarter last year. The increases were due to continued strength in client demand, head count growth and slightly elevated billable expenses compared to the prior year period. Our growth remains strong and well diversified across our core U.S. government markets.

Turning to Slide 7. Book-to-bill for the quarter was 1.29x, and our trailing 12-month figure is 1.4x. We continue to see a strong award environment and robust proposal activity. Total backlog as of June 30 was $19.9 billion, 16.2% higher than the prior year. Funded backlog at $3.2 billion increased by 13.7%. Unfunded backlog at $4.4 billion grew 5.1%, and priced options increased 21.5% to $12.3 billion. The backlog and book-to-bill numbers again show that we are not demand constrained, and they support our expectations of continued above-market revenue growth.

Head count as of the end of the first quarter was a record, as Horacio mentioned, up by 1,826 or 7.4% year-over-year and by 315 since the end of March. We continue to aggressively hire to maximize our growth potential, and we're on track to meet our targeted 5% head count growth for the full fiscal year.

We are encouraged by the rate at which we grew our team this quarter. We planned for an aggressive first half, and our colleagues have done an incredible job hiring in the areas that are immediately impactful for our clients. It's clear that in an extremely competitive labor market, talented people want to work at Booz Allen.

Moving to the bottom line. Adjusted EBITDA for the first quarter was $199 million, up 12% compared to last year. Adjusted EBITDA margin for the quarter was 10.9%. Our strong first quarter adjusted EBITDA margin was driven by many of the same factors that drove our margin performance in fiscal year 2019, including continued strong contract performance and efficient management of our business. And as we've previously said, our adjusted EBITDA margins are also benefiting from our ongoing shift towards higher-margin technically focused work. These results show that the business is set up to translate top line growth into profit even as we continue to invest in our business and our people. This is a strong position to be in and gives us great confidence in the future.

First quarter net income and adjusted net income grew 12.7% and 12.4%, respectively, to $117.4 million and $117.7 million, respectively. Both increased primarily due to our revenue growth and higher margins. This translated to an $0.11 increase in first quarter adjusted diluted earnings per share to $0.83. Our weighted average diluted shares outstanding declined 3.6 million shares compared to 1 year ago.

Turning to cash. We generated $51 million in operating cash for the quarter, an increase of $78 million over the same quarter last year. I'm pleased that this quarter's performance was seasonally strong due to a focus on cash collection and a variety of other working capital initiatives. We remain focused on driving process improvements in areas we can control in the cash collection cycle in coordination with our government partners.

Capital expenditures for the quarter were $27.3 million as we continued to invest in facilities, infrastructure and technology. This includes new, secure and retrofitted space and technology to support an increasingly technical workforce, new business lines and continued growth outside the Washington metro area.

Please turn to Slide 8. During the first quarter, we continued to execute on our disciplined, efficient capital allocation strategy that aims to deliver both near- and long-term shareholder value. We returned $41 million to shareholders through dividends and share repurchases during the quarter. While our capital deployment priorities remain unchanged, we continuously evaluate all our options consistent with our commitment to deploy the remaining $1 billion through fiscal year 2021, in line with our investment thesis, in a way that maximizes value for shareholders. The strength of our cash position and balance sheet supports this commitment. Today, we are also announcing that the company has authorized a quarterly dividend of $0.23 per share payable on August 30 to stockholders of record on August 14.

Lastly, I'll discuss our outlook. One quarter in, our guidance remains unchanged, as shown on Slide 9. For the full fiscal year, we continue to expect revenue growth between 6% and 9%, adjusted EBITDA margin in the low 10s, adjusted diluted earnings per share of between $2.90 and $3.05 and operating cash flow of $400 million to $450 million.

In closing, I'll reiterate that we are extremely pleased with our first quarter performance. Booz Allen is on a strong path. The entire management team is excited about the momentum we have generated to meet our multiyear financial goals.

Horacio, back to you.

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [5]

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Thanks, Lloyd. Each quarter, these calls are rightly focused on our financial performance, but we don't want to overlook another aspect of our institutional strength important to both internal and external stakeholders. So before we move to Q&A, I want to speak briefly about Booz Allen's corporate citizenship, particularly the impact we have in the communities where we operate.

In fiscal year 2019, our people logged more than 88,000 hours of volunteer service for more than 900 nonprofit organizations across the globe. That's roughly a 30% increase from the prior year. In addition, we as a firm continued to support many well-known organizations that assist military veterans and their families, promote STEM education, advance health care and build community resilience especially through disaster recovery. Our commitment to service is deep and enduring, which is why we established and support the independent Booz Allen Foundation even as we continue Booz Allen's own corporate citizenship programs. I am constantly inspired by the generosity and passion and service of our people.

Allow me to share just a few examples. We recently became the inaugural corporate donor to the Hiring Our Heroes Military Spouse Fellowship Program. Our funding will send 100 spouses to 6-week internships that help them relaunch careers after a move or deployment. Other corporate donors are now joining the effort, which will create a strong pipeline of opportunities and sustainability for this innovative program.

In May, we continued our tradition of funding the annual conference for the Tragedy Assistance Program for Survivors. TAPS supports families of those who died in the line of duty. Booz Allen provides nearly all the volunteers for National Field Day USA here in D.C. This event provides a day of -- and evening of care for children while their patients receive grief counseling and mentoring.

Also this spring, a team of our consultants donated their time and expertise in a pro bono project for the John F. Kennedy Center for The Performing Arts. The project is only the latest we've done in support of the Kennedy Center, and it focuses on helping them further operationalize a strategic growth plan that Booz Allen worked on a couple of years ago.

Finally, I'll mention National Volunteer Month. In April, we set a big goal, in fact, a firm-wide challenge of serving 5,000 volunteer hours. We easily surpassed it, recording more than 7,200 hours over 30 days. Our winning office was Pax River in Southern Maryland. Our roughly 400 colleagues there logged a remarkable 946 hours in support of several organizations, including Special Olympics, the Girl Scouts and the Ocean Conservancy. The challenge was such a success that we are doing it again this summer, and we fully expect to outdo our April performance.

There are countless other examples I could share, each demonstrates Booz Allen's purpose to empower people to change the world. So in closing, I will recognize and thank the people of this firm one more time. You define what it means to be Booz Allen through not only the impactful work you do but also the deep care you show for the people and communities around you.

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

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Nicholas Veasey, Booz Allen Hamilton Holding Corporation - Director of IR [6]

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Thanks. Shannon, please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Sheila Kahyaoglu with Jefferies.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [2]

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You've highlighted hiring would be front-end loaded. With the budget deal coming together, could you maybe provide some clarity on how you think about executing on hiring throughout the remainder of the year?

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [3]

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Sure, Sheila. A couple of thoughts. First of all, on the budget itself, we are cautiously optimistic because of the progress that has been made. But as you know, there's still a road ahead going from where we are now to fully appropriated dollars against all of the major agencies, hopefully by October 1. So we continue to watch that closely, but we are optimistic that all of that will work as it should.

As it relates to our hiring, I'm actually very happy about the hiring not just this quarter. But if you go and look back over the last 12 months, for example, north of 7% head count growth is actually very healthy for us, and we intend that to continue. We have our pedal to the metal on hiring this quarter as we said we would. And assuming conditions allow, we will continue to execute strongly against our hiring for the balance of the year. We have a strong value proposition to offer talent. We're finding, even though it's a competitive market, great people to bring on to the firm, and we don't intend to stop.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [4]

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Got it. And maybe just as a follow-up to that, Horacio. You mentioned a number of comments in your prepared remarks with regards to employee engagement. Does this make it easier to hire professionals? Do you find that your competitors do that? Or do they have more difficulty in adding head count?

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [5]

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No, I'll speak to us. I meant absolutely every word that I said about having a culture that makes people feel valued, that makes people's passions aligned with their work day and that both what we do with clients and the missions that we support and our entire effort of moving closer to the mission and what we do for our communities, all is part of a value proposition that is very attractive. A lot can be said about millennials. My experience with millennials in particular is that they are very passionate about making a difference and they're very mission-focused. And so I find that we can attract unique technical talent because we have this combination of a great culture, a great mission and a great engagement program, both internal and external. And as I've said before, we intend to continue all of that.

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Operator [6]

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Our next question comes from Jon Raviv with Citi.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [7]

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Just following up on that first question. If we do get some dollars appropriated around October 1, where do you expect that to manifest in how you're thinking about the year? Any chance to sort of keep on the accelerator in the second half of that more? Or is this going to be sort of potentially upside to growth and/or the low 10s margin for the year?

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Lloyd W. Howell, Booz Allen Hamilton Holding Corporation - Executive VP, CFO & Treasurer [8]

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I'm sorry, Jon, certainly, having a budget deal in place is beneficial to the sector and certainly to Booz Allen. We are increasingly close and getting closer to our clients' mission, and as you know, no less now in that. Demand is strong. And as you see from our Q1 results, we're not demand constrained.

As it relates to margin, we're off to a very strong start, roughly in line with what we did last year, Q1 of FY '19. And we're going to continue to push forward. We gave guidance in the low 10s. We still believe that is where we're going to end up, sustainable. We're very happy to be able to sustain that level of profitability. And frankly, we remain ahead of where we thought we would be when you think about our investment thesis that we talked about a couple -- a year ago.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [9]

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And then, Lloyd, you also mentioned that on the capital deployment front, you're always evaluating all the options of the remaining plan in terms of the cash coming in. You historically talked down M&A a bit, but can you just sort of just revisit what all the options are and what kind of approaches are working versus what you might be considering going forward as the market continues to shift around?

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Lloyd W. Howell, Booz Allen Hamilton Holding Corporation - Executive VP, CFO & Treasurer [10]

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Sure. Our capital deployment strategy, we're very pleased with it. Just to remind everyone, we are committed to a $1.4 billion capital return to maximize our shareholders over a 3-year period, and we're on track with that. We've got a very disciplined and efficient strategy. It has 4 levers: share repurchases, capability tuck-in and regular and special dividends. We see many M&A opportunities every fiscal year. We have a strategy that we believe is working for us. And so we're always looking for assets or capabilities in places that we can find, and we'll continue to do so going forward.

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Operator [11]

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Our next question comes from Edward Caso with Wells Fargo.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [12]

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Congrats on the quarter. Can you talk a little bit about your Commercial business? In your 10-Q, it looks like it was barely up year-to-year. And what -- the prospects and sort of what's going on underneath the covers?

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [13]

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Ed, it's Horacio. The portfolio is doing well. Commercial -- global Commercial is about 4% of our total revenue base, as you well know. It's a small business by the standards of the totality of Booz Allen, and so 1 or 2 contracts changing dynamics will move around the number. If you look at the longer-term trend, it's been a strong growth business, growing rapidly, growth of 30% for a couple of years. And we are confident in the long-term prospects of our global Commercial business even if from quarter-to-quarter, there will be some volatility.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [14]

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Can you -- the other question is on the award activity. Does it capture that large, almost $1 billion VA award that got re-protested, I guess, in May? And what are the prospects for the September quarter? Do you sense a typical spike up?

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Lloyd W. Howell, Booz Allen Hamilton Holding Corporation - Executive VP, CFO & Treasurer [15]

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Sure. Our backlog has always been -- is very conservative. It does not capture that VA award that's under protest. And as far as looking forward, typically, for those of you who have looked at us, there's a seasonality to our backlog that closely mirrors the government's fiscal year.

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [16]

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I just want to point out something that Lloyd said before. We're very pleased with the market. We are not demand constrained. Our growth prospects are, at this point, largely driven by our willingness and ability to attract and absorb the right kind of people that give us sustainable growth, and that's what we're focused on. The book-to-bill number this quarter shows it, but more broadly, we are winning in the market in the places where we really want to win.

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Operator [17]

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Our next question comes from Gavin Parsons with Goldman Sachs.

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Gavin Eric Parsons, Goldman Sachs Group Inc., Research Division - Associate [18]

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Demand not being -- or growth not being demand constrained being a big subject, I was wondering if you can maybe get at kind of customer environment and sentiment. Budget deal or not, a lot of your hardware peers have been talking about accelerated demand pull forward contracts. So I wanted to maybe get your sense of whether or not there's just more confidence in just kind of the general budget environment from the customer, whether deal or no deal, if they feel more confident on adding long contract growth or exercising options or spending money.

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [19]

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So the dynamic -- I'll take that. And sure, Lloyd will want to add. The dynamic that I see is one where now for, frankly, more than a couple of years, there's been funding in the system to invest in critical capabilities. At the year-end earnings call, I talked about the dynamics around great power competition and how that was shifting the defense investment priorities and more broadly across the government, how the digital revolution was coming into the federal government and driving significant change. And those are, to us, the underlying drivers of demand, and that's why we don't feel we're demand constrained. Close to our clients' missions, this type of work is and will continue to be in high demand.

Obviously, budget stability and budget certainty accelerates that, improves that, makes it less choppy and gives our clients the confidence to plan even longer term. But if you look at our numbers -- Ed talked about what's in the Q. Our defense business, our civil business, both growing around 13% this quarter. Our national security business, also a great deal of demand. Obviously, the supply constraint there because of the classification issue are the greatest, but a very strong showing and a strong potential to continue.

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Lloyd W. Howell, Booz Allen Hamilton Holding Corporation - Executive VP, CFO & Treasurer [20]

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Yes. Just to add that when you look at our backlog performance, our latest -- our trailing 12-month book-to-bill at 1.4x and then for the quarter at 1.29x really, I think, speaks to the environment that we're working in. We've got a strong start to the summer selling season. We've got a record Q1 backlog. Total's up 16%, and funded is up also by a healthy amount of 14%.

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Gavin Eric Parsons, Goldman Sachs Group Inc., Research Division - Associate [21]

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Great. And then, Horacio, maybe if you could talk a little bit about just the current state of AI investment in the government, where you think that could be in 5 to 10 years and what Booz is doing to position for that.

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [22]

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Thank you for that question. So let me start. I talked before about -- for example, let's start with DoD, great power competition. I think it's been widely reported that our competitors, for lack of a better term, are investing heavily in technology and AI is one of those areas. China is on the record saying that they want to be the global leader for that technology. And the U.S., at this point, is competing very heavily for that. We see -- I talked about it maybe a year ago when we won a very large operational AI contract. We have begun to see investment in this arena faster than we expected it. We were investing ahead of time on that for the last 2 or 3 years. But in the last year to 18 months, the notion of artificial intelligence, algorithmic warfare, machine learning has exploded throughout the federal government in terms of need.

If you talk about defense, that's there. But if you talk about other parts of the government, think about parts of the government that need to seasonally stand out very large call centers and then they bring them down when the season ends, those are areas that are ripe for machine intelligence to actually accelerate the opportunity. And we are very well positioned because of the investments that we're making, not just in talent, which are quite significant, but also in building platforms and architectures that will allow us to monetize our intellectual capital in different ways as part of what we talked about as option value that has me very encouraged. AI is going to be a multibillion-dollar area of investment for the federal government going forward, and Booz Allen is and wants to be at the center of that.

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Operator [23]

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Our next question comes from Cai von Rumohr with Cowen and Company.

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [24]

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So at your Investor Day, when you laid out your 3-year goals, you talked of improving profitability and a mix shift toward more fixed-price business. And yet, your fixed price was down and your cost-plus business was up very strongly in the first half. And yet, you delivered very satisfactory profitability. Maybe explain why that happened.

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Lloyd W. Howell, Booz Allen Hamilton Holding Corporation - Executive VP, CFO & Treasurer [25]

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Sure. Cai, this has been an effort for some time that's been underway. What we believe we're seeing is all that hard work by our team is really paying off. We see the margin performance really resulting from 3 factors: one being strong contract performance. We're also managing the business more efficiently than ever, and we continue to shift our capabilities and the work that we're providing toward technically focused type of work. The culmination of that certainly kicked in last fiscal year and, we believe, is sustainable this fiscal year. So we see our margin performance still being in low 10s. We're very happy to have that profitability and then also 10% at the top line. And we believe that we can remain in that posture throughout the rest of the year.

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [26]

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Terrific. And so normally, in the past, you haven't hired as aggressively as you have now in the first quarter, and you tend to hire more in the second half with associated pressure on the margins. What's your plan for this year? I mean you've talked about near term continuing to be aggressive. But do you feel there's likely to be enough business that we could see another 7%-plus head count lift in the fourth quarter? Or are things likely to sort of decelerate a bit?

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Lloyd W. Howell, Booz Allen Hamilton Holding Corporation - Executive VP, CFO & Treasurer [27]

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Well, for this year -- the story actually started in fourth quarter of last year. If you look back at Q4, you'll see that we had a positive net hiring quarter, and that momentum certainly flowed into Q1 of this year. Horacio and I have always maintained that we want to consistently hire and deploy our strong candidates across the business, so we feel that we're off to a great start.

And then if you refer back to our prepared remarks as well as Horacio's previous comment, we're not demand constrained, and we've had our foot on the accelerator when it comes to talent for quite some time. We expect that to continue. At the beginning of the year, we forecasted 5%. That's what we are shooting for, and we're off to a good start. And at the moment, that still remains our target.

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Operator [28]

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Our next question comes from Carter Copeland with Melius Research.

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Carter Copeland, Melius Research LLC - Founding Partner, President and Research Analyst of Aerospace & Defense [29]

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Just one quick follow-up on the capital deployment discussion. I know you highlighted all the levers, Lloyd. But obviously, just sort of going through the numbers in the Q, the share repurchases, very minimal. And I wondered, do you -- think back to the levers you talked about. Is there anything purposeful about that or is this the normal sort of ebbs and flows in how you see your various capital deployment opportunities?

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Lloyd W. Howell, Booz Allen Hamilton Holding Corporation - Executive VP, CFO & Treasurer [30]

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Sure. I mean we are always looking to maximize shareholder value given what the market presents to us, Carter. And I would say the ebbs and flows of the market and still with an eye for how do we maximize shareholder value.

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Operator [31]

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Our next question comes from Tobey Sommer with SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [32]

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So just wanted to ask a question about your long-term growth and kind of differentiator to be able to hire into pockets of future demand such as AI or machine learning that you talked about already. Is there anything that could change in the market that would trigger you to press those investments more now? And are there any new areas that you see on the horizon that you could add to beyond the themes and pockets that we've discussed already?

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [33]

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I ask myself that question all the time, and I think the answer has to be yes. I look at the market, and from our perspective, you want to drive differentiation and uniqueness in the market from a position of strength. And that's where we are now. We're in this payout period for Vision 2020. We are where we want to be one quarter into a fiscal year, and we're driving across all fronts.

We have an innovation agenda that is very robust. It began 6 or 7 years ago before innovation was cool. And we have been driving it relentlessly, and it's got a pipeline. It's got certain things that are already deployed. We've talked about those in the past like Recreation.gov, like District Defend. We have other things that are a little bit upstream like some of our solutions work around AI and things that are further upstream and will continue to be.

But our goal -- this is why we don't talk about these things individually. We talk about them as a portfolio. Our goal is to drive that portfolio to create both unique, differentiated revenue; a unique story around Booz Allen with our clients as a combination of these platforms and our talent create solutions; and ultimately, unique and differentiated financial performance because we believe that these investments actually carry the potential for much higher margin and higher profitability.

So that's our goal. We're at it. We're at it every quarter. We're accelerating as much as we can. These things take time, and we're going to take the time that's necessary.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

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As you look at your business sort of from a civil and defense perspective, are you seeing a different cadence and tempo to award activity and business wins? And I ask that in the context of just looking at simple treasury outlays and seeing that defense is tracking ahead of civil and wondering whether that's manifesting itself in your business.

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [35]

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I honestly don't see it at that level. We see very robust demand across the board, lots of great opportunities, and it's a question of positioning for the right ones. And the definition of the right ones are the ones not just that we can win, but the ones that give us the kinds of economics that Lloyd was talking about before and, most importantly, the ones that leverage our differentiation so that these are sustainable wins where we win not just the new work but the recompetes after that.

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Operator [36]

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Our next question comes from Robert Spingarn with Crédit Suisse.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [37]

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Horacio, on the back of that, and we talk about this every quarter, but you've had outstanding growth here. The backlog expansion is tremendous. It sounds like Lloyd is looking for another strong September bookings quarter. Could you -- could we probe a little bit into what that differentiation is or at least the parts that actually translate into sector-high backlog and revenue growth? I -- obviously, you guys see yourself as best in class and the numbers support that, but can we get a little more tangible here? Why are you outpacing the others?

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [38]

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I'll speak about that and why do I think we are winning. I'm out talking to clients regularly. And our conversation with our clients is about what are their major opportunities to drive mission in a different way and to use technology to accelerate and, at times, leapfrog where they are on their mission, and that conversation tends to lead to things that haven't been done before. And that's, frankly, where we excel, when we bring a capability that might have worked elsewhere, port if over to a place that has continued before or completely reimagine a mission based on leveraging a new capability. We're doing, for example, some recruiting work for one of the military services, and we're bringing our open source understandings to help them understand what is the tenor and the tone in a local market of how potential recruits are looking at that service. That is the kind of thing that is unique to us that we bring together that I don't -- I assume others don't because we win work like that regularly, and that fuels our growth.

And again, I think that's what makes it sustainable. What makes it sustainable is that we're not going rest on our laurels, is that we never compete for a recompete with the same proposal we had 5 years earlier. It's a new approach, a new thinking to push the mission forward. And frankly, by the way, in a supply-constrained environment, that is what excites people. And I honestly think that's what brings and keeps people here, is the opportunity not just to work in these great missions, but actually to advance them.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [39]

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So you talked about that being sustainable, so really brings up the next part of the question, which is while we do have some visibility here from a 2021 budget, the second half of that budget is kind of flat. When we look at the FYDP and we look at the O&M, it is kind of flattish from here on out. And so how do you think about your longer-term growth opportunity in a flattening budget? Or again, if we go back to what you just said, the end-market growth really doesn't necessarily drive your growth.

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [40]

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We outgrow the market for as long as I can remember. So what's really important to us is our clients having a reasonable level of certainty about their ability to invest because then we can win work. And we will take share in the course of doing that as we always have. I mean I guess, we've always outpaced the market, and we intend to continue to do that.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [41]

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And last thing is are there a couple of major contracts we should be on the lookout for as we progress through the fiscal year?

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [42]

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We don't talk about individual contracts on this call. We talk about the entirety of the portfolio because our portfolio is constructed such that no single contract actually drives the future of the firm. So look across all of it, look at the kinds of wins that we're having. And to the extent that you can, ask questions about what is that work, not just the size of it because I think that's what drives our uniqueness and our sustainability.

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Operator [43]

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Our next question comes from Joseph DeNardi with Stifel.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [44]

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Horacio, I guess you sound a little bit more cautious than optimistic in terms of the budget outlook. So can you just talk a little bit about what some of the risks are over the next few months that you're kind of monitoring?

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [45]

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Sure. I mean I don't claim to have a crystal ball around any of these. I'm out talking to clients. I'm up on the Hill trying to understand how people are thinking about it. I'm talking to experts who've lived in that world or longer than we have. And it's a complex process that can be -- that can have hiccups along the way. Think about last year. There was a budget, there was a budget deal, there was everything else. And then there was, come January, a shutdown. I don't expect that to happen this year.

I don't -- I am optimistic that all of the positive momentum will translate, but we're looking at it very closely. And as it relates to us, this is why we are running the year the way we are. A very strong first quarter, hopefully a very strong first half so that if things are great in the second half, we'll continue on. And if there's turbulence, we will be well prepared to deal with it.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [46]

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Got it. And then just lastly, is there any update kind of on District Defend or some of the other opportunities you guys talked about as part of your option value investment strategy? And then anything on the legal front to update us on?

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [47]

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No updates on the legal front. We continue to work with the government, and that process is ongoing. As it relates to our option value portfolio, the portfolio is moving forward. As I've said repeatedly, any part of that portfolio could actually be a real needle mover for the firm in the medium to long term, and we don't expect every part of the portfolio to succeed. But we're investing. We're managing it very closely. And I'm actually very excited about the progress that we're making on all fronts.

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Operator [48]

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Our next question comes from Tim McHugh with William Blair.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [49]

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Most of mine have been asked, but just wanted to follow up on the contract mix. There's been a gradual trend and then a more meaningful step towards cost reimbursable. I guess it's part of the mix this quarter. I guess you were asked earlier about the margin. I just wanted to ask, I guess, what's driving that mix shift. Is that a particular part of your client base or a type of work that you're doing that's driving that mix shift?

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Lloyd W. Howell, Booz Allen Hamilton Holding Corporation - Executive VP, CFO & Treasurer [50]

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Yes. Tim, it's sort of an outcome of a variety of factors. Our defense part of our portfolio has been having a strong performance. And as you may be aware, many of the contract types -- certain contract types in that market are cost-plus and time and materials. And from our analysis, that's what's contributed to the modest shift.

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Operator [51]

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This concludes the question-and-answer session. I would now like to turn the conference back over to Horacio Rozanski for closing remarks.

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Horacio D. Rozanski, Booz Allen Hamilton Holding Corporation - CEO, President & Director [52]

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Thank you, everyone. Thanks for your time, for the dialogue and for your questions this morning. Our firm, as you can tell, is off to another great start this fiscal year, and the payout period for Vision 2020 continues. So on behalf of the people at Booz Allen, I would like to thank our shareholders for their continued support and confidence. We are forging ahead with excitement about the future, especially about the positive difference we can make in the world and in our communities.

Have a great day, and enjoy the rest of the summer.

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Operator [53]

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Ladies and gentlemen, this concludes today's conference. Thanks for joining, and have a wonderful day.